Exhibit 10.1


 


CANO
PETROLEUM, INC.


2005
LONG-TERM INCENTIVE PLAN


 


The Cano Petroleum, Inc.
2005 Long-Term Incentive Plan (the “Plan”) was adopted by the Board of Directors
of Cano Petroleum, Inc., a Delaware corporation (the “Company”), effective
as of December 7, 2005, subject to approval by the Company’s stockholders.


 


ARTICLE 1


PURPOSE


 


The purpose of the Plan
is to attract and retain the services of key employees, key consultants and
Outside Directors of the Company and its Subsidiaries and to provide such
persons with a proprietary interest in the Company through the granting of
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, restricted stock units, performance awards, dividend
equivalent rights, and other awards, whether granted singly, or in combination,
or in tandem, that will


 


(a)                                  increase
the interest of such persons in the Company’s welfare;


 


(b)                                 furnish
an incentive to such persons to continue their services for the Company; and


 


(c)                                  provide
a means through which the Company may attract able persons as employees,
Consultants and Outside Directors.


 


With respect to Reporting
Participants, the Plan and all transactions under the Plan are intended to
comply with all applicable conditions of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the “1934 Act”). 
To the extent any provision of the Plan or action by the Committee fails
to so comply, it shall be deemed null and void ab initio,
to the extent permitted by law and deemed advisable by the Committee.


 


ARTICLE 2


DEFINITIONS


 


For the purpose of the
Plan, unless the context requires otherwise, the following terms shall have the
meanings indicated:


 


2.1                                 “Award” means the
grant of any Incentive Stock Option, Nonqualified Stock Option, Reload Option, Restricted Stock, SAR,
Restricted Stock Units, Performance Award, Dividend Equivalent Right or Other
Award, whether granted singly or in combination or in tandem (each individually
referred to herein as an “Incentive”).


 


2.2                                 “Award Agreement” means
a written agreement between a Participant and the Company which sets out the
terms of the grant of an Award.


 


2.3                                 “Award Period” means
the period set forth in the Award Agreement during which one or more Incentives
granted under an Award may be exercised.


 





















 


2.4                                 “Board” means the
board of directors of the Company.


 


2.5                                 “Change in Control”
means any of the following, except as otherwise provided herein:  (i) any consolidation, merger or share
exchange of the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company’s Common Stock would be
converted into cash, securities or other property, other than a consolidation,
merger or share exchange of the Company in which the holders of the Company’s Common
Stock immediately prior to such transaction have the same proportionate
ownership of Common Stock of the surviving corporation immediately after such
transaction; (ii) any sale, lease, exchange or other transfer (excluding
transfer by way of pledge or hypothecation) in one transaction or a series of
related transactions, of all or substantially all of the assets of the Company;
(iii) the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; (iv) the cessation of control
(by virtue of their not constituting a majority of directors) of the Board by
the individuals (the “Continuing
Directors”) who (x) at the date of this Plan were directors
or (y) become directors after the date of this Plan and whose election or
nomination for election by the Company’s stockholders was approved by a vote of
at least two-thirds of the directors then in office who were directors at the
date of this Plan or whose election or nomination for election was previously
so approved; (v) the acquisition of beneficial ownership (within the
meaning of Rule 13d-3 under the 1934 Act) of an aggregate of 50% or more
of the voting power of the Company’s outstanding voting securities by any
person or group (as such term is used in Rule 13d-5 under the 1934 Act)
who beneficially owned less than 50%
of the voting power of the Company’s outstanding voting securities on the date
of this Plan; provided, however, that notwithstanding the
foregoing, an acquisition shall not constitute a Change in Control hereunder if
the acquirer is (x) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company and acting in such capacity, (y) a
Subsidiary of the Company or a corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of voting securities of the Company or (z) any other person
whose acquisition of shares of voting securities is approved in advance by a
majority of the Continuing Directors; or (vi) in a Title 11 bankruptcy
proceeding, the appointment of a trustee or the conversion of a case involving
the Company to a case under Chapter 7.


 


Notwithstanding the
foregoing provisions of this Section 2.5, in the event an Award
issued under the Plan is subject to Section 409A of the Code, then, in
lieu of the foregoing definition and to the extent necessary to comply with the
requirements of Section 409A of the Code, the definition of “Change in
Control” for purposes of such Award shall be the definition provided for under Section 409A
of the Code and the regulations or other guidance issued thereunder.


 


2.6                                 “Code” means the
Internal Revenue Code of 1986, as amended.


 


2.7                                 “Committee” means the
committee appointed or designated by the Board to administer the Plan in
accordance with Article 3 of this Plan.


 


2.8                                 “Common Stock” means
the common stock, par value $0.0001 per share, which the Company is currently
authorized to issue or may in the future be authorized to issue, or any
securities into which or for which the common stock of the Company may be
converted or exchanged, as the case may be, pursuant to the terms of this Plan.


 


2.9                                 “Company” means Cano
Petroleum, Inc, a Delaware corporation, and any successor entity.


 


2.10                           “Consultant” means any person, who is not an Employee,
performing advisory or consulting services for the Company or a Subsidiary,
with or without compensation, provided that bona
fide services must be rendered by such person and such services
shall not be rendered in connection with the offer or sale of securities in a
capital raising transaction.


 


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2.11                           “Corporation” means
any entity that (i) is defined as a corporation under Section 7701 of
the Code and (ii) is the Company or is in an unbroken chain of
corporations (other than the Company) beginning with the Company, if each of
the corporations other than the last corporation in the unbroken chain owns
stock possessing a majority of the total combined voting power of all classes of
stock in one of the other corporations in the chain.  For purposes of clause (ii) hereof, an
entity shall be treated as a “corporation” if it satisfies the definition of a
corporation under Section 7701 of the Code.


 


2.12                           “Date of Grant” means
the effective date on which an Award is made to a Participant as set forth in
the applicable Award Agreement; provided, however, that solely for purposes of Section 16
of the 1934 Act and the rules and regulations promulgated thereunder, the
Date of Grant of an Award shall be the date of stockholder approval of the Plan
if such date is later than the effective date of such Award as set forth in the
Award Agreement.


 


2.13                           “Dividend Equivalent Right”
means the right of the holder thereof to receive credits based on the cash
dividends that would have been paid on the shares of Common Stock specified in
the Award if such shares were held by the Participant to whom the Award is
made.


 


2.14                           “Employee” means
common law employee (as defined in accordance with the Regulations and Revenue
Rulings then applicable under Section 3401(c) of the Code) of the
Company or any Subsidiary of the Company.


 


2.15                           “Executive Officer”
means an officer of the Company or a Subsidiary subject to Section 16 of
the 1934 Act or a “covered employee” as defined in Section 162(m)(3) of
the Code.


 


2.16                           “Fair Market Value” means, as of a particular date, (a) if
the shares of Common Stock are listed on any established national securities
exchange, the closing sales price per share of Common Stock on the consolidated
transaction reporting system for the principal securities exchange for the
Common Stock on that date, or, if there shall have been no such sale so
reported on that date, on the last preceding date on which such a sale was so
reported, (b) if the shares of Common Stock are not so listed but are
quoted on the Nasdaq National Market System, the closing sales price per share
of Common Stock on the Nasdaq National Market System on that date, or, if there
shall have been no such sale so reported on that date, on the last preceding
date on which such a sale was so reported, (c) if the Common Stock is not
so listed or quoted, the mean between the closing bid and asked price on that
date, or, if there are no quotations available for such date, on the last preceding
date on which such quotations shall be available, as reported by Nasdaq, or, if
not reported by Nasdaq, by the National Quotation Bureau, Inc., or (d) if
none of the above is applicable, such amount as may be determined by the
Committee (acting on the advice of an Independent Third Party, should the
Committee elect in its sole discretion to utilize an Independent Third Party
for this purpose), in good faith, to be the fair market value per share of
Common Stock.


 


2.17                           “Independent Third Party”
means an individual or entity independent of the Company having experience in
providing investment banking or similar appraisal or valuation services and
with expertise generally in the valuation of securities or other property for
purposes of this Plan.  The Committee may utilize one or more
Independent Third Parties.


 


2.18                           “Incentive” is defined
in Section 2.1 hereof.


 


2.19                           “Incentive Stock Option”
means an incentive stock option within the meaning of Section 422 of the
Code, granted pursuant to this Plan.


 


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2.20                           “Nonqualified Stock Option”
means a nonqualified stock option, granted pursuant to this Plan, which is not
an Incentive Stock Option.


 


2.21                           “Option Price” means
the price which must be paid by a Participant upon exercise of a Stock Option
to purchase a share of Common Stock.


 


2.22                           “Other Award” means an
Award issued pursuant to Section 6.9 hereof.


 


2.23                           “Outside Director”
means a director of the Company who is not an Employee or a Consultant.


 


2.24                           “Participant” means an
Employee, Consultant or Outside Director of the Company or a Subsidiary to whom
an Award is granted under this Plan.


 


2.25                           “Plan” means this Cano
Petroleum, Inc. 2005 Long-Term Incentive Plan, as amended from time to
time.


 


2.26                           “Performance Award”
means an Award hereunder of cash, shares of Common Stock, units or rights based
upon, payable in, or otherwise related to, Common Stock pursuant to Section 6.7
hereof.


 


2.27                           “Performance Goal”
means any of the goals set forth in Section 6.10 hereof.


 


2.28                           “Reload Stock Option”
means a Nonqualified Stock Option or an Incentive Stock Option granted pursuant
to Section 8.3(c) hereof.


 


2.29                           “Reporting Participant”
means a Participant who is subject to the reporting requirements of Section 16
of the 1934 Act.


 


2.30                           “Restricted Stock”
means shares of Common Stock issued or transferred to a Participant pursuant to
Section 6.4 of this Plan which are subject to restrictions or
limitations set forth in this Plan and in the related Award Agreement.


 


2.31                           “Restricted Stock Units”
means units awarded to Participants pursuant to Section 6.6 hereof,
which are convertible into Common Stock at such time as such units are no
longer subject to restrictions as established by the Committee.


 


2.32                           “Retirement” means any
Termination of Service solely due to retirement upon or after attainment of age
sixty-two and a half (62 1⁄2), or permitted early retirement as determined by the
Committee.


 


2.33                           “SAR” or “stock appreciation right”
means the right to receive an amount, in cash and/or Common Stock, equal to the
excess of the Fair Market Value of a specified number of shares of Common Stock
as of the date the SAR is exercised (or, as provided in the Award Agreement,
converted) over the SAR Price for such shares.


 


2.34                           “SAR Price” means the
exercise price or conversion price of each share of Common Stock covered by a
SAR, determined on the Date of Grant of the SAR.


 


2.35                           “Stock Option” means a
Nonqualified Stock Option, a Reload
Stock Option or an Incentive Stock Option.


 


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2.36                           “Subsidiary” means (i) any
corporation in an unbroken chain of corporations beginning with the Company, if
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing a majority of the total combined voting power of all
classes of stock in one of the other corporations in the chain, (ii) any
limited partnership, if the Company or any corporation described in item (i) above
owns a majority of the general partnership interest and a majority of the
limited partnership interests entitled to vote on the removal and replacement
of the general partner, and (iii) any partnership or limited liability
company, if the partners or members thereof are composed only of the Company,
any corporation listed in item (i) above or any limited partnership listed
in item (ii) above.  “Subsidiaries”
means more than one of any such corporations, limited partnerships,
partnerships or limited liability companies.


 


2.37                           “Termination of Service”
occurs when a Participant who is (i) an Employee of the Company or any
Subsidiary ceases to serve as an Employee of the Company and its Subsidiaries,
for any reason; (ii) an Outside Director of the Company or a Subsidiary
ceases to serve as a director of the Company and its Subsidiaries for any
reason; or (iii) a Consultant of the Company or a Subsidiary ceases to
serve as a Consultant of the Company and its Subsidiaries for any reason.  Except as may be necessary or desirable to
comply with applicable federal or state law, a “Termination of Service” shall
not be deemed to have occurred when a Participant who is an Employee becomes an
Outside Director or Consultant or vice versa. 
If, however, a Participant who is an Employee and who has an Incentive
Stock Option ceases to be an Employee but does not suffer a Termination of
Service, and if that Participant does not exercise the Incentive Stock Option
within the time required under Section 422 of the Code upon ceasing to be
an Employee, the Incentive Stock Option shall thereafter become a Nonqualified
Stock Option.  Notwithstanding the
foregoing provisions of this Section 2.37, in the event an Award
issued under the Plan is subject to Section 409A of the Code, then, in
lieu of the foregoing definition and to the extent necessary to comply with the
requirements of Section 409A of the Code, the definition of “Termination
of Service” for purposes of such Award shall be the definition of “separation
from service” provided for under Section 409A of the Code and the regulations
or other guidance issued thereunder.


 


2.38                           “Total and Permanent Disability”
means a Participant is qualified for long-term disability benefits under the
Company’s or Subsidiary’s disability plan or insurance policy; or, if no such
plan or policy is then in existence or if the Participant is not eligible to
participate in such plan or policy, that the Participant, because of a physical
or mental condition resulting from bodily injury, disease, or mental disorder
which prevents the Participant from performing his or her duties of employment
for a period of six (6) continuous months, as determined in good faith by
the Committee, based upon medical reports or other evidence satisfactory to the
Committee; provided  that, with respect to any Incentive Stock
Option, Total and Permanent Disability shall have the meaning given it under
the rules governing Incentive Stock Options under the Code.
Notwithstanding the foregoing provisions of this Section 2.38, in
the event an Award issued under the Plan is subject to Section 409A of the
Code, then, in lieu of the foregoing definition and to the extent necessary to
comply with the requirements of Section 409A of the Code, the definition
of “Total and Permanent Disability” for purposes of such Award shall be the definition
of “disability” provided for under Section 409A of the Code and the
regulations or other guidance issued thereunder.


 


ARTICLE 3


ADMINISTRATION


 


3.1                               General
Administration; Establishment of Committee. 
Subject to the terms of this Article 3, the Plan shall be
administered by the Board or such committee of the Board as is designated by
the Board to administer the Plan (the “Committee”). The Committee shall consist of
not fewer than two persons.  Any member
of the Committee may be removed at any time, with or without cause, by
resolution of the Board. Any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.  At 


 


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any time there is no
Committee to administer the Plan, any references in this Plan to the Committee
shall be deemed to refer to the Board.


 


Membership on the
Committee shall be limited to those members of the Board who are “outside
directors” under Section 162(m) of the Code and “non-employee directors”
as defined in Rule 16b-3 promulgated under the 1934 Act.  The Committee shall select one of its members
to act as its Chairman.  A majority of
the Committee shall constitute a quorum, and the act of a majority of the
members of the Committee present at a meeting at which a quorum is present
shall be the act of the Committee.


 


3.2                               Designation
of Participants and Awards.


 


(a)                                  The
Committee or the Board shall determine and designate from time to time the
eligible persons to whom Awards will be granted and shall set forth in each
related Award Agreement, where applicable, the Award Period, the Date of Grant,
and such other terms, provisions, limitations, and performance requirements, as
are approved by the Committee, but not inconsistent with the Plan.  The Committee shall determine whether an
Award shall include one type of Incentive or two or more Incentives granted in
combination or two or more Incentives granted in tandem (that is, a joint grant
where exercise of one Incentive results in cancellation of all or a portion of
the other Incentive). Although the
members of the Committee shall be eligible to receive Awards, all
decisions with respect to any Award, and the terms and conditions thereof, to
be granted under the Plan to any member of the Committee shall be made solely
and exclusively by the other members of the Committee, or if such member is the
only member of the Committee, by the Board.


 


(b)                                 Notwithstanding
Section 3.2(a), the Board may, in its discretion and by a
resolution adopted by the Board, authorize one or more officers of the Company
(an “Authorized Officer”)
to (i) designate one or more Employees as eligible persons to whom Awards
will be granted under the Plan and (ii) determine the number of shares of
Common Stock that will be subject to such Awards; provided, however, that the
resolution of the Board granting such authority shall (x) specify the total
number of shares of Common Stock that may be made subject to the Awards, (y)
set forth the price or prices (or a formula by which such price or prices may
be determined) to be paid for the purchase of the Common Stock subject to such
Awards, and (z) not authorize an officer to designate himself as a recipient of
any Award.


 


3.3                               Authority
of the Committee.  The Committee, in
its discretion, shall (i) interpret the Plan, (ii) prescribe, amend,
and rescind any rules and regulations necessary or appropriate for the
administration of the Plan, (iii) establish performance goals for an Award
and certify the extent of their achievement, and (iv) make such other
determinations or certifications and take such other action as it deems
necessary or advisable in the administration of the Plan.  Any interpretation, determination, or other
action made or taken by the Committee shall be final, binding, and conclusive
on all interested parties.  The Committee’s
discretion set forth herein shall not be limited by any provision of the Plan,
including any provision which by its terms is applicable notwithstanding any
other provision of the Plan to the contrary.


 


The Committee may
delegate to officers of the Company, pursuant to a written delegation, the
authority to perform specified functions under the Plan.  Any actions taken by any officers of the
Company pursuant to such written delegation of authority shall be deemed to
have been taken by the Committee.


 


With respect to
restrictions in the Plan that are based on the requirements of Rule 16b-3
promulgated under the 1934 Act, Section 422 of the Code, Section 162(m)
of the Code, the rules of any exchange or inter-dealer quotation system
upon which the Company’s securities are listed or quoted, or any other
applicable law, rule or restriction (collectively, “applicable law”), to
the extent that any such restrictions are no longer required 


 


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by applicable law, the
Committee shall have the sole discretion and authority to grant Awards that are
not subject to such mandated restrictions and/or to waive any such mandated
restrictions with respect to outstanding Awards.


 


ARTICLE 4


ELIGIBILITY


 


Any Employee (including
an Employee who is also a director or an officer), Consultant or Outside
Director of the Company whose judgment, initiative, and efforts contributed or
may be expected to contribute to the successful performance of the Company is
eligible to participate in the Plan; provided that only Employees of a
corporation shall be eligible to receive Incentive Stock Options.  The Committee, upon its own action, may
grant, but shall not be required to grant, an Award to any Employee, Consultant
or Outside Director of the Company or any Subsidiary.  Awards may be granted by the Committee at any
time and from time to time to new Participants, or to then Participants, or to
a greater or lesser number of Participants, and may include or exclude previous
Participants, as the Committee shall determine. 
Except as required by this Plan, Awards granted at different times need
not contain similar provisions.  The
Committee’s determinations under the Plan (including without limitation determinations
of which Employees, Consultants or Outside Directors, if any, are to receive
Awards, the form, amount and timing of such Awards, the terms and provisions of
such Awards and the agreements evidencing same) need not be uniform and may be
made by it selectively among Participants who receive, or are eligible to
receive, Awards under the Plan.


 


ARTICLE 5


SHARES
SUBJECT TO PLAN


 


5.1                               Number
Available for Awards.  Subject to
adjustment as provided in Articles 11 and 12, the maximum number of
shares of Common Stock that may be delivered pursuant to Awards granted under
the Plan is 1,000,000 shares, of which 100%
may be delivered pursuant to Incentive Stock Options.  Subject to adjustment pursuant to Articles
11 and 12, no Executive Officer may receive in any calendar year (i) Stock
Options or SARs relating to more than 100,000 shares of Common Stock, or (ii) Restricted
Stock, Restricted Stock Units, Performance Awards or Other Awards that are
subject to the attainment of Performance Goals relating to more than 100,000
shares of Common Stock; provided, however, that all such Awards to any
Executive Officer during any calendar year shall not exceed an aggregate of
more than 100,000 shares of Common Stock. 
Shares to be issued may be made available from authorized but unissued
Common Stock, Common Stock held by the Company in its treasury, or Common Stock
purchased by the Company on the open market or otherwise.  During the term of this Plan, the Company
will at all times reserve and keep available the number of shares of Common
Stock that shall be sufficient to satisfy the requirements of this Plan.


 


5.2                               Reuse
of Shares.  To the extent that any
Award under this Plan shall be forfeited, shall expire or be canceled, in whole
or in part, then the number of shares of Common Stock covered by the Award or
stock option so forfeited, expired or canceled may again be awarded pursuant to
the provisions of this Plan.  In the
event that previously acquired shares of Common Stock are delivered to the
Company in full or partial payment of the exercise price for the exercise of a
Stock Option granted under this Plan, the number of shares of Common Stock
available for future Awards under this Plan shall be reduced only by the net
number of shares of Common Stock issued upon the exercise of the Stock
Option.  Awards that may be satisfied
either by the issuance of shares of Common Stock or by cash or other
consideration shall be counted against the maximum number of shares of Common
Stock that may be issued under this Plan only during the period that the Award
is outstanding or to the extent the Award is ultimately satisfied by the
issuance of shares of Common Stock. 
Awards will not reduce the number of shares of Common Stock that may be
issued pursuant to this Plan if the 


 


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settlement of the Award
will not require the issuance of shares of Common Stock, as, for example, a SAR
that can be satisfied only by the payment of cash.  Notwithstanding any provisions of the Plan to
the contrary, only shares forfeited back to the Company, shares canceled on
account of termination, expiration or lapse of an Award, shares surrendered in
payment of the exercise price of an option or shares withheld for payment of
applicable employment taxes and/or withholding obligations resulting from the
exercise of an option shall again be available for grant of Incentive Stock
Options under the Plan, but shall not increase the maximum number of shares
described in Section 5.1 above as the maximum number of shares of
Common Stock that may be delivered pursuant to Incentive Stock Options.


 


ARTICLE 6


GRANT OF AWARDS


 


6.1                               In
General.


 


(a)                                  The
grant of an Award shall be authorized by the Committee and shall be evidenced
by an Award Agreement setting forth the Incentive or Incentives being granted,
the total number of shares of Common Stock subject to the Incentive(s), the
Option Price (if applicable), the Award Period, the Date of Grant, and such
other terms, provisions, limitations, and performance objectives, as are
approved by the Committee, but not inconsistent with the Plan.  The Company shall execute an Award Agreement
with a Participant after the Committee approves the issuance of an Award.  Any Award granted pursuant to this Plan must
be granted within ten (10) years of the date of adoption of this Plan. The
Plan shall be submitted to the Company’s stockholders for approval; however,
the Committee may grant Awards under the Plan prior to the time of stockholder
approval.  Any such Award granted prior
to such stockholder approval shall be made subject to such stockholder
approval. The grant of an Award to a Participant shall not be deemed either to
entitle the Participant to, or to disqualify the Participant from, receipt of
any other Award under the Plan.


 


(b)                                 If
the Committee establishes a purchase price for an Award, the Participant must
accept such Award within a period of thirty (30) days (or such shorter period
as the Committee may specify) after the Date of Grant by executing the
applicable Award Agreement and paying such purchase price.


 


(c)                                  Any
Award under this Plan that is settled in whole or in part in cash on a deferred
basis may provide for interest equivalents to be credited with respect to such
cash payment. Interest equivalents may be compounded and shall be paid upon
such terms and conditions as may be specified by the grant.


 


6.2                               Option
Price.  The Option Price for any
share of Common Stock which may be purchased under a Nonqualified Stock Option
for any share of Common Stock may equal to or greater than the Fair Market
Value of the share on the Date of Grant. 
The Option Price for any share of Common Stock which may be purchased
under an Incentive Stock Option must be at least equal to the Fair Market Value
of the share on the Date of Grant; if an Incentive Stock Option is granted to
an Employee who owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) more than ten percent (10%) of the
combined voting power of all classes of stock of the Company (or any parent or
Subsidiary), the Option Price shall be at least 110% of the Fair Market Value
of the Common Stock on the Date of Grant.


 


6.3                               Maximum
ISO Grants.  The Committee may not
grant Incentive Stock Options under the Plan to any Employee which would permit
the aggregate Fair Market Value (determined on the Date of Grant) of the Common
Stock with respect to which Incentive Stock Options (under this and any other
plan of the 


 


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Company and its
Subsidiaries) are exercisable for the first time by such Employee during any
calendar year to exceed $100,000.  To the
extent any Stock Option granted under this Plan which is designated as an
Incentive Stock Option exceeds this limit or otherwise fails to qualify as an
Incentive Stock Option, such Stock Option (or any such portion thereof) shall
be a Nonqualified Stock Option.  In such
case, the Committee shall designate which stock will be treated as Incentive
Stock Option stock by causing the issuance of a separate stock certificate and
identifying such stock as Incentive Stock Option stock on the Company’s stock
transfer records.


 


6.4                               Restricted
Stock.  If Restricted Stock is
granted to or received by a Participant under an Award (including a Stock
Option), the Committee shall set forth in the related Award Agreement: (i) the
number of shares of Common Stock awarded, (ii) the price, if any, to be
paid by the Participant for such Restricted Stock and the method of payment of
the price, (iii) the time or times within which such Award may be subject
to forfeiture, (iv) specified Performance Goals of the Company, a
Subsidiary, any division thereof or any group of Employees of the Company, or
other criteria, which the Committee determines must be met in order to remove
any restrictions (including vesting) on such Award, and (v) all other
terms, limitations, restrictions, and conditions of the Restricted Stock, which
shall be consistent with this Plan.  The
provisions of Restricted Stock need not be the same with respect to each Participant.


 


(a)                                  Legend
on Shares.  Each Participant who is
awarded or receives Restricted Stock shall be issued a stock certificate or
certificates in respect of such shares of Common Stock.  Such certificate(s) shall be registered in
the name of the Participant, and shall bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock,
substantially as provided in Section 15.9 of the Plan.


 


(b)                                  Restrictions
and Conditions.  Shares of Restricted
Stock shall be subject to the following restrictions and conditions:


 


(i)                                     Subject
to the other provisions of this Plan and the terms of the particular Award
Agreements, during such period as may be determined by the Committee commencing
on the Date of Grant or the date of exercise of an Award (the “Restriction Period”),
the Participant shall not be permitted to sell, transfer, pledge or assign
shares of Restricted Stock. Except for these limitations, the Committee may in
its sole discretion, remove any or all of the restrictions on such Restricted
Stock whenever it may determine that, by reason of changes in applicable laws
or other changes in circumstances arising after the date of the Award, such
action is appropriate.


 


(ii)                                  Except
as provided in sub-paragraph (i) above or in the applicable Award
Agreement, the Participant shall have, with respect to his or her Restricted
Stock, all of the rights of a stockholder of the Company, including the right
to vote the shares, and the right to receive any dividends thereon.  Certificates for shares of Common Stock free
of restriction under this Plan shall be delivered to the Participant promptly
after, and only after, the Restriction Period shall expire without forfeiture
in respect of such shares of Common Stock or after any other restrictions
imposed in such shares of Common Stock by the applicable Award Agreement or
other agreement have expired. 
Certificates for the shares of Common Stock forfeited under the
provisions of the Plan and the applicable Award Agreement shall be promptly
returned to the Company by the forfeiting Participant.  Each Award Agreement shall require that each Participant, in connection with the
issuance of a certificate for Restricted Stock, shall endorse such certificate
in blank or execute a stock power in form satisfactory to the Company in blank
and deliver such certificate and executed stock power to the Company.


 


9





















 


(iii)                               The
Restriction Period of Restricted Stock shall commence on the Date of Grant or
the date of exercise of an Award, as specified in the Award Agreement, and,
subject to Article 12 of the Plan, unless otherwise established by
the Committee in the Award Agreement setting forth the terms of the Restricted
Stock, shall expire upon satisfaction of the conditions set forth in the Award
Agreement; such conditions may provide for vesting based on such Performance
Goals, as may be determined by the Committee in its sole discretion.


 


(iv)                              Except
as otherwise provided in the particular Award Agreement, upon Termination of
Service for any reason during the Restriction Period, the nonvested shares of
Restricted Stock shall be forfeited by the Participant.  In the event a Participant has paid any
consideration to the Company for such forfeited Restricted Stock, the Committee
shall specify in the Award Agreement that either (i) the Company shall be
obligated to, or (ii) the Company may, in its sole discretion, elect to,
pay to the Participant, as soon as practicable after the event causing
forfeiture, in cash, an amount equal to the lesser of the total consideration
paid by the Participant for such forfeited shares or the Fair Market Value of
such forfeited shares as of the date of Termination of Service, as the
Committee, in its sole discretion shall select. Upon any forfeiture, all rights
of a Participant with respect to the forfeited shares of the Restricted Stock
shall cease and terminate, without any further obligation on the part of the
Company.


 


6.5                               SARs.  The Committee
may grant SARs to any Participant, either as a separate Award or in connection
with a Stock Option.  SARs shall be
subject to such terms and conditions as the Committee shall impose, provided
that such terms and conditions are (i)  not inconsistent with the Plan and
(ii) to the extent a SAR issued under the Plan is subject to Section 409A
of the Code, in compliance with the applicable requirements of Section 409A
of the Code and the regulations or other guidance issued thereunder.  The grant of the SAR may provide that the
holder may be paid for the value of the SAR either in cash or in shares of
Common Stock, or a combination thereof. 
In the event of the exercise of a SAR payable in shares of Common Stock,
the holder of the SAR shall receive that number of whole shares of Common Stock
having an aggregate Fair Market Value on the date of exercise equal to the
value obtained by multiplying (i) the difference between the Fair Market
Value of a share of Common Stock on the date of exercise over the SAR Price as
set forth in such SAR (or other value specified in the agreement granting the
SAR), by (ii) the number of shares of Common Stock as to which the SAR is
exercised, with a cash settlement to be made for any fractional shares of
Common Stock.  The SAR Price for any
share of Common Stock subject to a SAR may be equal to or greater than the Fair
Market Value of the share on the Date of Grant. 
The Committee, in its sole discretion, may place a ceiling on the amount
payable upon exercise of a SAR, but any such limitation shall be specified at
the time that the SAR is granted.


 


6.6                               Restricted
Stock Units.  Restricted Stock Units
may be awarded or sold to any Participant under such terms and conditions as
shall be established by the Committee, provided, however, that such terms and
conditions are (i) not inconsistent with the Plan and (ii) to the
extent a Restricted Stock Unit issued under the Plan is subject to Section 409A
of the Code, in compliance with the applicable requirements of Section 409A
of the Code and the regulations or other guidance issued thereunder).  Restricted Stock Units shall be subject to
such restrictions as the Committee determines, including, without limitation, (a) a
prohibition against sale, assignment, transfer, pledge, hypothecation or other
encumbrance for a specified period; or (b) a requirement that the holder
forfeit (or in the case of shares of Common Stock or units sold to the
Participant, resell to the Company at cost) such shares or units in the event
of Termination of Service during the period of restriction.


 


10





















 


6.7                               Performance
Awards.


 


(a)                                  The
Committee may grant Performance Awards to any Participant upon such terms and
conditions as shall be specified at the time of the grant and may include
provisions establishing the performance period, the Performance Goals to be
achieved during a performance period, and the maximum or minimum settlement
values, provided that such terms and
conditions are (i) not inconsistent with the Plan and (ii) to the
extent a Performance Award issued under the Plan is subject to Section 409A
of the Code, in compliance with the applicable requirements of Section 409A
of the Code and the regulations or other guidance issued thereunder.  Each Performance Award shall have its
own terms and conditions.  At the time of
the grant of a Performance Award intended to satisfy the requirements of Section 162(m)
of the Code  (other than a Stock Option)
and to the extent permitted under Section 162(m) of the Code and the
regulations issued thereunder, the Committee:


 


(i)                                     shall
provide for the manner in which the Performance Goals shall be reduced to take
into account the negative effect on the attained levels of the Performance
Goals which result from specified corporate transactions, extraordinary events,
accounting changes and other similar occurrences, so long as those
transactions, events, changes and occurrences were not certain at the time the
Performance Goal was initially established and the amount of the Performance
Award for any Participant is not increased, unless the reduction in the
Performance Goals would reduce or eliminate the amount of the Performance
Award, and the Committee determines not to make such reduction; and


 


(ii)                                  may
provide for the manner in which the Performance Goals will be measured in light
of specified corporate transactions, extraordinary events, accounting changes
and other similar occurrences, to the extent those transactions, events,
changes and occurrences have a positive effect on the attained levels of the Performance
Goals, so long as the Committee’s actions do not increase the amount of the
Performance Award for any Participant.


 


The determination of the
amount of any reduction in the Performance Goals shall be made by the Committee
in consultation with the Company’s independent auditor or compensation
consultant.  With respect to a
Performance Award that is not intended to satisfy the requirements of Section 162(m)
of the Code, if the
Committee determines, in its sole discretion, that the established performance
measures or objectives are no longer suitable because of a change in the
Company’s business, operations, corporate structure, or for other reasons that
the Committee deemed satisfactory, the Committee may modify the performance
measures or objectives and/or the performance period.


 


(b)                                 Performance
Awards may be valued by reference to the Fair Market Value of a share of Common
Stock or according to any formula or method deemed appropriate by the
Committee, in its sole discretion, including, but not limited to, achievement
of Performance Goals or other specific financial, production, sales or cost
performance objectives that the Committee believes to be relevant to the
Company’s business and/or remaining in the employ of the Company for a
specified period of time.  Performance
Awards may be paid in cash, shares of Common Stock, or other consideration, or
any combination thereof.  If payable in
shares of Common Stock, the consideration for the issuance of such shares may
be the achievement of the performance objective established at the time of the
grant of the Performance Award. 
Performance Awards may be payable in a single payment or in installments
and may be payable at a specified date or dates or upon attaining the
performance objective.  The extent to which
any applicable performance objective has been achieved shall be conclusively
determined by the Committee.


 


11





















 


6.8                               Dividend
Equivalent Rights.  The Committee may
grant a Dividend Equivalent Right to any Participant, either as a component of
another Award or as a separate Award. The terms and conditions of the Dividend
Equivalent Right shall be specified by the grant.  Dividend equivalents credited to the holder
of a Dividend Equivalent Right may be paid currently or may be deemed to be
reinvested in additional shares of Common Stock (which may thereafter accrue
additional dividend equivalents).  Any
such reinvestment shall be at the Fair Market Value at the time thereof.  Dividend Equivalent Rights may be settled in
cash or shares of Common Stock, or a combination thereof, in a single payment
or in installments.  A Dividend
Equivalent Right granted as a component of another Award may provide that such
Dividend Equivalent Right shall be settled upon exercise, settlement, or
payment of, or lapse of restrictions on, such other Award, and that such
Dividend Equivalent Right granted as a component of another Award may also
contain terms and conditions different from such other Award.


 


6.9                               Other
Awards.  The Committee may grant to
any Participant other forms of Awards, based upon, payable in, or otherwise
related to, in whole or in part, shares of Common Stock, if the Committee
determines that such other form of Award is consistent with the purpose and
restrictions of this Plan.  The terms and
conditions of such other form of Award shall be specified by the grant.  Such Other Awards may be granted for no cash
consideration, for such minimum consideration as may be required by applicable
law, or for such other consideration as may be specified by the grant.


 


6.10                        Performance
Goals.  Awards of Restricted Stock,
Restricted Stock Units, Performance Award and Other Awards (whether relating to
cash or shares of Common Stock) under the Plan may be made subject to the
attainment of Performance Goals relating to one or more business criteria
within the meaning of Section 162(m) of the Code may consist of one or
more or any combination of the following criteria: cash flow; cost;
revenues;  sales; ratio of debt to debt
plus equity; net borrowing, credit quality or debt ratings; profit before tax;
economic profit; earnings before interest and taxes; earnings before interest,
taxes, depreciation and amortization; gross margin; earnings per share (whether
on a pre-tax, after-tax, operational or other basis); operating earnings;
capital expenditures; expenses or expense levels; economic value added; ratio
of operating earnings to capital spending or any other operating ratios; free
cash flow; net profit; net sales; net asset value per share; the accomplishment
of mergers, acquisitions, dispositions, public offerings or similar
extraordinary business transactions; sales growth; price of the Company’s
Common Stock; return on assets, equity or stockholders’ equity; market share;
inventory levels, inventory turn or shrinkage; or total return to stockholders
(“Performance Criteria”).  Any Performance Criteria may be used to
measure the performance of the Company as a whole or any business unit of the
Company and may be measured relative to a peer group or index.  Any Performance Criteria may include or
exclude (i) extraordinary, unusual and/or non-recurring items of gain or
loss, (ii) gains or losses on the disposition of a business, (iii) changes
in tax or accounting regulations or laws, or (iv) the effect of a merger
or acquisition, as identified in the Company’s quarterly and annual earnings
releases.  In all other respects,
Performance Criteria shall be calculated in accordance with the Company’s
financial statements, under generally accepted accounting principles, or under
a methodology established by the Committee prior to the issuance of an Award
which is consistently applied and identified in the audited financial
statements, including footnotes, or the Management Discussion and Analysis section of
the Company’s annual report.  However,
the Committee may not in any event increase the amount of compensation payable
to an individual upon the attainment of a Performance Goal.


 


6.11                        Tandem
Awards.  The Committee may grant two
or more Incentives in one Award in the form of a “tandem Award,” so that the
right of the Participant to exercise one Incentive shall be canceled if, and to
the extent, the other Incentive is exercised. 
For example, if a Stock Option and a SAR are issued in a tandem Award,
and the Participant exercises the SAR with respect to 100 shares of Common
Stock, the right of the Participant to exercise the related Stock Option shall
be canceled to the extent of 100 shares of Common Stock.


 


12





















 


ARTICLE 7


AWARD
PERIOD; VESTING


 


7.1                               Award
Period.  Subject to the other
provisions of this Plan, the Committee may, in its discretion, provide that an
Incentive may not be exercised in whole or in part for any period or periods of
time or beyond any date specified in the Award Agreement.  Except as provided in the Award Agreement, an
Incentive may be exercised in whole or in part at any time during its
term.  The Award Period for an Incentive
shall be reduced or terminated upon Termination of Service.  No Incentive granted under the Plan may be
exercised at any time after the end of its Award Period.  No portion of any Incentive may be exercised
after the expiration of ten (10) years from its Date of Grant.  However, if an Employee owns or is deemed to
own (by reason of the attribution rules of Section 424(d) of the
Code) more than ten percent (10%) of the combined voting power of all classes
of stock of the Company (or any parent or Subsidiary) and an Incentive Stock
Option is granted to such Employee, the term of such Incentive Stock Option (to
the extent required by the Code at the time of grant) shall be no more than
five (5) years from the Date of Grant.


 


7.2                               Vesting.  The Committee, in its sole discretion, may
determine that an Incentive will be immediately vested in whole or in part, or
that all or any portion may not be vested until a date, or dates, subsequent to
its Date of Grant, or until the occurrence of one or more specified events,
subject in any case to the terms of the Plan. 
If the Committee imposes conditions upon vesting, then, subsequent to
the Date of Grant, the Committee may, in its sole discretion, accelerate the
date on which all or any portion of the Incentive may be vested.


 


ARTICLE 8


EXERCISE
OR CONVERSION OF INCENTIVE


 


8.1                               In General.  A vested
Incentive may be exercised or converted, during its Award Period, subject to
limitations and restrictions set forth in the Award Agreement.


 


8.2                               Securities
Law and Exchange Restrictions.  In no
event may an Incentive be exercised or shares of Common Stock be issued
pursuant to an Award if a necessary listing or quotation of the shares of
Common Stock on a stock exchange or inter-dealer quotation system or any
registration under state or federal securities laws required under the circumstances
has not been accomplished.


 


8.3                               Exercise
of Stock Option.


 


(a)                                  In
General.  If a Stock Option is
exercisable prior to the time it is vested, the Common Stock obtained on the
exercise of the Stock Option shall be Restricted Stock which is subject to the
applicable provisions of the Plan and the Award Agreement.  If the Committee imposes conditions upon
exercise, then subsequent to the Date of Grant, the Committee may, in its sole
discretion, accelerate the date on which all or any portion of the Stock Option
may be exercised.  No Stock Option may be
exercised for a fractional share of Common Stock.  The granting of a Stock Option shall impose
no obligation upon the Participant to exercise that Stock Option.


 


(b)                                  Notice
and Payment.  Subject to such
administrative regulations as the Committee may from time to time adopt, a
Stock Option may be exercised by the delivery of written notice to the
Committee setting forth the number of shares of Common Stock with respect to
which the Stock Option is to be exercised and the date of exercise thereof (the
“Exercise Date”)
which shall be at least three (3) days after giving such notice unless an
earlier time shall have been mutually agreed upon.  


 


13





















 


On the Exercise Date, the
Participant shall deliver to the Company consideration with a value equal to
the total Option Price of the shares to be purchased, payable as provided in
the Award Agreement, which may provide for payment in any one or more of the
following ways:  (a) cash or check,
bank draft, or money order payable to the order of the Company, (b) Common
Stock (including Restricted Stock) owned by the Participant on the Exercise
Date, valued at its Fair Market Value on the Exercise Date, and which the Participant
has not acquired from the Company within six (6) months prior to the
Exercise Date, (c) by delivery (including by FAX) to the Company or its
designated agent of an executed irrevocable option exercise form together with
irrevocable instructions from the Participant to a broker or dealer, reasonably
acceptable to the Company, to sell certain of the shares of Common Stock
purchased upon exercise of the Stock Option or to pledge such shares as
collateral for a loan and promptly deliver to the Company the amount of sale or
loan proceeds necessary to pay such purchase price, and/or (d) in any
other form of valid consideration that is acceptable to the Committee in its
sole discretion.  In the event that shares of Restricted Stock are tendered as consideration
for the exercise of a Stock Option, a number of shares of Common Stock issued
upon the exercise of the Stock Option equal to the number of shares of
Restricted Stock used as consideration therefor shall be subject to the same
restrictions and provisions as the Restricted Stock so tendered.


 


(c)                                  Reload
Stock Options.  In the event
that shares of Common Stock are delivered by a Participant in payment of all or
a portion of the exercise price of a Stock Option as set forth in Section 8.3(b) above
and/or shares of Common Stock are delivered to or withheld by the Company in
satisfaction of the Company’s tax withholding obligations upon exercise in
accordance with Section 15.6 hereof, then, subject to Article 10
hereof, the Committee may authorize the automatic grant to a Participant so
exercising a Nonqualified Stock Option, a replacement Nonqualified Stock
Option, and to a Participant so exercising an Incentive Stock Option, a
replacement Incentive Stock Option (in either case, a “Reload Stock Option”), to purchase that number of
shares so delivered to or withheld by the Company, as the case may be, at an
option exercise price equal to the Fair Market Value per share of the Common
Stock on the date of exercise of the original Stock Option (subject to the provisions
of the Plan regarding Incentive Stock Options and, in any event not less than
the par value per share of the Common Stock). The option period for a Reload
Stock Option will commence on its Date of Grant and expire on the expiration
date of the original Stock Option it replaces (subject to the provisions of the
Plan regarding Incentive Stock Options), after which period the Reload Stock
Option cannot be exercised.  The Date of
Grant of a Reload Stock Option shall be the date that the Stock Option it replaces
is exercised.  A Reload Stock Option
shall automatically vest and be exercisable in full after the expiration of six
(6) months from its Date of Grant. 
It shall be a condition to the grant of a Reload Stock Option that
promptly after its Date of Grant, a stock option agreement shall be delivered
to the Participant and executed by the Participant and the Company which sets
forth the total number of shares subject to the Reload Stock Option, the option
exercise price, the option period of the Reload Stock Option and such other
terms and provisions as are consistent with the Plan.


 


(d)                                  Issuance
of Certificate.  Except as otherwise
provided in Section 6.4 hereof (with respect to shares of
Restricted Stock) or in the applicable Award Agreement, upon payment of all
amounts due from the Participant, the Company shall cause certificates for the
Common Stock then being purchased to be delivered as directed by the
Participant (or the person exercising the Participant’s Stock Option in the
event of his death) at its principal business office promptly after the
Exercise Date; provided that if the Participant has exercised an Incentive
Stock Option, the Company may at its option retain physical possession of the
certificate evidencing the shares acquired upon exercise until the expiration
of the holding periods described in Section 422(a)(1) of the Code.
The obligation of the Company to deliver shares of Common Stock shall, however,
be subject to the condition that, if at any time the Committee shall determine
in its discretion that the listing, registration, or qualification of the Stock
Option or the Common Stock upon any securities exchange 


 


14





















 


or inter-dealer quotation
system or under any state or federal law, or the consent or approval of any
governmental regulatory body, is necessary as a condition of, or in connection
with, the Stock Option or the issuance or purchase of shares of Common Stock
thereunder, the Stock Option may not be exercised in whole or in part unless
such listing, registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not reasonably acceptable to the
Committee.


 


(e)                                  Failure
to Pay.  Except as may otherwise be
provided in an Award Agreement, if the Participant fails to pay for any of the
Common Stock specified in such notice or fails to accept delivery thereof, that
portion of the Participant’s Stock Option and right to purchase such Common
Stock may be forfeited by the Company.


 


8.4                               SARs.  Subject to
the conditions of this Section 8.4 and such administrative regulations as
the Committee may from time to time adopt, a SAR may be exercised by the
delivery (including by FAX) of written notice to the Committee setting forth
the number of shares of Common Stock with respect to which the SAR is to be
exercised and the date of exercise thereof (the “Exercise Date”) which shall be at least
three (3) days after giving such notice unless an earlier time shall have
been mutually agreed upon. Subject to the terms of the Award Agreement and only
if permissible under Section 409A of the Code and the regulations or other
guidance issued thereunder (or, if not so permissible, at such time as
permitted by Section 409A of the Code and the regulations or other guidance
issued thereunder), the Participant shall receive from the Company in exchange
therefor in the discretion of the Committee, and subject to the terms of the
Award Agreement:


 


(i)                                     cash in an amount equal to the excess (if
any) of the Fair Market Value (as of the date of the exercise, or if provided
in the Award Agreement, conversion, of the SAR) per share of Common Stock over
the SAR Price per share specified in such SAR, multiplied by the total number
of shares of Common Stock of the SAR being surrendered;


 


(ii)                                  that number of shares of Common Stock having
an aggregate Fair Market Value (as of the date of the exercise, or if provided
in the Award Agreement, conversion, of the SAR) equal to the amount of cash
otherwise payable to the Participant, with a cash settlement to be made for any
fractional share interests; or


 


(iii)                               the Company may settle such obligation in
part with shares of Common Stock and in part with cash.


 


The
distribution of any cash or Common Stock pursuant to the foregoing sentence shall
be made at such time as set forth in the Award Agreement.


 


8.5                               Disqualifying
Disposition of Incentive Stock Option. 
If shares of Common Stock acquired upon exercise of an Incentive Stock
Option are disposed of by a Participant prior to the expiration of either two (2) years
from the Date of Grant of such Stock Option or one (1) year from the
transfer of shares of Common Stock to the Participant pursuant to the exercise
of such Stock Option, or in any other disqualifying disposition within the
meaning of Section 422 of the Code, such Participant shall notify the
Company in writing of the date and terms of such disposition.  A disqualifying disposition by a Participant
shall not affect the status of any other Stock Option granted under the Plan as
an Incentive Stock Option within the meaning of Section 422 of the Code.


 


15





















 


ARTICLE 9


AMENDMENT
OR DISCONTINUANCE


 


Subject to the
limitations set forth in this Article 9, the Board may at any time
and from time to time, without the consent of the Participants, alter, amend,
revise, suspend, or discontinue the Plan in whole or in part; provided,
however, that no amendment for which stockholder approval is required either (i) by
any securities exchange or inter-dealer quotation system on which the Common
Stock is listed or traded or (ii) in order for the Plan and Incentives
awarded under the Plan to continue to comply with Sections 162(m), 421, and 422
of the Code, including any successors to such Sections;  shall be effective unless such amendment
shall be approved by the requisite vote of the stockholders of the Company
entitled to vote thereon.  Any such
amendment shall, to the extent deemed necessary or advisable by the Committee,
be applicable to any outstanding Incentives theretofore granted under the Plan,
notwithstanding any contrary provisions contained in any Award Agreement.  In the event of any such amendment to the
Plan, the holder of any Incentive outstanding under the Plan shall, upon
request of the Committee and as a condition to the exercisability thereof,
execute a conforming amendment in the form prescribed by the Committee to any
Award Agreement relating thereto. 
Notwithstanding anything contained in this Plan to the contrary, unless
required by law, no action contemplated or permitted by this Article 9
shall adversely affect any rights of Participants or obligations of the Company
to Participants with respect to any Incentive theretofore granted under the
Plan without the consent of the affected Participant.


 


ARTICLE 10


TERM


 


The Plan shall be
effective from the date that this Plan is approved by the Board.  Unless sooner terminated by action of the
Board, the Plan will terminate on December 7, 2015, but Incentives granted
before that date will continue to be effective in accordance with their terms
and conditions.


 


ARTICLE 11


CAPITAL
ADJUSTMENTS


 


In the event that the
Committee shall determine that any dividend or other distribution (whether in
the form of cash, Common Stock, other securities, or other property),
recapitalization, stock split, reverse stock split, rights offering,
reorganization, merger, consolidation, split-up, spin-off, split-off,
combination, subdivision, repurchase, or exchange of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase
Common Stock or other securities of the Company, or other similar corporate
transaction or event affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate to prevent the dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee shall, in such manner as it may deem
equitable, adjust any or all of the (i) the number of shares and type of
Common Stock (or the securities or property) which thereafter may be made the
subject of Awards, (ii) the number of shares and type of Common Stock (or
other securities or property) subject to outstanding Awards, (iii) the
number of shares and type of Common Stock (or other securities or property)
specified as the annual per-participant limitation under Section 5.1
of the Plan, (iv) the Option Price of each outstanding Award, (v) the
amount, if any, the Company pays for forfeited shares of Common Stock in
accordance with Section 6.4, and (vi) the number of or SAR
Price of shares of Common Stock then subject to outstanding SARs previously
granted and unexercised under the Plan to the end that the same proportion of
the Company’s issued and outstanding shares of Common Stock in each instance
shall remain subject to exercise at the same aggregate SAR Price; provided
however, that the number of shares of Common Stock (or other securities or
property) subject to any Award shall always be a whole 


 


16





















 


number.  In lieu of the foregoing, if deemed
appropriate, the Committee may make provision for a cash payment to the holder
of an outstanding Award.  Notwithstanding
the foregoing, no such adjustment or cash payment shall be made or authorized
to the extent that such adjustment or cash payment would cause the Plan or any
Stock Option to violate Section 422 of the Code.  Such adjustments shall be made in accordance
with the rules of any securities exchange, stock market, or stock
quotation system to which the Company is subject.


 


Upon the occurrence of
any such adjustment or cash payment, the Company shall provide notice to each
affected Participant of its computation of such adjustment or cash payment
which shall be conclusive and shall be binding upon each such Participant.


 


ARTICLE 12


RECAPITALIZATION,
MERGER AND CONSOLIDATION


 


12.1                        No Effect
on Company’s Authority.  The
existence of this Plan and Incentives granted hereunder shall not affect in any
way the right or power of the Company or its stockholders to make or authorize
any or all adjustments, recapitalizations, reorganizations, or other changes in
the Company’s capital structure and its business, or any Change in Control, or
any merger or consolidation of the Company, or any issuance of bonds,
debentures, preferred or preference stocks ranking prior to or otherwise
affecting the Common Stock or the rights thereof (or any rights, options, or
warrants to purchase same), or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.


 


12.2                        Conversion
of Incentives Where Company Survives. 
Subject to any required action by the stockholders and except as
otherwise provided by Section 12.4 hereof or as may be required to
comply with Section 409A of the Code and the regulations or other guidance
issued thereunder, if the Company shall be the surviving or resulting
corporation in any merger, consolidation or share exchange, any Incentive
granted hereunder shall pertain to and apply to the securities or rights
(including cash, property, or assets) to which a holder of the number of shares
of Common Stock subject to the Incentive would have been entitled.


 


12.3                        Exchange
or Cancellation of Incentives Where Company Does Not Survive.  Except as otherwise provided by Section 12.4
hereof or as may be required to comply with Section 409A of the Code and
the regulations or other guidance issued thereunder, in the event of any
merger, consolidation or share exchange pursuant to which the Company is not
the surviving or resulting corporation, there shall be substituted for each
share of Common Stock subject to the unexercised portions of outstanding
Incentives, that number of shares of each class of stock or other securities or
that amount of cash, property, or assets of the surviving, resulting or
consolidated company which were distributed or distributable to the
stockholders of the Company in respect to each share of Common Stock held by
them, such outstanding Incentives to be thereafter exercisable for such stock,
securities, cash, or property in accordance with their terms.


 


12.4                        Cancellation
of Incentives.  Notwithstanding the
provisions of Sections 12.2 and 12.3 hereof, and except as may be
required to comply with Section 409A of the Code and the regulations or
other guidance issued thereunder, all Incentives granted hereunder may be
canceled by the Company, in its sole discretion, as of the effective date of
any Change in Control, merger, consolidation or share exchange, or any issuance
of bonds, debentures, preferred or preference stocks ranking prior to or
otherwise affecting the Common Stock or the rights thereof (or any rights,
options, or warrants to purchase same), or of any proposed sale of all or
substantially all of the assets of the Company, or of any dissolution or
liquidation of the Company, by either:


 


(a)                                  giving
notice to each holder thereof or his personal representative of its intention
to cancel those Incentives for which the issuance of shares of Common Stock
involved payment by the 


 


17





















 


Participant for such
shares and, permitting the purchase during the thirty (30) day period next
preceding such effective date of any or all of the shares of Common Stock
subject to such outstanding Incentives, including in the Board’s discretion
some or all of the shares as to which such Incentives would not otherwise be
vested and exercisable; or


 


(b)                                 in
the case of Incentives that are either (i) settled only in shares of
Common Stock, or (ii) at the election of the Participant, settled in
shares of Common Stock, paying the holder thereof an amount equal to a
reasonable estimate of the difference between the net amount per share payable
in such transaction or as a result of such transaction, and the price per share
of such Incentive to be paid by the Participant (hereinafter the “Spread”), multiplied
by the number of shares subject to the Incentive.  In cases where the shares constitute, or
would after exercise, constitute Restricted Stock, the Company, in its
discretion may include some or all of those shares in the calculation of the
amount payable hereunder.  In estimating
the Spread, appropriate adjustments to give effect to the existence of the
Incentives shall be made, such as deeming the Incentives to have been
exercised, with the Company receiving the exercise price payable thereunder,
and treating the shares receivable upon exercise of the Incentives as being outstanding
in determining the net amount per share. 
In cases where the proposed transaction consists of the acquisition of
assets of the Company, the net amount per share shall be calculated on the
basis of the net amount receivable with respect to shares of Common Stock upon
a distribution and liquidation by the Company after giving effect to expenses
and charges, including but not limited to taxes, payable by the Company before
such liquidation could be completed.


 


(c)                                  An
Award that by its terms would be fully vested or exercisable upon a Change in
Control will be considered vested or exercisable for purposes of Section 12.4(a) hereof.


 


ARTICLE 13


LIQUIDATION
OR DISSOLUTION


 


Subject to Section 12.4
hereof, in case the Company shall, at any time while any Incentive under this
Plan shall be in force and remain unexpired, (i) sell all or substantially
all of its property, or (ii) dissolve, liquidate, or wind up its affairs,
then each Participant shall be entitled to receive, in lieu of each share of
Common Stock of the Company which such Participant would have been entitled to
receive under the Incentive, the same kind and amount of any securities or
assets as may be issuable, distributable, or payable upon any such sale,
dissolution, liquidation, or winding up with respect to each share of Common
Stock of the Company.  If the Company
shall, at any time prior to the expiration of any Incentive, make any partial
distribution of its assets, in the nature of a partial liquidation, whether
payable in cash or in kind (but excluding the distribution of a cash dividend
payable out of earned surplus and designated as such) and an adjustment is
determined by the Committee to be appropriate to prevent the dilution of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee shall, in such manner as it may deem equitable, make such
adjustment in accordance with the provisions of Article 11 hereof.


 


ARTICLE 14


INCENTIVES
IN SUBSTITUTION FOR


INCENTIVES
GRANTED BY OTHER ENTITIES


 


Incentives may be
granted under the Plan from time to time in substitution for similar
instruments held by employees, consultants or directors of a corporation,
partnership, or limited liability company who become or are about to become
Employees, Consultants or Outside Directors of the Company or any Subsidiary as
a 


 


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result of a merger or
consolidation of the employing corporation with the Company, the acquisition by
the Company of equity of the employing entity, or any other similar transaction
pursuant to which the Company becomes the successor employer.  The terms and conditions of the substitute
Incentives so granted may vary from the terms and conditions set forth in this
Plan to such extent as the Committee at the time of grant may deem appropriate
to conform, in whole or in part, to the provisions of the Incentives in
substitution for which they are granted.


 


ARTICLE 15


MISCELLANEOUS
PROVISIONS


 


15.1                        Investment Intent. 
The Company may require that there be presented to and filed with it by
any Participant under the Plan, such evidence as it may deem necessary to
establish that the Incentives granted or the shares of Common Stock to be
purchased or transferred are being acquired for investment and not with a view
to their distribution.


 


15.2                        No Right to Continued Employment.  Neither the Plan nor any Incentive granted
under the Plan shall confer upon any Participant any right with respect to
continuance of employment by the Company or any Subsidiary.


 


15.3                        Indemnification of Board and Committee.  No member of the Board or the Committee, nor
any officer or Employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board and the Committee, each officer of the Company, and each
Employee of the Company acting on behalf of the Board or the Committee shall,
to the extent permitted by law, be fully indemnified and protected by the
Company in respect of any such action, determination, or interpretation.


 


15.4                        Effect of
the Plan.  Neither the adoption of
this Plan nor any action of the Board or the Committee shall be deemed to give
any person any right to be granted an Award or any other rights except as may
be evidenced by an Award Agreement, or any amendment thereto, duly authorized
by the Committee and executed on behalf of the Company, and then only to the
extent and upon the terms and conditions expressly set forth therein.


 


15.5                        Compliance With Other Laws and Regulations.  Notwithstanding anything contained herein to
the contrary, the Company shall not be required to sell or issue shares of
Common Stock under any Incentive if the issuance thereof would constitute a
violation by the Participant or the Company of any provisions of any law or
regulation of any governmental authority or any national securities exchange or
inter-dealer quotation system or other forum in which shares of Common Stock
are quoted or traded (including without limitation Section 16 of the 1934
Act and Section 162(m) of the Code); and, as a condition of any sale or
issuance of shares of Common Stock under an Incentive, the Committee may
require such agreements or undertakings, if any, as the Committee may deem
necessary or advisable to assure compliance with any such law or
regulation.  The Plan, the grant and
exercise of Incentives hereunder, and the obligation of the Company to sell and
deliver shares of Common Stock, shall be subject to all applicable federal and
state laws, rules and regulations and to such approvals by any government
or regulatory agency as may be required.


 


15.6                        Tax Requirements.  The
Company or, if applicable, any Subsidiary (for purposes of this Section 15.6,
the term “Company”
shall be deemed to include any applicable Subsidiary), shall have the right to
deduct from all amounts paid in cash or other form in connection with the Plan,
any Federal, state, local, or other taxes required by law to be withheld in connection
with an Award granted under this Plan. 
The Company may, in its sole discretion, also require the Participant
receiving shares of Common Stock issued 


 


19





















 


under the Plan to pay the
Company the amount of any taxes that the Company is required to withhold in
connection with the Participant’s income arising with respect to the
Award.  Such payments shall be required
to be made when requested by Company and may be required to be made prior to
the delivery of any certificate representing shares of Common Stock.  Such payment may be made (i) by the
delivery of cash to the Company in an amount that equals or exceeds (to avoid
the issuance of fractional shares under (iii) below) the required tax
withholding obligations of the Company; (ii) if the Company, in its sole
discretion, so consents in writing, the actual delivery by the exercising
Participant to the Company of shares of Common Stock that the Participant has
not acquired from the Company within six (6) months prior to the date of
exercise, which shares so delivered have an aggregate Fair Market Value that
equals or exceeds (to avoid the issuance of fractional shares under (iii) below)
the required tax withholding payment; (iii) if the Company, in its sole
discretion, so consents in writing, the Company’s withholding of a number of
shares to be delivered upon the exercise of the Stock Option, which shares so
withheld have an aggregate fair market value that equals (but does not exceed)
the required tax withholding payment; or (iv) any combination of (i),
(ii), or (iii).  The Company may, in its
sole discretion, withhold any such taxes from any other cash remuneration
otherwise paid by the Company to the Participant.  The Committee may in the Award Agreement
impose any additional tax requirements or provisions that the Committee deems
necessary or desirable.


 


15.7                        Assignability.  Incentive Stock Options may not be
transferred, assigned, pledged, hypothecated or otherwise conveyed or
encumbered other than by will or the laws of descent and distribution and may
be exercised during the lifetime of the Participant only by the Participant or
the Participant’s legally authorized representative, and each Award Agreement
in respect of an Incentive Stock Option shall so provide. The designation by a
Participant of a beneficiary will not constitute a transfer of the Stock
Option.  The Committee may waive or
modify any limitation contained in the preceding sentences of this Section 15.7
that is not required for compliance with Section 422 of the Code.


 


Except as otherwise
provided herein, Nonqualified Stock Options and SARs may not be transferred,
assigned, pledged, hypothecated or otherwise conveyed or encumbered other than
by will or the laws of descent and distribution.  The Committee may, in its discretion,
authorize all or a portion of a Nonqualified Stock Option or SAR to be granted
to a Participant on terms which permit transfer by such Participant to (i) the
spouse (or former spouse), ancestors, children or grandchildren of the
Participant (“Immediate
Family Members”), (ii) a trust or trusts for the exclusive
benefit of such Immediate Family Members, (iii) a partnership in which the
only partners are (1) such Immediate Family Members and/or (2) entities
which are controlled by Immediate Family Members, (iv) an entity exempt
from federal income tax pursuant to Section 501(c)(3) of the Code or
any successor provision, or (v) a split interest trust or pooled income
fund described in Section 2522(c)(2) of the Code or any successor
provision, provided that (x) there shall be no consideration for
any such transfer, (y) the Award Agreement pursuant to which such
Nonqualified Stock Option or SAR is granted must be approved by the Committee
and must expressly provide for transferability in a manner consistent with this
Section, and (z) subsequent transfers of transferred Nonqualified Stock
Options or SARs shall be prohibited except those by will or the laws of descent
and distribution.


 


Following any transfer,
any such Nonqualified Stock Option and SAR shall continue to be subject to the
same terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of Articles 8, 9, 11, 13 and 15 hereof
the term “Participant” shall be deemed to include the transferee.  The events of Termination of Service shall
continue to be applied with respect to the original Participant, following
which the Nonqualified Stock Options and SARs shall be exercisable or
convertible by the transferee only to the extent and for the periods specified
in the Award Agreement.  The Committee
and the Company shall have no obligation to inform any transferee of a
Nonqualified Stock Option or SAR of any expiration, termination, lapse or
acceleration of such Stock Option or SAR. 
The Company shall have no obligation to register with any federal or
state securities commission or agency any Common Stock issuable or issued under
a Nonqualified Stock Option or SAR that has been transferred by a Participant
under this Section 15.7.


 


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15.8                        Use of
Proceeds.  Proceeds from the sale of
shares of Common Stock pursuant to Incentives granted under this Plan shall
constitute general funds of the Company.


 


15.9                        Legend.  Each certificate representing shares of
Restricted Stock issued to a Participant shall bear the following legend, or a
similar legend deemed by the Company to constitute an appropriate notice of the
provisions hereof (any such certificate not having such legend shall be
surrendered upon demand by the Company and so endorsed):


 


On the face of the
certificate:


 


“Transfer of this stock
is restricted in accordance with conditions printed on the reverse of this
certificate.”


 


On the reverse:


 


“The shares of stock
evidenced by this certificate are subject to and transferable only in
accordance with that certain Cano Petroleum, Inc. 2005 Long-Term Incentive
Plan, a copy of which is on file at the principal office of the Company in Fort
Worth, Texas.  No transfer or pledge of
the shares evidenced hereby may be made except in accordance with and subject
to the provisions of said Plan.  By
acceptance of this certificate, any holder, transferee or pledgee hereof agrees
to be bound by all of the provisions of said Plan.”


 


The following legend
shall be inserted on a certificate evidencing Common Stock issued under the
Plan if the shares were not issued in a transaction registered under the
applicable federal and state securities laws:


 


“Shares of stock
represented by this certificate have been acquired by the holder for investment
and not for resale, transfer or distribution, have been issued pursuant to
exemptions from the registration requirements of applicable state and federal
securities laws, and may not be offered for sale, sold or transferred other
than pursuant to effective registration under such laws, or in transactions
otherwise in compliance with such laws, and upon evidence satisfactory to the
Company of compliance with such laws, as to which the Company may rely upon an
opinion of counsel satisfactory to the Company.”


 


A copy of this Plan
shall be kept on file in the principal office of the Company in Fort Worth,
Texas.


 


15.10                 Gender and Number.  Except when otherwise indicated by the
context, words in the masculine gender when used in the Plan shall include the
feminine gender, the singular shall include the plural, and the plural shall
include the singular.


 


***************


 


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IN WITNESS WHEREOF, the
Company has caused this instrument to be executed as of December  7, 2005,
by its Chief Executive Officer and Secretary pursuant to prior action taken by
the Board.


 


 


	
   

  	
  CANO
  PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ S.
  Jeffrey Johnson

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  Attest:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ James K. Teringo, Jr.

  	
   

  	
   

  
	
  James K. Teringo, Jr.

  	
   

  
	
  Secretary

  	
   

  
					



 


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