Document:

Exhibit 10.1

 

Hawaiian Holdings, Inc. 2006
Management Incentive Plan

 

1.                                       PURPOSE
OF THE PLAN. The purpose of the Hawaiian Holdings, Inc. 2006 Management
Incentive Plan (the “Plan”) is to allow Hawaiian Holdings, Inc. (the “Company”)
to provide annual and long-term performance-based incentive compensation that
satisfies the requirements for performance-based compensation in Section 162(m)
of the Internal Revenue Code of 1986, as amended (the “Code”), to its officers,
upon whom, in large measure, the sustained progress, growth and profitability
of the Company depends.

 

2.                                       ADMINISTRATION
OF THE PLAN. The Plan shall be administered by the Compensation Committee of
the Board of Directors of the Company (the “Committee”). Subject to the
provisions of the Plan, the Committee shall have the exclusive authority to
select the officers to participate in the Plan, to establish the length of the
Annual Performance Periods and the Long-Term Performance Periods (as defined in
Section 4), to establish performance goals for performance during each
Performance Period (as defined in Section 4), to determine the amount of
the incentive compensation bonus payable to any Participant (as defined in Section 3)
in respect of each Performance Period, and to make all determinations and take
all other actions necessary or appropriate for the proper administration and
operation of the Plan. Any determination by the Committee on any matter
relating to the Plan shall be made in its sole discretion and need not be uniform among
Participants. The Committee’s interpretation of the Plan shall be final,
conclusive and binding on all parties concerned, including the Company, its
stockholders and any or all Participants.

 

3.                                       ELIGIBILITY.
Bonuses under the Plan may be paid to those officers (including officers
who are directors) of the Company who shall be selected by the Committee after
consideration of management’s recommendations (the “Participants”).
Participants may receive multiple incentive compensation bonuses during
the same year under the Plan.

 

4.                                       PERFORMANCE
PERIODS. Bonuses may be payable to each Participant as a result of the
satisfaction of performance goals in respect of a period of one fiscal year or
less (an “Annual Performance Period”) or as a result of the satisfaction of
performance goals in respect of a performance period of longer that one fiscal
year (a “Long-Term Performance Period”) (collectively referred to herein as “Performance
Periods”). Performance Periods shall be established for such length as shall be
determined by the Committee at the commencement of each Performance Period, and
the Annual Performance Periods and Long-Term Performance Periods established at
the same time may overlap the same time period or may overlap the
time periods established at different times for other Annual Performance
Periods and Long-Term Performance Periods.

 

5.                                       INCENTIVE
COMPENSATION BONUSES.

 

(a)                                  Target
Incentive Compensation Bonuses. Prior to the beginning of each Performance
Period, or at such other time as is permitted by the applicable provisions of
the Code, the Committee, after consideration of management’s recommendations,
shall establish in writing the target bonus opportunity or range of incentive
compensation bonus opportunities for each Participant in respect of each
Performance Period based upon the attainment of one or more performance goals
established by the Committee at such time. The Committee may provide for a
threshold level of performance below which no amount of incentive compensation
bonus will be paid and a maximum level of performance above which no additional
incentive compensation bonus will be paid, and it may provide for the
payment of differing amounts for different levels of performance.

 

(b)                                 Performance
Goals. Performance goals, which may vary among and between Participants
and incentive compensation bonus opportunities, shall be based upon the
attainment of specific amounts of, or increases in, one or more of the
following: gross or net revenues, operating income, cash flow, earnings before
interest, taxes, depreciation and amortization, net income, earnings per share,
book value per share, stockholders’ equity, return on equity, compound growth
in net income, operating efficiency or strategic business objectives, including
without limitation, one or more objectives based on meeting specified cost
targets, business expansion goals, service goals, vendor contract goals,
personnel or hiring goals and goals relating to acquisitions or

 

 

divestitures, all whether
applicable to the Company or any relevant subsidiary or business unit or entity
in which the Company has a significant investment, or any combination thereof
as the Committee may deem appropriate.

 

Each
performance goal may be expressed on an absolute and/or relative basis, may be
based on, or otherwise employ, comparisons based on internal targets, the past
performance of the Company and/or the past or current performance of other
companies, may provide for the inclusion, exclusion or averaging of
specified items in whole or in part, such as strategic investments,
discontinued operations, extraordinary items, accounting changes, and unusual
or nonrecurring items, and, in the case of earnings-based measures, may use
or employ comparisons relating to capital, shareholders’ equity and/or shares
outstanding.

 

(c)                                  Incentive
Compensation Bonus Determination. As soon as practicable after the end of
each Performance Period but before any incentive compensation bonuses are paid,
the Committee shall certify in writing (i) whether the performance goal or
goals were attained and (ii) the amount of the incentive compensation
bonus payable to each Participant based upon the attainment of the performance
goals established by the Committee. The Committee may determine to grant a
Participant an incentive compensation bonus equal to, but not in excess of, the
amount specified in the foregoing certification. The Committee may also
reduce or eliminate the amount of any incentive compensation bonus of any
Participant at any time prior to payment thereof, based on such criteria as it
shall determine, including but not limited to individual merit and attainment
of, or the failure to attain, specified personal goals established by the
Committee. Under no circumstance may the Committee (a) increase the
amount of an incentive compensation bonus otherwise payable to a Participant
upon attainment of such performance goal beyond the amount originally
established by the Committee, (b) waive the attainment of the performance
goals established by Committee or (c) otherwise exercise its discretion so
as to cause any incentive compensation bonus to fail to qualify as
performance-based compensation under Section 162(m) of the Code.

 

(d)                                 Payment.
Following the Committee’s determination pursuant to Section 5(c) hereof,
incentive compensation bonus shall be paid as promptly as is administratively
practicable. The amount of any incentive compensation bonus payable to a
Participant shall be paid by the Company to such Participant in cash or shares
of the Company’s common stock (valued at the fair market value thereof) or a
combination thereof, as determined by the Committee.

 

(e)                                  Death,
Disability, Etc. In the event a Participant shall die or become disabled
prior to the end of a Performance Period, the Participant (or in the event of
the Participant’s death, the Participant’s beneficiary) shall be entitled to
receive such pro-rata portion of the incentive compensation bonus established
for the Participant as shall be determined by the Committee, subject to Section 7(a).
In the event a Participant’s employment with the Company is otherwise
terminated during the Performance Period, the Committee, in its discretion,
shall determine the amount, if any, of the incentive compensation bonus that
shall be payable to the Participant.

 

(f)                                    Annual
Maximum. The maximum amount of the incentive compensation bonuses payable
to any Participant pursuant to the Plan in, or in respect of, any single fiscal
year shall not exceed $1.5 million.

 

6.                                       DILUTION
AND OTHER ADJUSTMENTS. To the extent that a performance goal is based on, or
calculated with respect to, the Company’s common stock (such as increases in
earnings per share, book value per share or other similar measures), then in
the event of any corporate transaction involving the Company (including,
without limitation, any subdivision or combination or exchange of the
outstanding shares of common stock, stock dividend, stock split, spin-off,
split-off, recapitalization, capital reorganization, liquidation,
reclassification of shares of common stock, merger, consolidation, extraordinary
cash distribution, redemption, stock issuance, or sale, lease or transfer of
substantially all of the assets of the Company), the Committee shall make or
provide for such adjustments in such performance goal as the Committee may in
good faith determine to be equitably required in order to prevent dilution or
enlargement of any increase or decrease in the rights of Participants.

 

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7.                                       MISCELLANEOUS
PROVISIONS.

 

(a)                                  Right
to Incentive Compensation Bonus. No officer or other person shall have any
claim or right to receive any incentive compensation bonus payable under the
Plan prior to the actual payment thereof, regardless of whether the Committee
shall have theretofore certified any amount payable to any Participant.

 

(b)                                 No
Assurance of Employment. Neither the establishment of the Plan nor any
action taken thereunder shall be construed as giving any officer or other
person any right to be retained in the employ of the Company.

 

(c)                                  Withholding
Taxes. The Company shall have the right to deduct from all incentive
compensation bonuses payable hereunder any federal, state, local or foreign
taxes required by law to be withheld with respect to such payments.

 

(d)                                 No
Transfers or Assignments. No incentive compensation bonus under the Plan
nor any rights or interests herein or therein shall be assigned, transferred,
pledged, encumbered, or hypothecated to, or in favor of, or subject to any
lien, obligation, or liability of a Participant to, any party (other than the
Company or any subsidiary), except, in the event of the Participant’s death, to
the beneficiary or beneficiaries designated as provided in Section 7(e).

 

(e)                                  Beneficiary.
Any payments on account of an incentive compensation bonus payable under the
Plan to a deceased Participant shall be paid to such beneficiary or
beneficiaries as has been designated by the Participant in a writing furnished
to the Company or in the absence of such designation, according to the
Participant’s will or the laws of descent and distribution.

 

(f)                                    Non-exclusivity
of Plan. Nothing in the Plan shall be construed in any way as limiting the
authority of the Committee, the Board of Directors of the Company, the Company
or any subsidiary to establish any other annual, long-term or other incentive
plan or as limiting the authority of any of the foregoing to pay cash bonuses
or other supplemental or additional incentive compensation to any persons
employed by the Company, whether or not such person is a Participant in this
Plan and regardless of how the amount of such bonus or compensation is
determined.

 

8.                                       AMENDMENT
OR TERMINATION OF THE PLAN. The Board of Directors of the Company, without the
consent of any Participant, may at any time terminate or from time to time
amend or terminate the Plan in whole or in part, whether prospectively or
retroactively, including in any manner that adversely affects the rights of
Participants; provided, however, that no amendment that would require the
consent of the stockholders of the Company pursuant to Section 162(m) of
the Code shall be effective without such consent.

 

9.                                       LAW
GOVERNING. The validity and construction of the Plan shall be governed by the
laws of the State of New York but without regard to the choice of law
principles thereof.

 

10.                                 EFFECTIVE
DATE. The Plan shall be effective commencing May 31, 2006, subject to
approval by the stockholders of the Company at the Annual Meeting of
Stockholders on such date in accordance with Section 162(m) of the Code.

 

3Exhibit 10.1

 

EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT
(this “Agreement”) is made and entered into by and between Cano Petroleum Inc., a Delaware corporation with its
principal executive offices in Fort Worth, Texas (the “Company”), and Morris B. Smith,
an individual
currently residing in Parker County, Texas (“Senior Vice President”), as of the
1st day of June, 2006 (the “Effective Date”). The Company and Senior Vice
President may sometimes be referred to herein individually as “Party” and
collectively as “Parties.”

 

Background

 

A.                                   The Company desires to employ Senior Vice
President in such a manner as will reinforce and encourage the highest
attention and dedication to the Company and in the best interest of the Company
and its shareholders; and

 

B.                                     Senior Vice President is willing to serve the
Company on the terms and conditions herein provided.

 

Terms and Conditions

 

In consideration of the
covenants and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the Parties hereto agree as follows:

 

1.                                       Employment. The Company hereby employs Senior Vice President in the capacity of
Senior Vice President and Chief Financial Officer, and Senior Vice President
hereby agrees to accept such employment by the Company, upon the terms and
conditions stated in this Agreement.

 

2.                                       Term. The employment of Senior Vice President by the Company as provided in
this Section will be for a term of three (3) years (the ‘“Term” or “Employment Period”)
commencing on the Effective Date and expiring at the close of business on May 31st,
2009.

 

3.                                       Duties. Senior Vice President shall perform such services and duties as may be
assigned to him from time to time by the Chief Executive Officer and the Board of
Directors of the Company. Senior Vice President shall devote his full working
time, efforts and energies to the performance of his duties hereunder, which
shall include managing the financial affairs of the Company.

 

4.                                       Compensation.

 

(a)                                  Salary:  The Company shall pay Senior
Vice President for his services, a base salary, on an annualized basis, of
$240,000.00 (Two Hundred Forty Thousand Dollars) per annum for the period from
the Effective Date, which salary shall be payable by the Company in substantially
equal installments on the Company’s normal payroll

 

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dates.
All applicable taxes on the base salary will be withheld in accordance with
applicable federal, state and local taxation guidelines.

 

(b)                                 Bonus: In
addition to the base salary described in paragraph 4(a) above, Senior Vice
President shall be eligible for periodic cash bonuses in an amount up to 100%
of the then base salary and/or stock bonuses at the discretion of the Board of
Directors of the Company.

 

(b)                                 Stock Award:  In
addition to the base salary described in paragraph 4(a) above, Senior Vice
President shall receive 60,000 shares of restricted common stock in the Company.
The restrictions on the shares shall lapse in 20,000 share increments on each
of May 30, 2007, May 30, 2008 and May 30, 2009, provided Senior
Vice President is still employed by the Company at that time. The terms and
conditions of this restricted stock award shall be contained in an agreement to
be executed by the Company and Senior Vice President and which will be awarded
pursuant to the 2005 Cano Petroleum, Inc. Long Term Incentive Plan.

 

(c)                                  Raises:  Senior Vice President may receive
increases in the base salary at the discretion of the Board of Directors of the
Company, which increased base salary shall become the base salary for purposes
of this Agreement. 

 

5.                                       Vacations and Days Off. Senior Vice President shall be entitled to
a reasonable paid vacation of not less than twenty (20) days each calendar year
during the Term (prorated for the first calendar year), exclusive of holidays
and weekends, which vacation shall be taken by Senior Vice President in
accordance with the business requirements of the Company at the time and its
vacation plans, policies and practices as applied to other officers of the
Company then in effect relative to this subject. Senior Vice President shall
also be entitled to up to five (5) paid days off each calendar year for
paternity leave and up to three (3) paid days off to attend the funeral of
any member of Senior Vice President’s immediate family.

 

6.                                       Employment Facilities. During the Employment Period, the Company
shall provide, at its expense, appropriate and adequate office space,
furniture, communications, stenographic and word-processing equipment, supplies
and such other facilities and services as shall be suitable to Senior Vice
President’s position or necessary for Senior Vice President to perform his
assigned tasks, duties and responsibilities under this Agreement.

 

7.                                       Expenses and Services. During the term of Senior Vice President’s
employment hereunder, Senior Vice President shall be entitled to receive prompt
reimbursement for all pre-approved, reasonable expenses incurred by Senior Vice
President by reason of his employment, including travel and living expenses
while away from home at the request of and in the service of the Company,
provided that such expenses are incurred and accounted for in accordance with
the policies and procedures established by the Company and in effect when the
expenses are incurred.

 

8.                                       Rights under Certain Plans. During the term of Senior Vice President’s
employment hereunder, Senior Vice President shall be entitled to participate in
any employee

 

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stock ownership plans, 401K plans, health and dental
insurance and other employee benefit plans and programs maintained by the
Company applicable to other executive officers on the same basis as other
executive officers of the Company.

 

9.                                       Confidential Information. Senior Vice President and the Company agree
that, upon executing this Agreement, the Company will provide Senior Vice
President with its confidential information, including, without limitation,
customer information, trade secrets, lists of suppliers and costs, information
concerning the business and operations of the Company and its Affiliates and
other proprietary data or information, that is valuable, special and a unique
asset of the Company and its Affiliates. Senior Vice President agrees not to
disclose such confidential information, except as may be necessary in the
performance of his duties, to any Person, nor use such confidential
information, except as may be necessary in the performance of his duties,
either (i) while employed; or (ii) within the later of three years
immediately following his termination of employment or the three years
immediately following expiration of this Agreement without renewal or
replacement unless Senior Vice President has received the prior written consent
of the Company. Upon termination of Senior Vice President’s employment for any
reason or upon a request, at any time, by the Company, Senior Vice President
shall promptly deliver to the Company all drawings, manuals, letters,
notebooks, customer lists, documents, records, equipment, files, computer disks
or tapes, reports or any other materials relating to the Company’s business
(and all copies) which are in Senior Vice President’s possession or under
Senior Vice President’s control.

 

10.                                 Early Termination. Senior Vice President’s employment
hereunder may be terminated without any breach of this Agreement only
under the following circumstances:

 

(a)                                  Senior Vice President’s employment hereunder
will terminate upon his death;

 

(b)                                 If, as a result of Senior Vice President’s incapacity
due to physical or mental illness, Senior Vice President shall have been absent
from his duties or unable to perform his full duties hereunder for a total
of 90 days during any 12 month period (“Disability Period”), and within 15 days
after written notice of termination is given (which may occur before or
after the end of such 90 day period), shall not have returned to the
performance of his full duties hereunder on a full-time basis, the Company may terminate
Senior Vice President’s employment hereunder.

 

 (c)                               The Company may terminate Senior Vice
President’s employment hereunder for Cause. For purposes of this Agreement, the
Company shall have “Cause” to terminate Senior Vice President’s employment
hereunder upon (i) the willful and continued failure by Senior Vice
President to substantially perform his duties hereunder (other than any
such failure resulting from Senior Vice President’s incapacity due to physical
or mental illness); (ii) the willful engaging by Senior Vice President in
misconduct which is injurious or disparaging to the Company; or (iii) the
conviction of Senior Vice President of any felony or crime of moral turpitude. For
purposes of this subsection (c), no act, or failure to act, on Senior Vice
President’s part shall be considered “willful” unless done, or omitted to
be done, by him not in good faith and

 

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without
reasonable belief that his action or omission was in the best interest of the
Company.

 

(d)                                 Any termination of Senior Vice President’s
employment by the Company or by Senior Vice President (other than termination
pursuant to subsection (a) above) shall be communicated by written
Notice of Termination to the other Party hereto. For purposes of this
Agreement, a “Notice of Termination” shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Senior Vice President’s employment under the provision
so indicated.

 

(e)                                  “Date of Termination” shall mean (i) if
Senior Vice President’s employment is terminated by his death, the date of his
death; (ii) if Senior Vice President’s employment is terminated pursuant
to subsection (b) above, 15 days after Notice of Termination is given
(provided that Senior Vice President shall not have returned to the performance
of his duties on a full-time basis during such 15 days period); (iii) if
Senior Vice President’s employment is terminated at the expiration of the Term
or any extension thereof, the last day of the Term or, if applicable, the last
day of any extension; and (iv) if Senior Vice President’s employment is
terminated for any other reason, the date the Notice of Termination is given.

 

11.                                 Compensation upon Termination or During
Disability. Upon termination
of Senior Vice President’s employment hereunder or during any period of Senior
Vice President’s physical or mental disability, Senior Vice President shall be
paid as follows:

 

(a)                                  Senior Vice President shall continue to
receive his annual base salary at the rate then in effect during any Disability
Period provided, however, that such payments shall not continue beyond the
earlier of (i) the end of the Term, or (ii) the Date of Termination
of this Agreement by the Company pursuant to Section 10(e)(ii), provided
that payments so made to Senior Vice President shall be reduced by the sum of
the amounts, if any, payable to Senior Vice President under any disability
benefit plans of the Company and which were not previously applied to reduce
any such payment. In addition the Company shall reimburse Senior Vice President
for any theretofore unreimbursed expenses which were incurred prior to the
commencement of the Disability Period.

 

(b)                                 If Senior Vice President’s employment is
terminated by his death, the Company shall pay to Senior Vice President’s
designated beneficiaries, or if he leaves no designated beneficiaries, to his
estate, his annual base salary through the date of Senior Vice President’s
death at the rate then in effect and any theretofore unreimbursed expenses and
the Company shall have no further obligations to Senior Vice President under
this Agreement.

 

(c)                                  If Senior Vice President’s employment shall
be terminated for Cause, the Company shall pay Senior Vice President his annual
base salary (but not the compensation described in Sections 4(b)) through
the Date of Termination at the rate in

 

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effect
at the time Notice of Termination is given and the Company shall have no
further obligations to Senior Vice President under this Agreement.

 

(d)           If  the Company shall (i) terminate Senior
Vice President’s employment other than pursuant to Section 10(b) or
10(c) hereof; (ii) assign to Senior Vice President any duties
materially inconsistent with Senior Vice President’s position in the Company;
or (iii) assign to Senior Vice President a title, office or status which
is inconsistent than that established herein (unless in the nature of a
promotion) then, in addition to reimbursement of  Senior Vice President for any theretofore
unreimbursed expenses, the Company shall pay Senior Vice President, with no
offset, an amount equal to the greater of (a) Senior Vice President’s
annual base salary at the rate in effect at the time Notice of Termination is
given, for the unexpired term of this Agreement and payment for any accrued,
but unused vacation days hereunder; or (b) six (6) months of Senior
Vice President’s annual base salary at the rate in effect at the time Notice of
Termination is given and payment for any accrued, but untaken vacation days
hereunder. Such payments to be made in a single lump sum within ten (10) days
of the termination of this Agreement.

 

During
the term of this Agreement Senior Vice President shall give the Company
immediate notice of any change of address.

 

If
Senior Vice President shall terminate his employment pursuant to Section 10(d),
the Company shall pay Senior Vice President, in addition to reimbursement of
any theretofore unreimbursed expenses, his full salary through the Date of
Termination at the rate in effect on the date that Notice of Termination is
received by the Company, plus payment for any accrued, but untaken vacation
days hereunder and the Company shall have no further obligation to Senior Vice
President under this Agreement.

 

12.                                 Change
in Control Severance Benefit. If within twelve (12) months after the
occurrence of a Change in Control (as defined below) (i) the Company
terminates Senior Vice President’s employment for any reason; or (ii) Senior
Vice President resigns at any time after any diminution in Senior Vice
President’s job title, duties or compensation or the relocation of Senior Vice
President, without Senior Vice President’s consent, to an office in a county
that does not abut Tarrant County, Texas, the Company shall pay to Senior Vice
President, in a lump sum, three times Senior Vice President’s annual salary in
effect as of the date of Senior Vice President’s termination or resignation and
three times the sum of prior year bonuses paid to Senior Vice President and
shall continue to provide to Senior Vice President, Senior Vice President’s
spouse and dependents, for a period of three years after such termination or
resignation, the right to participate in any health and dental plans that the
Company may maintain for its employees, on the same basis as participation
by such employees.

 

A “Change in Control” shall mean:

 

(a) 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

 

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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; (b) 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; (c) the
stockholders of the Company approve any plan or proposal for the liquidation or
dissolution of the Company; (d) 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 Effective Date were directors or
(y) become directors after the Effective Date 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
Effective Date or whose election or nomination for election was previously so
approved; (e) the acquisition of beneficial ownership (within the meaning
of Rule 13d-3 under the Securities Exchange Act of 1934) 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 Securities Exchange Act of 1934)
who beneficially owned less than 50%
of the voting power of the Company’s outstanding voting securities on the Effective
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 (f) 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.

 

Anything in this Section 12
to the contrary notwithstanding, in the event it shall be determined that any
payment or distribution made, or benefit provided, by the Company to or for the
benefit of Senior Vice President (whether paid or payable or distributed or
distributable or provided pursuant to the terms hereof or otherwise) would
constitute a “parachute payment” as defined in Section 280G of the
Internal Revenue Code of 1986, as amended (the “Code”), then the lump sum
payment payable pursuant to this Section 12 shall be reduced so that the
aggregate present value of all payments in the nature of compensation to (or
for the benefit of) Senior Vice President which are contingent on a change of
control (as defined in Code Section 280G(b)(2)(A)) is One Dollar ($1.00)
less than the amount which Senior Vice President could receive without being
considered to have received any parachute payment (the amount of this reduction
in the lump sum severance payment is referred to herein as the “Excess Amount”).
The determination of the amount of any reduction required by this Section 12
shall be made by an independent accounting firm (other than the Company’s
independent accounting firm) selected by the Company and acceptable to Senior
Vice President, and such determination shall be conclusive and binding on the
parties hereto.

 

13.                                 Defined Terms. For purposes of this Agreement, the terms
set forth in this Agreement shall have the following meanings:

 

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(a)                                  “Affiliate”
shall mean any individual, corporation, unincorporated organization, trust or
other form of entity controlling, controlled by or under common control
with the Company. For purposes of this definition, “control” (including “controlled
by” and “under common control with”) means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such individual, corporation, unincorporated organization, trust or
other form of entity, whether through the ownership of voting securities
or otherwise.

 

(b)                                 “Person” shall mean an individual, a corporation, a partnership, an
association, a joint-stock company, a trust, an incorporated organization or a
government or political subdivision thereof.

 

14.                                 Waiver. No waiver of any provision of this Agreement shall be deemed, or
shall constitute, a waiver of any other provision, whether or not similar, nor
shall any waiver constitute a waiver of any continuing or succeeding breach of
such provision, a waiver of the provision itself, or a waiver of any right
under this Agreement. No waiver shall be binding unless executed in writing by
the Party making the waiver.

 

15.                                 Limitation of Rights. Nothing in this Agreement, except as
specifically stated herein, is intended to confer any rights or remedies under
or by reason of this Agreement on any persons other than the Parties and their
respective permitted successors and assigns and other legal representatives,
nor is anything in this Agreement intended to relieve or discharge the
obligation or liability of any third persons to any Party to this Agreement,
nor shall any provision give any third persons any right of subrogation or
action over against any Party to this Agreement.

 

16.                                 Notices. All notices given in connection with this Agreement shall be in
writing and shall be delivered either by personal delivery, by telecopy or
similar facsimile means, by certified or registered mail (postage prepaid and
return receipt requested), or by express courier or delivery service, addressed
to the applicable Party hereto at the following address:

 

If to the Company:

 

Cano Petroleum, Inc.

309 West Seventh Street

Suite 1600

Fort Worth, Texas 76102

Attention: S. Jeffery Johnson

Telecopy No.: 817-698-0761:

 

If to Senior Vice President:

 

Morris B.
Smith

110 River Run
Drive

Azle, Texas
76020

Telephone:  817-551-0823

 

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or such other address and number as either Party
shall have previously designated by written notice given to the other Party in
the manner hereinabove set forth. Notices shall be deemed given when received,
if sent by telecopy or similar facsimile means (confirmation of such receipt by
confirmed facsimile transmission being deemed receipt of communications sent by
telecopy or other facsimile means); and when delivered and receipted for (or
upon the date of attempted delivery where delivery is refused), if
hand-delivered, sent by express courier or delivery service, or sent by
certified or registered mail.

 

17.                                 Inconsistent Obligations. Senior Vice President represents and
warrants that he is not subject to any undisclosed obligations inconsistent
with those of this Agreement.

 

18.                                 Code Section 409A; Delay of Payments. The terms of this Agreement have been
designed to comply with the requirements of Code Section 409A, as amended,
where applicable, and shall be interpreted and administered in a manner
consistent with such intent. Notwithstanding anything to the contrary in this
Agreement, (i) if upon the date of Senior Vice President’s termination of
employment with the Company, Senior Vice President is a “specified employee”
within the meaning of Code Section 409A, and the deferral of any amounts
otherwise payable under this Agreement as a result of Senior Vice President’s
termination of employment is necessary in order to prevent any accelerated or
additional tax to Senior Vice President under Code Section 409A, then the
Company will defer the payment of any such amounts hereunder until the date
that is six (6) months and one day following the date of Senior Vice
President’s termination of employment with the Company at which time any such
delayed amounts will be paid to Senior Vice President in a single lump sum,
with interest from the date otherwise payable at the prime rate as published in
The Wall Street Journal on the date of Senior Vice President’s termination of
employment with the Company, and (ii) if any other payments of money or
other benefits due to Senior Vice President hereunder could cause the
application of an accelerated or additional tax under Code Section 409A,
such payments or other benefits shall be deferred if deferral will make such
payment or other benefits compliant under Code Section 409A.

 

19.                                 Entirety and Amendments. This instrument and the instruments
referred to herein embody the entire agreement between the Parties, supersede
all prior agreements and understandings, if any, relating to the subject matter
hereof, and may be amended only by an instrument in writing executed by
all Parties, and supplemented only by documents delivered or to be delivered in
accordance with the express terms hereof.

 

20.                                 Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of the Parties hereto and any successors in interest to
the Company, but neither this Agreement nor any rights hereunder may be
assigned by Senior Vice President or by the Company, except that the Company may assign
this Agreement to an Affiliate.

 

21.                                 Governing Law And Venue. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Texas
applicable to agreements made and to be performed entirely in Texas, exclusive
of any provisions of Texas law which would apply the law of another
jurisdiction. The obligations and undertakings of each of the Parties to this
Agreement shall be performable in Tarrant County, Texas, and each Party agrees
that if any

 

8

 

action at law or in equity is necessary by the
Company or Senior Vice President to enforce or interpret the terms of this
Agreement, venue shall be in Tarrant County, Texas.

 

22.                                 Cumulative Remedies. No remedy herein conferred upon any Party
is intended to be exclusive of any other benefits or remedy, and each and every
such remedy shall be cumulative and shall be in addition to every other
benefits or remedy given hereunder or now or hereafter existing at law or in
equity or by statute or otherwise. No single or partial exercise by any Party
of any right, power or remedy hereunder shall preclude any other or further
exercise thereof.

 

23.                                 Multiple Counterparts. This Agreement may be executed and
delivered by facsimile and in a number of identical counterparts, each of which
constitute collectively, one agreement; but in making proof of this Agreement,
it shall not be necessary to produce or account for more than one counterpart. This
Agreement may be executed and delivered via facsimile.

 

24.                                 Descriptive Headings. The headings, captions and arrangements
used in this Agreement are for convenience only and shall not be deemed to
limit, amplify or modify the terms of this Agreement, nor affect the meanings
hereof.

 

25.                                 Severability. The parties intend all provisions of
this Agreement to be enforced to the fullest extent permitted by law. Accordingly,
if any provision of this Agreement is held illegal, invalid, or unenforceable
under present or future law, such provision shall be fully severable, this
Agreement shall be construed and enforced as if such illegal, invalid, or
unenforceable provision were never a part hereof, and the remaining
provisions of this Agreement shall remain in full force and effect and shall
not be affected by the illegal, invalid, or unenforceable provision or by its
severance.

 

Signatures

 

To evidence the binding
effect of the covenants and agreements described above, the Parties hereto have
executed this Agreement effective as of the Effective Date.

 

	
   

  	
  THE COMPANY:

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
  S. Jeffrey Johnson

  
	
   

  	
   

  	
  CEO and Chairman

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SENIOR VICE PRESIDENT:

  
	
   

  	
   

  
	
   

  	
  /s/ Morris B. Smith

  	
   

  
	
   

  	
           Morris B. Smith

  

 

9

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