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HIGHLAND HOSPITALITY CORPORATION

 

and

 

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

 

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WARRANT AGREEMENT

 

Dated as of December 19, 2003

 

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WARRANT AGREEMENT

 

This Warrant Agreement (the “Agreement”) is made as of December 19, 2003 between
HIGHLAND HOSPITALITY CORPORATION, a Maryland corporation (the “Company”),as the
issuer of the Warrants (as defined below) and FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC. (“FBR”).

 

RECITALS

 

A In connection with its initial public offering (the “Offering”), the Company
proposes to sell, pursuant to an Underwriting Agreement dated December 15, 2003
(the “Underwriting Agreement”) between the Company and FBR, as representative of
the underwriters named therein, 30,000,000 shares (the “Initial Shares”) of
Common Stock, par value $.01 per share, of the Company (the “Common Stock”), to
certain underwriters, for which FBR is acting as lead representative (the
“Underwriters”) and up to 4,500,000 shares of Common Stock, to cover
over-allotments, if any.

 

B. The Company deems it advisable, in consideration for the services rendered to
the Company by FBR as lead underwriter in connection with the Offering, to issue
to FBR warrants (the “Warrants”) entitling the holders thereof to purchase
888,488 shares of Common Stock on the terms and conditions set forth herein. The
shares of Common Stock issuable upon exercise of the Warrants are referred to as
the “Warrant Shares.”

 

C. The Company desires to enter into this Agreement to set forth the terms and
conditions of the Warrants and the rights of the holders.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
herein contained, the parties hereto agree as follows:

 

ARTICLE I

ISSUANCE, EXECUTION, EXPIRATION AND TRANSFER OF WARRANT

CERTIFICATES

 

SECTION 1.01. Form of Warrant Certificates. The Warrants shall be evidenced by
certificates in temporary or definitive fully registered form (the “Warrant
Certificates”) substantially in the form of Exhibit A and may have such letters,
numbers or other marks of identification and such legends or endorsements placed
thereon as may be required to comply with any law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any securities exchange,
or to conform to usage, or as consistently herewith may be determined by the
officers executing such Warrant Certificates as evidenced by their execution of
the Warrant Certificates. Each Warrant Certificate shall evidence the right,
subject to the provisions of this Agreement and of the Warrant Certificate, to
purchase the number of shares of Common Stock stated therein, adjusted as
provided for in Article III hereof, upon payment of the Exercise Price (as
defined in Section 2.01).

 

SECTION 1.02. Execution of Warrant Certificates. Each Warrant Certificate,
whenever issued, shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon exchange, substitution or transfer,
shall be signed manually by, or bear the facsimile signature of, the Chairman of
the Board or the President or a Treasurer or a Vice President of the Company and
shall be attested by the manual or facsimile signature of the

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Secretary or an Assistant Secretary of the Company. In case any officer of the
Company whose manual or facsimile signature has been placed upon any Warrant
Certificate shall have ceased to be such before such Warrant Certificate is
issued, it may be issued with the same effect as if such officer had not ceased
to be such at the date of issuance. Any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Agreement any
such person was not such an officer.

 

SECTION 1.03. Issuance, Delivery and Registration of Warrant Certificates. The
Company shall issue and deliver, at the closing of the sale of the Initial
Shares to the Underwriter as provided in the Underwriting Agreement, to FBR or
its permitted designees, a Warrant Certificate representing the Warrants, in
substantially the form of Exhibit A. Additionally, the Company shall sign and
deliver Warrant Certificates upon exchange, transfer or substitution for one or
more previously signed Warrant Certificates as hereinafter provided. The Company
shall maintain books for the registration of transfer and registration of
Warrant Certificates (the “Warrant Register”).

 

SECTION 1.04. Transfer and Exchange of Warrant Certificates. The Company, from
time to time, shall register the permitted transfer of any outstanding Warrant
Certificates in the Warrant Register upon surrender at the principal office of
the Company of Warrant Certificates accompanied by a written instrument or
instruments of transfer, in form satisfactory to the Company, duly executed by
the Warrantholder (as defined in Section 5.12) or the Warrantholder’s attorney
duly authorized in writing, and evidence, satisfactory to the Company, of
compliance with the provisions of Section 5.04. Upon any such registration of
transfer, a new Warrant Certificate shall be signed by the Company and issued to
the transferee and the surrendered Warrant Certificate shall be canceled by the
Company. Warrant Certificates may be exchanged at the option of the holder
thereof, upon surrender, properly endorsed, at the principal office of the
Company, with written instructions, for other Warrant Certificates signed by the
Company entitling the registered holder thereof, subject to the provisions
thereof and of this Agreement, to purchase in the aggregate a like number of
shares of Common Stock as the Warrant Certificate so surrendered. The Company
may require the payment of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any such exchange or transfer.

 

ARTICLE II

SHARES OF COMMON STOCK ISSUABLE, EXERCISE PRICE, EXPIRATION DATE

AND EXERCISE OF WARRANTS

 

SECTION 2.01. Warrant Shares Issuable; Exercise Price; Expiration Date. Each
Warrant Certificate shall entitle the registered holder thereof, subject to the
provisions thereof and of this Agreement, to purchase from the Company at any
time from the closing date of the sale of the Initial Shares pursuant to the
Underwriting Agreement (the “Closing Date”) until the close of business on the
fifth anniversary of the Closing Date (or, if such date is not a Business Day
(as defined below), the first following Business Day) the number of shares of
Common Stock stated therein, adjusted as provided in Article III, upon payment
of $10 per share (which price is equal to the initial public offering price),
adjusted as provided in Article III. Such price, as it may be adjusted from time
to time as provided in Article III, is referred to as the “Exercise Price.” Each
share of Common Stock issuable upon exercise of a Warrant is referred to as a
“Warrant Share.” Each Warrant not exercised during the period set forth above
shall become void, and all rights thereunder and all rights in respect thereof
under this Agreement shall cease, at the end of such

 

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period. For purposes of this Agreement, the term “Business Day” means any day of
the week other than a Saturday, Sunday or a day which in The City of New York or
in the city in which the principal office of the Company is located shall be a
legal holiday or a day on which banking institutions are authorized or required
by law to close.

 

SECTION 2.02. Exercise of Warrants. (a) Warrants may be exercised by
surrendering the Warrant Certificate evidencing such Warrants at the principal
office of the Company, with the Election to Exercise form set forth on the
reverse of the Warrant Certificate duly completed and signed, and by paying in
full to the Company (i) in cash, or (ii) by certified or official bank check or
(iii) by any combination of the foregoing, the Exercise Price for each Warrant
Share as to which Warrants are then being exercised and any applicable taxes,
other than taxes that the Company is required to pay under subsection (d) below.
A Warrantholder may exercise such holder’s Warrant for the full number of
Warrant Shares issuable upon exercise thereof or any lesser number of whole
Warrant Shares.

 

(b) As soon as practicable after the exercise of any Warrants and payment by the
Warrantholder of the full Exercise Price for the Warrant Shares as to which such
Warrants are then being exercised, the Company shall requisition from the
transfer agent for the shares of Common Stock and deliver to or upon the order
of such Warrantholder a certificate or certificates for the number of full
Warrant Shares to which such Warrantholder is entitled, registered in the name
of such Warrantholder or as such Warrantholder shall direct to the Company in
writing. Fractional Warrant Shares that otherwise would be issuable in respect
of such exercise shall be paid in cash as provided in Section 2.03, and the
number of Warrant Shares issuable to such Warrantholder shall be rounded down to
the next nearest whole number. If such Warrant Certificate shall not have been
exercised in full, the Company will issue to such Warrantholder a new Warrant
Certificate exercisable for the number of shares of Common Stock as to which
such Warrant shall not have been exercised. The Company will cancel all Warrants
so surrendered.

 

(c) Each person in whose name any such certificate for Warrant Shares is issued
shall for all purposes be deemed to have become the holder of record of such
Warrant Shares on the date on which the Warrant Certificate was surrendered to
the Company and payment of the Exercise Price and any applicable taxes was made
to the Company, irrespective of the date of delivery of such certificate for
Warrant Shares.

 

(d) The Company will pay all documentary stamp taxes attributable to the initial
issuance of Warrant Shares. The Company will not be required, however, to pay
any tax imposed in connection with any transfer involved in the issue of the
Warrant Shares in a name other than that of the Warrantholder. In such case, the
Company will not be required to issue any certificate for Warrant Shares until
the person or persons requesting the same shall have paid to the Company the
amount of any such tax or shall have established to the Company’s satisfaction
that the tax has been paid or that no tax is due.

 

SECTION 2.03. No Fractional Shares to Be Issued. If more than one Warrant
Certificate shall be surrendered for exercise at one time by the same holder,
the number of full Warrant Shares which shall be issuable upon exercise thereof
shall be computed on the basis of the aggregate number of Warrants so
surrendered. The Warrantholders, by their acceptance of the Warrant
Certificates, expressly waive their right to receive any fraction of a Warrant
Share or a share certificate representing a fraction of a Warrant Share. In lieu
thereof, the Company will purchase such fractional interest for an amount in
cash equal to the current market value of such fractional interest, as
reasonably determined by the Company.

 

3

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SECTION 2.04. Cancellation of Warrants. The Company shall cancel any Warrant
Certificate delivered to it for exercise, in whole or in part, or delivered to
it for transfer, exchange or substitution, and no Warrant Certificates shall be
issued in lieu thereof except as expressly permitted by any of the provisions of
this Agreement. The Company shall mark as canceled any such Warrant
Certificates.

 

ARTICLE III

ADJUSTMENT OF EXERCISE PRICE; MERGER, ACQUISITION, ETC.;

RESERVATION OF SHARES OF COMMON STOCK; PAYMENT OF TAXES

 

SECTION 3.01. Adjustment of Exercise Price and Number of Warrant Shares.(a) The
Exercise Price shall be subject to adjustment from time to time as provided in
this Article III. After each adjustment of the Exercise Price, each
Warrantholder shall at any time thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of Warrant Shares
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant to the
provisions of such Warrant immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment.

 

(b) For purposes of making adjustments of the Exercise Price pursuant to this
Article III, the “Current Market Price” shall be determined as of the date of
the grant, issuance or sale, whichever is earlier, as the case may be, giving
rise to the adjustment and shall be equal to the last sale price with respect to
shares of Common Stock as reported on the New York Stock Exchange on such date.
If there are no reported transactions on the New York Stock Exchange on such
date, the “Current Market Price” shall be the average of the highest current
independent bid and lowest current independent offer for the shares.

 

(c) Notwithstanding anything herein to the contrary, the Exercise Price and
Number of Warrant Shares shall not be adjusted if (i) the sale price of any
shares of Common Stock is equal to or greater than the Current Market Price as
of the date of the Company’s commitment to sell, (ii) the exercise price of any
Options (determined as described in the relevant sections of any Options (as
defined in Section 3.03(a)) is equal to or greater than 95% of the Current
Market Price as of the date of grant, (iii) the sale or issuance price
(determined as described in Section 3.03(b)) of any Convertible Securities (as
defined in Section 3.03(a)) is equal to or greater than the Current Market Price
as of the date of the Company’s commitment to sell or (iv) notwithstanding
clause (i) and (iii) any shares of Common Stock or Convertible Securities are
issued or sold in a firm commitment underwritten registered public offering or
in a private placement in which shares of Common Stock are issued at a market
rate discount.

 

SECTION 3.02. Exercise Price Adjustment Formula. Subject to Section 3.01, if,
during the period in which Warrants are exercisable, the Company sells any
shares of Common Stock for a price per share that is less than the Current
Market Price in effect at the time of such sale, the Exercise Price immediately
shall be adjusted by multiplying the Exercise Price by (a) an amount equal to
the sum of (i) the number of shares of Common Stock outstanding and deemed (in
accordance with the provisions of Section 3.03) to be outstanding immediately
prior to such sale multiplied by the Current Market Price at the time of such
issuance or sale and (ii) the total consideration received and deemed (in
accordance with the provisions of Section 3.03) to be received by the Company
upon such issuance and sale and (b) dividing the result by an amount equal to
(i) the sum of (A) the amount determined in (a) and (B) the product of the
number of shares issued or sold multiplied by the Current Market Price, minus
(ii) the consideration received.

 

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SECTION 3.03. Constructive Issuance of Shares. (a) Subject to Section 3.01, if
the Company grants any rights, warrants or options (collectively referred to as
“Options”) to subscribe for or purchase any shares of Common Stock or any
securities (collectively referred to as “Convertible Securities”) convertible
into or exchangeable for shares of Common Stock, whether or not any such Options
or the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which shares of Common
Stock are issuable upon the exercise of such Options or upon conversion or
exchange of such Convertible Securities (determined by dividing (i) the total
consideration received or receivable by the Company for the granting of such
Options, plus any additional consideration payable to the Company upon the
exercise of such Options, plus in the case of any such Options which relate to
Convertible Securities, any additional consideration payable to the Company upon
the conversion or exchange thereof by (ii) the maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon the conversion
or exchange of such Convertible Securities) shall be less than the Current
Market Price in effect as of the time of granting such Options, the maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon conversion or exchange of all Convertible Securities issuable upon the
exercise of such Options shall be deemed, upon the granting of such Options, to
be outstanding and to have been issued for such price per share. Except as
provided in Section 3.03(c), no further adjustment of the Exercise Price shall
be made upon the issue or sale of shares of Common Stock upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.

 

(b) Subject to Section 3.01, if the Company issues or sells any Convertible
Securities (other than securities referred to in Section 3.03(a)), whether or
not the right to convert or exchange any such Convertible Securities is
immediately exercisable, and the price per share for which the shares of Common
Stock are issuable upon such conversion or exchange (determined by dividing (i)
the total consideration received or receivable by the Company for the issue or
sale of such Convertible Securities, plus any additional consideration payable
to the Company upon the conversion or exchange of such Convertible Securities by
(ii) the maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities) shall be less than the Current
Market Price in effect as of the time of such issue or sale of the Convertible
Securities, the maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed, upon
the issue or sale of such Convertible Securities, to be outstanding and to have
been issued for such price per share. Except as provided in Section 3.03(c), no
further adjustment of the Exercise Price shall be made upon the issue or sale of
shares of Common Stock upon conversion or exchange of any such Convertible
Securities.

 

(c) Subject to Section 3.01, if the exercise price provided for in any Option
referred to in Section 3.03(a), or the rate at which any Convertible Security
referred to in Section 3.03(a) or Section 3.03(b) is convertible into or
exchangeable for shares of Common Stock, shall change or a different exercise
price or rate shall become effective at any time or from time to time, the
Exercise Price immediately shall be adjusted to the Exercise Price that would
have obtained had the adjustments made and required to be made under this
Section 3.03 upon the grant, issuance or sale of such Options or such
Convertible Securities been made upon the basis of (i) the issuance of the
number of shares of Common Stock theretofore delivered upon the exercise of such
Options or upon the conversion or exchange of such Convertible Securities and
the total consideration received therefor, (ii) the issuance of all shares of
Common Stock and all other Options or Convertible Securities and the total
consideration received therefor and (iii) the

 

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original issuance at the time of such change of exercise price or rate of any
such Options or Convertible Securities then outstanding and the total
consideration received therefor. On the expiration of any such Option or the
termination of any such right to convert or exchange any such Convertible
Securities, the Exercise Price immediately shall be adjusted to the Exercise
Price that would have obtained (iv) had the adjustments made upon the issuance
of such Options or such Convertible Securities been made upon the issuance of
only the number of shares of Common Stock actually delivered and the total
consideration received therefor upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities and (v) had adjustments
been made on the basis of the Exercise Price as adjusted under clause (iv) of
this Section 3.03(c) for all issues or sales of shares of Common Stock, Options
or Convertible Securities made after the issuance of such Options or Convertible
Securities. If the exercise price provided for in any Option referred to in
Section 3.03(a), or the rate at which any Convertible Security referred to in
Section 3.03(a) or Section 3.03(b) is convertible or exchangeable for shares of
Common Stock, shall decrease at any time pursuant to applicable provisions
thereof designed to protect against dilution, the Exercise Price immediately
shall be decreased in the case of delivery of shares of Common Stock upon the
exercise of any such Option or upon the conversion or exchange of any such
Convertible Securities, to the Exercise Price that would have obtained had the
adjustments made upon the issue or sale of such Option (as defined in Section
3.03(a)) or such Convertible Security (as defined in Section 3.03(b)) been made
upon the basis of the issuance of the shares of Common Stock so delivered and
the total consideration received therefor.

 

(d) If any shares of Common Stock or any Convertible Securities or any Option
shall be issued or sold for cash, the consideration received by the Company
shall be deemed to be the amount paid by the purchaser therefor without
deduction of any expense incurred or any underwriting commission, concession or
discount paid or allowed by the Company in connection therewith. If any shares
of Common Stock or any Convertible Securities or any Option shall be issued or
sold for a consideration other than cash, the consideration received by the
Company shall be deemed to be the fair value of such consideration as determined
by the Board of Directors of the Company without deduction of any expense
incurred or any underwriting commission, concession or discount paid or allowed
by the Company in connection therewith. If any shares of Common Stock or any
Convertible Securities or any Option shall be issued in connection with a merger
of another corporation into the Company, the consideration received by the
Company shall be deemed to be the fair value as determined by the Board of
Directors of the Company of such portion of the assets of such merged
corporation as the Board of Directors shall reasonably determine to be
attributable to such shares of Common Stock or such Option or Convertible
Securities, as the case may be.

 

SECTION 3.04. Stock Dividends. If the Company shall declare a dividend or any
other distribution upon any capital stock which is payable in shares of Common
Stock or Convertible Securities, the Exercise Price shall be reduced to the
quotient obtained by dividing (i) the number of shares of Common Stock
outstanding immediately prior to such declaration multiplied by the then
effective Exercise Price by (ii) the total number of shares of Common Stock
outstanding immediately after such declaration. All shares of Common Stock and
all Convertible Securities issuable in payment of any dividend or other
distribution upon the capital stock of the Company shall be deemed to have been
issued or sold without consideration.

 

SECTION 3.05. Stock Splits and Reverse Stock Splits. If the Company shall
subdivide its outstanding shares of Common Stock into a greater number of
shares, the Exercise Price shall be proportionately reduced and the number of
Warrant Shares issuable upon exercise of each Warrant shall be proportionately
increased. If the Company shall combine the outstanding shares

 

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of Common Stock into a smaller number of shares, the Exercise Price shall be
proportionately increased and the number of Warrant Shares issuable upon
exercise of each Warrant shall be proportionately decreased.

 

SECTION 3.06. Reorganizations and Asset Sales. If any capital reorganization or
reclassification of the Company, or any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all of the assets
of the Company shall be effected in such a way that the holders of the shares of
Common Stock shall be entitled to receive securities or assets with respect to
or in exchange for shares of Common Stock, adequate provision shall be made,
prior to and as a condition of such reorganization, reclassification,
consolidation, merger or sale, whereby each Warrantholder shall have the right
to receive, upon exercise of the Warrants upon the terms and conditions
specified herein and in lieu of the Warrant Shares otherwise receivable upon the
exercise of such Warrants, such securities or assets as may be issued or payable
with respect to or in exchange for a number of shares of Common Stock equal to
the number of Warrant Shares otherwise issuable had such reorganization,
reclassification, consolidation, merger or sale not taken place. In any such
case, appropriate provision shall be made so that the provisions of this
Agreement shall be applicable with respect to any securities or assets
thereafter deliverable upon exercise of the Warrants. The Company shall not
effect any such consolidation, merger or sale unless prior to or simultaneously
with the consummation thereof, the survivor or successor corporation resulting
from such consolidation or merger or the purchaser of such assets shall assume
by written instrument delivered to each holder of Warrants the obligation to
deliver to such holder such securities or assets as such holder may be entitled
to receive, subject to payment of the Exercise Price.

 

SECTION 3.07. Covenant to Reserve Shares for Issuance on Exercise.(a) At all
times the Company will cause an appropriate number of shares of Common Stock to
be duly and validly authorized and reserved and will keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of issue
upon exercise of Warrants as herein provided, the full number of shares of
Common Stock, if any, then issuable if all outstanding Warrants then exercisable
were to be exercised. The Company covenants that all shares of Common Stock that
shall be so issuable shall be duly and validly issued and, upon payment of the
Exercise Price, fully paid and non-assessable. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient for such
purpose, the Company will take such action as, in the opinion of its counsel,
may be necessary to increase its authorized but unissued Common Stock to such
number of shares as shall be sufficient for such purpose. Prior to or upon the
issuance of any Warrant Shares, the Company shall secure the listing of such
Warrant Shares upon any securities exchange upon which shares of Common Stock
are then listed.

 

(b) The Company shall authorize and direct its current and future transfer
agents for the shares of Common Stock at all times to reserve such number of
authorized shares as shall be requisite for such purpose. The Company will
supply such transfer agents with duly executed stock certificates for such
purposes. Promptly after the date of expiration of the Warrants, no shares shall
be reserved in respect of such Warrants.

 

SECTION 3.08. Statements on Warrants. The form of Warrant Certificate need not
be changed because of any adjustment made pursuant to this Article III, and
Warrant Certificates issued after such adjustment may state the same Exercise
Price and the same number of shares of Common Stock as are stated in the Warrant
Certificates initially issued pursuant to this Agreement. The Company, however,
may at any time in its sole discretion (which shall be conclusive) make any
change in the form of Warrant Certificate that it may deem appropriate and that
does not affect the substance thereof; and any Warrant Certificates thereafter
issued or countersigned, whether in exchange or substitution for an outstanding
Warrant Certificate or otherwise, may be in the form as so changed.

 

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Notice of Change in Securities Issuable and Exercise Price. Whenever the
securities issuable or deliverable in exchange for Warrants are or the Exercise
Price is changed pursuant to this Article III, the Company promptly shall mail
to each Warrantholder a notice, executed by its Chief Financial Officer, setting
forth in reasonable detail the facts requiring the change and specifying the
effective date of such change and the number or amount of the change. Failure to
publish such notice, or any defect in such notice, shall not affect the legality
or validity of any such change.

 

SECTION 3.09. References to Common Stock. Unless the context otherwise
indicates, all references to Common Stock in this Agreement and in the Warrant
Certificates, in the event of a change under this Article III, shall be deemed
to refer also to any other securities issuable or deliverable in exchange for
Warrants pursuant to such change.

 

ARTICLE IV

OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS

 

SECTION 4.01. No Rights as Shareholders. Nothing contained in this Agreement or
in any Warrant Certificate shall be construed as conferring on any Warrantholder
any rights whatsoever as a shareholder of the Company, including the right to
vote at, or to receive notice of, any meeting of shareholders of the Company;
nor shall the consent of any such holder be required with respect to any action
or proceeding of the Company; nor shall any such holder, by reason of the
ownership or possession of a Warrant or the Warrant Certificate representing the
same, either at, before or after exercising such Warrant, have any right to
receive any cash dividends, stock dividends, allotments or rights, or other
distributions (except as specifically provided herein), paid, allotted or
distributed or distributable to the shareholders of the Company prior to the
date of the exercise of such Warrant, nor shall such holder have any right not
expressly conferred by such holder’s Warrant or Warrant Certificate.

 

SECTION 4.02. Mutilated or Missing Warrant Certificates. If any Warrant
Certificate is lost, stolen, mutilated or destroyed, the Company in its
discretion may issue, in exchange and substitution for and upon cancellation of
the mutilated Warrant Certificate, or in lieu of and substitution for the
Warrant Certificate lost, stolen or destroyed, upon receipt of a proper
affidavit or other evidence satisfactory to the Company (and surrender of any
mutilated Warrant Certificate) and bond of indemnity in form and amount and with
corporate surety satisfactory to the Company in each instance protecting the
Company, a new Warrant Certificate of like tenor and exercisable for an
equivalent number of shares of Common Stock as the Warrant Certificate so lost,
stolen, mutilated or destroyed. Any such new Warrant Certificate shall
constitute an original contractual obligation of the Company, whether or not the
allegedly lost, stolen, mutilated or destroyed Warrant Certificate at any time
shall be enforceable by anyone. An applicant for such a substitute Warrant
Certificate also shall comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe. All Warrant
Certificates shall be held and owned upon the express condition that the
foregoing provisions are exclusive with respect to the replacement of lost,
stolen, mutilated or destroyed Warrant Certificates, and shall preclude any and
all other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.

 

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SECTION 4.03. Liquidation, Merger, etc.; Notice to Warrantholders. If:

 

(a) the Company shall authorize the issuance to all holders of Common Stock of
rights or warrants to subscribe for or purchase capital stock of the Company or
of any other subscription rights or warrants; or

 

(b) the Company shall authorize the distribution to all holders of Common Stock
of evidences of its indebtedness or assets (other than cash dividends or cash
distributions payable out of current earnings, retained earnings or earned
surplus or dividends payable in Common Stock); or

 

(c) there shall be proposed any consolidation or merger to which the Company is
to be a party and for which approval of the holders of Common Stock is required,
or the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or such other merger or transaction described in
Section 3.06 hereof; or

 

(d) there shall be proposed the voluntary or involuntary dissolution,
liquidation or winding up of the Company;

 

the Company shall cause to be given to each Warrantholder, by first-class mail,
postage prepaid, a written notice stating (i) the date as of which the holders
of record of shares of Common Stock to be entitled to receive any such rights,
warrants or distribution are to be determined or (ii) the date on which any
consolidation, merger, conveyance, transfer, reorganization, reclassification,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of record of shares of Common Stock
shall be entitled to exchange the shares for securities or other property, if
any, deliverable upon the consolidation, merger, conveyance, transfer,
reorganization, reclassification, dissolution, liquidation or winding up. Such
notice shall be mailed at the same time as any notice of such transaction shall
be given to holders of Common Stock in the case of a notice pursuant to (i)
above at least ten calendar days before the record date specified and in the
case of a notice pursuant to clause (ii) above at least 20 calendar days before
the earlier of the dates specified. Notwithstanding the foregoing, a press
release or filing by the Company with the Securities and Exchange Commission
containing the information required by this Section 4.03 shall be deemed to
constitute notice to the Warrantholders required by this Section 4.03.

 

ARTICLE V

MISCELLANEOUS

 

SECTION 5.01. Registration of Warrant Shares.

 

(a) The Company shall cause the Warrant Shares to be registered under the
Securities Act of 1933, as amended (the “Securities Act”) on the first
anniversary of the effective date (the “Effective Date”) of the registration
statement (No. 333-108671) filed by the Company on Form S-11 under the
Securities Act of 1933 and will use its best efforts to keep such registration
effective through the close of business on the fifth anniversary of the
Effective Date.

 

(b) If, at any time prior to the close of business on the fifth anniversary of
the Effective Date, there is no registration statement in effect for the Warrant
Shares, the Company, upon the written request of the holders of the Warrants and
of Warrant Shares representing an aggregate of 50% or more of the Warrant
Shares, will file with the Securities and

 

9

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Exchange Commission under the Securities Act, such registration statements and
amendments thereto and such other filings as may be required to permit the
public offering and sale of such Warrant Shares in compliance with the
Securities Act. The Company shall be required to register Warrant Shares no more
than once pursuant to this Section 5.02(b).

 

(c) Each holder of Warrants shall pay any transfer tax payable with respect to
such holder’s Warrant Shares and the fees and expenses of such holder’s counsel.
All other expenses of registration under Section 5.02(a) or Section 5.02(b)
shall be borne by the Company.

 

(d) The Company will agree to indemnify the holders of Warrant Shares that are
included in a registration statement or amendments to existing registration
statements pursuant to this Section 5.02 substantially to the same extent as the
Company has agreed to indemnify the Underwriters in the Underwriting Agreement
and such holders will agree to indemnify the Company and any Underwriter with
respect to information furnished by them in writing to the Company for inclusion
therein substantially to the same extent as the Underwriters have indemnified
the Company in the Underwriting Agreement.

 

SECTION 5.02. Enforcement of Warrant Rights. All rights of action are vested in
the respective Warrantholders. Any holder of any Warrant, in his own behalf and
for his own benefit, may enforce, and may institute and maintain any suit,
action or proceeding against the Company suitable to enforce, or otherwise in
respect of, his right to exercise his Warrant for the purchase of the number of
Warrant Shares issuable or deliverable in exchange therefor, in the manner
provided in the Warrant and in this Agreement.

 

SECTION 5.03. Negotiability and Ownership. The Warrants issued hereunder shall
not, for a period of one year following the Effective Date, be sold,
transferred, assigned or hypothecated by the holders thereof except (a) to
persons who are directors, officers or affiliates of FBR who represent to the
Company that they are “accredited investors” as that term is defined in Rule 501
under Regulation D of the Securities Act or (b) in the case of an individual,
pursuant to such individual’s last will and testament or the laws of descent and
distribution and, in any case, only in compliance with the Securities Act and
Rule 2710 of the National Association of Securities Dealers, Inc. Manual, or any
successor rule. For the purposes of this Section 5.03, the terms “officers,” and
“partners” shall refer to those persons who are officers or partners, as the
case may be, of FBR or any of its affiliates, as the case maybe, or who become
officers or partners of FBR or any of its affiliates at any time before the
expiration of the Warrants regardless of whether such persons are officers or
partners of FBR or any of its affiliates at the time they sell, transfer, assign
or hypothecate a Warrant. Any attempt to sell, transfer, assign or hypothecate
in contravention of this Section shall be null and void.

 

SECTION 5.04. Warrant Legend. (a) Each Warrant shall contain a legend in
substantially the following form:

 

“THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT, DATED
DECEMBER 19, 2003 BETWEEN HIGHLAND HOSPITALITY CORPORATION AND FRIEDMAN,
BILLINGS, RAMSEY & CO., INC. ANY ATTEMPT TO TRANSFER THIS WARRANT OR ANY SHARE
OF COMMON STOCK ISSUED UPON EXERCISE OF THIS WARRANT TO ANY UNAUTHORIZED
TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF SAID AGREEMENT
SHALL BE EFFECTIVE. THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE AND CURRENT

 

10

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REGISTRATION STATEMENT OR POSTEFFECTIVE AMENDMENT THERETO UNDER THE SECURITIES
ACT OF 1933 (THE “ACT”) OR AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT. THE
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD OR
TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR
POSTEFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE ACT OR AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT REGISTRATION IS
NOT REQUIRED UNDER THIS ACT.”

 

(b) Each certificate representing Warrant Shares, unless registered pursuant to
Section 5.01, shall contain a legend substantially in the following form:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED
WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POSTEFFECTIVE
AMENDMENT THERETO FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION
OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT REGISTRATION IS
NOT REQUIRED UNDER THAT ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT, DATED DECEMBER 19,
2003, BETWEEN HIGHLAND HOSPITALITY CORPORATION AND FRIEDMAN, BILLINGS, RAMSEY &
CO., INC. ANY ATTEMPT TO TRANSFER THE SHARES REPRESENTED BY THIS CERTIFICATE TO
ANY UNAUTHORIZED TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF
SAID AGREEMENT SHALL BE EFFECTIVE.”

 

SECTION 5.05. Supplements and Amendments.(a) Notwithstanding the provisions of
Section 5.05(b), FBR, without the consent or concurrence of the registered
holders of the Warrants, may enter into one or more supplemental agreements or
amendments with the Company for the purpose of evidencing the rights of
Warrantholders upon consolidation, merger, sale, transfer or reclassification
pursuant to Section 3.06, making any changes or corrections in this Agreement
that are required to cure any ambiguity, to correct or supplement any provision
contained herein that may be defective or inconsistent with any other provision
herein or any clerical omission or mistake or manifest error herein contained,
or making such other provisions in regard to matters or questions arising under
this Agreement as shall not adversely affect the interests of the holders of the
Warrants or be inconsistent with this Agreement or any supplemental agreement or
amendment.

 

(b) With the consent of the registered holders of at least a majority in number
of the Warrants at the time outstanding, the Company at any time and from time
to time by supplemental agreement or amendment may add any provisions to or
change in any manner or eliminate any of the provisions of this Agreement or of
any supplemental agreement or modify in any manner the rights and obligations of
the Warrantholders and of the Company; provided, however, that no such
supplemental agreement or amendment, without the consent of the registered
holder of each outstanding Warrant affected thereby, shall:

 

(i) alter the provisions of this Agreement so as to affect adversely the terms
upon which the Warrants are exercisable; or

 

(ii) reduce the number of Warrants outstanding the consent of whose holders is
required for any such supplemental agreement or amendment.

 

11

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SECTION 5.06. Notices. Any notice or demand authorized by this Agreement to be
given or made by the holder of any Warrant to or on the Company shall be
sufficiently given or made if sent by mail first-class, postage prepaid,
addressed (until another address is filed in writing by the Company with the
Representative), as follows:

 

Highland Hospitality Corporation

    

8405 Greensboro Drive, Suite 500

    

McLean, Virginia 22102

    

Attention: President

    

with a copy to

    

Highland Hospitality Corporation

    

8405 Greensboro Drive, Suite 500

    

McLean, Virginia 22102

    

Attention: General Counsel

    

 

Any notice or demand authorized by this Agreement to be given or made by the
holder of any Warrant or by the Company to or on FBR shall be sufficiently given
or made if sent by mail first-class, postage prepaid, addressed (until another
address is filed in writing by the Representative with the Company), as follows:

 

Friedman, Billings, Ramsey & Co., Inc.

    

1001 Nineteenth Street North

    

Arlington, Virginia 22209

    

Attention: James R. Kleeblatt

    

 

Any notice or demand authorized by this Agreement to be given or made to the
holder of any Warrants shall be sufficiently given or made if sent by
first-class mail, postage prepaid to the last address of such holder as it shall
appear on the Warrant Register.

 

SECTION 5.07. Applicable Law. The validity, interpretation and performance of
this Agreement and of the Warrant Certificate shall be governed by the law of
the State of Maryland, without giving effect to the principles of conflicts of
law thereof.

 

SECTION 5.08. Benefits of this Agreement. Nothing in this Agreement expressed
and nothing that may be implied from any of the provisions hereof is intended,
or shall be construed, to confer upon, or give to, any person or corporation
other than the parties hereto and the holders of the Warrants any right, remedy
or claim under or by reason of this Agreement or of any covenant, condition,
stipulation, promise or agreement hereof, and all covenants, conditions,
stipulations, promises and agreements in this Agreement contained shall be for
the sole and exclusive benefit of the parties hereto and their successors and of
the holders of the Warrants.

 

SECTION 5.09. Registered Warrantholders. Prior to due presentment for
registration of transfer, the Company may deem and treat the person in whose
name any Warrants are registered in the Warrant Register as the absolute owner
thereof for all purposes whatsoever (notwithstanding any notation of ownership
or other writing thereon made by anyone other than the Company) and the Company
shall not be affected by any notice to the contrary or be bound to recognize any
equitable or other claim to or interest in any Warrants on the part of any other
person and shall not be liable for any registration of transfer of Warrants that
are registered or to be registered in the name of a fiduciary or the nominee of
a fiduciary. The terms “Warrantholder” and “holder of any “Warrants” and all
other similar terms used herein shall mean such person in whose name Warrants
are registered in the Warrant Register.

 

12

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SECTION 5.10. Inspection of Agreement. A copy of this Agreement shall be
available at all reasonable times for inspection by any Warrantholder at the
principal office of the Company. The Company may require any such Warrantholder
to submit his Warrant Certificate for inspection by it before allowing such
Warrantholder to inspect a copy of this Agreement.

 

SECTION 5.11. Headings. The Article and Section headings herein are for
convenience only and are not a part of this Agreement and shall not affect the
interpretation thereof.

 

SECTION 5.12. Counterparts. The Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original.

 

13

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IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto
under their respective seals as of the day and year first above written.

 

HIGHLAND HOSPITALITY CORPORATION

By:

 

/s/    Tracy M. J. Colden

--------------------------------------------------------------------------------

   

Name: Tracy M. J. Colden

   

Title: Executive Vice President

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

By:

 

/s/    James R. Kleebatt

--------------------------------------------------------------------------------

   

Name: James R. Kleebatt

   

Title: Senior Managing Director

 

14

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Exhibit A

 

FORM OF WARRANT CERTIFICATE

 

No. 1

  888,488 Warrants

 

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
WARRANT ARE SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT AGREEMENT, DATED
DECEMBER 19, 2003 BETWEEN HIGHLAND HOSPITALITY CORPORATION AND FRIEDMAN,
BILLINGS, RAMSEY & CO., INC. ANY ATTEMPT TO TRANSFER THIS WARRANT OR ANY SHARE
OF COMMON STOCK ISSUED UPON EXERCISE OF THIS WARRANT TO ANY UNAUTHORIZED
TRANSFEREE, SHALL BE NULL AND VOID. NO TRANSFER IN VIOLATION OF SAID AGREEMENT
SHALL BE EFFECTIVE. THIS WARRANT MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT
TO AN EFFECTIVE AND CURRENT REGISTRATION STATEMENT OR POSTEFFECTIVE AMENDMENT
THERETO UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) OR AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED
UNDER THE ACT. THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT
MAY NOT BE SOLD OR TRANSFERRED WITHOUT AN EFFECTIVE AND CURRENT REGISTRATION
STATEMENT OR POSTEFFECTIVE AMENDMENT THERETO FOR SUCH SHARES UNDER THE ACT OR AN
OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED UNDER THIS ACT.

 

WARRANTS

TO PURCHASE SHARES OF COMMON STOCK OF

HIGHLAND HOSPITALITY CORPORATION

 

Highland Hospitality Corporation, a Maryland corporation (the “Company”), for
value received, hereby certifies that

 

Friedman, Billings, Ramsey & Co., Inc.

 

or registered assigns, is the owner of the number of Warrants, set forth above,
each of which represents the right, subject to the terms and conditions hereof
and of the Warrant Agreement hereafter referred to (the “Warrant Agreement”), to
purchase from the Company at any time, or from time to time, from the first
anniversary of the date of original issuance of the Warrants to the close of
business on the fifth anniversary of such date (or, if such date is not a
Business Day (as defined below), the first following Business Day) (the
“Exercise Period”), the number of shares of Common Stock, par value $.01 per
share, of the Company (the “Common Stock”) described in the Warrant Agreement
(each share of Common Stock issuable upon exercise of a Warrant is referred to
as a “Warrant Share”). Subject to the terms and conditions of the Warrant
Agreement, the exercise price per Warrant represented by this Warrant
Certificate shall be $10 per share, as it may be adjusted as provided in Article
III of the Warrant Agreement, payable in full as to each Warrant exercised at
the time of exercise. The term “Exercise Price” as used herein refers to the
foregoing price per share in effect at the time of exercise of the Warrants.

 

This Warrant may be exercised in whole or in part at any time or from time to
time during the Exercise Period. The portion of any Warrant not exercised during
the Exercise Period shall become void, and all rights hereunder and all rights
in respect hereof and under the Warrant Agreement shall cease at the end of the
Exercise Period.

 

A-1

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Each such purchase of Warrant Shares shall be made, and shall be deemed
effective for the purpose of determining the date of exercise, only upon
surrender hereof to the Company at the principal office of the Company, with the
form of Election to Exercise on the reverse hereof duly filled in and signed,
and upon payment in full to the Company of the Exercise Price (i) in cash or
(ii) by certified or official bank check or (iii) by any combination of the
foregoing, all as provided in the Warrant Agreement and upon compliance with and
subject to the conditions set forth herein and in the Warrant Agreement.

 

This Warrant Certificate is issued under and in accordance with the Warrant
Agreement dated as of December 19, 2003 (the “Warrant Agreement”), between the
Company and Friedman, Billings, Ramsey & Co., Inc., and is subject to the terms
and provisions of the Warrant Agreement, which terms and provisions are hereby
incorporated by reference herein and made a part hereof. A copy of the Warrant
Agreement is available for inspection by the registered holder at the principal
office of the Company upon presentation of this Warrant Certificate.

 

The Company shall not be required upon the exercise of the Warrants represented
hereby to issue fractions of Warrant Shares or to distribute share certificates
that evidence fractional Warrant Shares. Every holder of this Warrant
Certificate expressly waives its right to receive any fraction of a Warrant
Share or a share certificate representing a fraction of a Warrant Share.
Fractional Warrant Shares that otherwise would be issuable in respect of such
exercise shall be paid in cash as provided in the Warrant Agreement, and the
number of Warrant Shares issuable to such Warrantholder shall be rounded down to
the next nearest whole number. If the Warrants represented by this Warrant
Certificate are not exercised in full, the Company will issue to the
Warrantholder a new Warrant Certificate exercisable for the number of shares of
Common Stock as to which the Warrants shall not have been exercised.

 

This Warrant Certificate may be exchanged either separately or in combination
with other Warrant Certificates at the principal office of the Company for new
Warrant Certificates representing the same aggregate number of Warrants as were
evidenced by the Warrant Certificate or Warrant Certificates exchanged, upon
surrender of this Warrant Certificate and upon compliance with and subject to
the conditions set forth herein and in the Warrant Agreement.

 

This Warrant Certificate is transferable (subject to restrictions set forth in
the Warrant Agreement) at the principal office of the Company by the registered
holder hereof in person or by his attorney duly authorized in writing, upon (i)
surrender of this Warrant Certificate and (ii) compliance with and subject to
the conditions set forth herein and in the Warrant Agreement. Upon any such
transfer, a new Warrant Certificate or new Warrant Certificates of different
denominations, representing in the aggregate a like number of Warrants, will be
issued to the transferee. Every holder of Warrants, by accepting this Warrant
Certificate, consents and agrees with the Company and with every subsequent
holder of this Warrant Certificate that until due presentation for the
registration of transfer of this Warrant Certificate on the Warrant Register
maintained by the Company, the Company may deem and treat the person in whose
name this Warrant Certificate is registered as the absolute and lawful owner for
all purposes whatsoever and the Company shall not be affected by any notice to
the contrary.

 

A-2

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Nothing contained in the Warrant Agreement or in this Warrant Certificate shall
be construed as conferring on the holder of any Warrants or his transferee any
rights whatsoever as a shareholder of the Company.

 

The Warrant Agreement and each Warrant Certificate, including this Warrant
Certificate, shall be deemed a contract made under the laws of the State of
Maryland and for all purposes shall be construed in accordance with the laws of
the State of Maryland without giving effect to the principles of conflicts of
law thereof.

 

A-3

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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed under its corporate seal.

 

Dated: December 19, 2003

 

                             

HIGHLAND HOSPITALITY CORPORATION

   

(CORPORATE SEAL)

      By:  

/s/    Tracy M.J. Colden

--------------------------------------------------------------------------------

               

Name: Tracy M.J. Colden

               

Title: Executive Vice President

   

ATTEST:

 

_________________________

           

 

A-4

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ELECTION TO EXERCISE

 

(To be executed upon exercise of Warrant)

 

TO. :

 

The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant Certificate for, and to purchase thereunder,
                     shares of Common Stock, as provided for therein, and
tenders herewith payment of the purchase price in full in the form of cash or a
certified or official bank check (or combination thereof) in the amount of
$                    .

 

Please issue a certificate or certificates for such shares of Common Stock in
the name of:

 

PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE:          

Name

 

 

 

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

      Address  

 

--------------------------------------------------------------------------------

        Signature  

 

--------------------------------------------------------------------------------

       

 

--------------------------------------------------------------------------------

            Note: The above signature should correspond exactly with the name on
the face of this Warrant Certificate or with the name of assignee appearing in
the assignment form below.

      

Dated:                             ,             

    

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ASSIGNMENT

 

(To be executed only upon assignment of Warrant Certificate)

 

For value received,                          hereby sells, assigns and transfer
unto                          the within Warrant Certificate, together with all
right, title and interest therein, and does hereby irrevocably constitute and
appoint                          attorney, to transfer said Warrant Certificate
on the books of the within-named Company, with full power of substitution in the
premises.

 

Dated:                         ,             

 

--------------------------------------------------------------------------------

NOTE:

  The above signature should correspond exactly with the name on the face of
this Warrant Certificate