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NONQUALIFIED STOCK OPTION AGREEMENT
CANO PETROLEUM, INC.
2005 LONG-TERM INCENTIVE PLAN
1. Grant of Option . Pursuant to
the Cano Petroleum, Inc. 2005 Long-Term Incentive Plan (the "
Plan ") for employees, consultants and outside
directors of Cano Petroleum, Inc., a Delaware corporation (the "
Company "), the Company grants to
Donald W. Niemiec
(the " Participant "),
an option to purchase shares of Common Stock (" Common
Stock ") of the Company as follows:
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On the date hereof, the Company grants to the Participant an
option (the " Option " or " Stock
Option ") to purchase Twenty Thousand Eight Hundred
Thirty-Three (20,833) full shares (the " Optioned
Shares ") of Common Stock at an Option Price equal to $4.73
per share, being the closing price of the Company’s Common
Stock on April 4, 2007. The Date of Grant of this Stock
Option is April 4, 2007.
The " Option Period " shall commence on the Date
of Grant and shall expire on the date immediately preceding the
tenth (10 th ) anniversary of
the Date of Grant. The Stock Option is a Nonqualified Stock
Option. This Stock Option is intended to comply with the
provisions governing nonqualified stock options under Internal
Revenue Service Notice 2005-1 and the proposed Treasury Regulations
issued under Section 409A of the Code on September 29, 2005 in
order to exempt this Stock Option from application of Section 409A
of the Code.
2.
Subject to Plan . The Stock Option and its exercise
are subject to the terms and conditions of the Plan, and the terms
of the Plan shall control to the extent not otherwise inconsistent
with the provisions of this Agreement. The capitalized terms used
herein that are defined in the Plan shall have the same meanings
assigned to them in the Plan. The Stock Option is subject to
any rules promulgated pursuant to the Plan by the Board or the
Committee and communicated to the Participant in writing.
3.
Vesting; Time of Exercise . Except as specifically
provided in this Agreement and subject to certain restrictions and
conditions set forth in the Plan, 100% of the total Optioned Shares
shall vest and that portion of the Stock Option shall become
exercisable on December 28, 2007, provided the Participant is
employed by (or, if the Participant is a consultant or an Outside
Director, is providing services to) the Company or a Subsidiary on
that date. In the event that a Change in Control occurs, then
immediately prior to the effective date of such Change in Control
the total Optioned Shares not previously vested shall thereupon
immediately become vested and this Option shall become fully
exercisable if not previously so exercisable.
4.
Term; Forfeiture .
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a.
Except as otherwise provided in this Agreement, to the
extent the unexercised portion of the Stock Option relates to
Optioned Shares which are not vested on the date of the
Participant’s Termination of Service, the Stock Option will
be terminated on that date. The unexercised portion of the
Stock Option that relates to Optioned Shares which are vested will
terminate at the first of the following to occur:
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i.
5 p.m. on the date the Option Period terminates;
ii.
5 p.m. on the date which is twelve (12) months following the date
of the Participant’s Termination of Service due to death or
Total and Permanent Disability;
iii.
5 p.m. on the date of the Participant’s Termination of
Service by the Company for cause (as defined herein);
iv.
5 p.m. on the date which is ninety (90) days following the date of
the Participant’s Termination of Service for any reason not
otherwise specified in this Section 4.a. ; or
v.
5 p.m. on the date the Company causes any portion of the Option to
be forfeited pursuant to Section 7 hereof.
b.
Solely for purposes of this Section 4 , "
Cause " shall mean (i) the Participant’s gross
negligence in the performance or intentional nonperformance of any
of his duties and responsibilities (which remains uncured and
continues for thirty (30) days after delivery of written notice);
(ii) the Participant’s dishonesty or fraud with respect to
the business, reputation or affairs of the Company; (iii) the
Participant’s conviction of a felony or crime involving moral
turpitude; (iv) the Participant’s debilitating drug or
alcohol abuse as determined by a qualified physician; (v) the
Participant’s material breach of any provisions of an
employment, consulting or service agreement between the Company and
the Participant; or (vi) the Participant’s material violation
of any written Company policy (which remains uncured or continues
thirty (30) days after delivery of written notice).
5.
Who May Exercise . Subject to the terms and conditions
set forth in Sections 3 and 4 above, during the lifetime of
the Participant, the Stock Option may be exercised only by the
Participant, or by the Participant’s guardian or personal or
legal representative. If the Participant’s Termination
of Service is due to his death prior to the date specified in
Section 4.i. hereof, or the Participant dies prior to the
termination dates specified in Sections 4.i., ii., iii., or
iv. hereof, and the Participant has not exercised the Stock
Option as to the maximum number of vested Optioned Shares as set
forth in Section 3 hereof as of the date of death, the
following persons may exercise the exercisable portion of the Stock
Option on behalf of the Participant at any time prior to the
earliest of the dates specified in Section 4
hereof: the personal representative of his estate, or the
person who acquired the right to exercise the Stock Option by
bequest or inheritance or by reason of the death of the
Participant; provided that the Stock Option shall remain subject to
the other terms of this Agreement, the Plan, and applicable laws,
rules, and regulations. Notwithstanding the foregoing
sentence, by delivering to the Company the prescribed form (see
Appendix A), the Participant may designate one or more
beneficiaries and successor beneficiaries who may exercise the
exercisable portion of the Option on behalf of the Participant at
any time prior to the earliest of the dates specified in
Section 4 hereof (provided that the Option shall remain
subject to the other terms of this Agreement and applicable laws,
rules, and regulations) in the event (i) of the Participant’s
Termination of Service due to his death prior to the date specified
in Section 4.a.i. hereof, or (ii) the Participant dies
prior to the termination dates specified in Sections 4.a.i.,
ii., iii., iv. or v. hereof, and the Participant has not
exercised the Option as to the maximum number of vested Optioned
Shares as set forth in Section 3 hereof as of the date
of death. In the event the Participant does not deliver to
the Company a form designating one or more beneficiaries, or no
designated beneficiary survives the Participant, the foregoing
sentence shall not apply.
6.
No Fractional Shares . The Stock Option may be
exercised only with respect to full shares, and no fractional share
of stock shall be issued.
7.
Manner of Exercise . Subject to such administrative
regulations as the Committee may from time to time adopt, the 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, 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. 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 follows: (a) cash, 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) if
the Optioned Shares are Publicly Traded (as defined herein), 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
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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. For purposes of this Section 7, the Common
Stock shall be " Publicly Traded " if the Common
Stock subjects the Company to the periodic reporting requirements
of Sections 12(g) or 15(d) of the 1934 Act.
Upon payment of all amounts due from the Participant, the
Company shall cause certificates for the Optioned Shares then being
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