EXHIBIT 10.1

 

FORM OF SECURITIES PURCHASE AGREEMENT

 

 

 

 

SECURITIES PURCHASE AGREEMENT

 

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of May 31, 2005, by
and among Galaxy Energy Corporation, a Colorado corporation, with headquarters
located at 1331-17th Street, Suite 730, Denver, Colorado 80202 (the “Company”),
and the investors listed on the Schedule of Buyers attached hereto
(individually, a “Buyer” and collectively, the “Buyers”).

WHEREAS:

A.         On August 19, 2004, pursuant to a Securities Purchase Agreement (the
“2004 Agreement”), by and between the Company and the buyers named therein (the
“2004 Buyers”), each of the 2004 Buyers purchased certain senior secured
convertible notes of the Company in the aggregate principal amount of
$20,000,000 (the “2004 Notes”) and warrants (the “2004 Warrants”);

B.         In connection with the 2004 Agreement, (a) the parties thereto and
certain subsidiaries executed and delivered a security agreement (the “2004
Security Agreement”), (b) the parties thereto, certain subsidiaries of the
Company and U.S. Bank Corp. Investments, Inc. executed and delivered account
control agreements (the “USBIT Account Control Agreement”), and the parties
thereto, certain subsidiaries of the Company and

American National Bank executed and delivered a deposit account control
agreement (the “ANB Account Control Agreement” and, collectively with the UBIT
Account Control Agreement, the “Account Control Agreements”), (c) the Debtors
(as defined in the 2004 Security Agreement), other than the Company, executed
and delivered a guaranty (the “Guaranty”), (d) the parties to the 2004 Agreement
executed and delivered pledge agreements (the “Pledge Agreement”), and (e) the
Debtors executed and delivered mortgages covering the Company’s leasehold
interest in its leased real property in Converse County, Wyoming; Powder River
County, Montana; Rosebud County, Montana; Custer County, Montana; Campbell
County, Wyoming; Sheridan County, Wyoming; Nacogdoches County, Texas; Rusk
County, Texas; and Big Horn County, Montana (collectively, the “Mortgages”);

C.         The Company and the Buyers (all of which are 2004 Buyers or
affiliates thereof) are executing and delivering this Agreement in reliance upon
the exemption from securities registration afforded by Rule 506 of Regulation D
(“Regulation D”) as promulgated by the United States Securities and Exchange
Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933
Act”);

D.         The Company has authorized senior secured convertible notes of the
Company (the “Convertible Notes”), which shall be convertible into shares of the
Company’s common stock, par value $0.001 per share (the “Common Stock”) (the
shares of Common Stock issuable upon conversion of the Convertible Notes being
referred to herein as the “Conversion Shares”), in accordance with the terms of
the Convertible Notes;

 

 

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E.            The Buyers wish to purchase, upon the terms and conditions stated
in this Agreement, Convertible Notes, substantially in the form attached as
Exhibit A, in an original aggregate principal amount of $10,000,000 and in the
respective principal amounts set forth opposite each Buyer’s name on the
Schedule of Buyers (such notes, together with any promissory notes or other
securities issued in exchange or substitution therefor or replacement thereof,
along with the guarantees thereof pursuant to the Guaranty (as amended by the
First Amendment (as defined below)), and as any of the same may be amended,
restated, modified or supplemented and in effect from time to time, the
“Notes”);

F.             Pursuant to this Agreement and/or the Notes, and subject to the
terms and conditions hereof and/or thereof, the Company may be required to issue
to the Buyers Qualifying Issuance Warrants (as defined in Section 4(f) hereof),
substantially in the form attached as Exhibit B, and Repurchase Warrants (as
defined in the Notes), substantially in the form attached as Exhibit C, to
acquire shares of Common Stock (all of the warrants referred to above, together
with any warrants or other securities issued in exchange or substitution
therefor or replacement thereof and as any of the same may be amended, restated,
modified or supplemented and in effect from time to time, being collectively
referred to herein as the “Warrants” and the shares of Common Stock issuable
upon exercise of the Warrants being referred to herein as the “Warrant Shares”);

G.            Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement, substantially in the form attached as Exhibit D (the “Registration
Rights Agreement”), pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws;

H.            Contemporaneously with the Closing (as defined below), the
Debtors, the 2004 Buyers and the Buyers will execute and deliver a First
Amendment to Security Agreement, Pledge Agreement and Guaranty, substantially in
the form attached as Exhibit E (the “First Amendment”);

I.              Contemporaneously with the Closing, the parties to the ANB
Account Control Agreement will execute and deliver a First Amendment to Deposit
Account Control Agreement, substantially in the form attached as Exhibit F (the
“ANB Amendment”);

J.             Contemporaneously with the Closing, the Debtors will execute and
deliver (a) a first amendment to each of the Mortgages, substantially in the
form attached as Exhibit G (the “Mortgage Amendments”), and (b) a mortgage,
substantially in the form attached as Exhibit H, covering the Company’s
leasehold interest in its leased real property in Garfield County, Colorado (the
“Colorado Mortgage”);

K.            Contemporaneously with the Closing, the Company and each of the
2004 Buyers will execute and deliver a Waiver and First Amendment, substantially
in the form attached as Exhibit I (the “2004 Amendment”), in which each such
2004 Buyer, among other things, waives any anti-dilution adjustments with
respect to the 2004 Notes and the 2004 Warrants that would have resulted from
the issuance of the senior subordinate convertible notes (the “March 2005

 

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Notes”) and the warrants to purchase Common Stock (the “March 2005 Warrants”)
pursuant to the Securities Purchase Agreement, dated as of March 1, 2005 (the
“March Purchase Agreement”);

L.             Contemporaneously with the Closing, the Company and each of the
holders of the March 2005 Notes and the March 2005 Warrants will execute and
deliver to the Buyers a Waiver and First Amendment to the March 2005 Notes and
the March 2005 Warrants, substantially in the form attached as Exhibit J (the
“March 2005 Amendment”);

M.           Contemporaneously with the Closing, the Company and each of its
Subsidiaries will execute and deliver the Conveyances of Overriding Royalty
Interests granting the Buyers perpetual overriding royalty interests in the
hydrocarbon production of the Company’s properties, substantially in the forms
attached as Exhibit K (the “Conveyances of Overriding Royalty Interests”); and

N.            Contemporaneously with the Closing, each of the 2004 Buyers, the
Buyers, the Company and the holders of the March 2005 Notes will execute and
deliver a subordination agreement, substantially in the form attached as Exhibit
L (the “March 2005 Note Subordination Agreement”), subordinating the obligations
under the March 2005 Notes to the obligations under the Notes and the 2004
Notes.

NOW THEREFORE, the Company and the Buyers hereby agree as follows:

1.

PURCHASE AND SALE OF NOTES.

a.               Purchase of Notes. Subject to the satisfaction (or waiver) of
the conditions set forth in Sections 6 and 7 below, the Company shall issue and
sell to each Buyer, and each Buyer severally agrees to purchase from the
Company, Notes in the principal amount set forth opposite such Buyer’s name on
the Schedule of Buyers on the Closing Date (as defined below) (the “Closing”).
The purchase price (the “Purchase Price”) of the Notes at the Closing shall be
equal to $1.00 for each $1.00 of principal amount of the Notes purchased
(representing an aggregate Purchase Price of $10,000,000 for the aggregate
principal amount of $10,000,000 of Notes, to be purchased at the Closing).
“Business Day” means any day other than Saturday, Sunday or other day on which
commercial banks in the City of New York are authorized or required by law to
remain closed.

b.               The Closing Date. The date and time of the Closing (the
“Closing Date”) shall be 10:00 a.m., Central Standard Time, on May 31, 2005,
subject to the satisfaction (or waiver) of all of the conditions to the Closing
set forth in Sections 6 and 7 (or such later date as is mutually agreed to by
the Company and the Buyers). The Closing shall occur on the Closing Date at the
offices of Katten Muchin Rosenman LLP, 525 West Monroe Street, Chicago, Illinois
60661-3693 or at such other time, date and place as the Company and the Buyers
may collectively designate in writing.

c.               Form of Payment. On the Closing Date, (i) each Buyer shall pay
the Purchase Price to the Company for the Notes to be issued and sold to such
Buyer at such

 

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Closing, by wire transfer of immediately available funds in accordance with the
Company’s written wire instructions, less any amount withheld pursuant to
Section 4(j), and (ii) the Company shall deliver to each Buyer, Notes (in the
principal amounts as such Buyer shall request) (the “Note Certificates”)
representing such principal amount of the Notes that such Buyer is purchasing
hereunder at the Closing, duly executed on behalf of the Company and registered
in the name of such Buyer or its designee.

2.

BUYER’S REPRESENTATIONS AND WARRANTIES.

Each Buyer represents and warrants with respect to only itself that:

a.               Investment Purpose. Such Buyer (i) is acquiring the Notes set
forth opposite such Buyer’s name on the Schedule of Buyers, (ii) upon conversion
of such Notes, will acquire the Conversion Shares then issuable, (iii) will
acquire any Warrants issued to such Buyer pursuant to Section 4 of this
Agreement and/or Section 7 of any Note and (iv) upon any exercise of any
Warrants issued to such Buyer will acquire the Warrant Shares issuable upon
exercise thereof (the Notes, the Conversion Shares, the Warrants and the Warrant
Shares collectively being referred to herein as the “Securities”), for its own
account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales registered or
exempted under the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act.

b.               Accredited Investor Status. Such Buyer is an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D.

c.               Reliance on Exemptions. Such Buyer understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of the United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
such Buyer to acquire the Securities.

d.               Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
that have been requested by such Buyer. Such Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer’s right to rely on the Company’s representations and warranties contained
in Sections 3 and 9(l) below. Such Buyer understands that its investment in the
Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.

 

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e.               No Governmental Review. Such Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

f.                Transfer or Resale. Such Buyer understands that, except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the 1933 Act or any state securities laws,
and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration, or (C) such
Buyer provides the Company with reasonable assurance that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act, as amended (or a successor rule thereto) (“Rule 144”); (ii) any sale of the
Securities made in reliance on Rule 144 may be made only in accordance with the
terms of Rule 144, and further, if Rule 144 is not applicable, any resale of the
Securities under circumstances in which the seller (or the person through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in
the 1933 Act) may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register the Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. Notwithstanding the foregoing, the
Securities may be pledged in connection with a bona fide margin account or other
loan or financing arrangement secured by the Securities.

g.               Legends. Such Buyer understands that the certificates or other
instruments representing the Notes and any Warrants and, until such time as the
sale of the Conversion Shares and the Warrant Shares have been registered under
the 1933 Act as contemplated by the Registration Rights Agreement, the stock
certificates representing the Conversion Shares and any Warrant Shares, except
as set forth below, shall bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of such
stock certificates):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR (B)
AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT
REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID

 

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ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if (i) such Securities are registered for resale under the 1933 Act,
(ii) in connection with a sale transaction, such holder provides the Company
with an opinion of counsel, in a generally acceptable form, to the effect that a
public sale, assignment or transfer of the Securities may be made without
registration under the 1933 Act, (iii) such holder provides the Company with
reasonable assurances that the Securities can be sold pursuant to Rule 144(k),
or (iv) such holder provides the Company reasonable assurances that the
Securities have been or are being sold pursuant to Rule 144.

h.               Authorization; Enforcement; Validity. Such Buyer is a validly
existing corporation, partnership, limited liability company or other entity and
has the requisite corporate, partnership, limited liability or other
organizational power and authority to purchase the Securities pursuant to this
Agreement. This Agreement and the Registration Rights Agreement have been duly
and validly authorized, executed and delivered on behalf of such Buyer and are
valid and binding agreements of such Buyer enforceable against such Buyer in
accordance with their respective terms. The First Amendment and each of the
other agreements entered into and other documents executed by such Buyer in
connection with the transactions contemplated hereby and thereby as of the
Closing will have been duly and validly authorized, executed and delivered on
behalf of such Buyer and as of the Closing will be valid and binding agreements
of such Buyer enforceable against such Buyer in accordance with their respective
terms.

i.               Residency. Such Buyer is a resident of that jurisdiction
specified below its address on the Schedule of Buyers.

3.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers that:

a.               Organization and Qualification. Set forth in Schedule 3(a) is a
true and correct list of the entities in which the Company, directly or
indirectly, owns capital stock or holds an equity or similar interest, as well
as a list designating each of the Company’s Subsidiaries (as defined below).
Each of the Company and its “Subsidiaries” (which for purposes of this Agreement
means any entity in which the Company, directly or indirectly, owns capital
stock or holds an equity or similar interest as of the date hereof or at any
time hereafter) is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction in which it is incorporated and has
the requisite corporate power and authority to own its properties and to carry
on its business as now being conducted. Each of the Company and its Subsidiaries
is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which its ownership of property or the nature
of the business conducted by it makes such qualification necessary, except to
the extent that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect. As used in this

 

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Agreement, “Material Adverse Effect” means any material adverse effect on the
business, properties, assets, operations, results of operations, financial
condition, or prospects of the Company and its Subsidiaries taken as a whole, or
on the transactions contemplated hereby or by the agreements and instruments to
be entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined
below). The Company has no Subsidiaries except as designated in Schedule 3(a).
Except as set forth in Schedule 3(a), the Company holds all right, title and
interest in and to 100% of the capital stock, equity or similar interests of
each of its Subsidiaries, in each case, free and clear of any Liens (as defined
below), including any restriction on the use, voting, transfer, receipt of
income or other exercise of any attributes of free and clear ownership by a
current holder, and no such Subsidiary owns capital stock or holds an equity or
similar interest in any other Person. “Lien” means, with respect to any asset,
any mortgage, lien, pledge, hypothecation, violation, charge, lease, license,
adverse claim, restrictive covenant, condition, restriction, exception, security
interest or encumbrance of any kind, or any other type of preferential
arrangement that has the practical effect of creating a security interest or
third party right in respect of such asset.

b.               Authorization; Enforcement; Validity. Each of the Company and
its applicable Subsidiaries has the requisite corporate power and authority to
enter into and perform its obligations under each of this Agreement, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions (as
defined in Section 5), the Notes, the Warrants, the Conveyances of Overriding
Royalty Interests, the March Note 2005 Subordination Agreement, the 2004
Amendment, the March 2005 Amendment, the First Amendment and the 2004 Security
Agreement as amended thereby (the 2004 Security Agreement, as so amended, the
“Security Agreement”), the Guaranty as amended thereby and the Pledge Agreement
as amended thereby, the USBIT Account Control Agreement, the ANB Amendment and
the ANB Account Control Agreement as amended thereby, the Mortgage Amendments
and the Mortgages as amended thereby, the Colorado Mortgage and each of the
other agreements to which it is a party or by which it is bound and which is
entered into by the parties hereto in connection with the transactions
contemplated hereby and thereby (collectively, the “Transaction Documents”), and
to issue the Securities in accordance with the terms hereof and thereof. The
execution and delivery of the Transaction Documents, as appropriate, by the
Company and, if applicable, its Subsidiaries and the consummation by the Company
and its Subsidiaries of the transactions contemplated hereby and thereby,
including the issuance of the Notes and any Warrants, and the reservation for
issuance and the issuance of the Conversion Shares and Warrant Shares issuable
upon conversion or exercise thereof, have been duly authorized by the Company’s
Board of Directors and no further consent or authorization is required by the
Company, its Board of Directors or its shareholders. This Agreement and the
other Transaction Documents dated of even date herewith have been duly executed
and delivered by the Company and, if applicable, its Subsidiaries and constitute
the valid and binding obligations of such parties enforceable against such
parties in accordance with their terms.

c.               Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 400,000,000 shares of Common Stock, of
which as of the date hereof 63,238,986 shares are issued and outstanding,
6,500,000 shares are reserved for issuance pursuant to the Company’s stock
option, restricted stock and stock purchase plans and

 

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12,077,994 shares are issuable and reserved for issuance pursuant to securities
(other than the Notes and the Warrants) exercisable or exchangeable for, or
convertible into, shares of Common Stock and (ii) 25,000,000 shares of preferred
stock, $0.001 par value, of which as of the date hereof, none of which is issued
or outstanding. All of such outstanding or issuable shares have been, or upon
issuance will be, validly issued and are fully paid and nonassessable. Except as
disclosed in Schedule 3(c), (A) no shares of the capital stock of the Company or
any of its Subsidiaries are subject to preemptive rights or any other similar
rights or any Liens suffered or permitted by the Company or any of its
Subsidiaries; (B) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable for, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into or exercisable for, any shares of capital
stock of the Company or any of its Subsidiaries; (C) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (D) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries that contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (E) there are no securities or instruments containing
anti-dilution or similar provisions that will or may be triggered by the
issuance of the Securities; and (F) the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan
or agreement. The Company has furnished to each Buyer true and correct copies of
the Company’s Articles of Incorporation, as amended and as in effect on the date
hereof (the “Articles of Incorporation”), and the Company’s Bylaws, as amended
and as in effect on the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, Common Stock,
and the material rights of the holders thereof in respect thereto.

d.               Issuance of Securities. The Notes are duly authorized and, upon
issuance in accordance with the terms hereof, shall be (i) free from all taxes
and Liens with respect to the issuance thereof and (ii) entitled to the rights
set forth in the Notes. At least 18,000,000 shares of Common Stock (subject to
adjustment pursuant to the Company’s covenant set forth in Section 4(g) below)
have been duly authorized and reserved for issuance upon conversion of the Notes
and upon exercise of any Warrants. Upon conversion or exercise in accordance
with the Notes or the Warrants, as the case may be, the Conversion Shares and
the Warrant Shares will be validly issued, fully paid and nonassessable and free
from all taxes and Liens with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. The issuance
by the Company of the Securities is exempt from registration under the 1933 Act
and applicable state securities laws.

e.               No Conflicts. The execution and delivery of the Transaction
Documents by the Company and, if applicable, its Subsidiaries, the performance
by such parties of their

 

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obligations thereunder and the consummation by such parties of the transactions
contemplated thereby (including the reservation for issuance and issuance of the
Conversion Shares and the Warrant Shares) will not (i) result in a violation of
the Articles of Incorporation or the Bylaws or the organizational documents of
any Subsidiary; (ii) conflict with, or constitute a breach or default (or an
event which, with the giving of notice or lapse of time or both, constitutes or
would constitute a breach or default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or other remedy with
respect to, any agreement, indenture or instrument to which the Company or any
of its Subsidiaries is a party; (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations applicable to the Company or any of its Subsidiaries or by
which any property or asset of the Company or any of its Subsidiaries is bound
or affected. Neither the Company nor any of its Subsidiaries is in violation of
any term of its articles of incorporation or bylaws (or operating agreement), as
applicable. Neither the Company nor any of its Subsidiaries is in violation of
any term of or in default under any contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to the Company or its Subsidiaries. The business of the
Company and its Subsidiaries is not being conducted, and shall not be conducted,
in violation of any law, ordinance or regulation of any governmental entity.
Except as specifically contemplated by this Agreement, including the filings and
listings as described in Section 4(b) and Section 4(i), and as required under
the 1933 Act none of the Company and its Subsidiaries is required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents in accordance with the terms hereof or
thereof. All consents, authorizations, orders, filings and registrations that
the Company or any of its Subsidiaries is required to obtain as described in the
preceding sentence have been obtained or effected on or prior to the date
hereof. Neither the Company nor any of its Subsidiaries is in violation of any
applicable provision of the Sarbanes-Oxley Act of 2002, as amended, and the
rules and regulations thereunder (collectively, “Sarbanes-Oxley”). The Company
and its Subsidiaries are unaware of any facts or circumstances that might give
rise to any of the foregoing.

f.                SEC Documents; Financial Statements. Since November 30, 2002,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act (all of the foregoing filed prior to the date
hereof (including all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein) being
hereinafter referred to as the “SEC Documents”). A complete and accurate list of
the SEC Documents is set forth on Schedule 3(f), and the Company has made
available to the Buyers or their respective representatives true and complete
copies of the SEC Documents. Except as set forth in Schedule 3(f), each of the
SEC Documents was filed with the SEC within the time frames prescribed by the
SEC for the filing of such SEC Documents such that each filing was timely filed
with the SEC. None of the late filings set forth in Schedule 3(f) will adversely
affect the Company’s ability to use SEC Form S-3 for registration of securities
after the date hereof. As of their respective dates, the SEC Documents complied
in all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder

 

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applicable to the SEC Documents. None of the SEC Documents, at the time they
were filed with the SEC, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. As of their respective dates, the consolidated
financial statements of the Company and its Subsidiaries included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, consistently applied,
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of unaudited
interim statements, to the extent they may exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial
position of the Company and its Subsidiaries as of the dates thereof and the
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments). None
of the Company or any of its Subsidiaries, or any of their respective officers,
directors or affiliates (as defined below) or, to the Company’s knowledge, any
shareholder of the Company has made any other filing with the SEC, issued any
press release or made any other public statement or communication on behalf of
the Company or any of its Subsidiaries or otherwise relating to the Company or
any of its subsidiaries that contains any untrue statement of a material fact or
omits any statement of material fact necessary in order to make the statements
therein, in the light of the circumstances under which they are or were made,
not misleading or has provided any other information to the Buyers, including
information referred to in Section 2(d), that contains any untrue statement of a
material fact or omits to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they are or
were made, not misleading. None of the Company, any of its Subsidiaries and any
of their respective officers, directors, employees or agents has provided the
Buyers with any material, nonpublic information. The Company is not required to
file and will not be required to file any agreement, note, lease, mortgage, deed
or other instrument entered into prior to the date hereof and to which the
Company or any Subsidiary is a party or by which the Company or any Subsidiary
is bound that has not been previously filed as an exhibit (including by way of
incorporation by reference) to its reports filed or made with the SEC under the
1934 Act. Each of the firms of Wheeler Wasoff, P.C. and Hein & Associates LLP,
which have expressed their opinions with respect to consolidated financial
statements included in the Company’s annual report on Form 10-K for the fiscal
year ended November 30, 2004 (the “2004 10-K”), is and at all relevant times was
independent of the Company pursuant to the standards set forth in Rule 2-01 of
Regulation S-X promulgated by the SEC, and such firm was otherwise qualified to
render its audit opinion on the Company’s consolidated financial statements
included in the 2004 10-K under applicable law and the rules and regulation of
the SEC. There is no transaction, arrangement or other relationship between the
Company and an unconsolidated or other off-balance-sheet entity that is required
to be disclosed by the Company in its reports pursuant to the 1934 Act that has
not been so disclosed in the SEC Documents. None of the Company or any of its
Subsidiaries, or any of their respective officers, directors or affiliates or,
to the Company’s knowledge, any shareholder of the Company is in any way
affiliated with or has ever contributed or paid money to North American
Consultants or has, directly or indirectly, provided any

 

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information to, participated in the preparation of any article contained in, or
otherwise contributed or paid any money to, the Small Cap Stock Advisor.

g.               Absence of Certain Changes. Since November 30, 2003, there has
been no Material Adverse Effect. The Company has not taken any steps, and does
not currently expect to take any steps, to seek protection pursuant to any
bankruptcy law nor does the Company or any of its Subsidiaries have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact that would reasonably
lead a creditor to do so. The Company is not as of the date hereof, and after
giving effect to the transactions contemplated hereby, will not be Insolvent (as
defined below). For purposes of this Section 3(g), “Insolvent” means (i) the
present fair saleable value of the Company’s assets is less than the amount
required to pay the Company’s total indebtedness, contingent or otherwise, (ii)
the Company is unable to pay its debts and liabilities, subordinated, contingent
or otherwise, as such debts and liabilities become absolute and matured, (iii)
the Company intends to incur, prior to May 30, 2007, or believes that it will
incur, prior to May 30, 2007, debts that would be beyond its ability to pay as
such debts mature or (iv) the Company has unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted. Except as disclosed in Schedule 3(g), since
November 30, 2003, the Company has not declared or paid any dividends or sold
any assets outside of the ordinary course of business or had capital
expenditures, individually or in the aggregate, in excess of $100,000.

h.               Absence of Litigation. Except as set forth on Schedule 3(h),
(i) there is no action, suit, proceeding, inquiry or investigation before or by
any court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, the Common Stock or any of the
Subsidiaries or any of the Company’s or the Subsidiaries’ officers or directors
in their capacities as such, and (ii) to the knowledge of the Company, none of
the directors or officers of the Company has been involved in securities related
litigation during the past five years. None of the matters described in Schedule
3(h), regardless of their outcome, will have a Material Adverse Effect.

i.                Acknowledgment Regarding Buyer’s Purchase of Notes. The
Company acknowledges and agrees that each of the Buyers is acting solely in the
capacity of an arm’s length purchaser with respect to the Company in connection
with the Transaction Documents and the transactions contemplated hereby and
thereby. The Company further acknowledges that each Buyer is not acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated hereby
and thereby and any advice given by any of the Buyers or any of their respective
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Buyer’s purchase of the Securities. The Company further represents to each Buyer
that the Company’s decision to enter into the Transaction Documents has been
based solely on the independent evaluation by the Company and its
representatives.

 

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j.                No Undisclosed Events, Liabilities, Developments or
Circumstances. Except for the issuance of the Notes and Warrants contemplated by
this Agreement, no event, liability, development or circumstance has occurred or
exists, or is contemplated to occur, with respect to the Company or its
Subsidiaries or their respective business, properties, prospects, operations or
financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1 filed with
the SEC relating to an issuance and sale by the Company of its Common Stock and
that has not been publicly disclosed.

k.               No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged or will
engage in any form of general solicitation or general advertising (within the
meaning of Regulation D under the 1933 Act) in connection with the offer or sale
of the Securities.

l.                No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable shareholder approval provisions, nor will the Company or any of
its Subsidiaries take any action or steps that would require registration of the
offer or sale of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings for purposes of the 1933
Act or any applicable shareholder approval provisions.

m.              Dilutive Effect. The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Notes and the
Warrant Shares issuable upon exercise of the Warrants will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Notes in accordance with this Agreement
and the Notes and its obligation to issue Warrants or the Warrant Shares upon
exercise of the Warrants in accordance with this Agreement and the Warrants is,
in each case, absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other shareholders of the
Company.

n.               Employee Relations. Neither the Company nor any of its
Subsidiaries is involved in any labor union dispute nor, to the knowledge of the
Company or any of its Subsidiaries, is any such dispute threatened. None of the
Company’s or its Subsidiaries’ employees is a member of a union that relates to
such employee’s relationship with the Company, neither the Company nor any of
its Subsidiaries is a party to a collective bargaining agreement, and the
Company and its Subsidiaries believe that their relations with their employees
are good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has
notified the Company that such officer intends to leave the Company or otherwise
terminate such officer’s employment with the Company. No executive officer, to
the best knowledge of the Company and its Subsidiaries, is, or is now expected
to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the

 

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continued employment of each such executive officer does not subject the Company
or any of its Subsidiaries to any liability with respect to any of the foregoing
matters. The Company and its Subsidiaries are in compliance with all federal,
state, local and foreign laws and regulations relating to employment and
employment practices, terms and conditions of employment and wages and hours,
except where the failure to be in compliance would not result, either
individually or in the aggregate, in a Material Adverse Effect.

o.               Intellectual Property Rights. The Company and its Subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and other intellectual property rights necessary
to conduct their respective businesses as now conducted. None of the Company’s
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property
rights have expired or terminated, or are expected to expire or terminate within
two years from the date of this Agreement. The Company and its Subsidiaries do
not have any knowledge of any infringement by the Company or its Subsidiaries of
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, trade secrets
or other intellectual property rights of others, or of any development of
similar or identical trade secrets or technical information by others. There is
no claim, action or proceeding being made or brought against, or to the
Company’s knowledge, being threatened against, the Company or its Subsidiaries
regarding its trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, trade secrets, or infringement of other intellectual property rights.
The Company and its Subsidiaries do not have any knowledge of any facts or
circumstances that might give rise to any of the foregoing. The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.

p.               Environmental Laws. Except as set forth in Schedule 3(h), the
Company and its Subsidiaries (i) are in compliance with any and all
Environmental Laws (as defined below), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval. The term “Environmental
Laws” means all federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including ambient air, surface
water, groundwater, land surface or subsurface strata), including laws relating
to emissions, discharges, releases or threatened releases of chemicals,
pollutants, contaminants, or toxic or hazardous substances or wastes into the
environment, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous materials,
as well as all authorizations, codes, decrees, demands or demand letters,
injunctions, judgments, licenses, notices or notice letters, orders, permits,
plans or regulations issued, entered, promulgated or approved thereunder.

 

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q.               Title. Except as set forth in Schedule 3(cc), neither the
Company nor any of its Subsidiaries has any interest in real property or any
oil, gas or other mineral drilling, exploration or development rights. The
Company and its Subsidiaries have good and marketable title to all personal
property owned by them that is material to the business of the Company and its
Subsidiaries, in each case free and clear of all Liens, except such as are
described in Schedule 3(q).

r.                Insurance. The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been
refused any insurance coverage sought or applied for, and neither the Company
nor any such Subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect.

s.                Regulatory Permits. The Company and its Subsidiaries possess
all certificates, authorizations, approvals, licenses and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses (“Permits”), and neither the Company nor any
such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such Permit. Without limiting the foregoing,
the Company and its Subsidiaries possess all Permits necessary to produce,
extract, transport and sell the oil, gas and other minerals under the Real
Property Leases (as defined below) for the Leiter Field, Pipeline Ridge, UCross,
Piceance Basin and Crockett Prospect projects (each as described more fully in
the SEC Documents) as contemplated by Schedule 4(d), except for certain Permits
for future activities, ancillary to drilling that are not required to be
possessed, and would not customarily have been applied for, at the time this
representation is made (the “Future Permits”). The Company and its Subsidiaries
have no reason to believe they will not be able to obtain any of the Future
Permits as and when necessary to enable the Company to produce, extract,
transport and sell the oil, gas and other minerals under the Real Property
Leases for the Leiter Field, Pipeline Ridge, UCross, Piceance Basin and Crockett
Prospect projects as contemplated by Schedule 4(d).

t.                Internal Accounting Controls; Disclosure Controls and
Procedures. The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability, (iii)
access to assets or incurrence of liability is permitted only in accordance with
management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets,
liabilities at reasonable intervals and appropriate action is taken with respect
to any differences. The Company has timely filed and made available to the
Buyers all certifications and statements required by (x) Rule 13a-14 or Rule
15d-14 under the 1934 Act or (y) 18 U.S.C. Section 1350

 

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(Section 906 of Sarbanes-Oxley) with respect to any Company SEC Documents. The
Company maintains disclosure controls and procedures required by Rule 13a-15 or
Rule 15d-15 under the 1934 Act; such controls and procedures are effective to
ensure that the information required to be disclosed by the Company in the
reports that it files with or submits to the SEC is (I) recorded, processed,
summarized and reported accurately within the time periods specified in the
SEC’s rules and forms and (II) accumulated and communicated to the Company’s
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure.

u.               No Materially Adverse Contracts, Etc. Neither the Company nor
any of its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation that in the
judgment of the Company’s officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement that in the judgment of the Company’s
officers has or is expected to have a Material Adverse Effect.

v.               Tax Status. The Company and each of its Subsidiaries (i) has
made or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its Subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes), except as set forth on Schedule 3(v) (the
exceptions set forth on such Schedule 3(v) being referred to as the “Tax
Exceptions”), (ii) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and for which the Company has made appropriate reserves on its books, and (iii)
has set aside on its books provisions reasonably adequate for the payment of all
taxes for periods subsequent to the periods to which such returns, reports or
declarations (referred to in clause (i) above) apply. None of the Tax Exceptions
will have a Material Adverse Effect. Except as set forth in Schedule 3(v), there
are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.

w.              Transactions With Affiliates. Except as set forth in Schedule
3(w), and other than the grant of stock options disclosed in Schedule 3(c), no
Related Party (as defined below) of the Company or any of its Subsidiaries, or
any of their respective affiliates, is presently, or has been within the past
two years, a party to any transaction, contract, agreement, instrument,
commitments, understandings or other arrangement or relationship with the
Company or any of its Subsidiaries (other than for services as employees,
officers and directors), whether for the furnishing of services to or by,
providing for rental of real or personal property to or from, or otherwise
requiring payments or consideration to or from any such Related Party. Except as
set forth in Schedule 3(w), no Related Party of the Company or any of its
Subsidiaries, or any of their respective affiliates, has any direct or indirect
ownership interest in any person in which the Company or any of its Subsidiaries
has any direct or indirect ownership interest or with which the Company or any
of its Subsidiaries competes or has a business relationship.

 

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x.               Application of Takeover Protections. The Company and its Board
of Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination or other
similar anti-takeover provision under the Articles of Incorporation or the laws
of Colorado that is or could become applicable to the Buyers as a result of the
transactions contemplated by this Agreement, including the Company’s issuance of
the Securities and the Buyers’ ownership of the Securities.

y.               Rights Agreement. The Company has not adopted a shareholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.

z.                Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.

aa.             No Other Agreements. The Company has not, directly or
indirectly, made any agreements with any Buyers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents.

bb.             Outstanding Indebtedness; Liens. Payments of principal and other
payments due under the Notes will, upon issuance, rank senior to all other
Indebtedness (as defined in the Notes) and trade account payables of the Company
or any of its Subsidiaries. Except as set forth on Schedule 3(bb), (I) neither
the Company nor any of its Subsidiaries has any outstanding Indebtedness or
trade payables and (II) there are no Liens on any of the assets of the Company
and its Subsidiaries, or financing statements securing obligations of any
amounts, either individually or in the aggregate, filed in connection with, the
Company or any of its Subsidiaries or any of their respective assets. As of the
Closing Date the aggregate amount of the Indebtedness and trade account payables
of the Company or any of its Subsidiaries shall not exceed the aggregate amount
of the Indebtedness and trade account payables set forth on Schedule 3(bb) by
more than $100,000.

cc.             Real Property Leases. Schedule 3(cc) contains a complete and
correct list of all the real property; facilities; and oil, gas and other
mineral drilling, exploration and development rights, concessions, working
interests and participation interests (including all Hydrocarbon Property (as
defined in the Mortgages)) that (i) are leased or otherwise owned or possessed
by the Company or any of its Subsidiaries, (ii) in connection with which the
Company or any of its Subsidiaries has entered into an option agreement,
participation agreement or acquisition and drilling agreement or (iii) the
Company or any of its Subsidiaries has agreed (or has an option) to lease or
otherwise acquire or may be obligated to lease or otherwise acquire in
connection with the conduct of its business (collectively, the “Leased Real
Property”).

 

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Schedule 3(cc) also contains a complete and correct list of all leases and other
agreements with respect to which the Company or any of its Subsidiaries is a
party or otherwise bound or affected with respect to the Leased Real Property,
except easements, rights of way, access agreements, surface damage agreements,
surface use agreements or similar agreements that pertain to Leased Real
Property that is contained wholly within the boundaries of any owned or leased
Real Property otherwise described on Schedule 3(cc) (the “Real Property
Leases”). Schedule 3(cc) contains a summary of the material terms of those Real
Property Leases the termination of which could have a Material Adverse Effect or
a Property Material Adverse Effect. The lists of Real Property Leases included
in Schedule 3(cc) do not contain any material non-public information. Except as
set forth in Schedule 3(cc), the Company is the sole legal and equitable owner
of a leasehold interest in all of the Leased Real Property that is producing
oil, gas, minerals and/or other Hydrocarbons (“Producing Property”), and
possesses good and marketable, indefeasible title thereto, free and clear of all
Liens and other matters affecting title to such leasehold that could impair the
ability of the Company or any of its Subsidiaries to realize the benefits of the
rights provided to it under any of the Real Property Leases. The Company is the
legal and equitable owner of a leasehold interest in all of the Leased Real
Property that is not Producing Property and, except as could not reasonably be
expected, individually or in the aggregate, to have either a Material Adverse
Effect or a Property Material Adverse Effect, possesses good, marketable and
defensible title thereto, free and clear of all Liens and other matters
affecting title to such leasehold that could impair the ability of the Company
or any of its Subsidiaries to realize the benefits of the rights provided to any
of them under the Real Property Leases. All of the Real Property Leases with
respect to Producing Property are valid and in full force and effect and are
enforceable against all parties thereto; neither the Company nor any of its
Subsidiaries nor, to the Company’s knowledge, any other party thereto is in
default under any of such Real Property Leases; and no event has occurred which
with the giving of notice or the passage of time or both could constitute a
default under, or otherwise give any party the right to terminate, any of such
Real Property Leases, or could adversely affect the Company’s or any of its
Subsidiaries’ interest in and title to the Leased Real Property subject to any
of such Real Property Leases. Except as could not reasonably be expected,
individually or in the aggregate, to have either a Material Adverse Effect or a
Property Material Adverse Effect, all of the Real Property Leases with respect
to all of the Leased Real Property that is not Producing Property are valid and
in full force and effect and are enforceable against all parties thereto,
neither the Company nor any of its Subsidiaries nor, to the Company’s knowledge,
any other party thereto is in default under any of such Real Property Leases and
no event has occurred which with the giving of notice or the passage of time or
both could constitute a default by the Company or its Subsidiaries under, or
otherwise give any party the right to terminate, any of such Real Property
Leases, or could adversely affect the Company’s or any of its Subsidiaries’
interest in and title to the Leased Real Property subject to any of such Real
Property Leases. No Real Property Lease is subject to termination, modification
or acceleration as a result of the transactions contemplated hereby. All of the
Real Property Leases will remain in full force and effect upon, and permit, the
consummation of the transactions contemplated hereby (including the granting of
leasehold mortgages). Except as could not reasonably be expected, individually
or in the aggregate, to have either a Material Adverse Effect or a Property
Material Adverse Effect, the Leased Real Property are properly zoned for their
present uses, are permitted conforming structures and comply with all applicable
building codes, ordinances and other similar legal requirements.

 

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There are no pending or, to the knowledge of the Company, threatened
condemnation, eminent domain or similar proceedings, or litigation or other
proceedings affecting the Leased Real Property, or any portion or portions
thereof. To the knowledge of the Company, there are no pending or threatened
requests, applications or proceedings to alter or restrict any zoning or other
use restrictions applicable to the Leased Real Property that would interfere
with the conduct of the Company’s or any of its Subsidiaries’ business. There
are no restrictions applicable to the Leased Real Property that would interfere
with the Company’s or any of its Subsidiary’s making an assignment or granting
of a leasehold or other mortgage to the Buyers as contemplated by the Security
Documents, including any requirement under any Real Property Leases requiring
the consent of, or notice to, any lessor of any such Leased Real Property.
“Property Material Adverse Effect” means any material adverse effect on the
business, properties, assets, operations, results of operations, financial
condition, credit worthiness or prospects of the Company and its Subsidiaries,
taken as a whole, with respect to any of the geographical areas in which the
Company has Leased Real Property that is described in the 2004 10-K, or any such
geographical area that will be required to be described in the next annual
report on Form 10-K to be filed by the Company, or otherwise is material to the
Company.

dd.             Apollo Contracts. The Company has provided the Buyers with true,
correct and complete copies of (i) that certain Lease Acquisition and
Development Agreement dated February 22, 2005, by and among Apollo Energy
Corporation, ATEC Energy Ventures, LLC, et al. (collectively, “Apollo”) and
Dolphin Energy Corporation, a wholly-owned Subsidiary of the Company
(“Dolphin”), (ii) that certain First Amendment to Lease Acquisition and
Development Agreement, dated March 22, 2005, by and between Apollo and Dolphin,
(iii) that certain Lease Acquisition and Development Agreement, dated February
23, 2005, by and between Marc A. Bruner (“Bruner”) and Apollo, (iv) that certain
First Amendment to Lease Acquisition and Development Agreement, dated March 22,
2005, by and between Bruner and Apollo, (v) that certain Amended Participation
Agreement, dated March 16, 2005, by and between Dolphin and Bruner, (vi) that
certain Second Amendment to Participation Agreement, dated May 24, 2005, by and
between Dolphin and Exxel Energy Corporation, and (vii) that certain Assignment
of Contractual Rights, dated March 16, 2005, from Bruner to Exxel Energy
Corporation (collectively, the “Apollo Contracts”). None of the Apollo Contracts
to which the Company and/or any of its Subsidiaries is a party has been altered,
changed, amended, supplemented or otherwise modified in any respect, and, to the
Company’s knowledge, none of the other Apollo Contracts has been altered,
changed, amended, supplemented or otherwise modified in any respect. Neither the
Company nor any of its Subsidiaries has waived any rights or obligations under
any of the Apollo Contracts or consented to any non-performance or
non-compliance with the terms thereof by any other party, and, to the Company’s
knowledge, no other party to any of the Apollo Contracts has waived any rights
or obligations under any of the Apollo Contracts or consented to any
non-performance or non-compliance with the terms thereof by any other party.

ee.             Conveyances of Overriding Royalty Interests. The Conveyances of
Overriding Royalty Interests, upon execution and delivery by the parties
thereto, (i) will legally and effectively convey perpetual overriding royalty
interests in the Hydrocarbon production in all of the Leased Real Property,
other than the Leased Real Property located on approximately

 

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2,560 acres in Leiter Field (as described more fully in the SEC Documents) on
which the Company or its Subsidiaries have less than a 75% net revenue interest
as of the date of this Agreement, in the percentages and as otherwise described
in such conveyances, in each of the respective jurisdictions in which such
Leased Real Property is located, and (ii) provides legal descriptions of the
Subject Lands (as defined in each of the Conveyances of Overriding Royalty
Interests) sufficient to satisfy all requirements relating to such descriptions
in each of such jurisdictions.

4.

COVENANTS.

a.               Best Efforts. Each party shall use its best efforts to timely
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.

b.               Form D and Blue Sky. The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing. The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States, and shall provide evidence of any such action so taken to the Buyers on
or prior to the Closing Date. The Company shall make all filings and reports
relating to the offer and sale of the Securities required under applicable
securities or “Blue Sky” laws of the states of the United States following the
Closing Date.

c.               Reporting Status. Until the later of (i) the date that is one
year after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and any
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto) and (ii) the date on which no Notes or Warrants
remain outstanding (the “Reporting Period”), the Company shall file all reports
required to be filed with the SEC pursuant to the 1934 Act, and the Company
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
otherwise permit such termination.

d.                Use of Proceeds. The Company will use the proceeds from the
sale of the Notes for drilling and production of the Company’s and its
Subsidiaries’ hydrocarbon properties in which the Buyers received an overriding
royalty interest pursuant to the Conveyances of Overriding Royalty Interests, as
more specifically described in Schedule 4(d). The Company shall not use the
proceeds from the sale of the Notes in violation of any applicable law.

e.               Financial Information. The Company agrees to send the following
to each Investor (as that term is defined in the Registration Rights Agreement)
during the Reporting Period: (i) within one (1) day after the filing thereof
with the SEC, a copy of its Annual Reports on Form 10-K, its Quarterly Reports
on Form 10-Q, any Current Reports on Form 8-K and any registration statements
(other than on Form S-8) or amendments filed pursuant to the 1933 Act, unless
the foregoing are filed with the SEC through EDGAR and are immediately available
to the public through EDGAR; (ii) on the same day as the release thereof,
facsimile copies of all

 

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press releases issued by the Company or any of its Subsidiaries, except to the
extent such release is available through Bloomberg Financial Markets (or any
successor thereto) contemporaneously with such issuance; and (iii) copies of any
notices and other information made available or given to the shareholders of the
Company generally, contemporaneously with the making available or giving thereof
to the shareholders.

f.                Qualifying Issuance. If the Company consummates a Qualifying
Issuance (as defined in the Notes), the Company will within three (3) Business
Days thereafter, issue to each of the Buyers a warrant, substantially in the
form attached as Exhibit B (any such warrants, the “Qualifying Issuance
Warrants”), to purchase at a price per share of $1.88 (subject to adjustment for
stock splits, stock dividends, stock combinations and other similar transactions
after the date hereof) (the “Qualifying Issuance Warrant Strike Price”), for a
number of shares of Common Stock such that the aggregate Black-Scholes Value of
such Qualifying Issuance Warrant equals the product of (a) the arithmetic
average of the Weighted Average Price (as defined in the Notes) of the Common
Stock on each of the five consecutive Trading Days immediately preceding such
Qualifying Issuance, multiplied by (b) the difference of (I) the number of
shares of Common Stock that would have been issuable, immediately after the
consummation of the Qualifying Issuance, upon conversion of the Notes and the
2004 Notes then outstanding and held by such Buyer and upon exercise of any
Repurchase Warrants (as defined in the Notes) then outstanding and held by such
Buyer (in each case without regard to any limitations on conversion or exercise
thereof) had the Anti-Dilution Provisions (as defined below) applied to such
Qualifying Issuance, and had the corresponding adjustments been made as if such
Qualifying Issuance had not been an Exempted Issuance (as defined in each of the
Notes, the 2004 Notes and the Repurchase Warrants) minus (II) the aggregate
number of shares of Common Stock issuable upon conversion of the Notes and the
2004 Notes then outstanding and held by such Buyer and upon exercise of any
Repurchase Warrants then outstanding and held by such Buyer (in each case
without regard to any limitations on conversion or exercise thereof) immediately
prior to the consummation of such Qualifying Issuance. “Anti-Dilution
Provisions” means the provisions of the Notes and the 2004 Notes providing for
the adjustment of the conversion prices thereof, and the provisions of the
Repurchase Warrants providing for adjustments to the exercise prices thereof,
and corresponding adjustments of the number of shares that may be acquired upon
exercise thereof, in each case, in the event that pursuant to the terms thereof,
shares of Common Stock are issued or sold, or deemed to have been issued or sold
at prices less than such conversion or exercise prices. “Black-Scholes Value” of
any Qualifying Issuance Warrant shall mean the sum of the amounts resulting from
applying the Black-Scholes pricing model to such Qualifying Issuance Warrant,
which calculation is made with the following inputs: (i) the “option striking
price” being equal to the Qualifying Issuance Warrant Strike Price on the date
of the issuance of such Qualifying Issuance Warrant (the “Valuation Date”), (ii)
the "interest rate" being equal to the Federal Reserve US H.15 T Note Treasury
Constant Maturity 1 Year rate on the Valuation Date (as reported by Bloomberg
through its "ALLX H15T" function (accessed by typing "ALLX H15T" [GO] on a
Bloomberg terminal, and inserting the date of the Valuation Date and then
looking at the row entitled "Treas Const Mat 1 Year" under the column entitled
"Previous Value")), or if such rate is not available then such other similar
rate as mutually agreed to by the Company and the holders of Notes, 2004 Notes,
Warrants and 2004 Warrants representing at least two-thirds (2/3) of the
aggregate number of

 

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shares of Common Stock obtainable upon conversion of the Notes (at the Fixed
Conversion Price set forth therein) and the 2004 Notes (at the Fixed Conversion
Price set forth therein) then outstanding and exercise of the Warrants and the
2004 Warrants then outstanding, (iii) the “time until option expiration” being
three (3) years, (iv) the “current stock price” being equal to the Weighted
Average Price of the Common Stock on the Valuation Date, (v) the “volatility”
being 80% of the 100-day historical volatility of the Common Stock as of the
Valuation Date (as reported by the Bloomberg “HVT” screen), and (vi) the
“dividend rate” being equal to zero.

g.               Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 200% of the number of shares of Common Stock needed to
provide for the issuance of the Conversion Shares upon conversion of all
outstanding Notes (without regard to any limitations on conversions) and 200% of
the number of shares of Common Stock needed to provide for the issuance of the
Warrant Shares upon exercise of all outstanding Warrants (without regard to any
limitations on exercises).

h.               Right to Participate in Future Financing. Subject to the
exceptions described below, each of the Company and its Subsidiaries agrees that
during the period beginning on the date hereof and ending on the earlier of (i)
the fifth (5th) anniversary of the Closing and (ii) three (3) years after the
first date following the Closing on which no Notes or 2004 Notes remain
outstanding, neither the Company nor its Subsidiaries will (x) contract with any
party for any debt or equity financing (including any debt financing with an
equity component), (y) issue any debt or equity securities of the Company or any
Subsidiary or securities convertible, exchangeable or exercisable into or for
debt or equity securities of the Company or any Subsidiary (including debt
securities with an equity component) or (z) engage in “farm-out” financing
transactions or similar transactions which do not have operating obligations by
the financing party as a material component, in any form (a “Future Offering”)
unless it shall have first delivered to each Buyer or its designee appointed by
such Buyer written notice (the “Future Offering Notice”) describing generally
the proposed Future Offering and providing each Buyer an option to purchase up
to its Aggregate Percentage (as defined below) of 100% of the total amount of
securities to be issued in such Future Offering (the limitations referred to in
this and the preceding sentence are collectively referred to as the “Capital
Raising Limitations”). No Future Offering Notice shall contain any material
nonpublic information regarding the Company or any of its Subsidiaries. For
purposes of this Section 4(h), “Aggregate Percentage” shall mean the percentage
obtained by dividing (i) the aggregate principal amount of Notes initially
issued to such Buyer on the Closing Date by (ii) the aggregate principal amount
of Notes initially issued to all the Buyers on the Closing Date. Upon the
written request of any Buyer, the Company shall provide such Buyer with such
additional information regarding the proposed Future Offering, including the
buyer, terms and conditions and use of proceeds thereof, as such Buyer shall so
request. A Buyer can exercise its option to participate in a Future Offering by
delivering written notice to the Company within five (5) Business Days after
receipt of a Future Offering Notice, which notice shall state the quantity of
securities being offered in the Future Offering that such Buyer will purchase,
up to its Aggregate Percentage, and that quantity of securities it is willing to
purchase in excess of its Aggregate Percentage. In the event that one or more
Buyers fail to elect to purchase up to each such Buyer’s Aggregate Percentage,

 

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then each Buyer which has indicated that it is willing to purchase a number of
securities in such Future Offering in excess of its Aggregate Percentage shall
be entitled to purchase its pro rata portion (determined in the same manner as
described in the preceding sentence) of the securities in the Future Offering
which one or more of the Buyers have not elected to purchase. In the event the
Buyers fail to elect to participate fully in the Future Offering within the
periods described in this Section 4(h), the Company shall have 60 days
thereafter to sell the securities in the Future Offering that the Buyers did not
elect to purchase, upon terms and conditions no more favorable to the purchasers
thereof than specified in the Future Offering Notice. In the event the Company
has not sold such securities of the Future Offering within such 60-day period,
the Company shall not thereafter issue or sell such securities without first
offering such securities to the Buyers in the manner provided in this Section
4(h). The Capital Raising Limitations shall not apply to (i) any transaction
involving the Company’s issuances of securities (A) as consideration in a merger
or consolidation (the primary purpose or material result of which is not to
raise or obtain equity capital or cash), (B) in connection with any strategic
partnership or joint venture (the primary purpose or material result of which is
not to raise or obtain equity capital or cash), or (C) as consideration for the
acquisition of a business, product, license or other assets by the Company (the
primary purpose or material result of which is not to raise or obtain equity
capital or cash), (ii) the issuance solely of Common Stock in a fixed price,
firm commitment, public offering underwritten by a nationally recognized
investment bank which has net proceeds to the Company of at least $75,000,000
(excluding equity lines, “registered direct” offerings and “at-the-market”
offerings or similar transactions), (iii) the issuance of securities upon
exercise or conversion of the Company’s options, warrants or other convertible
securities outstanding as of the date hereof and listed on Schedule 3(c) hereto,
provided such securities are not amended or modified on or after the date hereof
and provided that the conversion price, exchange price, exercise price or other
purchase price is not reduced, adjusted or otherwise modified and the number of
shares issued or issuable is not increased (whether by operation of law or in
accordance with the relevant governing documents or otherwise) on or after the
date hereof, and (iv) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option plan,
restricted stock plan or stock purchase plan approved by the Company’s Board of
Directors and shareholders and for the benefit of the Company’s employees or
directors. No Buyer shall be required to participate or exercise its right of
participation with respect to a particular Future Offering in order to exercise
its right of participation with respect to later Future Offerings.

i.                Listing. The Company shall take all actions necessary to
remain eligible for quotation of its securities on The NASDAQ Stock Market’s OTC
Bulletin Board and to cause all of the Registrable Securities (as defined in the
Registration Rights Agreement) covered by a Registration Statement to be quoted
thereon, unless listed on The New York Stock Exchange (“NYSE”), The American
Stock Exchange (“AMEX”), the NASDAQ National Market (“NASDAQ”) or the NASDAQ
Small CapMarket (“NASDAQ SmallCap”) (each, a “National Market”). The Company
shall use its reasonable best efforts to (i) secure the listing of all of the
Registrable Securities on a National Market as promptly as practicable; and (ii)
following such listing maintain such listing of all Registrable Securities from
time to time issuable under the terms of the Transaction Documents. Following
such listing, neither the Company nor any of its Subsidiaries shall take any
action that would be reasonably expected to result in the delisting or

 

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suspension of the Common Stock from the National Market. The Company shall pay
all fees and expenses in connection with satisfying its obligations under this
Section 4(i).

j.                Expenses. Subject to Section 9(l) below, at the Closing, the
Company shall pay each of the Buyers an expense and commitment allowance in an
amount set forth opposite such Buyer’s name on the Schedule of Buyers to cover
due diligence, negotiating and preparing the Transaction Documents and
consummating the transactions contemplated thereby. The amount payable to each
of the Buyers pursuant to this Section 4(j), shall be withheld by such Buyer
from its Purchase Price to be paid at the Closing.

k.               Disclosure of Transactions and Other Material Information.
Prior to 8:00 a.m. (New York Time) on the second (2nd) Business Day following
the Closing Date, the Company shall file a Form 8-K with the SEC describing the
terms of the transactions contemplated by the Transaction Documents and
including as exhibits to such Form 8-K this Agreement (including the schedules
hereto, other than the lists of Leased Real Property and Real Property Leases
included in Schedule 3(cc)), the form of Note, the form of Registration Rights
Agreement, the form of Warrants, the form of First Amendment, the form of
Mortgage Amendment, the form of 2004 Amendment, the forms of Conveyances of
Overriding Royalty Interests, the form of March 2005 Note Subordination
Agreement and the form of March 2005 Amendment, in the form required by the 1934
Act (the “Announcing Form 8-K”). The Company shall not make any public
announcement regarding the transactions contemplated hereby on or after the date
hereof and prior to the Closing. From and after the Company’s issuance of the
Closing Press Release (as defined below), no Buyer shall be in possession of any
material nonpublic information received from the Company, any of its
Subsidiaries or any of their respective officers, directors, employees or
agents. The Company shall not, and shall cause each of its Subsidiaries and its
and each of their respective officers, directors, employees and agents not to,
provide any Buyer with any material nonpublic information regarding the Company
or any of its Subsidiaries from and after the filing of the Announcing Form 8-K
with the SEC without the express prior written consent of such Buyer. In the
event of a breach of the foregoing covenant by the Company, any of its
Subsidiaries, or any of its or their respective officers, directors, employees
and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such
material nonpublic information without the prior approval by the Company, its
Subsidiaries, or any of its or their respective officers, directors, employees
or agents. No Buyer shall have any liability to the Company, its Subsidiaries,
or any of its or their respective officers, directors, employees, shareholders
or agents for any such disclosure. Subject to the foregoing, neither the Company
nor any Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby or disclosing the name of any
Buyer; provided, however, that (i) prior to 9:00 a.m. (New York Time) on the
first (1st) Business Day following the Closing Date, the Company will issue a
press release that is widely disseminated announcing the Closing (the “Closing
Press Release”) and (ii) the Company shall be entitled, without the prior
approval of any Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law and regulations
(provided that each Buyer shall be consulted by

 

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the Company in connection with any such press release or other public disclosure
prior to its release and shall be provided with a copy thereof).

l.                Transactions With Affiliates. So long as any of the Notes or
Warrants is outstanding, the Company shall not, and shall cause each of its
Subsidiaries not to, enter into, amend, modify or supplement any transaction,
contract, agreement, instrument, commitment, understanding or other arrangement
with any of its or any Subsidiary’s officers, directors, persons who were
officers or directors at any time during the previous two years, shareholders,
or affiliates of the Company or any of its Subsidiaries, or with any individual
related by blood, marriage or adoption to any such individual or with any entity
in which any such entity or individual owns a beneficial interest (each a
“Related Party”), except for (a) customary employment arrangements and benefit
programs on reasonable terms, or (b) any transaction, contract, agreement,
instrument, commitment, understanding or other arrangement on an arms-length
basis on terms no less favorable than terms that would have been obtainable from
a person other than such Related Party, and that is approved by a majority of
the disinterested directors of the Company. For purposes hereof, any director
who is also an officer of the Company or any Subsidiary shall not be a
disinterested director with respect to any such transaction, contract,
agreement, instrument, commitment, understanding or other arrangement.
“Affiliate” for purposes hereof means, with respect to any person or entity,
another person or entity that, directly or indirectly, (i) has an equity
interest in that person or entity, (ii) has a common ownership with that person
or entity, (iii) controls that person or entity, (iv) is controlled by that
person or entity or (v) shares common control with that person or entity.
“Control” or “controls” for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity.

m.              Shareholder Approval. In the event that the Company solicits
approval by the Company’s shareholders of the Company’s issuance of all of the
Conversion Shares and Warrant Shares, as set forth in this Agreement, the Notes
and the Warrants, in accordance with the rules and regulations of the Principal
Market (as defined in each of the Notes) (such approval being referred to herein
as “Shareholder Approval”), each Buyer and a counsel of its choice shall be
entitled to review, prior to filing with the SEC, the proxy statement to be
provided by the Company to its shareholders in connection with soliciting
Shareholder Approval, which proxy statement shall not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.

n.               Corporate Existence; Real Property Leases. From the date of
this Agreement and for so long as any of the Notes or Warrants is outstanding,
the Company shall maintain its corporate existence and shall not sell all or
substantially all of the Company’s assets (including, for the avoidance of any
doubt, the assets of any Subsidiary), except in the event of a merger or
consolidation or sale or transfer of all or substantially all of the Company’s
assets (including, for the avoidance of any doubt, the assets of any
Subsidiary), where the surviving or successor entity in such transaction (i)
assumes the Company’s obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded
corporation whose common stock is quoted on or listed for trading on NASDAQ,
NASDAQ

 

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SmallCap, AMEX or NYSE. From the date of this Agreement and for so long as any
Notes or Warrants are outstanding, the Company shall, and shall cause each of
its Subsidiaries to, refrain from violating, breaching or defaulting under in
any material respect, or taking or failing to take any action that (with or
without notice or lapse of time or both) would constitute a material violation
or breach of, or default under, any term or provision of any Real Property Lease
to which the Company or any of its Subsidiaries is a party.

o.               Pledge of Securities. The Company acknowledges and agrees that
the Securities may be pledged by an Investor in connection with a bona fide
margin agreement or other loan secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Investor effecting any such pledge of Securities
shall be required to provide the Company with any notice thereof or otherwise
make any delivery to the Company pursuant to this Agreement or any other
Transaction Document, including Section 2(f) of this Agreement; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(f) in order to effect a sale, transfer or assignment of Securities to
such pledgee. The Company hereby agrees to execute and deliver such
documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by an Investor.

p.               Priority of Notes. From the date of this Agreement and for so
long as this Note is outstanding, the Company shall not, and shall not permit
any of its Subsidiaries to breach or violate any of the provisions of Section 11
of any of the Notes.

q.               Restriction on Loans and Investments. From the date of this
Agreement and for so long as any of the Notes is outstanding, the Company shall
not, and shall not permit any of its Subsidiaries to, (i) except for Permitted
Investments (as defined herein) in which the Buyers have a valid, perfected
first priority security interest, make any loans to, or investments in, any
other person or entity, including through lending money, deferring the purchase
price of property or services (other than trade payables on terms of ninety (90)
days or less), purchasing any note, bond, debenture or similar instrument,
entering into any letter of credit, guaranteeing (or taking any action that has
the effect of guaranteeing) any obligations of any other person or entity, or
acquiring any equity securities of, or other ownership interest in, any other
entity, or (ii) invest in, participate in, lease, purchase, obtain or otherwise
acquire any real property; facilities; or oil, gas or other mineral drilling,
exploration or development rights, concessions, working interests or
participation interests in which the Buyers are not provided with a valid,
perfected first priority security interest. “Permitted Investments” means any
investment in (A) direct obligations of the United States, or obligations
guaranteed by the United States, in each case which mature and become payable
within 90 days of the investment by the Company or any Subsidiary, (B)
commercial paper rated at least A-1 by Standard & Poor’s Ratings Service and P-1
by Moody’s Investors Services, Inc., (C) time deposits with, including
certificates of deposit issued by, any office located in the United States of
any bank or trust company which is organized under the laws of the United States
or any State thereof and has capital, surplus and undivided profits aggregating
at least $500,000,000 and which issues (or the parent of which issues)
certificates of deposit or commercial paper with a rating described in clause
(B) above, in each case which mature and become payable within 90 days of the
investment by the Company

 

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or any Subsidiary, (D) repurchase agreements with respect to securities
described in clause (A) above entered into with an office of a bank or trust
company meeting the criteria specified in clause (C) above, provided in each
case that such investment matures and becomes payable within 90 days of the
investment by the Company or any Subsidiary, or (E) any money market or mutual
fund which invests only in the foregoing types of investments and the liquidity
of which is satisfactory to the Secured Party (as defined in the Security
Agreement).

r.                Restriction on Purchases or Payments. From the date of this
Agreement and for so long as any of the Notes are outstanding, the Company shall
not, and shall not permit any of its Subsidiaries to: (i) declare, set aside or
pay any dividends on or make any other distributions (whether in cash, stock,
equity securities or property) in respect of any capital stock or split, combine
or reclassify any capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for any capital stock or
(ii) purchase, redeem or otherwise acquire, directly or indirectly, any shares
of the Company’s capital stock or the capital stock of any of its Subsidiaries,
except repurchases of unvested shares at cost in connection with the termination
of the employment relationship with any employee pursuant to stock option or
purchase agreements in effect on the date hereof and set forth on Schedule 3(c).

s.                Director and Officer Liability Insurance. From the date of
this Agreement and for so long as any of the Notes is outstanding, the Company
shall maintain directors’ and officers’ liability insurance providing for
aggregate coverage of at least $5,000,000.

t.                Apollo Contracts. Without the prior written consent of the
Buyers, the Company will not, and will not permit any of the other parties to
any of the Apollo Contracts, to alter, change, amend, supplement or otherwise
modify in any respect any of the terms or conditions of the Apollo Contracts.
The Company will not waive (through course of conduct, inaction or otherwise)
any of the Company's rights under the Apollo Contracts and will not waive
(through course of conduct, inaction or otherwise) any of the obligations of any
of the other parties to any of the Apollo Contracts and the Company will not
consent (through course of conduct, inaction or otherwise) to any
non-performance or non-compliance with any of the terms or conditions of any the
Apollo Contracts by any of the other parties to any of the Apollo Contracts.
Promptly following the Closing, the Company will deliver written notice of the
requirements set forth in this Section 4(t) to each of the other parties to each
of the Apollo Contracts.

5.

TRANSFER AGENT INSTRUCTIONS.

The Company shall issue irrevocable instructions to its transfer agent in the
form attached hereto as Exhibit N (the “Irrevocable Transfer Agent
Instructions”), and any subsequent transfer agent, to issue certificates or
credit shares to the applicable balance accounts at DTC, registered in the name
of each Buyer or its respective nominee(s), for the Conversion Shares and the
Warrant Shares in such amounts as specified from time to time by each Buyer to
the Company upon conversion of the Notes or exercise of the Warrants. Prior to
registration of the Conversion Shares and the Warrant Shares under the 1933 Act,
all such certificates shall bear the restrictive legend specified in Section
2(g). The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5 and stop transfer

 

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instructions to give effect to Section 2(f) (in the case of the Conversion
Shares and the Warrant Shares, prior to registration of the Conversion Shares
and the Warrant Shares under the 1933 Act) will be given by the Company to its
transfer agent and that the Securities shall otherwise be freely transferable on
the books and records of the Company as and to the extent provided in this
Agreement and the Registration Rights Agreement. If a Buyer provides the Company
with an opinion of counsel, in a generally acceptable form, to the effect that a
public sale, assignment or transfer of the Securities may be made without
registration under the 1933 Act or the Buyer provides the Company with
reasonable assurances that the Securities can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer, and, in the case of the Conversion Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one or more certificates or credit
shares to the applicable balance accounts at DTC in such name and in such
denominations as specified by such Buyer and without any restrictive legend. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyers by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Buyers shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.

6.

CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

The obligation of the Company to issue and sell the Notes to each Buyer at the
Closing is subject to the satisfaction, at or before the Closing Date, of each
of the following conditions, provided that these conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Buyer with prior written notice thereof:

(i)              Such Buyer shall have executed each of the Transaction
Documents to which it is a party and delivered the same to the Company.

(ii)            Such Buyer shall have delivered to the Company the Purchase
Price (less the amount withheld pursuant to Section 4(j)) for the Notes being
purchased by such Buyer at the Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided by the Company.

(iii)           The representations and warranties of such Buyer shall be true
and correct as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date, which shall be true and correct as of such date), and such Buyer
shall have performed, satisfied and complied with the covenants, agreements and
conditions required by the Transaction Documents to be performed, satisfied or
complied with by such Buyer at or prior to the Closing Date.

7.

CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.

 

 

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The obligation of each Buyer hereunder to purchase the Notes from the Company at
the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for each
Buyer’s sole benefit and may be waived only by such Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:

(i)              Each of the Company and its Subsidiaries shall have executed
each of the Transaction Documents applicable to it and delivered the same to
such Buyer.

(ii)            The representations and warranties of the Company shall be true
and correct as of the date when made and as of the Closing Date as though made
at that time (except for representations and warranties that speak as of a
specific date, which shall be true and correct as of such date) and the Company
shall have performed, satisfied and complied with the covenants, agreements and
conditions required by the Transaction Documents to be performed, satisfied or
complied with by the Company at or prior to the Closing Date. Such Buyer shall
have received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Closing Date, to the foregoing effect and as to such
other matters as may be reasonably requested by such Buyer, including an update
as of the Closing Date of the representations contained in Sections 3(c) and
3(bb) above.

(iii)           Such Buyer shall have received (A) the opinion of Dill Dill Carr
Stonbraker & Hutchings, P.C., dated as of the Closing Date, which opinion will
address, among other things, laws of the State of Colorado and New York
applicable to the transactions contemplated hereby, in form, scope and substance
reasonably satisfactory to such Buyer and in substantially the form of Exhibit O
attached hereto, and (B) the opinion of Welborn Sullivan Meck & Tooley, P.C.,
dated as of the Closing Date, which opinion will address, among other things,
certain laws of the States of Colorado, Wyoming and Montana applicable to the
security interests provided pursuant to the Security Agreement, in form, scope
and substance reasonably satisfactory to such Buyer and in substantially the
form of Exhibit P attached hereto.

(iv)           The Company shall have executed and delivered to such Buyer the
Note Certificates (in such denominations as such Buyer shall request) for the
Notes being purchased by such Buyer at the Closing.

(v)             The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b) above and in a form reasonably
acceptable to such Buyer (the “Resolutions”).

(vi)           As of the Closing Date, the Company shall have reserved out of
its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Notes, at least 18,000,000 shares of Common Stock (such
number to be adjusted for any stock splits, stock dividends, stock combinations
or other similar transactions involving the Common Stock that are effective at
any time after the date hereof).

 

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(vii)          The Irrevocable Transfer Agent Instructions shall have been
delivered to and acknowledged in writing by the Company’s transfer agent, and
the Company shall have delivered a copy thereof to such Buyer.

(viii)        The Company shall have delivered to such Buyer a certificate
evidencing the incorporation and good standing of the Company and each
Subsidiary in such entity’s state of incorporation or organization issued by the
Secretary of State of such state of incorporation or organization as of a date
within ten (10) days of the Closing Date.

(ix)           The Company, and with the parties set forth therein, shall have
executed and delivered the March 2005 Amendment and related documents.

(x)             The Company shall have delivered to such Buyer a secretary’s
certificate, dated as of the Closing Date, certifying as to (A) the Resolutions,
(B) the Articles of Incorporation, certified as of a date within ten (10) days
of the Closing Date, by the Secretary of State of the State of Colorado, (C) the
Bylaws, each as in effect at the Closing, (D) the execution and delivery by the
parties thereto of the March 2005 Amendment and related documents.

(xi)           The Company shall have made all filings under all applicable
federal and state securities laws necessary to consummate the issuance of the
Securities pursuant to this Agreement in compliance with such laws.

(xii)          The Company shall have delivered to such Buyer a letter from the
Company’s transfer agent certifying the number of shares of Common Stock
outstanding as of a date within five (5) days of the Closing Date.

(xiii)        The Company and its Subsidiaries shall have delivered and pledged
to such Buyer any and all Instruments, Negotiable Documents, Chattel Paper (each
of the foregoing terms, as defined in the Security Agreement) and certificated
securities (accompanied by stock powers executed in blank) duly endorsed and/or
accompanied by such instruments of assignment and transfer executed by the
Company and its Subsidiaries in such form and substance as such Buyer may
request.

(xiv)         The Company and its Subsidiaries shall have delivered to such
Buyer the ANB Amendment, executed by American National Bank.

(xv)          The Company shall have delivered to such Buyer the March 2005 Note
Subordination Agreement executed by the holders of the March 2005 Notes.

(xvi)         The Company and its Subsidiaries shall have delivered to such
Buyer the March 2005 Amendment, executed by the parties, other than the Company,
to the March Purchase Agreement.

(xvii)       The Company and its Subsidiaries shall have given, executed,
delivered, filed and/or recorded any financing statement, notice, instrument,
document, agreement or other papers that may be necessary or desirable (in the
reasonable judgment of such

 

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Buyer) to create, preserve, perfect or validate the security interest granted to
such Buyer pursuant to the Security Agreement, and to enable such Buyer to
exercise and enforce its rights with respect to such security interest.

(xviii)      The Company and its Subsidiaries shall have delivered to such Buyer
such other documents relating to the transactions contemplated by this Agreement
as such Buyer or its counsel may reasonably request.

8.               INDEMNIFICATION. In consideration of each Buyer’s execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless each
Buyer and each other holder of the Securities and all of their shareholders,
partners, officers, directors, employees and direct or indirect investors and
any of the foregoing persons’ agents or other representatives (including those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against any and all actions, causes
of action, suits, claims, losses, costs, penalties, fees, liabilities and
damages, and expenses in connection therewith (irrespective of whether any such
Indemnitees is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the
“Indemnified Liabilities”), incurred by any Indemnitees as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (c) any cause of action, suit or claim brought
or made against such Indemnitees and arising out of or resulting from the
execution, delivery, performance or enforcement of the Transaction Documents in
accordance with the terms thereof or any other certificate, instrument or
document contemplated hereby or thereby in accordance with the terms thereof
(other than a cause of action, suit or claim brought or made against an
Indemnitee by such Indemnitee’s owners, investors or affiliates), (d) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities or (e) the
status of such Buyer or holder of the Securities as an investor in the Company.
To the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities that is permissible
under applicable law. Except as otherwise set forth herein, the mechanics and
procedures with respect to the rights and obligations under this Section 8 shall
be the same as those set forth in Sections 6 of the Registration Rights
Agreement, including those procedures with respect to the settlement of claims
and the Company’s rights to assume the defense of claims.

9.

GOVERNING LAW; MISCELLANEOUS.

a.               Governing Law; Jurisdiction; Jury Trial. All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by the internal laws of the State of New York,
without giving effect to any choice of law or conflict of

 

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law provision or rule (whether of the State of New York or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of New York. Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, borough of Manhattan, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
The Parties acknowledge that each of the Buyers has executed each of the
Transaction Documents to be executed by it in the State of New York and will
have made the payment of the Purchase Price from its bank account located in the
State of New York. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE,
AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY
TRANSACTION CONTEMPLATED HEREBY.

b.               Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to each other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.

c.               Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.

d.               Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

e.               Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between each Buyer, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the Buyers that purchased at least two-thirds (2/3) of the aggregate
principal amount of the Notes on the Closing Date, or if prior to the

 

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Closing, by the Buyers listed on the Schedule of Buyers as being obligated to
purchase at least two-thirds (2/3) of the aggregate principal amount of the
Notes. Any such amendment shall bind all holders of the Notes and the Warrants.
No such amendment shall be effective to the extent that it applies to less than
all of the holders of the Notes or Warrants then outstanding. No consideration
shall be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the
same consideration also is offered to all of the parties to the Transaction
Documents or holders of Notes, as the case may be.

f.                Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one (1) Business Day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:

If to the Company:

Galaxy Energy Corporation

1331 17th Street, Suite 730

Denver, CO 80202

Telephone:

303-293-2300

 

Facsimile:

303-293-2417

 

Attention:

Chief Executive Officer

 

With a copy to:

Dill Dill Carr Stonbraker & Hutchings, P.C.

455 Sherman St., Suite 300

Denver, CO 80203

Telephone:

303-777-3737

 

Facsimile:

303-777-3823

 

Attention:

Fay Matsukage, Esq.

 

If to the Transfer Agent:

Computershare Trust Company

350 Indiana Street, Suite 800

Golden, Colorado 80401

Telephone:

(303) 262-0889

Facsimile:

(303) 262-0632

Attention:

Nicole Hunt

 

 

If to a Buyer, to it at the address and facsimile number set forth on the
Schedule of Buyers, with copies to such Buyer’s representatives as set forth on
the Schedule of Buyers, or, in the case of a Buyer or any other party named
above, at such other address and/or facsimile number and/or to the attention of
such other person as the recipient party has specified by written notice given
to

 

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each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by a nationally recognized overnight delivery service shall be
rebuttable evidence of personal service, receipt by facsimile or deposit with a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.

g.               Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Notes. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds (2/3) of the aggregate principal
of the Notes then outstanding, including by merger or consolidation, except
pursuant to a Change of Control (as defined in Section 4(b) of the Notes) with
respect to which the Company is in compliance with Section 4(n) of this
Agreement, Section 4 of the Notes and Section 9 of the Warrants. A Buyer may
assign some or all of its rights hereunder without the consent of the Company;
provided, however, that any such assignment shall not release such Buyer from
its obligations hereunder unless such obligations are assumed by such assignee
and the Company has consented to such assignment and assumption, which consent
shall not be unreasonably withheld. Notwithstanding anything to the contrary
contained in the Transaction Documents, the Buyers shall be entitled to pledge
the Securities in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities.

h.               No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and, to the extent provided in Section 8 hereof, each Indemnitee, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
person.

i.                Survival. Unless this Agreement is terminated under Section
9(k), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set forth in Section 8, shall survive the
Closing. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.

j.                Further Assurances. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall execute
and deliver all such other agreements, certificates, instruments and documents,
as the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

k.               Termination. In the event that the Closing shall not have
occurred with respect to a Buyer on or before the fifth (5th) Business Day
following the date hereof due to the Company’s or such Buyer’s failure to
satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching
party’s failure to waive such unsatisfied condition(s)), the nonbreaching party
shall have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party; provided,

 

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however, that if this Agreement is terminated pursuant to this Section 9(k), the
Company shall be obligated to pay each of the Buyers (so long as such Buyer is
not a breaching party) its expense and commitment allowance as set forth in
Section 4(j) as if such Buyer had purchased the principal amount of Notes set
forth opposite its name on the Schedule of Buyers.

l.                Placement Agent. The Company acknowledges that it has engaged
The Shemano Group as placement agent in connection with the sale of the Notes
and the related Warrants, which placement agent may have formally or informally
engaged other agents on its behalf. The Company shall be responsible for the
payment of any placement agent’s fees or broker’s commissions relating to or
arising out of the transactions contemplated hereby. The Company shall pay, and
hold each Buyer harmless against, any liability, loss or expense (including
attorneys’ fees and out of pocket expenses) arising in connection with any such
claim.

m.              No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.

n.               Remedies. Each Buyer and each holder of the Securities shall
have all rights and remedies set forth in the Transaction Documents and all
rights and remedies that such holders have been granted at any time under any
other agreement or contract and all of the rights that such holders have under
any law. Any person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or
other security or proving actual damages), to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
granted by law.

o.               Payment Set Aside. To the extent that the Company makes a
payment or payments to the Buyers hereunder or pursuant to the Registration
Rights Agreement, the Notes or the Warrants or the Buyers enforce or exercise
their rights hereunder or thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, by a trustee, receiver or any other person under any law
(including any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

p.               Independent Nature of Buyers. The obligations of each Buyer
hereunder are several and not joint with the obligations of any other Buyer, and
no Buyer shall be responsible in any way for the performance of the obligations
of any other Buyer hereunder. Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder. The decision of
each Buyer to purchase the Securities pursuant to this Agreement has been made
by such Buyer independently of any other Buyer and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or any of its Subsidiaries
which may have been made or given by any other Buyer or

 

34

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by any agent or employee of any other Buyer, and no Buyer or any of its agents
or employees shall have any liability to any other Buyer (or any other person or
entity) relating to or arising from any such information, materials, statements
or opinions. Nothing contained herein, and no action taken by any Buyer pursuant
hereto or thereto, shall be deemed to constitute the Buyers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Buyers are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated hereby. Each Buyer
shall be entitled to independently protect and enforce its rights, including the
rights arising out of this Agreement the Notes or the Warrants, and it shall not
be necessary for any other Buyer to be joined as an additional party in any
proceeding for such purpose.

q.               Interpretative Matters. Unless the context otherwise requires,
(a) all references to Sections, Schedules or Exhibits are to Sections, Schedules
or Exhibits contained in or attached to this Agreement, (b) each accounting term
not otherwise defined in this Agreement has the meaning assigned to it in
accordance with GAAP, (c) words in the singular or plural include the singular
and plural and pronouns stated in either the masculine, the feminine or neuter
gender shall include the masculine, feminine and neuter and (d) the use of the
word “including” in this Agreement shall be by way of example rather than
limitation.

* * * * * *

 

35

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IN WITNESS WHEREOF, the Buyers and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.

 

 

COMPANY:

BUYERS:

 

GALAXY ENERGY CORPORATION

HFTP INVESTMENT L.L.C.

 

 

By:

Promethean Asset Management L.L.C.

Its: Investment Manager

 

By: ________________________________

Name:

Marc E.
Bruner                                         By:________________________________    

Title:

Chief Executive
Officer                                  Name:                                          
                 

Title:                 

 

GAIA OFFSHORE MASTER FUND, LTD.

By: Promethean Asset Management L.L.C.

Its: Investment Manager

 

By:________________________________

Name:

Title:

 

CAERUS FUND LTD.

By: Promethean Asset Management L.L.C.

Its:

Investment Manager

 

 

By:________________________________

Name:

Title:

 

LEONARDO, L.P.

By: Leonardo Capital Management, Inc.

Its: General Partner

By: Angelo, Gordon & Co., L.P.

Its: Director

 

 

By:________________________________

Name:

Title:

 

 

 

37

60370812

 

 

 

SCHEDULE OF BUYERS

 

 

Buyer’s Name

 

Buyer Address

and Facsimile Number

 

Principal Amount of Notes

 

 

Expense and Commitment Allocance

 

Investor’s Legal Representative’s

Address and Facsimile Number

 

 

 

 

 

 

 

 

 

 

 

HFTP Investment L.L.C.

 

c/o Promethean Asset Management L.L.C.

750 Lexington Avenue

22nd Floor

New York, New York 10022

Attention: Robert J. Brantman

Telephone: (212) 702-5200

Facsimile: (212) 758-9620

Residence: Delaware

 

$5,166,667

 

 

$139,500

 

Katten Muchin Rosenman LLP

525 W. Monroe Street

Chicago, Illinois 60661-3693

Attention: Mark D. Wood, Esq.

Telephone: (312) 902-5200

Facsimile: (312) 902-1061

 

Gaia Offshore Master Fund, Ltd.

 

c/o Promethean Asset Management L.L.C.

750 Lexington Avenue

22nd Floor

New York, New York 10022

Attention: Robert J. Brantman

Telephone: (212) 702-5200

Facsimile: (212) 758-9620

Residence: Cayman Islands

 

$1,333,333

 

 

$36,000

 

Katten Muchin Rosenman LLP

525 W. Monroe Street

Chicago, Illinois 60661-3693

Attention: Mark D. Wood, Esq.

Telephone: (312) 902-5200

Facsimile: (312) 902-1061

 

Caerus Fund Ltd.

 

c/o Promethean Asset Management L.L.C.

750 Lexington Avenue

22nd Floor

New York, New York 10022

Attention: Robert J. Brantman

Telephone: (212) 702-5200

Facsimile: (212) 758-9620

Residence: Cayman Islands

 

$166,667

 

 

$4,500

 

Katten Muchin Rosenman LLP

525 W. Monroe Street

Chicago, Illinois 60661-3693

Attention: Mark D. Wood, Esq.

Telephone: (312) 902-5200

Facsimile: (312) 902-1061

 

Leonardo, L.P.

 

c/o Angelo, Gordon & Co.
245 Park Avenue
New York, New York 10167
Attention: Gary I. Wolf

Telephone: (212) 692-2058
Facsimile: (212) 867-6449

Residence: Cayman Islands

 

$3,333,333

 

 

$5,000

 

Paul, Weiss, Rifkind, Wharton & Garrison LLP

1285 Avenue of the Americas

New York, New York 10019-6064

Attention: Douglas A. Cifu, Esq.

Telephone: (212) 373-3000

Facsimile: (212) 759-3990

 

 

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SCHEDULES

 

Schedule 3(a)

Subsidiaries

 

Schedule 3(c)

Capitalization

 

Schedule 3(f)

SEC Documents

 

Schedule 3(g)

Material Changes

 

Schedule 3(h)

Litigation

 

Schedule 3(q)

Liens and Security Interests

 

Schedule 3(v)

Tax Status

 

Schedule 3(w)

Certain Transactions

 

Schedule 3(bb)

Outstanding Indebtedness; Liens

Schedule 3(cc)

Leases

 

Schedule 4(d)

Use of Proceeds

 

 

EXHIBITS

 

Exhibit A

Form of Note

 

Exhibit B

Form of Qualifying Issuance Warrants

 

Exhibit C

Form of Repurchase Warrants

 

Exhibit D

Form of Registration Rights Agreement

 

Exhibit E

Form of First Amendment

 

Exhibit F

Form of ANB Amendment

 

Exhibit G

Form of Mortgage Amendment

 

Exhibit H

Form of Colorado Mortgage

 

Exhibit I

Form of 2004 Amendment

 

Exhibit J

Form of March 2005 Amendment

 

Exhibit K

Form of Conveyances of Overriding Royalty Interests

Exhibit L

Form of March 2005 Note Subordination Agreement

 

Exhibit M

Form of Subordination Agreement

 

Exhibit N

Form of Irrevocable Transfer Agent Instructions

 

Exhibit O

Form of Company Counsel Opinion

 

Exhibit P

Form of Company Regulatory Counsel Opinion

 

 

 

 

60370812