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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-K/A

Amendment No. 1

For the fiscal year ended:  June 30, 2008

OR

COMMISSION FILE NUMBER: 001-32496

CANO PETROLEUM, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (817) 698-0900

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.504 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the closing sales price of such stock, as of December 31, 2007 was approximately $189,500,000. (For purposes of determination of the aggregate market value, only directors, executive officers and 10% or greater stockholders have been deemed affiliates.)

The number of shares outstanding of the registrant’s common stock, par value $.0001, as of October 24, 2008 was 46,078,518 shares.

DOCUMENTS INCORPORATED BY REFERENCE

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Explanatory Note about the Report

Cano Petroleum, Inc. (together with its direct and indirect subsidiaries, “Cano,” “we,” “us,” or the “Company”) is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended June 30, 2008, originally filed on September 11, 2008, for the purpose of including the information required by Part III of Form 10-K.  In addition, we are also including as exhibits to this Amendment the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002.  Because no financial statements are contained within this Amendment, we are not including certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Except as set forth herein, no other changes are made to our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

PART III

ITEM 10.                Directors, Executive Officers and Corporate Governance.

The following table sets forth the names and ages of the current members of our Board of Directors and our executive officers and the positions held by each.

Each director holds office until the next annual meeting of our stockholders and until his successors have been duly elected and qualified or until such director’s earlier resignation or removal Our executive officers are elected by, and serve at the designation and appointment of the board of directors. Some of our directors and executive officers also serve in various capacities with our subsidiaries. There are no family relationships among any of our directors and executive officers.

Background of Executive Officers and Directors

S. Jeffrey Johnson , Chief Executive Officer and Chairman of the Board of Directors . Mr. Johnson was appointed Chief Executive Officer on May 28, 2004 and Chairman on June 25, 2004. Prior to joining Cano, Mr. Johnson served as the Chief Executive Officer of Cano Energy Corporation from 2001 through 2004, and he served as the Chief Executive Officer of Scope Operating Company from 1997 through 2004.

Benjamin Daitch , Senior Vice President and Chief Financial Officer. Mr. Daitch was appointed Senior Vice President and Chief Financial Officer on June 23, 2008.  From March 2008 until June 2008, he was a financial consultant to CDX Gas, LLC, and from September 2006 until March 2008, he served as Senior Vice President and Chief Financial Officer of CDX Gas, LLC.  From April 2006 until September 2006, he served as Vice President in the Energy and Infrastructure Group of Trust Company of the West.  From August 2004 to April 2006, he was a Director in the Global Energy Group of UBS Investment Bank.  From June 2000 until August 2004, he served as a Vice President in the Natural Resources Investment Banking Group of Banc of America Securities, LLC.

Patrick McKinney , Senior Vice President—Engineering and Operations .   On November 9, 2006, Mr. McKinney was appointed Senior Vice President—Engineering and Operations.  From June 1, 2006 until November 9, 2006, he was Vice President—Business Development.  From April 2005 until June 2006, he was the Manager of Corporate Planning for Pioneer Natural Resources Company where he analyzed the corporate portfolio

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and portfolio based assessments of the company.  From July 2002 until April 2005, he was the President of Transcor America LLC which was the nation’s largest private prisoner transportation and extradition company.  From December 1999 until July 2002, he was the Senior Vice President—Chief Financial Officer and Secretary of freightPro, Inc., a transportation, warehousing and logistics company.  From 1982 to 1993, he served in engineering and management positions with Union Pacific Resources Company and its parent, Union Pacific Corporation.

Michael J. Ricketts , Vice President and Principal Accounting Officer . Mr. Ricketts was appointed Chief Financial Officer and Principal Accounting Officer on May 28, 2004 and remained in such positions until June 1, 2006.  He remains the Principal Accounting Officer. Mr. Ricketts served as a member of our Board of Directors from June 25, 2004 until April 6, 2005.  Mr. Ricketts is a Certified Public Accountant.  Prior to joining Cano, Mr. Ricketts was employed by TNP Enterprises, Inc. and its subsidiaries, Texas-New Mexico Power Company and First Choice Power for 15 years.  He served as Director, Treasury from 2003 to 2004. He served as Director, Business Development from 2002—2003. He was the Controller and Assistant Controller from 1998- 2002.

Phillip Feiner , Vice President and General Counsel . Mr. Feiner was appointed Vice President and General Counsel on May 7, 2008 and was Assistant General Counsel from February 2007 until May 7, 2008. Prior to joining us, Mr. Feiner served as General Counsel to BDS International, LLC, a Dallas-based exploration and development company, as well as its affiliate Piute Pipeline from February 2002 until August 2005.  From August 2005 until February 2007, Mr. Feiner maintained his own law practice specializing in real estate and corporate matters.  He is a licensed attorney in the states of Texas and North Carolina.

Randall Boyd , Director .  Mr. Boyd was appointed to our Board of Directors on October 25, 2004.  Mr. Boyd began his career with IBM in 1979 and served in various capacities, including sales, market forecasting/pricing and industry strategy. He joined Sky Chefs in 1989 and left the company in 2003. In 2001, he was appointed CEO of the Americas Regions, member of the Global Executive Board and Global Executive Vice President of Marketing and Sales of Sky Chefs. Since 2004, he has been Executive Producer of the television production “Honey Hole” and has been president of R.C. Boyd Enterprises, LLC, the owner of the television production.

Donald W. Niemiec , Director .  Mr. Niemiec was appointed to our Board of Directors on March 2, 2007.   From 1982 to 2000, Mr. Niemiec was employed in various capacities by Union Pacific Resources Group, Inc., including President of Union Pacific Fuels, Inc. and Vice President, Marketing & Corporate Development.  From 2000 to the present, he has served as President of WR Energy, LLC, a strategic consulting company for the energy industry.

Robert L. Gaudin , Director .  Mr. Gaudin was appointed to our Board of Directors on March 2, 2007.   Mr. Gaudin maintains over thirty years of exploration and land management experience in the oil and gas industry and since 1998 has been the owner of Grande Energy Company and is also an owner of Holland Acquisitions and Extra Energy in Fort Worth, Texas.  Mr. Gaudin is an active member in oil and gas industry associations, including the Society of Petroleum Engineers, the American Association of Petroleum Geologists and the American Association of Petroleum Landmen.

William O. Powell, III , Director .  Mr. Powell was appointed to our Board of Directors on March 12, 2007.   From May 1974 to June 2002, Mr. Powell held various positions, including Worldwide Engagement Leader-Partner with PricewaterhouseCoopers, focusing on energy companies.  From October 2003 to March 2004, Mr. Powell was the Vice President and Chief Accounting Officer for La Quinta Corporation and served as Senior Vice President/Chief Financial Officer and Treasurer of ABS Group of Companies from March 2005 to December 2006.  Mr. Powell is a Certified Public Accountant.

David W. Wehlmann , Director .  Mr. Wehlmann was elected to our Board of Directors at our Annual Meeting of Stockholders on December 12, 2007.  He joined Grey Wolf Inc., a leading provider of oil and gas land drilling services in the United States in July 1996 as Vice President and Controller.  In February 1998, he was promoted to Senior Vice President, Chief Financial Officer and Secretary and in March 2003 was promoted to Executive Vice President.  Prior to joining Grey Wolf Inc, Mr. Wehlmann was Vice President and Chief Accounting Officer of EnerVest Management Company, L.C., a privately-held oil and gas property acquisition and management

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company.  Mr. Wehlmann was Controller of Convest Energy Corporation, a publicly traded oil and gas exploration and production company, from April 1991 until November 1994.  Mr. Wehlmann is a Certified Public Accountant.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the Securities and Exchange Commission (“SEC”) initial reports of ownership and reports of change in ownership of our common stock and other equity securities.  Officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. To our knowledge, the following persons have failed to file, on a timely basis, the identified reports required by Section 16(a) of the Exchange Act during the most recent fiscal year:

Code of Ethics

The Board of Directors has adopted a Code of Ethics and Business Conduct that applies to all directors, officers and employees of Cano, a copy of which was filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended June 30, 2004, filed with the Securities and Exchange Commission on September 23, 2004. A current copy of the Code of Ethics and Business Conduct, the Bylaws of Cano, the Audit Committee Charter, the Compensation Committee Charter and the Nominating and Corporate Governance Committee Charter may be found on Cano’s internet website at www.canopetro.com. Copies of these documents are also available, without charge, to stockholders upon written request to Phillip Feiner, 801 Cherry St., Suite 3200, Fort Worth, Texas 76102.

Audit Committee

The Audit Committee is composed of Messrs. Powell, Niemiec and Wehlmann.  Mr. Wehlmann joined the committee on December 12, 2007, replacing Mr. Don Dent who had elected not to seek reelection to the Board of Directors at the 2007 Annual Meeting of Stockholders.  The Audit Committee held five meetings during the fiscal year ended June 30, 2008 (“Fiscal 2008”). No member of the Audit Committee may be an officer of Cano. The Board of Directors has determined that each of the Audit Committee members is an independent director as required by the rules of the NYSE Alternext US (formerly known as the American Stock Exchange) and Rule 10A-3(b)(1)(ii) of the Exchange Act. The principal responsibilities of the committee are described in the Audit Committee Charter. The Audit Committee retains the firm of independent public accountants that annually audits our books and records. The Audit Committee reviews the scope and results of the audit with the independent public accountants, as well as our accounting procedures, internal controls, accounting and financial reporting policies and practices, and makes reports and recommendations to the Board of Directors as it deems appropriate. The Audit Committee also conducts appropriate review and oversight over related party transactions. The Board of Directors has determined that Mr. William O. Powell, III, the Audit Committee Chairman, is the Audit Committee financial expert. The Board of Directors has adopted a written Audit Committee Charter which can be found on Cano’s website www.canopetro.com or may be obtained upon written request from Phillip Feiner, at 801 Cherry St., Suite 3200, Fort Worth, Texas 76102.

ITEM 11.                Executive Compensation.

Compensation Discussion and Analysis

In this compensation discussion and analysis, we discuss our compensation objectives, our decisions and the rationale behind those decisions relating to compensation for Fiscal 2008 for our executive officers and our decisions to date regarding compensation for the fiscal year ending June 30, 2009 (“Fiscal 2009”) and the rationale behind those decisions.

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Objectives of Our Compensation Program

Our executive compensation program is designed to provide a comprehensive compensation program to meet the following objectives:

·       to be fair to both the executive and the Company;

·       to provide opportunities to achieve a total compensation level that is competitive with comparable positions at companies with which the Company competes for executives;

·       to provide financial incentives to our executives to achieve our key operational objectives set by the Board of Directors;

·       to provide an appropriate mix of fixed and variable pay components to establish a “pay-for-performance” oriented compensation program;

·       to provide compensation that takes into consideration the education, professional experience and knowledge that is specific to each job and the unique qualities the executive provides; and

·       to recognize an executive’s commitment and dedication in his job performance and in support of the Company’s culture.

What Our Compensation Program Is Designed to Reward

Our compensation program is designed to reward, in both the short-term and the long-term, performance that contributes to the implementation of our business strategy and the achievement of our objectives.  In addition, we reward qualities that we believe help achieve our business strategy such as teamwork, individual performance in light of general economic and industry specific conditions, the ability to manage and enhance production from our existing assets, the ability to explore new opportunities to increase oil and natural gas production, level of job responsibility and industry experience.

Elements of Our Compensation Program and Why We Pay Each Element

Our management compensation program is comprised of four elements: base salary, cash bonus, long-term equity based compensation and benefits.

·       Base Salary .  We pay base salary to be competitive with salary levels for comparable executive positions at other oil and natural gas companies and to reward an executive’s responsibilities, experience, leadership and potential future contribution.

·       Cash Bonus .  We include a cash bonus as part of our management compensation program because we believe this element of compensation (i) helps focus management on and motivate management to achieve key previously identified corporate objectives by rewarding the achievement of these objectives and (ii) is necessary to be competitive from a total remuneration standpoint.

·       Long-Term Equity Incentive Compensation .  We use long-term equity incentive compensation as the primary vehicle for (i) linking the Company’s long-term performance and increases in stockholder value to the total compensation for the Company’s executive officers and (ii) providing competitive compensation to attract and maintain our executive officers.

·       Benefits .  We offer a variety of health and welfare programs to all eligible employees, including the executive officers.  The health and welfare programs are intended to protect employees against catastrophic loss and encourage a healthy lifestyle. Our health and welfare programs include medical, pharmacy, dental, vision, life insurance and accidental death and disability.  In May 2008, we initiated a 401(K) plan for all full time employees, including the executive officers in which we match up to 4% of contributions.

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How We Determine Each Element of Compensation

The Compensation Committee and the Board of Directors oversee our compensation program. In accordance with rules of the NYSE Alternext US (formerly known as the American Stock Exchange) and pursuant to the Compensation Committee Charter, for Fiscal 2008 and through October 20, 2008, the Compensation Committee was responsible for recommending to the Board of Directors for approval certain types and levels of compensation for our executive officers and for determining itself other types and levels of compensation for our executive officers. Specifically, during this period, the Compensation Committee: (i) reviewed our compensation strategy; (ii) after consultation with and receiving recommendations from the Chief Executive Officer and Chief Financial Officer, reviewed and made its own recommendations to the Board of Directors with respect to the base salary, incentive compensation that was not made pursuant to the 2008 Annual Incentive Plan, deferred compensation, stock options, performance units and other equity based awards that were not covered by our incentive or equity based plans; and (iii) after consultation with and receiving recommendations from the Chief Executive Officer and Chief Financial Officer, administered the 2008 Annual Incentive Plan and other incentive and equity based plans in which the Chief Executive Officer and other executive officers were participants, including the making of grants thereunder.

After consultation with and receiving recommendations from the Chief Executive Officer and Chief Financial Officer, the Compensation Committee also reviewed and made recommendations to the Board of Directors regarding (i) any employment agreement, severance agreement, change in control agreement or provision that was not covered by our 2008 Annual Incentive Plan or other incentive or equity based plans, or separation agreement, or any amendment to the same, that was proposed to be entered into any executive officer; and (ii) any deferred compensation arrangement or retirement plan or benefits that were proposed to be entered into with any executive officer.

On October 20, 2008, the Compensation Committee Charter was amended effective after the Board of Directors meeting.  Pursuant to the amended Compensation Committee Charter, the Compensation Committee will review and make recommendations to the Independent Board with respect to the base salary, incentive compensation, deferred compensation, stock options, performance units and other equity based awards for the Chief Executive Officer and all other executive officers.  The Compensation Committee will no longer administer the Company’s incentive compensation, stock option and other equity based plans, but will recommend to the Independent Board such plans (including specific provisions thereof) in which the Chief Executive Officer and other executive officers may be participants and amendments to such plans or adoption of new plans.

The Compensation Committee is composed of Messrs. Niemiec, Wehlmann and Gaudin.  Each of the Compensation Committee members is an independent director as required by the rules of the NYSE Alternext US (formerly known as the American Stock Exchange), an “outside director” as defined under Section 162(m) of the Code and a “non-employee director” as defined under Section 16b-3 of the Exchange Act.

The Compensation Committee has the authority to retain and terminate independent third party compensation consultants and to obtain independent advice and assistance from internal and external legal, accounting and other advisors.  Beginning in June 2007, the Compensation Committee hired Towers Perrin to obtain data in order to assess our competitive position at that time with respect to the individual elements of total executive compensation for chief executive officers, chief financial officers and chief operating officers of a peer group to ensure the attraction, retention and appropriate reward of these executive officers by us.  In December 2007, Towers Perrin provided advice to the Compensation Committee and the Board of Directors and management regarding the 2008 Annual Incentive Plan which we adopted in February 2008.

Fiscal 2008

General.   The process for determining compensation changed at the end of the fiscal year ended June 30, 2007 (“Fiscal 2007”).  Until late in Fiscal 2007, we did not use compensation consultants surveys in analyzing our base salaries, cash bonuses and long-term equity incentive.  In June 2007, we changed the process for determining compensation, and, as described above, the Compensation Committee hired Towers Perrin to provide the executive compensation of comparable companies in the oil and natural gas industry for the chief executive officer, chief financial officer and chief operating officer positions.  The peer group of 15 public companies in the oil and natural gas industry, including 6 of which we compete with directly in the Fort Worth market, was developed by the

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Company and the Compensation Committee with the Compensation Committee making the final determination and was comprised of the following companies:

For Mr. McKinney, not all of the 15 peer group companies reported compensation information for a position comparable to Mr. McKinney’s position.  The seven companies that did have comparable positions to Mr. McKinney’s position were as follows:

As described below, in setting the Fiscal 2008 base salary and making the July 2007 restricted stock grants for Messrs. Johnson, Smith and McKinney, the Compensation Committee and the Board of Directors did not benchmark against the peer group.  Instead, the Compensation Committee and the Board of Directors used the Company specific results set forth below and certain individual factors set forth below in setting the Fiscal 2008 base salary and in making the July 2007 restricted stock grants for Messrs. Johnson, Smith and McKinney.

As described below, in adopting (i) the performance metrics, (ii) the ratios of the threshold, target and maximum performance goals for the performance metrics and (iii) the ratios of the payment amounts upon meeting the threshold, target and maximum performance goals for the Fiscal 2008 potential bonus payments (“2008 Fiscal Year Bonus”) pursuant to the 2008 Annual Incentive Plan, the Compensation Committee considered information gathered by Towers Perrin regarding similar bonus plans of the 15 peer group companies listed above.  Towers Perrin was able to obtain varying degrees of detail on at least one similar bonus plan at all 15 companies, and also took into account the experience of the applicable executive in making comparisons.  In setting the actual performance goals and potential payment amounts for the 2008 Fiscal Year Bonus under the 2008 Annual Incentive Plan, the Compensation Committee did not consider information from the peer group companies.

In addition, in making the May 2008 restricted stock grants for Messrs. Johnson, Smith and McKinney, the Compensation Committee and the Board of Directors did not benchmark against the peer group.  Instead, the Compensation Committee and the Board of Directors used the long-term Company specific factors set forth below in making the May 2008 restricted stock grants for Messrs. Johnson, Smith and McKinney.

The Company did not target any percentage or ranking with respect to its peer group.  The compensation package as a whole for Mr. Johnson is designed to recognize the fact that he is also the Chairman of the Board of Directors, bears the primary responsibility for effective management and operation of our business, the development of a successful business plan, the implementation of our business plan and increasing stockholder value. Accordingly, when evaluating the Mr. Johnson’s on-the-job performance with respect to each of the categories of compensation, the Compensation Committee considers his leadership, strategic planning for our future, dedication and focus on the short-term and long-term interests of the Company and its stockholders and professionalism, integrity and competence.

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The Company did not target any percentage or ranking with respect to its peer group for Messrs. Smith and McKinney.

Mr. Ricketts is our Principal Accounting Officer.  Since Principal Accounting Officers are often not named executive officers and their compensation is not available to the public on proxy statements, peer group information was not obtained regarding principal accounting officers.

Mr. Feiner was named our General Counsel on May 7, 2008.  Since he was not our General Counsel in June 2007 when Towers Perrin performed the peer group analysis, peer group information for General Counsel was not obtained (i) by the company in setting his July 1, 2007 through May 7, 2008 compensation or (ii) by the Compensation Committee or the Board of Directors in raising his salary pursuant to the employment agreement he entered into as of May 7, 2008, granting him restricted stock in May 2008 or setting his possible 2008 Fiscal Year Bonus payments.

Mr. Daitch was named our Chief Financial Officer on June 23, 2008.  In searching for a Chief Financial Officer, the Compensation Committee hired Ray Partners, Inc., an executive search firm, to assist the committee.  Ray Partners reviewed survey data from compensation consulting firms for oil and natural gas exploration and production companies and provided the Compensation Committee with a range for a possible base salary, bonus target and equity grant for a Chief Financial Officer.  Based on the information provided by Ray Partners, the Compensation Committee negotiated an employment agreement with Mr. Daitch with his base salary and equity grant being at the lower end of the range and recommended this employment agreement to the Board of Directors which approved the agreement.

Base Salary.   On June 28, 2007, the following executive officers had their annual base salaries for Fiscal 2008 increased to the following amounts:

Pursuant to the terms of his employment agreement, on January 1, 2008, Mr. Johnson’s annual base salary increased by 7% from $476,150 to $509,480.

Messrs. Johnson and Smith made recommendations to the Compensation Committee regarding the Fiscal 2008 base salaries, although Mr. Johnson did not make a recommendation regarding his base salary and Mr. Smith did not make a recommendation regarding his base salary.  In determining its own recommendation to the Board of Directors for the base salaries, the Compensation Committee did not take into account specific individual performance factors, but rather considered the individual factors described below and the performance of the Company for the entire Fiscal 2007 described below.

The individual factors that the Compensation Committee considered were the following;

·       Mr. Johnson’s involvement in coordinating the merger in 2004 with Huron Ventures, providing the leadership in identifying assets to acquire and arranging for the financing to acquire such assets and in leading the defense of the fire litigation;

·       Mr. Smith’s experience as the chief financial officers for 2 public companies, one of whom had an initial public offering and one of whom had a spin-off and recapitalization when Mr. Smith was chief financial

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officer, his years of experience, the internal controls and procedures that Mr. Smith implemented once he became the Chief Financial Officer and the positive performance review in general of Mr. Smith by the Board of Directors;

·       Mr. McKinney’s capability in being in charge of engineering and operations, the need to keep Mr. McKinney in charge of engineering and operations in order to implement our business strategy and the positive performance review in general of Mr. McKinney by the Board of Directors; and

·       the reviews that Messrs. Johnson and Smith provided regarding Mr. Ricketts’s performance in general, his history and institutional knowledge of Cano, responsibility for the timely filing of our Securities and Exchange Commission reports and his performance in implementing our internal controls and procedures.

The company specific factors were how we executed the capital expenditure budget which included drilling 80 wells, developing the Barnett Shale and beginning the Panhandle waterflood.  In addition, the Board of Directors took into consideration the following:

·       handling of the fire litigation; and

·       the value added to the Company from the following:

·       acquiring the New Mexico properties for $8.4 million which added 9.1 million of barrels of oil equivalent of proved reserves;

·       disposing of the Rich Valley properties in Oklahoma for $7.0 million which had 600,000 barrel of oil equivalent of proved reserves; and

·       the fact that the Company anticipated that its standardized measure of discounted estimated future net cash flows of its proved reserves would increase from $342.5 million at June 30, 2006 to approximately $700 million at June 30, 2007, primarily from the increased reserves and accelerating the development of the Panhandle Field.

On May 7, 2008, we promoted Mr. Feiner from Assistant General Counsel to Vice President and General Counsel and entered into a 3 year employment agreement which included an increase in his annual salary to $150,000 from $147,000.  Although the Compensation Committee did not attempt to compare Mr. Feiner’s salary with the salary of other general counsel based on any specific survey and did not try to have his compensation meet any benchmarks of a peer group, the Compensation Committee based the terms of his employment agreement on the recommendations of Messrs. Johnson and Smith.  Their recommendations were based on the responsibilities of Mr. Feiner as General Counsel.  The Board of Directors approved the agreement as recommended by the Compensation Committee.

On June 23, 2008, we hired Mr. Daitch as Senior Vice President and Chief Financial Officer and entered into a 3 year employment agreement with an annual salary to $250,000.  As described above under “Fiscal 2008 – General,” the Compensation Committee hired Ray Partners to assist the committee in searching for a chief financial officer.  Based on survey data obtained from compensation consulting firms for oil and natural gas exploration and production companies, Ray Partners provided the Compensation Committee with a range for a possible base salary, bonus target and equity grant for a chief financial officer.  Based on the information provided by Ray Partners, the Compensation Committee negotiated an employment agreement with Mr. Daitch with his base salary at the lower end of the range and the Compensation Committee approved the agreement as recommended by the Compensation Committee.

See “Summary Compensation Table” for the ultimate base salaries paid for Fiscal 2008.

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Cash Bonuses .

In 2007, the Board of Directors requested that the Compensation Committee develop an annual bonus plan for executive officers to be based on certain specified performance objectives to be set based upon metrics driven by the Board of Directors with these performance objectives being used as guidelines in awarding cash bonuses for Fiscal 2008.  In February 2008, the Compensation Committee recommended to the Board of Directors and the Board of Directors adopted the 2008 Annual Incentive Plan which sets forth the procedures for setting performance goals and potential payments and the Compensation Committee set forth the 2008 Fiscal Year Bonus.  The Board of Directors ratified the 2008 Fiscal Year Bonus.

The Compensation Committee retained Towers Perrin to assist with the development of 2008 Annual Incentive Plan and the 2008 Fiscal Year Bonus.  In addition to providing general information for the 2008 Annual Incentive Plan, the Compensation Committee requested Towers Perrin provide information regarding the following for the 2008 Fiscal Year Bonus:

·       possible performance metrics that would reflect the key indicators of our performance;

·       the ratios of the threshold, target and maximum performance goals; and

·       the ratios of the potential payment amounts upon meeting the threshold, target and maximum performance goals.

Based on information gathered by Towers Perrin regarding similar bonus plans of the 15 peer group companies listed above, its general knowledge which it obtained as executive compensation consultants and meetings with the Compensation Committee, Towers Perrin provided the Compensation Committee and the Board of Directors information about

·       possible performance metrics;

·       the ratios of the threshold, target and maximum performance goals; and

·       the ratios of the potential payment amounts upon meeting the threshold, target and maximum performance goals.

After considering the Towers Perrin information and the recommendation of Messrs. Johnson and Smith, the Compensation Committee determined that the following four performance metrics reflected the most important short-term factors on which the executive officers should focus:

·       Average Daily Production for Fiscal 2008;

·       Proved Developed Producing Reserves;

·       EBITDA (earnings before interest, taxes, depreciation and amortization); and

·       Finding and Development Costs.

After considering the recommendation of Messrs. Johnson and Smith, the Compensation Committee determined that the target performance goal for each of the four performance metrics would be the amounts set forth for each metric in the Fiscal 2008 budget.  In following Towers Perrin’s findings, the Compensation Committee decided that the threshold performance goal would be 80% of the target performance goal.  With regard to the maximum performance goal, the Compensation Committee determined to set it at 130% of the target performance goal which was higher than the Towers Perrin findings because the Compensation Committee wanted to provide a more challenging maximum performance goal than Towers Perrin had found to be most common.

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The Compensation Committee determined the relative weighting of the four performance goals based the relative importance of the strategic goals of the Company.  The Compensation Committee also authorized a 25% discretionary performance metric to provide the committee with discretionary authority to make additional bonus awards to executive officers above the bonuses based on the performance goals in order to reward executive officers for performance that would not necessarily be reflected in the four performance metrics.  The Fiscal 2008 performance goals and weighting of such goals are set forth below:

*Average daily production for Fiscal 2008.

In setting the potential payments to be made to the executive officers upon the achievement of the target performance goal, the Compensation Committee considered the following:

·       the general information by position obtained by the Compensation Committee from a review of the proxy statements of the 15 peer group companies set forth above;

·       the Compensation Committee’s judgment of the appropriate target amount by position based on perceived industry practice; and

·       the goal of the Company’s overall compensation plan to have the largest amount of compensation be paid in the form of stock awards, the second largest amount be paid in the form of base salary and the smallest amount be paid in the form of bonus.

Due to their positions and responsibility within the Company, Messrs. Johnston, Smith and McKinney received a higher percentage of salary as the target bonus than did Messrs. Ricketts and Feiner.  In determining the ratio of the potential payments for the achievement of the threshold, target and maximum performance goals, the Compensation Committee adopted Towers Perrin’s findings and set the threshold level potential payment at 50% of the target level potential payment and the maximum level potential payment at 150% of the target level potential payment.  The potential payments based on the performance goals for the 2008 Fiscal Year Bonus are set forth in the table below.

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In addition, as described above, the Compensation Committee is also authorized to make an up to 25% discretionary performance metric in order to provide the committee with discretionary authority to make additional bonus awards to executive officers to reward executive officers for performance that would not necessarily be reflected in the four performance metrics.

Since Mr. Feiner was not promoted to an executive officer until May 7, 2008, he was not covered by the 2008 Fiscal Year Bonus until his promotion.  In November 2007, he received a performance related bonus of $23,000.  Although the threshold, target and maximum performance goals and possible discretionary bonus amounts under the 2008 Fiscal Year Bonus are the same for Mr. Feiner as for the other executive officers that were executive officers in February 2008, his threshold, target and maximum potential payments are pro rated from May 2008 through June 30, 2008 such that his threshold potential payment for meeting the threshold goals was $6,250, his target potential payment for meeting the target goals was $12,500 and his maximum potential payment for meeting the maximum performance goals was $18,750.

Since Mr. Daitch did not join the Company until June 23, 2008, he did not participate in the 2008 Fiscal Year Bonus.

On September 8, 2008, the Compensation Committee authorized the following bonuses for the executive officers:

For Fiscal 2008, we had Finding and Development Costs of $9.93 per BOE which was between our threshold and target performance goal.  The 2008 Fiscal Year Bonus paid to Messrs. Johnson and McKinney were based on the amount associated with having Finding and Development Costs of $9.93 per BOE.  The 2008 Fiscal Year Bonus paid to Messrs. Smith and Ricketts were based on the amount associated with having Finding and Development Costs of $9.93 per BOE and a discretionary amount based on the positive reviews of their performance by our independent public accountants and our internal auditors.  The 2008 Fiscal Year Bonus paid to Mr. Feiner was based on the amount associated with having Finding and Development Costs of $9.93 per BOE and a discretionary amount based on the positive reviews of his performance by management and the Board of Directors.

The Board of Directors ratified the Compensation Committee’s payments under the 2008 Fiscal Year Bonus.

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Stock Incentive Plan .

In June 2007, in keeping with a general trend, we decided to no longer issue stock options to our executive officers, but just to issue restricted stock.  This is due to both the lack of favorable tax and accounting treatment of stock options as compared to restricted stock as was formerly the case and the desire to reduce the dilution to our stockholders since less shares of restricted stock must be granted to get the same value as shares exercised pursuant to stock options.

As compensation for Fiscal 2007 performance, on June 28, 2007 the Compensation Committee authorized the granting on July 2, 2007 to our executive officers of the following shares of restricted stock with the restrictions on transfer lapsing for one-third of the shares on the first, second and third anniversaries of July 2, 2007 if such executive officer is still employed on such dates:

Messrs. Johnson and Smith made recommendations to the Compensation Committee regarding the restricted stock grants, although Mr. Johnson did not make a recommendation regarding himself and Mr. Smith did not make a recommendation regarding himself.  In determining the amount of the restricted stock grants, the Compensation Committee took into account the stock options that were granted in December 2006 such that the entire Fiscal 2007 stock incentive grants would be considered based on the Fiscal 2007 results.  The Compensation Committee did not take into account specific Fiscal 2007 individual performance factors, but rather considered the individual factors described above under “Fiscal 2008 – Base Salary” and the performance of the Company for the entire year described above under “Fiscal 2008 – Base Salary.”  The vesting schedule encourages the executives to remain Cano employees.

Prior to Mr. Feiner becoming an executive officer, on February 18, 2007, in recognition of his performance, Mr. Feiner was granted stock options to purchase 10,000 shares of common stock at $5.75 per share with one-third of the stock options vesting on the first, second and third anniversaries of February 18, 2008 if he is still employed on such dates.

As compensation for Fiscal 2008, at the last Compensation Committee meeting of Fiscal 2008 on May 7, 2008, the Compensation Committee authorized the granting on May 12, 2008 to our executive officers at that time of the following shares of restricted stock with the restrictions on transfer lapsing for one-third of the shares on the first, second and third anniversaries of May 12, 2008 if such executive officer is employed on such dates:

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Messrs. Johnson and Smith made recommendations to the Compensation Committee regarding the restricted stock grants, although Mr. Johnson did not make a recommendation regarding himself and Mr. Smith did not make a recommendation regarding himself.  In determining the amount of the restricted stock grants, the Compensation Committee did not take into account specific individual performance factors, but rather considered the number of restricted shares granted on July 2, 2007 in recognition of the Fiscal 2007, the position held by each executive officer and our results as compared to long term performance goals as set forth below.  As a result of his position as Chairman of the Board and Chief Executive Officer, Mr. Johnson received the largest increase in the number of shares of restricted stock granted as compared to the July 2, 2007 grant with Messrs. Smith and McKinney receiving the next largest increase in the number of shares of restricted stock granted as compared to the July 2, 2007 grant due to their positions with the company.  The vesting schedule encourages the executives to remain Cano employees.

The results as compared to long term performance goals that were considered in making the restricted stock grants were as follows:

·       November 2007 equity raise of $25 million;

·       December 2007 $150 million universal shelf registration statement;

·       handling of the fire litigation; and

·       the value added to the Company from the following general items from July 2007 – April 2008:

·       drilling 64 wells; and

·       performing capital workovers on over 240 wells;

·       the value added to the Company from the following specific items from July 2007 – April 2008:

·       Panhandle Field – completing three phases of the Cockrell Ranch waterflood and initiating full injection in February 2008;

·       Cato Field – initiating 20-acre waterflood infill development, drilling 28 new well and returning to production an additional 35 wells and increasing production from the field as a whole;

·       Desdemona Field – completing the first phase of the waterflood facilities, receiving the injection permit in September 2008 and immediately beginning injection of 5,000 BWPD; and

·       Nowata Properties — completing the Nowata ASP pilot in December 2007 and having continuous injection since that time.

As described above, Mr. Daitch became our Senior Vice President and Chief Financial Officer on June 23, 2008.  In searching for a Chief Financial Officer, the Compensation Committee hired Ray Partners to assist the committee, and Ray Partners reviewed survey data from compensation consulting firms for oil and natural gas exploration and production companies and provided the Compensation Committee with a range for a possible equity grant for a Chief Financial Officer.  Based on the information provided by Ray Partners, the Compensation Committee negotiated an employment agreement with Mr. Daitch with his equity grant being 100,000 shares of restricted stock with the restrictions on transfer lapsing for one-third of the shares on the first, second and third

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anniversaries of June 23, 2008 if he is employed on such dates, This number of shares was at the lower end of the Ray Partners range.  The Compensation Committee recommended this employment agreement to the Board of Directors which approved the agreement.

The Board of Directors ratified all of the restricted stock awards made by the Compensation Committee.

Fiscal 2009

Base Salary.   At the last Compensation Committee meeting of Fiscal 2008 on May 7, 2008, based on the recommendations of Messrs. Johnson and Smith, although neither Mr. Johnson nor Mr. Smith made recommendations regarding himself, the Compensation Committee recommended to the Board of Directors and the Board of Directors approved the extending of the employment agreements of Messrs. Johnson, Smith, McKinney and Ricketts through May 31, 2011.  In determining to extend the employment agreements, the Compensation Committee considered the desire to provide incentive for the executive officers to remain with the Company and the results as compared to the long term performance of the Company described above under “Fiscal 2008 – Stock Incentive Plan.”  At its May 2008 meeting, the Compensation Committee determined that the Fiscal 2008 base salaries were appropriate for Fiscal 2009 based on the Company’s overall compensation plan to have the largest amount of compensation be paid in the form of stock awards, the second largest amount be paid in the form of base salary and the smallest amount be paid in the form of bonus.  Therefore, the Compensation Committee did not recommend any base salary changes for Fiscal 2009 for Messrs. Johnson, Smith, McKinney or Ricketts.  Pursuant to the terms of his employment agreement, on January 1, 2009, Mr. Johnson’s annual base salary is set to increase by at least 7% to at least $545,145. Mr. Johnson has elected to forego this annual base salary increase for January 2009.

On September 8, 2008, at the recommendation of Messrs. Johnson, Smith and Daitch due to his performance, the Compensation Committee recommended to the Board of Directors, and the Board of Directors approved, an increase to Mr. Feiner’s annual base salary to $170,000.

Cash Bonuses.   As described above under “Fiscal 2008 – Cash Bonuses,” in February 2008, the Compensation Committee recommended to the Board of Directors and the Board of Directors adopted the 2008 Annual Incentive Plan which sets forth the procedures for setting performance goals and potential payments.

In setting the annual bonus goals and potential payments for the Fiscal 2009 (the “2009 Fiscal Year Bonus”) at its October 2008 meeting, the Compensation Committee followed the recommendation of Messrs. Johnson and Daitch to maintain the following four performance metrics which reflect the most important short-term factors on which the executive officers should focus:

·       Average Daily Production for Fiscal 2009;

·       Proved Developed Producing Reserves;

·       EBITDA (earnings before interest, taxes, depreciation and amortization); and

·       Finding and Development Costs.

After considering the recommendation of Messrs. Johnson and Daitch, the Compensation Committee determined that the target performance goal for each of the four performance metrics would be above the budgeted amount for each metric in order to provide an incentive for the executive officers to have the Company exceed the budgeted amounts while still providing an achievable goal.  The Compensation Committee decided that the threshold performance goal for each of the four performance metrics would be 90% of the target performance goal.  With regard to the maximum performance goal for each of the four performance metrics, the Compensation Committee determined to set it at 120% of the target performance goal.

The Compensation Committee determined the relative weighting of the four performance goals based the relative importance of the strategic goals of the Company.  The Fiscal 2009 performance goals and weighting of such goals are set forth below (Cano notes that these goals are part of Cano’s incentive program and do not

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correspond to any financial or performance guidance that Cano has provided or will provide and should not be considered as statements of Cano’s expectations or estimates):

*Average daily production for Fiscal 2009.

As with the 2008 Fiscal Year Bonus, in setting the potential payments to be made to the executive officers upon the achievement of the target performance goal for all four metrics, the Compensation Committee considered the following:

·       the general information by position obtained by the Compensation Committee from a review of the proxy statements of the 15 peer group companies set forth above;

·       the Compensation Committee’s judgment of the appropriate target amount by position based on perceived industry practice; and

·       the goal of the Company’s overall compensation plan to have the largest amount of compensation be paid in the form of stock awards, the second largest amount be paid in the form of base salary and the smallest amount be paid in the form of bonus.

Due to their positions and responsibility with the Company, Messrs. Johnson, Daitch and McKinney received a higher percentage of salary as the target bonus than did Messrs. Ricketts and Feiner.  In determining the ratio of the potential payments for the achievement of the threshold, target and maximum performance goals, the Compensation Committee adopted Towers Perrin’s Fiscal 2008 findings and as with the 2008 Fiscal Year Bonus set the threshold level potential payment for achieving all four metrics at 50% of the target level potential payment and the maximum level potential payment for achieving all four metrics at 150% of the target level potential payment.  The potential payments based on the performance goals for the 2009 Fiscal Year Bonus are set forth in the table below.

The Compensation Committee is authorized in its sole discretion to exercise negative discretion for up to 25% of the award.

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Benefits.   We offer a variety of health and welfare programs to all eligible employees, including the executive officers.  The health and welfare programs are intended to protect employees against catastrophic loss and encourage a healthy lifestyle. Our health and welfare programs include medical, pharmacy, dental, vision, life insurance and accidental death and disability. We provide full time employees, regularly scheduled to work 40 or more hours per week, short and long-term disability and basic life insurance at no cost to the employee.  In May 2008, we initiated a 401(K) plan for all full time employees, including the executive officers in which we match up to 4% of contributions.  Since we instituted the 401(K) plan in May 2008, we have matched 4% of contributions.  In addition, for Messrs. Johnson, Daitch, Smith (through his retirement on September 30, 2008), McKinney and Ricketts, we pay for lunch/athletic club dues and, in addition, for Mr. Johnson we pay for country club dues and, pursuant to his employment agreement, provide a car allowance, which he relinquished in October 2008.  The Compensation Committee believes that the lunch/athletic club and country club dues and, when it was in place, car allowance are benefits for Mr. Johnson that are comparable with those received by other chief executive officers and that the lunch/athletic club dues for the other executive officers are benefits that are comparable with those received by other executive officers.

On September 30, 2008, Mr. Smith retired as Senior Vice President, and on October 1, 2008, Cano and Mr. Smith entered into a Consulting Agreement (the “Consulting Agreement”) with a one year term, with each party having the right to terminate the Consulting Agreement on 30 days notice.  The Consulting Agreement provides for Mr. Smith to receive $3,000 per month and to provide at least 15 hours of consulting services as requested by the Chief Executive Officer.  Mr. Smith shall receive $200 per hour for any consulting services during any calendar month in excess of 15 hours.  In connection with entering into the Consulting Agreement, on September 30, 2008, Cano vested 86,043 shares of Mr. Smith’s restricted stock with the remaining 130,624 shares of restricted stock being forfeited.

How Elements of Our Compensation Program Are Related to Each Other

We view the various components of compensation as related but distinct with a significant portion of total compensation reflecting “pay for performance.”  Our Compensation Committee has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid out compensation, between cash or non-cash compensation, or among different forms of non-cash compensation.  However, for Fiscal 2008, Messrs. Johnson, Smith and McKinney received (i) the most value from the May 2008 restricted stock grants which related to Fiscal 2008 results, (ii) the second most value from the July 2007 restricted stock grants which related to Fiscal 2007 results, (iii) the third most value from their base salaries and (iv) the least value from their cash bonuses.  For Fiscal 2008 for Mr. Ricketts, he received (i) the most value from the May 2008 restricted stock grant which related to Fiscal 2008 results, (ii) the second most value from his base salary, (iii) the third most value from the July 2007 restricted stock grant which related to Fiscal 2007 results and (iv) the least value from his cash bonus.  For Fiscal 2008 for Mr. Feiner, he received (i) the most value from the May 2008 restricted stock grant which related to Fiscal 2008 results, (ii) the second most value from his base salary and (iii) the least value from his cash bonus.  Since Mr. Feiner was not an executive officer in June-July 2007, he did not receive a restricted stock grant in July 2007.  The Compensation Committee anticipates that the ranking of the value of stock grants, base salaries and cash bonuses in descending order will remain its goal for Fiscal 2009 although there is no set ratio between the 3 elements.

Accounting and Tax Considerations

To date, our compensation program has complied with Section 162(m) of the Code.  Under Section 162(m), a limitation is placed on tax deductions of any publicly-held corporation for individual compensation to certain executives of such corporation exceeding $1 million in any taxable year, unless the compensation is performance based.  In connection with the 2008 Annual Stockholders Meeting, we will request that the stockholders approve the 2008 Annual Incentive Plan.  If the stockholders approve such plan, we anticipate that any bonuses paid under the 2008 Annual Incentive Plan in fiscal year 2010 and beyond will be deemed to be performance based and meet the qualifications of Section 162(m).

Although we will generally attempt to structure executive compensation so as to preserve deductibility, we also believe that there may be circumstances where our interests are best served by maintaining flexibility in the way compensation is provided, even if it might result in the non-deductibility of certain compensation under the Internal Revenue Code, including any bonuses paid under our 2009 Fiscal Year Bonus.  Although equity awards may be

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deductible for tax purposes by us, the accounting rules pursuant to Statement of Financial Accounting Standard 123R, Share-Based Payment , require that the portion of the tax benefit in excess of the financial compensation cost be recorded to paid-in-capital.

Termination of Employment Arrangements

Employment Agreements

As described under “Discussion of Summary Compensation Table and Grants of Plan-Based Awards Table, we have entered into employment agreements with Messrs. Johnson, Daitch, Smith, McKinney, Ricketts and Feiner.  Mr. Smith’s employment agreement terminated upon his retirement on September 30, 2008.

If we do one of the following:

·       terminate a executive officer other than due to his physical or mental illness or other than for “Cause;”

·       assign him any duties materially inconsistent with his current position with us; or

·       assign him a title, office or status which is inconsistent with his present title, office or status, other than a promotion,

we shall pay him the greater of the following:

·       his annual base salary for the remainder of the term of his employment agreement; or

·       six months of his annual base salary.

See the definition of “Cause” under “Discussion Regarding Summary Compensation Table and Grants of Plan-Based Awards Table.”

If within twelve months after a “Change in Control,” we terminate any executive officer’s employment for any reason or if any executive officer resigns at any time after any diminution of his job title, duties or compensation or the relocation of him to an office in a county that does not abut Tarrant County, Texas, we shall pay such executive officer three times his annual salary and three times his prior year’s bonuses and shall provide for three years to him, his spouse and dependents the right to participate in any health and dental plans that we maintain for our employees.

See the definition of “Change in Control” under “Potential Payments Under Termination or Change-in-Control.”

Equity Plans.   Pursuant to their stock option agreements, upon a “Change in Control,” the unvested stock options of all employees, including the executive officers, vest immediately prior to the effective date of the “Change in Control.”  On August 20, 2007, we amended the restricted stock award agreements of all employees, including the executive officers, such that upon a “Change in Control,” the unvested restricted stock also vests immediately prior to the effective date of the “Change in Control.”

The “Change in Control” provisions in both the employment agreements and the stock option and restricted stock agreements help prevent management from being distracted by rumored or actual changes in control.  The “Change in Control” provisions provide:

·       incentives for executive officers to remain with Cano despite the uncertainties of a potential or actual change in control transaction;

·       assurance of severance and benefits for terminated executive officers; and

·       access to equity components after a change in control.

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While there is a double trigger for an executive officer to receive cash payments upon a change in control, there is a single trigger for the vesting of stock options and restricted stock agreements for all employees for the following reasons:

·       to be competitive with what we believe to be the standards for the treatment of equity upon a change in control;

·       employees who remain after a change of control are treated the same with regard to equity as the general stockholders who could sell or otherwise transfer their equity upon a change in control; and

·       since Cano would not exist in its present form after a change in control, executives should not have to have their return on such equity dependent upon the new company’s future success.

Stock Ownership Policy

Currently the Company does not have a stock ownership policy and does not have a policy that prohibits employees hedging their economic exposure to any shares of the Company stock that they might own or from pledging their shares.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Regulation S-K, Item 402(b) with management. Based on the review and discussions referred to in the preceding sentence, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Amendment No. 1 on Form 10-K/A.

2008 and 2007 Summary Compensation Table

The following table summarizes the total compensation awarded to, earned by or paid to (i) S. Jeffrey Johnson, our Chief Executive Officer and Chairman of the Board for Fiscal 2007 and Fiscal 2008, (ii) Morris B. Smith, our Senior Vice President and Chief Financial Officer for Fiscal 2007 and through June 23, 2008 and a Senior Vice President from June 23, 2008 through June 30, 2008, (iii) Benjamin Daitch, our Senior Vice President and Chief Financial Officer since June 23, 2008, (iv) Patrick M. McKinney, our Senior Vice President of Engineering and Operations, and Michael J. Ricketts, our Vice President and Chief Accounting Officer, for Fiscal 2007 and Fiscal 2008 and (v) Phillip Feiner, our Vice President and General Counsel since May 7, 2008.  This table and the accompanying narrative should be read in conjunction with the Compensation Discussion and Analysis, which sets forth the objectives and other information regarding our executive compensation program.  Since Mr. Feiner was not an executive officer during Fiscal 2007, his compensation is only shown for Fiscal 2008.

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(a)            Amounts reported reflect the dollar amount required to be expensed for financial statement reporting purposes in Fiscal 2007 and Fiscal 2008 in accordance with Statement of Financial Accounting Standards No. 123 (R), “Share Based Payment” and includes awards granted in prior periods.  Pursuant to Securities and Exchange Commission rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. We refer you to the discussion of the assumptions used in the valuation in Note 8 of Notes to Consolidated Financial Statements in our 2008 Annual Report on Form 10-K.  The restricted stock was granted under our 2005 Long-Term Incentive Plan. The ultimate amount realized may be significantly more or less than the amount shown depending on the price of our stock at the time of vesting or the time of sale of the restricted stock.

(b)            Amounts reported reflect the dollar amount required to be expensed for financial statement reporting purposes in our Fiscal 2008 in accordance with Statement of Financial Accounting Standards No. 123 (R), “Share Based Payment” and includes awards granted in prior periods.  Pursuant to Securities and Exchange Commission rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. We refer you to the discussion of the assumptions used in the valuation in Note 8 of Notes to Consolidated Financial Statements in our 2008 Form 10-K.  All stock options were under our 2005 Long-Term Incentive Plan. The ultimate amount realized may be significantly more or less than the amount shown depending on the price of our stock at the time of exercise

(c)            For Mr. Johnson, “All Other Compensation” consists of the total of all car allowances, lunch/athletic club dues and country club dues we paid for on behalf of Mr. Johnson and all Company 401(K) contributions.  For all others, consists of Company 401(K) contributions.

Grants of Plan-Based Awards During Fiscal Year 2008

Shown in the table below are the restricted stock and stock option grants to acquire common stock made during Fiscal 2008 to our executive officers under the 2005 Long-Term Incentive Plan.

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(a)            The threshold amount is the least amount that could be earned assuming that only either the threshold EBITDA or Finding and Development Cost performance goal is met since these goals have the lowest weighting.

(b)            The target amount is the amount that could be earned assuming that the target performance goals of all four performance metrics are met and the target discretionary amount is awarded.

(c)            The maximum amount is the amount that could be earned assuming that the maximum performance goals of all four performance metrics are met and the maximum discretionary amount is awarded.

(d)            The exercise price is based on our closing stock price of $5.75 on February 19, 2008.

(e)            The grant date fair value was determined in accordance with Statement of Financial Accounting Standards No. 123 (R), “Share Based Payment” and represents the full grant date fair value for restricted stock awards and options granted during Fiscal 2008.

(f)             Mr. Feiner was not granted potential awards under non-equity incentive plan awards until May 2008; therefore, his amounts represent only the May-June 2008 portion of Fiscal 2008.

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(g)            Granted by Chief Executive Officer pursuant to authority granted by the Board of Directors under the 2005 Long-Term Incentive Plan since Mr. Feiner was not an executive officer at such time.

Discussion Regarding Summary Compensation Table and Grants of Plan-Based Awards Table

We are party to employment agreements with the executive officers as follows:

S. Jeffrey Johnson .  We have an employment agreement with Mr. Johnson through May 31, 2011 pursuant to which he receives a current annual salary of $509,480 and a bonus to be determined at the discretion of the Board of Directors of up to Mr. Johnson’s entire annual base salary. Mr. Johnson is entitled to receive raises of at least 7% per year effective on January 1 of each year. Mr. Johnson has elected to forego his 7% annual raise that was to be effective January 1, 2009.

Benjamin Daitch .  We have an employment agreement with Mr. Daitch through June 23, 2011, appointing him as Senior Vice President and Chief Financial Officer.  Pursuant to the employment agreement, his current annual salary is $250,000 and he is eligible for a bonus to be determined at the discretion of the Board of Directors of up to his entire annual base salary and/or stock bonuses.

Morris B. “Sam” Smith .  We had an employment agreement with Mr. Smith through May 31, 2011, appointing him as Senior Vice President and Chief Financial Officer and this employment agreement terminated on September 30, 2008 upon Mr. Smith’s retirement from the Company.

Patrick McKinney .  We have an employment agreement with Mr. McKinney through May 31, 2011, appointing him as Senior Vice President—Engineering and Operations. Pursuant to the employment agreement, his current annual salary is $250,000 and he is eligible for a bonus to be determined at the discretion of the Board of Directors of up to his entire annual base salary and/or stock bonuses.

Michael J. Ricketts .  We have an employment agreement through May 31, 2011 with Michael J. Ricketts, Vice President and Principal Accounting Officer. Pursuant to the employment agreement, his current annual salary is $187,000 and he is eligible for a bonus to be determined at the discretion of the Board of Directors of up to his entire annual base salary.

Phillip Feiner .  We have an employment agreement with Mr. Feiner through May 31, 2011, appointing him as Vice President and General Counsel.  On September 8, 2008, we amended his employment agreement to increase his current annual base salary to $170,000.  Pursuant to the employment agreement, his current annual salary is $170,000 and he is eligible for a bonus to be determined at the discretion of the Board of Directors of up to his entire annual base salary and/or stock bonuses.

Pursuant to the employment agreements with Messrs. Johnson, Daitch, Smith (through September 30, 2008), McKinney, Ricketts and Feiner, without incurring any additional liability, we may terminate the employment of any of them prior to the termination of his employment agreement for the following:

·       upon his death,

·       if, due to illness, he shall have been absent or unable to perform his duties for a total of 90 days during any 12 month period, or

·       for “Cause.”

We shall have “Cause” to terminate the employment of each of Messrs. Johnson, Daitch, Smith and Feiner under his employment agreement upon one of the following:

·       the willful and continued failure by him to perform his duties;

·       the willful engaging in misconduct which is injurious or disparaging to us; or

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·       the conviction any felony or crime of moral turpitude.

We shall have “Cause” to terminate either Mr. McKinney’s employment or Mr. Ricketts’s employment under his employment agreement upon one of the following:

·       financial dishonesty;

·       willful refusal for at least 10 days to comply with reasonable directions of us after receiving written notice of such noncompliance;

·       gross negligence or reckless or willful misconduct in the performance of his duties;

·       the failure to perform, or continuing neglect in the performance of duties for at least 10 days after receipt of written notice of such failure or neglect;

·       misconduct which has a materially adverse effect on our business or reputation;

·       use of illicit or illegal drugs;

·       abuse of alcohol or prescription medication;

·       the conviction of, or plea of nolo contender to, any felony or a misdemeanor involving moral turpitude or fraud;

·       continuing the material breach of any provision of the employment agreement for at least 10 days after receipt of written notice of such breach;

·       the violation of our policies; or

·       a violation of the confidentiality and non-competition provisions in the employment agreement.

See “Potential Payments Under Termination or Change in Control” for additional information regarding the specific financial ramifications for termination of a executive officer for “cause” or pursuant to a “change in control.”

Bonuses .  See “Compensation Discussion and Analysis – How We Determine Each Element of Compensation – Fiscal 2008 – Cash Bonuses,” regarding the cash bonuses that we paid to the executive officers in September 2008 and the rationale for such payments as well as a cash bonus paid to Mr. Feiner in November 2007.

Stock Incentive Plan .  See “Compensation Discussion and Analysis – How We Determine Each Element of Compensation – Fiscal 2008 – Stock Incentive Plan,” regarding the restricted stock granted to Messrs. Johnson, Smith, McKinney and Ricketts on July 2, 2007 and May 12, 2008, the stock options granted to Mr. Feiner on February 18, 2008, the restricted stock granted to Mr. Feiner on May 12, 2008, the restricted stock granted to Mr. Daitch on June 23, 2008 and the rationale for such grants.

General .  Any dividends that are paid on our common stock are also payable on the restricted stock.  The executive officers have the right to vote all shares of restricted held by them.

Base salary paid and the amount of cash bonuses/non-equity incentive plan compensation paid represented from 31.4% to 84.2% of the executive officers’ total compensation as represented in the Summary Compensation Table with the percentages being as follows:  Mr. Johnson – 43.7%; Mr. Daitch – 31.4%; Mr. Smith – 37.2%; Mr. McKinney – 32.4%; Mr. Ricketts – 57.3%; and Mr. Feiner – 84.2%.

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Outstanding Equity Awards at June 30, 2008

The following table summarizes the total outstanding equity awards as of June 30, 2008 for each executive officer.  The market value of the stock awards was based on the closing price of our common stock as of June 30, 2008 (the last trading day of the Fiscal 2008) which was $7.94 per share.  The unvested restricted stock grants and stock option awards include the grants of restricted stock and grants of stock options made in Fiscal 2008 which are also included in the Grants of Plan-Based Awards Table, all of which were unvested at June 30, 2008.

(a)       The market value is based on the June 30, 2008 closing price of $7.94 per share.

(b)       The following table provides the vesting dates as of June 30, 2008 for unvested stock options.

(1)            Due to Mr. Smith’s retirement on September 30, 2008, these stock options were forfeited.

(c)       The following table provides the vesting dates as of June 30, 2008 for unvested stock awards.

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(1)            Pursuant to his consulting agreement entered into on October 1, 2008 with the Company, on September 30, 2008, the Company vested 86,043 shares of Mr. Smith’s restricted stock with the remaining 130,624 shares of restricted stock being forfeited.

Option Exercises and Stock Vested During Fiscal Year 2008

The following table summarizes for Fiscal 2008 the number of shares of stock acquired by Mr. Smith upon the vesting of restricted stock and the value realized, before payout of any applicable withholding tax.  No other executive officers had any restricted stock vest in Fiscal 2008 and no executive officers exercised any stock options in Fiscal 2008.

Potential Payments Upon Termination or Change-in-Control

Termination without Death, Physical or Mental Illness or Cause

If we do one of the following to Messrs. Johnson, Daitch, Smith (through September 30, 2008), McKinney, Ricketts or Feiner:

·       terminate him other than due to his death, physical or mental illness or other than for “Cause;”

·       assign him any duties materially inconsistent with his current position with us; or

·       assign him a title, office or status which is inconsistent with his present title, office or status, other than a promotion,

we shall pay him in a lump sum the greater of the following:

·       his annual base salary for the remainder of the term of his employment agreement; or

·       six months of his annual base salary; plus

·       any accrued and unused vacation days.

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See the definition of “Cause” set forth in “ Discussion Regarding Summary Compensation Table and Grants of Plan-Based Awards Table.”

Termination upon Death or Disability

Pursuant to the terms of the 2008 Annual Incentive Plan, if Messrs. Johnson, Daitch, Smith (through September 30, 2008), McKinney, Ricketts or Feiner dies or becomes disabled and cannot work during the fiscal year, such executive officer shall, if the Compensation Committee so determines, be eligible to receive pro rata portion of the bonus that would have been payable to such executive officer, if he had remained employed, based on the number of days worked during the applicable performance period.  The table below assumes that the Compensation Committee would pay the amount earned under the 2008 Fiscal Year Bonus to the executive officer that died or became disabled.

Change of Control

If within twelve months after a “Change in Control,” we terminate the employment of Messrs. Johnson, Daitch, Smith (through September 30, 2008), McKinney, Ricketts or Feiner for any reason or if any of them resigns at any time after any diminution of his job title, duties or compensation or the relocation of him to an office in a county that does not abut Tarrant County, Texas, we shall pay in a lump sum the applicable executive officer three times his annual salary and three times his prior year’s bonuses and shall provide for three years to him, his spouse and dependents the right to participate in any health and dental plans that we maintain for our employees, on the same basis as participation by such employees.  The table below assumes that the Compensation Committee would pay three times the amount earned under the 2008 Fiscal Year Bonus to the executive officer.

A “Change in Control” shall mean the following:

·      any transaction in which Cano is not the continuing or surviving corporation or pursuant to which shares of Cano’s common stock would be converted into cash, securities or other property unless the holders of Cano’s common stock immediately prior to such transaction have the same proportionate ownership of common stock of the surviving corporation immediately after such transaction;

·      any transfer of all or substantially all of the assets of Cano;

·      the stockholders of Cano approve any plan or proposal for the liquidation or dissolution of Cano;

·      the cessation of control of the board by the individuals who:

·       at the effective date of the agreement were directors; or

·       become directors after the effective date of the agreement and whose election or nomination for election by Cano’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;

·      subject to certain exceptions, the acquisition of beneficial ownership of 50% or more of the voting power of Cano’s outstanding voting securities by any person or group who beneficially owned less than 50% of the voting power of Cano’s outstanding voting securities on the effective date; or

·      a Cano bankruptcy proceeding.

As described in “Compensation Discussion and Analysis – Termination of Employment Arrangements – Equity Plans,” the unvested stock options and restricted stock of all employees, including the executive officers, vest immediately prior to the effective date of a “Change-in-Control.”

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Set forth below are the amounts that our executive officers would have received if specified events had occurred on June 30, 2008.  The closing stock price on June 30, 2008 was $7.94 per share.