2005 ROWAN COMPANIES, INC.

LONG-TERM INCENTIVE PLAN

Table of Contents

 

 

 

 

 

 

ARTICLE I INTRODUCTION

 

B-1

 

 

1.1

 

Purpose

 

B-1

 

 

1.2

 

Definitions

 

B-1

 

 

1.3

 

Shares Subject to this Plan-Limitations-Adjustments

 

B-4

 

 

1.4

 

Administration of this Plan

 

B-5

 

 

1.5

 

Granting of Awards to Participants

 

B-6

 

 

1.6

 

Leave of Absence

 

B-6

 

 

1.7

 

Term of Plan

 

B-6

 

 

1.8

 

Amendment and Discontinuance of this Plan

 

B-6

 

ARTICLE II NON-QUALIFIED OPTIONS

 

B-6

 

 

2.1

 

Eligibility

 

B-6

 

 

2.2

 

Exercise Price

 

B-6

 

 

2.3

 

Terms and Conditions of Non-Qualified Options

 

B-7

 

 

2.4

 

Option Repricing

 

B-8

 

 

2.5

 

Vesting

 

B-8

 

ARTICLE III INCENTIVE OPTIONS

 

B-8

 

 

3.1

 

Eligibility

 

B-8

 

 

3.2

 

Exercise Price

 

B-8

 

 

3.3

 

Dollar Limitation

 

B-8

 

 

3.4

 

10% Stockholder

 

B-9

 

 

3.5

 

Incentive Options Not Transferable

 

B-9

 

 

3.6

 

Compliance with Code Section 422

 

B-9

 

 

3.7

 

Limitations on Exercise

 

B-9

 

ARTICLE IV PURCHASED STOCK

 

B-9

 

 

4.1

 

Eligibility

 

B-9

 

 

4.2

 

Purchase Price

 

B-9

 

 

4.3

 

Payment of Purchase Price

 

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

 

 

 

 

 

 

 

ARTICLE V BONUS STOCK

 

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ARTICLE VI STOCK APPRECIATION RIGHTS AND RESTRICTED STOCK UNIT

 

B-10

 

 

6.1

 

Stock Appreciation Rights

 

B-10

 

 

6.2

 

Restricted Stock Units

 

B-10

 

ARTICLE VII RESTRICTED STOCK

 

B-10

 

 

7.1

 

Eligibility

 

B-10

 

 

7.2

 

Restrictions, Restricted Period and Vesting

 

B-11

 

 

7.3

 

Forfeiture of Restricted Stock

 

B-11

 

 

7.4

 

Delivery of Shares of Common Stock

 

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ARTICLE VIII PERFORMANCE AWARDS

 

B-11

 

 

8.1

 

Performance Awards

 

B-11

 

 

8.2

 

Performance Goals

 

B-11

 

ARTICLE IX OTHER STOCK OR PERFORMANCE-BASED AWARDS

 

B-13

 

ARTICLE X CERTAIN PROVISIONS APPLICABLE TO ALL AWARDS

 

B-13

 

 

10.1

 

Vesting and Other General Provisions

 

B-13

 

 

10.2

 

Stand-Alone, Additional, Tandem and Substitute Awards

 

B-14

 

 

10.3

 

Term of Awards

 

B-14

 

 

10.4

 

Form and Timing of Payment under Awards; Deferrals

 

B-14

 

 

10.5

 

Vested and Unvested Awards

 

B-14

 

 

10.6

 

Exemptions from Section 16(b) Liability

 

B-15

 

 

10.7

 

Securities Requirements

 

B-15

 

 

10.8

 

Transferability

 

B-15

 

 

10.9

 

Rights as a Stockholder

 

B-16

 

 

10.10

 

Listing and Registration of Shares of Common Stock

 

B-16

 

 

10.11

 

Termination of Employment, Death and Disability

 

B-16

 

 

10.12

 

Change in Control

 

B-16

 

ARTICLE XI WITHHOLDING FOR TAXES

 

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

 

 

 

 

 

 

 

ARTICLE XII MISCELLANEOUS

 

B-18

 

 

12.1

 

No Rights to Awards or Uniformity Among Awards

 

B-18

 

 

12.2

 

Conflicts with Plan

 

B-18

 

 

12.3

 

No Right to Employment

 

B-18

 

 

12.4

 

Governing Law

 

B-18

 

 

12.5

 

Gender, Tense and Headings

 

B-18

 

 

12.6

 

Severability

 

B-18

 

 

12.7

 

Other Laws

 

B-18

 

 

12.8

 

Stockholder Agreements

 

B-18

 

 

12.9

 

Funding

 

B-18

 

 

12.10

 

No Guarantee of Tax Consequences

 

B-18

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

2005 ROWAN COMPANIES, INC.

LONG-TERM INCENTIVE PLAN

ARTICLE I

INTRODUCTION

1.1     Purpose. This 2005 Rowan Companies, Inc. Long-Term Incentive Plan (as the same may be amended from time to time, this “Plan”) is intended to promote the interests of Rowan Companies, Inc., a Delaware corporation (the “Company”), and its stockholders by encouraging Employees, Consultants and Non-Employee Directors of the Company or its Affiliates (as defined below) to acquire or increase their equity interests in the Company, thereby giving them an added incentive to work toward the continued growth and success of the Company. The Board of Directors of the Company (the “Board”) also contemplates that through this Plan, the Company and its Affiliates will be better able to compete for the services of the individuals needed for the continued growth and success of the Company. The Plan provides for payment of various forms of incentive compensation, and accordingly, is not intended to be a plan that is subject to the Employee Retirement Income Security Act of 1974, as amended, and shall be administered accordingly. This Plan replaces the Restated 1988 Nonqualified Stock Option Plan as Amended and the 1998 Nonemployee Directors Stock Option Plan (collectively the “Prior Plans”) with respect to Awards after the Effective Date hereof.

1.2     Definitions. As used in this Plan, the following terms shall have the meanings set forth below:

“Affiliate” means (i) any entity in which the Company, directly or indirectly, owns 50% or more of the combined voting power, as determined by the Committee, (ii) any “parent corporation” of the Company (as defined in section 424(e) of the Code), (iii) any “subsidiary corporation” of any such parent corporation (as defined in section 424(f) of the Code) of the Company and (iv) any trades or businesses, whether or not incorporated which are members of a controlled group or are under common control (as defined in Sections 414(b) or (c) of the Code) with the Company.

“Awards” means, collectively, Options, Purchased Stock, Bonus Stock, Stock Appreciation Rights, Restricted Stock Unit, Restricted Stock, Performance Awards, or Other Stock or Performance-Based Awards.

“Board” has the meaning set forth in Section 1.1 of this Plan.

“Bonus Stock” means Common Stock described in Article V of this Plan.

“Change of Control” shall be deemed to have occurred upon any of the following events:

(a) any “person” (as defined in Section 3(a)(9) of the Exchange Act, and as modified in Section 13(d) and 14(d) of the Exchange Act) other than (i) the Company or any of its subsidiaries, (ii) any employee benefit plan of the Company or any of its subsidiaries, (iii) any Affiliate, (iv) a company owned, directly or indirectly, by stockholders of the Company in substantially the same proportions as their ownership of the Company or (v) an underwriter temporarily holding securities pursuant to an offering of such securities (a “Person”), becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing more than 50% of the shares of voting stock of the Company then outstanding;

(b) the consummation of any merger, organization, business combination or consolidation of the Company or one of its subsidiaries with or into any other entity, other than a merger, reorganization, business combination or consolidation which would result in the holders of the voting securities of the Company outstanding immediately prior thereto holding securities which represent immediately after such merger, reorganization, business combination or consolidation more than 50% of the combined voting power of the voting securities of the Company or the surviving company or the parent of such surviving company;

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

(c) the consummation of a sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition if the holders of the voting securities of the Company outstanding immediately prior thereto hold securities immediately thereafter which represent more than 50% of the combined voting power of the voting securities of the acquiror, or parent of the acquiror, of such assets;

(d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or

(e) individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the Effective Date whose election to the Board was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an election contest with respect to the election or removal of directors or other solicitation of proxies or consents by or on behalf of a person other than the Board.

“Code” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations thereunder.

“Committee” means the compensation committee of the Board, which shall consist of not less than two (2) independent members of the Board, each of whom shall qualify as a “non-employee director” (as that term is defined in Rule 16b-3 of the General Rules and Regulations under the Exchange Act) appointed by and serving at the pleasure of the Board to administer this Plan or, if none, the independent members of the Board; provided, however, that with respect to any Award granted to a Covered Employee which is intended to be “performance-based compensation” as described in Section 162(m)(4)(C) of the Code, the Committee shall consist solely of two (2) or more “outside directors” as described in Section 162(m)(4)(C)(i) of the Code.

“Common Stock” means the common stock, $.125 par value per share, of the Company.

“Company” has the meaning set forth in Section 1.1 of this Plan.

“Consultant” means any individual, other than a Director or an Employee, who renders consulting or advisory services to the Company or an Affiliate, provided that such services are not in connection with the offer or sale of securities in a capital-raising transaction.

“Covered Employee” shall mean any of the Chief Executive Officer of the Company and the four highest paid officers of the Company other than the Chief Executive Officer, as described in Section 162(m)(3) of the Code.

“Director” means an individual who is a member of the Board.

“Disability” means the “Disability” of an Employee shall have occurred if he has a mental or physical condition which totally and presumably permanently prevents him from engaging in any substantial gainful employment with the Company or the Company subsidiary or affiliate with which he was employed prior to inception of his disability which (i) did not arise while engaged in or as a result of being engaged in an illegal act or enterprise, (ii) did not result from chronic alcoholism, addiction to narcotics or the use of illegal or unauthorized drugs in any manner, (iii) did not result from service in the Armed Forces of the United States which entitled the Employee to a Veteran’s Disability Pension, and (iv) did not arise while employed by an employer other than the Company or a Company subsidiary or affiliate of the Company. The existence of such Disability must be certified by two duly licensed and practicing physicians selected, respectively, by the Committee and by the Employee (or his representative). If they fail to agree, a third physician shall be selected by the Committee, and the determination of any two of such three physicians shall be final and controlling on all interested parties. The determination of any such physicians shall be evidenced by appropriate written certifications delivered to the Committee. Notwithstanding the foregoing, the Committee may, in its discretion, waive the requirement of certification of Disability by licensed physicians, and, in lieu of

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

such certification, rely on such other appropriate medical evidence of Disability as is deemed satisfactory by the Committee. Determination of whether such Disability exists shall be made as promptly as possible after the date such Disability is claimed to have commenced. Determination of the date of termination of employment by reason of Disability shall be based on such evidence as the Committee may require and a determination by the Committee of such date of termination shall be final and controlling on all interested parties.

“Effective Date” means, with respect to this Plan, the date that this Plan is (a) adopted by the Board and (b) approved by stockholders of the Company, provided that such stockholder approval occurs not more than one (1) year prior to or after the date of such adoption by the Board.

“Employee” means any employee of the Company or an Affiliate.

“Employment” includes any period in which a Participant is an Employee.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Fair Market Value” or “FMV Per Share” means, with respect to shares of Common Stock, the fair market value of such shares determined in good faith by the Committee, which may be conclusively deemed by the Committee to be the average of the highest and lowest sales price (or, if applicable, the highest and lowest reported bid price) of a share of Common Stock on the immediately preceding trading date as reported in The Wall Street Journal (or other reporting service approved by the Committee). If such shares are not publicly traded at the time a determination of its fair market value is required to be made hereunder, the determination of fair market value shall be made in good faith by the Committee using any fair and reasonable means selected in the Committee’s discretion.

“Full Value Awards” shall mean any Award other than Options or Stock Appreciation Rights.

“Incentive Option” means any Option that satisfies the requirements of Code Section 422 and is granted pursuant to Article III of this Plan.

“Incumbent Board” has the meaning set forth in paragraph (e) of the definition of “Change of Control” under this Section 1.2.

“Non-Employee Director” means a Director who is neither an Employee nor a Consultant.

“Non-Employee Director Option” means an Option not intended to satisfy the requirements of Code Section 422.

“Non-Qualified Option” means an Option not intended to satisfy the requirements of Code Section 422 that is granted pursuant to Article II of this Plan.

“Option” means an option to acquire Common Stock granted pursuant to the provisions of this Plan and includes either an Incentive Option or a Non-Qualified Option, or both, as applicable.

“Option Expiration Date” means, with respect to an Option, the date determined by the Committee, which shall not be more than ten (10) years after the date of grant of such Option.

“Optionee” means a Participant who has received or will receive an Option.

“Other Stock or Performance-Based Award” means an award granted pursuant to Article IX of this Plan that is not otherwise specifically provided for, the value of which is based in whole or in part upon the value of a share of Common Stock.

“Participant” means any Non-Employee Director, Employee or Consultant granted an Award under this Plan.

“Performance Award” means an Award granted pursuant to Article III of this Plan, that, if earned, shall be payable in shares of Common Stock, cash or any combination thereof as determined by the Committee.

“Plan” has the meaning set forth in Section 1.1 of this Plan.

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

“Prior Plans” means the Rowan Companies, Inc. Restated 1988 Nonqualified Stock Option Plan as Amended and the Rowan Companies Inc. 1998 Nonemployee Directors Stock Option Plan

“Purchased Stock” means a right to purchase Common Stock granted pursuant to Article IV of this Plan.

“Restricted Period” means, with respect to an Award, the period established by the Committee during which such Award either remains subject to forfeiture or is not exercisable by the Participant.

“Restricted Stock” means one or more shares of Common Stock, prior to the lapse of restrictions thereon, granted under Article VII of this Plan.

“Restricted Stock Unit” means an Award, granted pursuant to Article VI of this Plan, of the right to receive (a) shares of Common Stock issued at the end of a Restricted Period, (b) the Fair Market Value of shares of Common Stock paid in cash at the end of a Restricted Period or (c) a combination of shares of Common Stock and cash, as determined by the Committee, paid at the end of a Restricted Period.

“Retirement” means “Retirement” by an Employee, which shall have occurred if:

(a) in the case of an Employee who is an employee of Rowan Companies, Inc. or an employee of an Employing Company, as defined in the Rowan Pension Plan (the “Rowan Plan”), the Employee: (1) has satisfied the requirements for normal retirement pursuant to the rules of the Rowan Plan which, in terms of age, is a minimum of 60 and (2) has requested and received authorization from the administrative committee appointed by the Company’s Board of Directors to administer the Rowan Plan to commence receiving pension benefits; or

(b) in the case of an Employee who is an employee of LeTourneau, Inc. or an employee of an Employing Company, as defined in the LeTourneau Pension Plan (the “LeTourneau Plan”), the Employee: (1) has satisfied the requirements for either normal or late retirement pursuant to the rules of the LeTourneau Plan, (2) has requested and received authorization from the administrative committee appointed by the Board of Directors of LeTourneau, Inc. to administer the LeTourneau Plan to commence receiving pension benefits, and (3) would have satisfied the requirements for normal retirement pursuant to the rules of the Rowan Plan if he or she was an employee of Rowan Companies, Inc. or an employee of an Employing Company under the Rowan Plan.

Determination of the date of termination of employment by reason of Retirement shall be based on such evidence as the Committee may require and a determination by the Committee of such date of termination shall be final and controlling on all interested parties.

“Securities Act” means the Securities Act of 1933, as amended.

“Spread” has the meaning set forth in Section 6.1(a) of this Plan.

“Stock Appreciation Rights” means an Award granted pursuant to Article VI of this Plan.

1.3     Shares Subject to this Plan-Limitations-Adjustments.

(a) Plan and Award Limitations. The maximum number of shares of Common Stock that may be issued under this Plan shall be 3,400,000 shares. The maximum number of shares that may be issued as Full Value Awards under the Plan shall be 1,700,000 shares. With respect to any Award of Options, Stock Appreciation Rights or any other Award to any Employee that is intended to be a Performance Award under Article VIII, the maximum number of shares of Common Stock issued or reserved for issuance plus the maximum number of shares underlying or equal in Fair Market Value to the cash received under any such Award that may be granted to any one Participant in any one calendar year shall not exceed 500,000. The maximum number of shares of Common Stock issued or reserved for issuance, plus the maximum number of shares underlying or equal in Fair Market Value as of the date of grant of any Award to Non-Employee Directors with respect to any one-year term of such Non-employee Director shall not exceed 5,000. The maximum number of shares of Common Stock issued under the Plan during its term to all Non-Employee Directors shall not exceed

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

250,000. The maximum number of shares of Common Stock that may be issued under this Plan pursuant to Incentive Options shall be 1,000,000 shares.

(b) Adjustment of Limitations. In the event that the number of shares to be delivered upon the exercise or payment of any award granted under the Plan or the Prior Plans is reduced for any reason other than the withholding of shares for the payment of taxes or exercise price, or in the event any award (or portion thereof) granted under the Plan or the Prior Plans can no longer under any circumstances be exercised or paid, the number of shares no longer subject to such award shall thereupon be released from such award and shall thereafter be available under this Plan for the grant of additional Awards including Full Value Awards. Notwithstanding the foregoing, in the event that at any time after the Effective Date the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the aggregate number and class of securities available, and each of the limitations on Awards set forth above shall be ratably adjusted by the Committee. Upon the occurrence of any of the events described in the immediately preceding sentence, in order to ensure that after such event the shares of Common Stock subject to this Plan and each Participant’s proportionate interest remain substantially as before the occurrence of such event, the Committee shall, in such manner as it may deem equitable, adjust (a) the number of shares of Common Stock with respect to which Awards may be granted, (b) the number of shares of Common Stock subject to outstanding Awards and (c) the grant or exercise price with respect to an Award. Such adjustment in an outstanding Option shall be made (i) without change in the total price applicable to the Option or any unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and (ii) with any necessary corresponding adjustment in exercise price per share. The Committee’s determinations shall be final, binding and conclusive with respect to the Company and all other interested persons.

(c) Share Counting and Forfeitures. In the event the number of shares to be delivered upon the exercise or payment of any Award granted under this Plan is reduced for any reason other than the withholding of shares for the payment of taxes or exercise price, or in the event any Award (or portion thereof) granted under this Plan can no longer under any circumstances be exercised or paid, the number of shares no longer subject to such Award shall thereupon be released from such Award and shall thereafter be available under this Plan for the grant of additional Awards. Shares that cease to be subject to an Award because of the exercise of the Award, or the vesting of a Restricted Stock Award or similar Award, shall no longer be subject to or available for any further grant under this Plan. Shares issued pursuant to this Plan (x) may be treasury shares, authorized but unissued shares or, if applicable, shares acquired in the open market and (y) shall be fully paid and nonassessable. No fractional shares shall be issued under this Plan. Payment for any fractional shares that would otherwise be issuable hereunder in the absence of the immediately preceding sentence shall be made in cash.

1.4     Administration of this Plan.

(a) Committee, Meetings, Rule Making and Interpretations. The Plan shall be administered by the Committee. Subject to the provisions of this Plan, the Committee shall (i) interpret this Plan and all Awards under this Plan, (ii) make, amend and rescind such rules as it deems necessary for the proper administration of this Plan, (iii) make all other determinations necessary or advisable for the administration of this Plan and (iv) correct any defect or supply any omission or reconcile any inconsistency in this Plan or in any Award under this Plan in the manner and to the extent that the Committee deems desirable to effectuate this Plan. Any action taken or determination made by the Committee pursuant to this or any other provision of this Plan shall be final, binding and conclusive on all affected persons, including, without limitation, the Company, any Affiliate, any grantee, holder or beneficiary of an Award, any stockholder and any Employee, Consultant or Non-Employee Director. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to this Plan or any Award granted hereunder, and the members of the Board and the Committee shall be entitled to indemnification and reimbursement by the Company and

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

its Affiliates in respect of any claim, loss, damage or expense (including legal fees) arising therefrom to the fullest extent permitted by law.

1.5     Granting of Awards to Participants. The Committee shall have the authority to grant, prior to the expiration date of this Plan, Awards to such Employees, Consultants and Non-Employee Directors as may be selected by it, subject to the terms and conditions set forth in this Plan. In selecting the persons to receive Awards, including the type and size of the Award, the Committee may consider the contribution the recipient has made and/or may make to the growth of the Company or its Affiliates and any other factors that it may deem relevant. No member of the Committee shall vote or act upon any matter relating solely to himself. Grants of Awards to members of the Committee must be ratified by the Board. In no event shall any Employee, Consultant or Non-Employee Director, nor his legal representatives, heirs, legatees or distributees have any right to participate in this Plan, except to such extent, if any, as permitted under this Plan and as the Committee may determine.

1.6     Leave of Absence. If an employee is on military, sick leave or other bona fide leave of absence, such person shall be considered an “Employee” for purposes of an outstanding Award during the period of such leave, provided that it does not exceed ninety (90) days (or such longer period as may be determined by the Committee in its sole discretion), or, if longer, so long as the person’s right to reemployment is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days (or such longer period as may be determined by the Committee in its sole discretion), the employment relationship shall be deemed to have terminated on the ninety-first (91st) day (or the first (1st) day immediately following any period of leave in excess of ninety (90) days as approved by the Committee) of such leave, unless the person’s right to reemployment is guaranteed by statute or contract.

1.7     Term of Plan. If not sooner terminated under the provisions of Section 1.8, this Plan shall terminate upon, and no further Awards shall be made, after the tenth (10th) anniversary of the Effective Date.

1.8     Amendment and Discontinuance of this Plan. The Board may amend, suspend or terminate this Plan at any time without prior notice to or consent of any person; provided, however, that subject to Section 10.12, no amendment, suspension or termination of this Plan may, without the consent of the holder of an Award, terminate such Award or adversely affect such person’s rights with respect to such Award in any material respect; and provided further that no amendment shall be effective prior to its approval by the stockholders of the Company, to the extent such approval is required by applicable legal requirements or the requirements of any securities market or exchange on which the Company’s stock is then listed. Notwithstanding the foregoing, the Board may amend this Plan in such manner as it deems necessary in order to permit Awards to meet the requirements of the Code or other applicable laws, or to prevent adverse tax consequences to the Participants.

ARTICLE II

NON-QUALIFIED OPTIONS

2.1     Eligibility. The Committee may grant Non-Qualified Options to purchase shares of Common Stock to any Employee, Consultant or Non-Employee Director. Each Non-Qualified Option granted under this Plan shall be evidenced by a written agreement between the Company and the individual to whom such Non-Qualified Option is granted in such form as the Committee shall provide.

2.2     Exercise Price. The exercise price to be paid for each share of Common Stock deliverable upon exercise of each Non-Qualified Option granted under this Article II shall not be less than one hundred percent (100%) of the FMV Per Share on the date of grant of such Non-Qualified Option. The exercise price for each Non-Qualified Option granted under this Article II shall be subject to adjustment as provided in Section 2.3(f) of this Plan.

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

2.3     Terms and Conditions of Non-Qualified Options. Non-Qualified Options shall be in such form as the Committee may from time to time approve, shall be subject to the following terms and conditions and may contain such additional terms and conditions (including, but not limited to conditions of vesting or exercise of the Options), not inconsistent with the Plan, as the Committee shall deem desirable:

(a) Option Period and Conditions and Limitations on Exercise. No Non-Qualified Option shall be exercisable later than the Option Expiration Date. To the extent not prohibited by other provisions of this Plan, each Non-Qualified Option shall be exercisable at such time or times as the Committee, in its discretion, may determine at the time such Non-Qualified Option is granted.

(b) Manner of Exercise. In order to exercise a Non-Qualified Option, the person or persons entitled to exercise such Non-Qualified Option shall deliver to the Company payment in full for (i) the shares being purchased and (ii) unless other arrangements have been made with the Committee, any required withholding taxes. The payment of the exercise price for each Non-Qualified Option shall either be (x) in cash or by check payable and acceptable to the Company, (y) with the consent of the Committee, which consent may be granted or withheld in the Committee’s sole discretion, by tendering to the Company shares of Common Stock having an aggregate Fair Market Value as of the date of exercise that is not greater than the full exercise price for the shares with respect to which the Non-Qualified Option is being exercised and by paying any remaining amount of the exercise price as provided in (x) above or (z) with the consent of the Committee, which may be granted or withheld in the Committee’s sole discretion, and upon compliance with such instructions as the Committee may specify, at the person’s written request, the Company may deliver certificates for the shares of Common Stock for which the Non-Qualified Option is being exercised to a broker for sale on behalf of the person, provided that the person has irrevocably instructed such broker to remit directly to the Company on the person’s behalf from the proceeds of such sale the full amount of the exercise price, plus all required withholding taxes. In the event that the person elects to make payment as allowed under clause (y) above, the Committee may, upon confirming that the Optionee owns the number of shares being tendered, authorize the issuance of a new certificate for the number of shares being acquired pursuant to the exercise of the Non-Qualified Option, less the number of shares being tendered upon the exercise and return to the person (or not require surrender of) the certificate for the shares being tendered upon the exercise. If the Committee so requires, such person or persons shall also deliver a written representation that all shares being purchased are being acquired for investment and not with a view to, or for resale in connection with, any distribution of such shares.

(c) Alternative Payment for Stock. Subject to the consent of the Committee, which may be granted or withheld in the Committee’s sole discretion and at the election of the Participant, payment of the exercise price or withholding may be made, in whole or in part, with shares of Common Stock with respect to which the Option is being exercised. If payment is to be made in such manner, then the Participant shall deliver to the Company a notice of exercise as to the number of shares of Common Stock to be issued to the Participant as well as the number of shares of Common Stock to be retained by the Company in payment. In such case, the notice of exercise shall include (A) a statement (i) directing the Company to retain the number of shares from the exercise of the Options the Fair Market Value (as of the date of delivery of such notice) of which is equal to the portion of the exercise price and/or withholding with respect to which the Participant intends to make payment, and (ii) confirming the aggregate number of shares to be delivered to the Participant; and (B) such additional payment in cash or shares as shall be necessary, when added to the consideration paid with shares subject to the Option, to pay the exercise price and withholding in full for all such shares. If the Company is required to withhold on account of any federal, state or local tax imposed as a result of an exercise of an Option with previously issued stock or by retention of optioned shares under this Section, the Common Stock surrendered or retained shall include an additional number of shares whose Fair Market Value equals the amount thus required to be withheld at the applicable minimum statutory rate.

(d) Proceeds. The proceeds received from the sale of shares of Common Stock pursuant to exercise of Non-Qualified Options exercised under this Plan will be used for general corporate purposes.

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

(e) Non-Qualified Options not Transferable. Except as provided below, no Non-Qualified Option granted hereunder shall be transferable other than by (i) will or by the laws of descent and distribution or (ii) pursuant to a domestic relations order, and during the lifetime of the Participant to whom any such Non-Qualified Option is granted, it shall be exercisable only by the Participant (or his guardian). The Committee may, in its discretion, provide in an Option Agreement or otherwise that any Non-Qualified Option may be transferred in whole or in part. Any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or to subject to execution, attachment or similar process, any Non-Qualified Option granted hereunder, or any right thereunder, contrary to the provisions hereof, shall be void and ineffective, shall give no right to the purported transferee and shall, at the sole discretion of the Committee, result in forfeiture of the Non-Qualified Option with respect to the shares involved in such attempt. Any Non-Qualified Option that is transferred in accordance with the provisions of this Section 2.3(e)may only be exercised by the person or persons who acquire a proprietary interest in the Non-Qualified Options pursuant to the transfer.

(f) Adjustment of Non-Qualified Options. In the event that at any time after the Effective Date the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of merger, consolidation, recapitalization, reclassification, stock split, stock dividend, combination of shares or the like, the Committee shall make appropriate and equitable adjustments to all Non-Qualified Options then outstanding as provided in Section 1.3.

(g) Listing and Registration of Shares. Each Non-Qualified Option shall be subject to the requirement that if at any time the Committee determines, in its discretion, that the listing, registration or qualification of the shares subject to such Non-Qualified Option under any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares thereunder, such Non-Qualified Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained and the same shall have been free of any conditions not acceptable to the Committee.

2.4     Option Repricing. With stockholder approval only, the Committee, in its absolute discretion, may grant to holders of outstanding Non-Qualified Options, in exchange for the surrender and cancellation of such Non-Qualified Options, new Non-Qualified Options having exercise prices lower (or higher with any required consent) than the exercise price provided in the Non-Qualified Options so surrendered and canceled and containing such other terms and conditions as the Committee may deem appropriate.

2.5     Vesting. See Section 10.11 of this Plan for provisions on vesting in connection with termination of Employment or service. Also, see Section 10.12 of this Plan relating to vesting in connection with a Change of Control.

ARTICLE III

INCENTIVE OPTIONS

The terms specified in this Article III shall be applicable to all Incentive Options. Except as modified by the provisions of this Article III, all of the provisions of Article II shall be applicable to Incentive Options. Options which are specifically designated as Non-Qualified Options shall not be subject to the terms of this Article III.

3.1     Eligibility. Incentive Options may only be granted to Employees of a “corporation” within the meaning of Code section 7701(a)(3).

3.2     Exercise Price. Subject to Section 3.4, the exercise price per share shall not be less than one hundred percent (100%) of the FMV Per Share on the date of grant of the Incentive Option.

3.3     Dollar Limitation. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of shares of Common Stock for which one or more Options granted to any Employee under this Plan (or any other option plan of the Company or any Affiliate which is a parent or subsidiary as defined in Code

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Rowan Companies, Inc. 2005 Proxy Statement

Appendix B

Sections 424(e) or (f), as applicable) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of $100,000. To the extent the Employee holds two (2) or more such Options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such Options as Incentive Options shall be applied on the basis of the order in which such Options are granted.

3.4     10% Stockholder. If any Employee to whom an Incentive Option is granted owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any “parent corporation” of the Company (as defined in Section 424(e) of the Code) or any “subsidiary corporation” of the Company (as defined in Section 424(f) of the Code), then the exercise price per share under such Incentive Option shall not be less than one hundred ten percent (110%) of the FMV Per Share on the date of grant, and the Option term shall not exceed five (5) years measured from the date of grant. For purposes of the immediately preceding sentence, the attribution rules under Section 424(d) of the Code shall apply for purposes of determining an Employee’s ownership.

3.5     Incentive Options Not Transferable. No Incentive Option granted hereunder (a) shall be transferable other than by will or by the laws of descent and distribution and (b) except as permitted in regulations or other guidance issued under Section 422 of the Code, shall be exercisable during the Optionee’s lifetime by any person other than the Optionee (or his guardian).

3.6     Compliance with Code Section 422. All Options that are intended to be Incentive Options described in Code Section 422 shall be designated as such in the Option grant and in all respects shall be issued in compliance with Code Section 422.

3.7     Limitations on Exercise. No Incentive Option shall be exercisable more than three (3) months after the Optionee ceases to be an Employee for any reason other than death or Disability, or more than one (1) year after the Optionee ceases to be an Employee due to death or Disability.

ARTICLE IV

PURCHASED STOCK

4.1     Eligibility. The Committee shall have the authority to sell shares of Common Stock to such Employees, Consultants and Non-Employee Directors as may be selected by it, on such terms and conditions as it may establish, subject to the further provisions of this Article IV. Each issuance of Common Stock under this Article IV shall be evidenced by an agreement, which shall be subject to applicable provisions of this Plan and to such other provisions not inconsistent with this Plan as the Committee may approve for the particular sale transaction.

4.2     Purchase Price. The price per share of Common Stock to be purchased by a Participant under this Article IV shall be determined in the sole discretion of the Committee, and may be less than, but shall not be greater than the FMV Per Share at the time of purchase.

4.3     Payment of Purchase Price. Payment of the purchase price of Purchased Stock under this Article IV shall be made in full in cash.

ARTICLE V

BONUS STOCK

The Committee may, from time to time and subject to the provisions of this Plan, grant shares of Bonus Stock to Employees, Consultants and Non-Employee Directors. Such grants of Bonus Stock shall be in consideration of performance of services by the Participant without additional consideration, except as may be required by the Committee or pursuant to Section 10.1. Bonus Stock shall be shares of Common Stock that are not subject to a Restricted Period under Article VII.

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