EXHIBIT 10.3

 

FORM OF QUALIFYING ISSUANCE WARRANTS

 

 

 

 

FORM OF QUALIFYING ISSUANCE WARRANT

 

THE SECURITIES REPRESENTED BY THIS WARRANT 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 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. ANY TRANSFEREE OF THIS
WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF THIS WARRANT, INCLUDING SECTION
2(f) HEREOF. THE SECURITIES REPRESENTED BY THIS WARRANT MAY BE LESS THAN THE
NUMBER SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 2(f) HEREOF.

 

Galaxy Energy Corporation

 

WARRANT TO PURCHASE COMMON STOCK

 

Warrant No.:

Number of Shares: ____

Date of Issuance: ______, 2005

 

Galaxy Energy Corporation, a Colorado corporation (the “Company”), hereby
certifies that, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, ____________________, the registered holder
hereof or its permitted assigns, is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant (if required
by Section 2(f)), at any time or times on or after the date hereof, but not
after 11:59 P.M. New York Time on the Expiration Date (as defined herein)
________________ (                 ) [INSERT: the number of shares such that the
Black-Scholes Value of this Warrant (determined in accordance with Section 4(f)
of the Securities Purchase Agreement (as defined below) equals the product of
(a) the arithmetic average of the Weighted Average Price of the Common Stock on
each of the five (5) consecutive Trading Days immediately preceding the date of
the Qualifying Issuance, multiplied by (b) the difference of (i) the aggregate
number of shares of Common Stock that would have been issuable, immediately
after the consummation of the Qualifying Issuance with respect to which this
Warrant is issued, upon conversion of the Notes and the 2004 Notes then
outstanding and held by the holder of this Warrant and upon exercise of any
Repurchase Warrants then outstanding and held by the holder of this Warrant (in
each case without regard to any limitations on conversion or exercise thereof)
had the anti-dilution provisions (as defined below) applied

 

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to the Qualifying Issuance with respect to which this Warrant is issued 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 number of shares of Common Stock
issuable upon conversion of the Notes and the 2004 Notes then outstanding and
held by the holder of this Warrant and upon exercise of any Repurchase Warrants
then outstanding and held by the holder of this Warrant (in each case without
regard to any limitations on conversion or exercise thereof) immediately prior
to the consummation of such Qualifying Issuance; for purposes hereof
“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 adjustment to the exercise
prices thereof and a corresponding adjustment of the number of shares that may
be acquired upon exercise of the Repurchase Warrants, in each case in the event
that, pursuant to the terms thereof, shares of Common Stock are issued or sold,
or are deemed to have been issued and sold, at prices less than the such
conversion or exercise prices;] fully paid nonassessable shares of Common Stock
(as defined herein) of the Company (the “Warrant Shares”) at a purchase price
per share equal to the Warrant Exercise Price (as defined in Section 1(b)
below); provided, however, that in no event shall the holder be entitled or
required to exercise this Warrant for a number of Warrant Shares in excess of
that number of Warrant Shares that, upon giving effect to such exercise, would
cause the aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 4.99% of the outstanding shares of the
Common Stock following such exercise. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by the holder and
its affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such proviso
is being made, but shall exclude shares of Common Stock that would be issuable
upon (i) exercise of the remaining, unexercised SPA Warrants (as defined below)
beneficially owned by the holder and its affiliates and (ii) exercise,
conversion or exchange of the unexercised, unconverted or unexchanged portion of
any other securities of the Company beneficially owned by the holder and its
affiliates (including the Notes, the 2004 Notes, the Repurchase Warrants (as
defined below) and the 2004 Warrants (as defined below) and any other
convertible notes or preferred stock) subject to a limitation on conversion,
exercise or exchange analogous to the limitation contained herein. Except as set
forth in the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. For purposes of this Warrant, in determining
the number of outstanding shares of Common Stock a holder may rely on the number
of outstanding shares of Common Stock as reflected in (1) the Company’s most
recent Form 10-Q or Form 10-K, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
Upon the written request of any holder, the Company shall promptly, but in no
event later than one (1) Business Day following the receipt of such notice,
confirm in writing to any such holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock shall
be determined after giving effect to the conversion, exercise or exchange of
securities of the Company, including the Notes, the 2004 Notes and the 2004
Warrants, by such holder and its affiliates, since the date as of which such
number of outstanding shares of Common Stock was reported.

 

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Section 1.

(a)             Securities Purchase Agreement. This Warrant is one of the
warrants issued pursuant to Section 4(f) of that certain Securities Purchase
Agreement, dated as of May 31, 2005, among the Company and the Persons (as
defined below) referred to therein (as such agreement may be amended from time
to time as provided in such agreement, the “Securities Purchase Agreement”) or
of any warrants issued in exchange or substitution therefor or replacement
thereof (all such warrants being collectively referred to as the “SPA
Warrants”). Each capitalized term used, and not otherwise defined herein, shall
have the meaning ascribed thereto in the Securities Purchase Agreement.

 

(b)             Definitions. The following words and terms as used in this
Warrant shall have the following meanings:

(i)              “2004 Notes” means the senior secured convertible notes of the
Company issued pursuant to the 2004 Securities Purchase Agreement, and all
senior secured convertible notes issued in exchange therefor or replacement
thereof pursuant to the terms of such senior secured convertible notes, as such
notes may be amended from time to time as provided in such notes.

(ii)            “2004 Securities Purchase Agreement” means the Securities
Purchase Agreement, dated as of August 19, 2004, between the Company and the
buyers named therein (as such agreement may be amended from time to time as
provided in such agreement).

(iii)           “2004 Warrants” means the warrants issued pursuant to the 2004
Securities Purchase Agreement and all warrants issued in exchange or
substitution therefor or replacement thereof (including any warrants issued
pursuant to Section 3(b) thereof or any similar provisions of any warrants
issued in exchange or substitution therefor or in replacement thereof), as such
warrants may be amended from time to time as provided in such warrants.

(iv)           “Approved Stock Plan” means any employee benefit plan that has
been approved by the Board of Directors and shareholders of the Company prior to
the date of the Securities Purchase Agreement and listed on Schedule 3(c)
thereto, pursuant to which the Company’s securities may be issued to any
employee, officer or director for services provided to the Company.

(v)             “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.

(vi)           “Common Stock” means (i) the Company’s common stock, $0.001 par
value per share, and (ii) any capital stock into which such Common Stock shall
have been changed or any capital stock resulting from a reclassification of such
Common Stock.

 

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(vii)          “Convertible Securities” means any stock or securities (other
than Options) directly or indirectly convertible into or exchangeable or
exercisable for Common Stock.

(viii)         “Expiration Date” means the date that is three (3) years after
the Warrant Date (as defined in Section 12) or, if such date does not fall on a
Business Day, then the next Business Day.

(ix)           “Notes” means the convertible notes of the Company issued
pursuant to the Securities Purchase Agreement, and all convertible notes issued
in exchange therefor or replacement thereof pursuant to the terms of such
convertible notes.

(x)             “Options” means any rights, warrants or options to subscribe for
or purchase Common Stock or Convertible Securities.

(xi)           “Person” means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization or a government or any department or agency thereof or any other
legal entity.

(xii)          “Principal Market” means the principal securities exchange or
trading market for a security.

(xiii)        “Qualifying Issuance” means the issuance by the Company of shares
of Common Stock, Convertible Securities or Options, or any combination thereof,
(A) which is consummated prior to January 1, 2006, (B) which is for gross
proceeds, which, when added to the gross proceeds from all prior or concurrent
Qualifying Issuances (including Qualifying Issuances consummated on or prior to
the Warrant Date), does not exceed $20,000,000 in the aggregate, (C) which
includes the issuance, or deemed issuance, of Shares (each as determined through
the application of subsections (A), (B), (C), (D), (E) and (F) of Section
2(f)(i) of the Notes) at a net price per share of not less than $1.55 (subject
to adjustment for stock splits, stock dividends, stock combination and other
similar transactions after the date of the Securities Purchase Agreement), (D)
which does not include securities which have or may have a Variable Price (as
defined in Section 2(f)(iii) of the Notes), provided that, for purposes of this
definition of “Qualifying Issuance,” a Variable Price shall not include
customary anti-dilution provisions no more favorable to the holders of such
securities than those contained in Section 2(f)(i) of the Notes), (E) the
proceeds of which are used by the Company solely for the drilling and production
of the Company’s and its Subsidiaries’ hydrocarbon properties in which the
original holders of the Notes were granted overriding royalty interests pursuant
to the Conveyances of Overriding Royalty Interests (as defined in the Securities
Purchase Agreement) (F) at a time at which the Conveyances of Overriding Royalty
Interests are in full force and effect, and the Company and its Subsidiaries are
in compliance with, and have not breached, the Conveyances of Overriding Royalty
Interests and (G) subsequent to which the Company fully complies with its
obligations under Section 4(f) of the Securities Purchase Agreement.

(xiv)         “Registration Rights Agreement” means that registration rights
agreement, dated as of May 31, 2005 by and among the Company and the Persons
referred to therein, as such agreement may be amended from time to time as
provided in such agreement.

 

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(xv)          “Repurchase Warrants” means any warrants of the Company issued
pursuant to Section 7 of the Notes, and all warrants issued in exchange therefor
or replacement thereof pursuant to the terms of such warrants, as such warrants
may be amended from time to time as provided in such warrants.

(xvi)

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

(xvii)       “Trading Day” means any day on which the Common Stock is traded on
the principal securities exchange or securities market on which the Common Stock
is then traded; provided that “Trading Day” shall not include any day on which
the Common Stock is scheduled to trade, or actually trades, on such exchange or
market for less than 4.5 hours.

(xviii)       “Warrant” means this Warrant and all Warrants issued in exchange,
transfer or replacement thereof pursuant to the terms of such Warrants.

(xix)         “Warrant Exercise Price” shall be equal to, with respect to any
Warrant Share, [INSERT: $1.88 (subject to adjustment for stock splits, stock
dividends, stock combinations or other similar transactions after the date of
the Securities Purchase Agreement and prior to the date hereof)], subject to
adjustment as hereinafter provided.

(xx)        “Weighted Average Price” means, for any security as of any date, the
dollar volume-weighted average price for such security on its Principal Market
during the period beginning at 9:30 a.m., New York City Time (or such other time
as the Principal Market publicly announces is the official open of trading), and
ending at 4:00 p.m., New York City Time (or such other time as the Principal
Market publicly announces is the official close of trading), as reported by
Bloomberg Financial Markets (“Bloomberg”) through its “Volume at Price”
functions, or, if the foregoing does not apply, the dollar volume-weighted
average price of such security in the over-the-counter market on the electronic
bulletin board for such security during the period beginning at 9:30 a.m., New
York City Time (or such other time as such over-the-counter market publicly
announces is the official open of trading), and ending at 4:00 p.m., New York
City Time (or such other time as such over-the-counter market publicly announces
is the official close of trading), as reported by Bloomberg, or, if no dollar
volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the highest closing bid price and the lowest closing
ask price of any of the market makers for such security as reported in the “pink
sheets” by the National Quotation Bureau, Inc. If the Weighted Average Price
cannot be calculated for such security on such date on any of the foregoing
bases, the Weighted Average Price of such security on such date shall be the
fair market value as mutually determined by the Company and the holder of this
Warrant. If the Company and the holder of this Warrant are unable to agree upon
the fair market value of the Common Stock, then such dispute shall be resolved
pursuant to Section 2(a) below. All such determinations to be appropriately
adjusted for any stock dividend, stock split, stock combination or other similar
transaction during any period during which the Weighted Average Price is being
determined.

Section 2.

Exercise of Warrant.

(a)             Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any

 

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time on any Business Day on or after the opening of business on the date hereof
and prior to 11:59 P.M. New York Time on the Expiration Date by (i) delivery of
a written notice, in the form of the subscription form attached as Exhibit A
hereto (the “Exercise Notice”), of such holder’s election to exercise this
Warrant, which notice shall specify the number of Warrant Shares to be
purchased, (ii) (A) payment to the Company of an amount equal to the Warrant
Exercise Price multiplied by the number of Warrant Shares as to which this
Warrant is being exercised (the “Aggregate Exercise Price”) by wire transfer of
immediately available funds (or by check if the Company has not provided the
holder of this Warrant with wire transfer instructions for such payment) or (B)
by notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 2(e)), and (iii) if required by Section
2(f) or unless the Holder has previously delivered this Warrant to the Company
and it or a new replacement Warrant has not yet been delivered to the Holder,
the surrender to a common carrier for overnight delivery to the Company as soon
as practicable following such date, this Warrant (or an indemnification
undertaking with respect to this Warrant in the case of its loss, theft or
destruction); provided, that if such Warrant Shares are to be issued in any name
other than that of the registered holder of this Warrant, such issuance shall be
deemed a transfer and the provisions of Section 7 shall be applicable. In the
event of any exercise of the rights represented by this Warrant in compliance
with this Section 2(a), the Company shall on the second (2nd) Business Day (the
“Warrant Share Delivery Date”) following the date of its receipt of the Exercise
Notice, the Aggregate Exercise Price (or notice of Cashless Exercise) and if
required by Section 2(f) (or unless the holder of this Warrant has previously
delivered this Warrant to the Company and it or a new replacement Warrant has
not yet been delivered to the holder), this Warrant (or an indemnification
undertaking with respect to this Warrant in the case of its loss, theft or
destruction) (collectively, the “Exercise Delivery Documents”), (A) provided
that the Company’s transfer agent is participating in The Depository Trust
Company (“DTC”) Fast Automated Securities Transfer Program and provided that the
holder is eligible to receive shares through DTC, credit such aggregate number
of shares of Common Stock to which the holder shall be entitled to the holder’s
or its designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system or (B) issue and deliver to the address specified in the
Exercise Notice, a certificate, registered in the name of the holder or its
designee, for the number of shares of Common Stock to which the holder shall be
entitled. Upon (x) delivery of the Exercise Notice and (y) the Aggregate
Exercise Price referred to in clause (ii)(A) above or notification to the
Company of a Cashless Exercise referred to in Section 2(e), the holder of this
Warrant shall be deemed for all corporate purposes to have become the holder of
record of the Warrant Shares with respect to which this Warrant has been
exercised (the date thereof being referred to as the “Deemed Issuance Date”),
irrespective of the date of delivery of this Warrant as required by clause (iii)
above or the certificates evidencing such Warrant Shares. In the case of a
dispute as to the determination of the Warrant Exercise Price, the Weighted
Average Price of a security or the arithmetic calculation of the number of
Warrant Shares, the Company shall promptly issue to the holder the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder of this Warrant via
facsimile within one (1) Business Day of receipt of the holder’s Exercise
Notice. If the holder of this Warrant and the Company are unable to agree upon
the determination of the Warrant Exercise Price, the Weighted Average Price or
arithmetic calculation of the number of Warrant Shares within one (1) Business
Day of such disputed determination or arithmetic calculation being submitted to
the holder, then the Company shall immediately submit via

 

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facsimile (i) the disputed determination of the Warrant Exercise Price or the
Weighted Average Price to an independent, reputable investment banking firm
agreed to by the Company and the holder of this Warrant or (ii) the disputed
arithmetic calculation of the number of Warrant Shares to its independent,
outside public accountant. The Company shall cause the investment banking firm
or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the holder of the results no later than
two (2) Business Days after the time it receives the disputed determinations or
calculations. Such investment banking firm’s or accountant’s determination or
calculation, as the case may be, shall be deemed conclusive absent error.

(b)             If this Warrant is submitted for exercise, as may be required by
Section 2(f), and unless the rights represented by this Warrant shall have
expired or shall have been fully exercised, the Company shall, as soon as
practicable and in no event later than three (3) Business Days after receipt of
this Warrant (the “Warrant Delivery Date”) and at its own expense, issue a new
Warrant identical in all respects to this Warrant exercised except it shall
represent rights to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which such Warrant is exercised (together with,
in the case of a cashless exercise, the number of Warrant Shares surrendered in
lieu of payment of the Exercise Price).

(c)             No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.

(d)             If the Company shall fail for any reason or for no reason (x) to
issue and deliver to the holder within three (3) Business Days of receipt of the
Exercise Delivery Documents a certificate for the number of shares of Common
Stock to which the holder is entitled or to credit the holder’s balance account
with DTC for such number of shares of Common Stock to which the holder is
entitled upon the holder’s exercise of this Warrant or (y) to issue and deliver
to the holder on the Warrant Delivery Date a new Warrant for the number of
shares of Common Stock to which such holder is entitled pursuant to Section 2(b)
hereof, if any, then the Company shall, in addition to any other remedies under
this Warrant or the Securities Purchase Agreement or otherwise available to such
holder, including any indemnification under Section 8 of the Securities Purchase
Agreement, pay as additional damages in cash to such holder on each day after
such third (3rd) Business Day that such shares of Common Stock are not issued
and delivered to the holder, in the case of clause (x) above, or such third
(3rd) Business Day that such Warrant is not delivered, in the case of clause (y)
above, in an amount equal to the sum of (i) 0.5% of the product of (A) the
number of shares of Common Stock not issued to the holder on or prior to the
Warrant Share Delivery Date and (B) the Weighted Average Price of the Common
Stock on the Warrant Share Delivery Date, in the case of the failure to deliver
Common Stock, and (ii) if the Company has failed to deliver a Warrant to the
holder on or prior to the Warrant Delivery Date, 0.5% of the product of (x) the
number of shares of Common Stock issuable upon exercise of the Warrant as of the
Warrant Delivery Date, and (y) the Weighted Average Price of the Common Stock on
the Warrant Delivery Date; provided that in no event shall cash damages accrue
pursuant to this Section 2(d) during the period, if any, in which any Warrant
Shares are the subject of a bona fide dispute that is subject to and being
resolved pursuant to, and in compliance with the time periods and other
provisions

 

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of, the dispute resolution provisions of Section 2(a). Alternatively, subject to
the dispute resolution provisions of Section 2(a), at the election of the holder
made in the holder’s sole discretion, the Company shall pay to the holder, in
lieu of the additional damages referred to in the preceding sentence (but in
addition to all other available remedies that the holder may pursue hereunder
and under the Securities Purchase Agreement (including indemnification pursuant
to Section 8 thereof)), 110% of the amount by which (A) the holder’s total
purchase price (including brokerage commissions, if any) for shares of Common
Stock purchased to make delivery in satisfaction of a sale by such holder of the
shares of Common Stock to which the holder is entitled but has not received upon
an exercise, exceeds (B) the net proceeds received by the holder from the sale
of the shares of Common Stock to which the holder is entitled but has not
received upon such exercise.

(e)             If the Warrant Shares to be issued are not registered and
available for resale pursuant to a registration statement in accordance with the
Registration Rights Agreement, including during a Grace Period (as defined in
the Registration Rights Agreement), then notwithstanding anything contained
herein to the contrary, the holder of this Warrant may, at its election
exercised in its sole discretion, exercise this Warrant in whole or in part and,
in lieu of making the cash payment otherwise contemplated to be made to the
Company upon such exercise in payment of the Aggregate Exercise Price, elect
instead to receive upon such exercise the “Net Number” of shares of Common Stock
determined according to the following formula (a “Cashless Exercise”):

 

Net Number = (A x B) - (A x C)

B

 

For purposes of the foregoing formula:

 

A= the total number of shares with respect to which this Warrant is then being
exercised;

 

B= the Weighted Average Price of the Common Stock on the trading day immediately
preceding the date of the delivery of the Exercise Notice; and

 

C= the Warrant Exercise Price then in effect for the applicable Warrant Shares
at the time of such exercise.

 

(f)              Book-Entry. Notwithstanding anything to the contrary set forth
herein, upon exercise of this Warrant in accordance with the terms hereof, the
holder of this Warrant shall not be required to physically surrender this
Warrant to the Company unless it is being exercised for all of the Warrant
Shares represented by the Warrant. The holder and the Company shall maintain
records showing the number of Warrant Shares exercised and issued and the dates
of such exercises or shall use such other method, reasonably satisfactory to the
holder and the Company, so as not to require physical surrender of this Warrant
upon each such exercise. In the event of any dispute or discrepancy, such
records of the Company establishing the number of

 

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Warrant Shares to which the holder is entitled shall be controlling and
determinative in the absence of error. Notwithstanding the foregoing, if this
Warrant is exercised as aforesaid, the holder may not transfer this Warrant
unless the holder first physically surrenders this Warrant to the Company,
whereupon the Company will forthwith issue and deliver upon the order of the
holder a new Warrant of like tenor, registered as the holder may request,
representing in the aggregate the remaining number of Warrant Shares represented
by this Warrant. The holder and any assignee, by acceptance of this Warrant,
acknowledge and agree that, by reason of the provisions of this paragraph,
following exercises of any portion of this Warrant, the number of Warrant Shares
represented by this Warrant may be less than the number stated on the face
hereof. Each Warrant shall bear the following legend:

 

ANY TRANSFEREE OF THIS WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF THIS
WARRANT, INCLUDING SECTION 2(f) HEREOF. THE SECURITIES REPRESENTED BY THIS
WARRANT MAY BE LESS THAN THE NUMBER SET FORTH ON THE FACE HEREOF PURSUANT TO
SECTION 2(f) HEREOF.

 

 

Section 3.              Covenants as to Common Stock. The Company hereby
covenants and agrees as follows:

(a)             This Warrant is, and any Warrants issued in substitution for or
replacement of this Warrant will upon issuance be, duly authorized and validly
issued.

(b)             All Warrant Shares that may be issued upon the exercise of the
rights represented by this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.

(c)             During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved at least 200% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant.

(d)             If, and so long as, any shares of Common Stock shall be listed
on the NASDAQ National Market, the NASDAQ SmallCap Market or another securities
exchange or trading market, the shares of Common Stock issuable upon exercise of
this Warrant shall be so listed; and the Company shall so list on such exchange
or market, and shall maintain such listing of, any other shares of capital stock
of the Company issuable upon the exercise of this Warrant if and so long as any
shares of the same class shall be listed on such securities exchange or market.

(e)             The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
avoid or seek to avoid the observance or performance of

 

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any of the terms to be observed or performed by it hereunder, but will at all
times in good faith assist in the carrying out of all the provisions of this
Warrant and in the taking of all such action as may reasonably be requested by
the holder of this Warrant in order to protect the exercise privilege of the
holder of this Warrant against dilution or other impairment, consistent with the
tenor and purpose of this Warrant. Without limiting the generality of the
foregoing, the Company (i) will not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above $0.001 per
share, and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.

(f)              This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company’s assets.

Section 4.              Taxes. The Company shall pay any and all taxes that may
be payable with respect to the issuance and delivery of Warrant Shares upon
exercise of this Warrant.

Section 5.              Warrant Holder Not Deemed a Shareholder. No holder, as
such, of this Warrant shall be entitled to vote or receive dividends or be
deemed the holder of shares of the Company for any purpose (other than to the
extent that the holder is deemed to be a beneficial holder of shares under
applicable securities laws after taking into account the limitation set forth in
the first paragraph of this Warrant), nor shall anything contained in this
Warrant be construed to confer upon the holder hereof, as such, any of the
rights of a shareholder of the Company or any right to vote, give or withhold
consent to any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the Deemed Issuance Date of the Warrant Shares that such
holder is then entitled to receive upon the due exercise of this Warrant. In
addition, nothing contained in this Warrant shall be construed as imposing any
liabilities on such holder to purchase any securities (upon exercise of this
Warrant or otherwise) or as a shareholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company.
Notwithstanding this Section 5, the Company will provide the holder of this
Warrant with copies of the same notices and other information given to the
shareholders of the Company generally, contemporaneously with the giving thereof
to the shareholders.

Section 6.              Representations of Holder. The holder of this Warrant,
by the acceptance hereof, represents that it is acquiring this Warrant, and upon
exercise hereof (other than pursuant to a Cashless Exercise) will acquire the
Warrant Shares, for its own account and not with a view towards, or for resale
in connection with, the public sale or distribution of this Warrant or the
Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves the right to dispose of this
Warrant and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act. The holder of
this Warrant further represents, by acceptance hereof, that, as of this date,
such holder is an “accredited investor” as such term is defined in Rule
501(a)(3) of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act (an “Accredited Investor”). Each delivery of an
Exercise Notice, other than in connection with a Cashless Exercise, shall

 

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constitute confirmation at such time by the holder of the representations
concerning the Warrant Shares set forth in the first two sentences of this
Section 6, unless contemporaneous with the delivery of such Exercise Notice the
holder notifies the Company in writing that it is not making such
representations (a “Representation Notice”). If the holder delivers a
Representation Notice in connection with an exercise, it shall be a condition to
such holder’s exercise of this Warrant and the Company’s obligations set forth
in Section 2 in connection with such exercise, that the Company receive such
other representations as the Company considers reasonably necessary to assure
the Company that the issuance of its securities upon exercise of this Warrant
shall not violate any United States or state securities laws.

Section 7.

Ownership and Transfer.

(a)             The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
the holder hereof), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder thereof for all purposes, notwithstanding any notice to the
contrary, but in all events recognizing any transfers made in accordance with
the terms of this Warrant.

(b)             This Warrant and the rights granted hereunder shall be
assignable by the holder hereof without the consent of the Company.

(c)             The Company is obligated to register the Warrant Shares for
resale under the Securities Act pursuant to the Registration Rights Agreement
and the initial holder of this Warrant (and certain assignees thereof) is
entitled to the registration rights in respect of the Warrant Shares as set
forth in the Registration Rights Agreement.

Section 8.              Adjustment of Warrant Exercise Price and Number of
Warrant Shares. The Warrant Exercise Price and the number of shares of Common
Stock issuable upon exercise of this Warrant shall be adjusted from time to time
as follows:

(a)             Adjustment of Warrant Exercise Price and Number of Shares upon
Issuance of Common Stock. If and whenever on or after the Warrant Date, the
Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (including the issuance or sale of shares of Common Stock owned or
held by or for the account of the Company, but excluding Exempted Issuances (as
defined below)), for a consideration per share less than a price (the
“Applicable Price”) equal to the Warrant Exercise Price in effect immediately
prior to such issuance or sale, then immediately after such issue or sale the
Warrant Exercise Price then in effect shall be reduced to an amount equal to
such consideration per share. Upon each such adjustment of the Warrant Exercise
Price pursuant to the immediately preceding sentence, the number of shares of
Common Stock acquirable upon exercise of this Warrant shall be adjusted to the
number of shares determined by multiplying the Warrant Exercise Price in effect
immediately prior to such adjustment by the number of shares of Common Stock
acquirable upon exercise of this Warrant immediately prior to such adjustment
and dividing the product thereof by the Warrant Exercise Price resulting from
such adjustment. For purposes of this Warrant, “Exempted Issuances” shall mean:
(A) shares of Common Stock issued or deemed

 

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to be issued by the Company pursuant to an Approved Stock Plan; (B) shares of
Common Stock issued or deemed to have been issued upon the conversion, exchange
or exercise of any Option or Convertible Security outstanding on the date prior
to the Issuance Date and set forth in Schedule 3(c) to the Securities Purchase
Agreement, provided that the terms of such Option or Convertible Security are
not amended or otherwise modified on or after the date of the Securities
Purchase Agreement, 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 of Common Stock issued or issuable is not
increased (whether by operation of, or in accordance with, the relevant
governing documents or otherwise) on or after the date of the Securities
Purchase Agreement; (C) shares of Common Stock issued or deemed to have been
issued pursuant to a Qualifying Issuance, provided that the terms of the
securities included in such Qualifying Issuance are not amended or otherwise
modified on or after the date such Qualifying Issuance is consummated 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 of Common Stock issued or issuable is not increased (whether by operation
of, or in accordance with, the relevant governing documents or otherwise) on or
after the date such Qualifying Issuance is consummated; and (D) Shares issued or
deemed to have been issued by the Company upon conversion of the Notes or the
2004 Notes or exercise of the Warrants (as defined in the Notes) or the 2004
Warrants.

(b)             Effect on Warrant Exercise Price of Certain Events. For purposes
of determining the adjusted Warrant Exercise Price under Section 8(a) above
(which, for the avoidance of doubt, the Company expressly agrees shall mean, at
least as of any date after the Warrant Date, for all purposes of this Section 8,
including for purposes of determining whether the Company has issued or sold, or
shall be deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than a price equal to the Applicable Price), the
following shall be applicable:

(i)              Issuance of Options. If the Company in any manner grants or
sells any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion,
exchange or exercise of any Convertible Securities issuable upon exercise of any
such Option is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section 8(b)(i), the “lowest price per share for
which one share of Common Stock is issuable upon exercise of any such Option or
upon conversion, exchange or exercise of any Convertible Security issuable upon
exercise of any such Option” shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon the granting or sale of the Option, upon exercise
of the Option and upon conversion, exchange or exercise of any Convertible
Security issuable upon exercise of such Option. No further adjustment of the
Warrant Exercise Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options or
upon the actual issuance of such Common Stock upon conversion, exchange or
exercise of such Convertible Securities.

(ii)            Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities and the lowest price per share for
which one share of

 

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Common Stock is issuable upon such conversion, exchange or exercise thereof is
less than the Applicable Price, then such share of Common Stock shall be deemed
to be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such Convertible Securities for such price per share.
For the purposes of this Section 8(b)(ii), the “lowest price per share for which
one share of Common Stock is issuable upon such conversion, exchange or
exercise” shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to one share of Common
Stock upon the issuance or sale of the Convertible Security and upon conversion,
exchange or exercise of such Convertible Security. No further adjustment of the
Warrant Exercise Price shall be made upon the actual issuance of such Common
Stock upon conversion, exchange or exercise of such Convertible Securities, and
if any such issue or sale of such Convertible Securities is made upon exercise
of any Options for which adjustment of the Warrant Exercise Price had been or
are to be made pursuant to other provisions of this Section 8(b), no further
adjustment of the Warrant Exercise Price shall be made by reason of such issue
or sale.

(iii)           Change in Option Price or Rate of Conversion. If the purchase,
exchange or exercise price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion, exchange or exercise
of any Convertible Securities, or the rate at which any Options or Convertible
Securities are convertible into or exchangeable or exercisable for Common Stock
changes at any time, the Warrant Exercise Price in effect at the time of such
change shall be adjusted to the Warrant Exercise Price that would have been in
effect at such time had such Options or Convertible Securities provided for such
changed purchase, exchange or exercise price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold and the number of shares of Common Stock acquirable hereunder
shall be correspondingly readjusted. For purposes of this Section 8(b)(iii), if
the terms of any Option or Convertible Security that was outstanding as of the
date of issuance of this Warrant are changed in the manner described in the
immediately preceding sentence, then such Option or Convertible Security and the
Common Stock deemed issuable upon exercise, conversion or exchange thereof shall
be deemed to have been issued as of the date of such change. No adjustment shall
be made if such adjustment would result in an increase of the Warrant Exercise
Price then in effect.

(c)             Effect on Warrant Exercise Price of Certain Events. For purposes
of determining the adjusted Warrant Exercise Price under Sections 8(a) and 8(b)
above (which, for the avoidance of doubt, the Company expressly agrees shall
mean, at least as of any date after the Warrant Date, for all purposes of this
Section 8, including for purposes of determining whether the Company has issued
or sold, or shall be deemed to have issued or sold, any shares of Common Stock
for a consideration per share less than a price equal to the Applicable Price),
the following shall be applicable:

(i)              Calculation of Consideration Received. In case any Options are
issued in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction or series of related
transactions, (A) the Options will be deemed to have been issued for a
consideration equal to the greater of $0.01 and the specific aggregate
consideration, if any, allocated to such Options (in either case, the “Option
Consideration”) and, for purposes of applying the provisions of this Section 8,
the Option Consideration shall be allocated pro rata among all the shares of
Common Stock issuable upon

 

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exercise of such Options to determine the consideration per each such share of
Common Stock and (B) the other securities will be deemed to have been issued for
an aggregate consideration equal to the aggregate consideration received by the
Company for the Options and other securities (determined as provided below with
respect to each share of Common Stock represented thereby), less the sum of (1)
the Black-Scholes Value (as defined below) of such Options and (2) the Option
Consideration. If any Common Stock, Options or Convertible Securities are issued
or sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount received by the Company
therefor. If any Common Stock, Options or Convertible Securities are issued or
sold for a consideration other than cash, the amount of such consideration
received by the Company will be the fair value of such consideration, except
where such consideration consists of marketable securities, in which case the
amount of consideration received by the Company will be the Weighted Average
Price of such securities on the date of receipt of such securities. If any
Common Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in which the Company is the
surviving entity, the amount of consideration therefor will be deemed to be the
fair value of such portion of the net assets and business of the non-surviving
entity as is attributable to such Common Stock, Options or Convertible
Securities, as the case may be. The fair value of any consideration other than
cash or securities will be determined jointly by the Company and the holder of
this Warrant. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the “Valuation Event”),
the fair value of such consideration will be determined within five (5) Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holder of this
Warrant. The determination of such appraiser shall be final and binding upon all
parties absent error, and the fees and expenses of such appraiser shall be borne
by the Company.

(ii)            Record Date. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.

(iii)           Black-Scholes Value. The “Black-Scholes Value” of any Options
shall mean the sum of the amounts resulting from applying the Black-Scholes
pricing model to each such Option, which calculation is made with the following
inputs: (i) the “option striking price” being equal to the lowest exercise price
possible under the terms of such Option on the date of the issuance of such
Option (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, SPA Warrants, Repurchase Warrants and 2004
Warrants representing at least two-thirds (2/3) of the aggregate number of
shares of Common Stock obtainable upon conversion of the Notes (at the Fixed
Conversion Price set forth therein)

 

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and the 2004 Notes (at the Fixed Conversion Price set forth therein) then
outstanding and exercise of the SPA Warrants, the Repurchase Warrants and the
2004 Warrants then outstanding, (iii) the “time until option expiration” being
the time from the Valuation Date until the expiration date of such Option, (iv)
the “current stock price” being equal to the Weighted Average Price of the
Common Stock on the Valuation Date, (v) the “volatility” being 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. Within three (3) Business Days after the Company Valuation Date, each of
the Company and the holder of this Warrant shall deliver to the other a written
calculation of its determination of the Black-Scholes value of the Options. If
the holder and the Company are unable to agree upon the calculation of the
Black-Scholes Value of the Options within five (5) Business Days of the
Valuation Date, then the Company shall submit via facsimile the disputed
calculation to an investment banking firm (jointly selected by the Company and
the holders of Notes, 2004 Notes, SPA Warrants, Repurchase Warrants and 2004
Warrants representing at least two-thirds (2/3) of the aggregate number of
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 SPA Warrants, the
Repurchase Warrants and the 2004 Warrants then outstanding) within seven (7)
Business Days of the Valuation Date. The Company shall cause such investment
banking firm to perform the calculations and notify the company and the holder
of the results no later than ten (10) Business Days after the Valuation Date.
Such investment banking firm’s calculation of the Black-Scholes Value of the
Options shall be deemed conclusive absent error. The Company shall bear the fees
and expenses of such investment banking firm for providing such calculation.

(d)             Adjustment of Warrant Exercise Price upon Subdivision or
Combination of Common Stock. If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Price in effect immediately prior
to such subdivision will be proportionately reduced and the number of shares of
Common Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) its outstanding
shares of Common Stock into a smaller number of shares, the Warrant Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of shares of Common Stock obtainable upon exercise of
this Warrant will be proportionately decreased. Any adjustment under this
Section 8(d) shall become effective at the close of business on the date the
subdivision or combination becomes effective.

(e)             Distribution of Assets. If the Company shall declare or make any
dividend or other distribution of its assets (or rights to acquire its assets)
to holders of Common Stock, by way of return of capital or otherwise (including
any distribution of cash, stock or other securities, property or options by way
of a dividend, spin off, reclassification, corporate rearrangement or other
similar transaction) (a “Distribution”), at any time after the issuance of this
Warrant, then, in each such case:

(i)              the Warrant Exercise Price in effect immediately prior to the
close of business on the record date fixed for the determination of holders of
Common Stock entitled

 

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to receive the Distribution shall be reduced, effective as of the close of
business on such record date, to a price determined by multiplying such Warrant
Exercise Price by a fraction of which (A) the numerator shall be the Weighted
Average Price of the Common Stock on the trading day immediately preceding such
record date minus the value of the Distribution (as determined in good faith by
the Company’s Board of Directors) applicable to one share of Common Stock, and
(B) the denominator shall be the Weighted Average Price of the Common Stock on
the trading day immediately preceding such record date; and

(ii)            either (A) the number of Warrant Shares obtainable upon exercise
of this Warrant shall be increased to a number of shares equal to the number of
shares of Common Stock obtainable immediately prior to the close of business on
the record date fixed for the determination of holders of Common Stock entitled
to receive the Distribution multiplied by the reciprocal of the fraction set
forth in the immediately preceding clause (i), or (B) in the event that the
Distribution is of common stock of a company whose common stock is traded on a
national securities exchange or a national automated quotation system, then the
holder of this Warrant shall receive an additional warrant, the terms of which
shall be identical to those of this Warrant, except that such warrant shall be
exercisable for the amount of the assets that would have been payable to the
holder of this Warrant pursuant to the Distribution had the holder exercised
this Warrant immediately prior to such record date and with an exercise price
equal to the amount by which the exercise price of this Warrant was decreased
with respect to the Distribution pursuant to the terms of the immediately
preceding clause (i).

(f)              Certain Events. If any event occurs of the type contemplated by
the provisions of this Section 8 but not expressly provided for by such
provisions (including the granting of stock appreciation rights, phantom stock
rights or other rights with equity features), then the Company’s Board of
Directors will make an appropriate adjustment in the Warrant Exercise Price and
the number of shares of Common Stock obtainable upon exercise of this Warrant so
as to protect the rights of the holders of the SPA Warrants; provided that no
such adjustment will increase the Warrant Exercise Price or decrease the number
of shares of Common Stock obtainable as otherwise determined pursuant to this
Section 8.

(g)

Notices.

(i)              Immediately upon any adjustment of the Warrant Exercise Price,
the Company will give written notice thereof to the holder of this Warrant,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment.

(ii)            The Company will give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which the Company closes its
books or takes a record (A) with respect to any dividend or distribution upon
the Common Stock, (B) with respect to any pro rata subscription offer to holders
of Common Stock or (C) for determining rights to vote with respect to any
Organic Change (as defined below), dissolution or liquidation, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder.

(iii)           The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or

 

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liquidation will take place, provided that such information shall be made known
to the public prior to or in conjunction with such notice being provided to such
holder.

Section 9.              Purchase Rights; Reorganization, Reclassification,
Consolidation, Merger or Sale. (a) In addition to any adjustments pursuant to
Section 8 above, if at any time the Company grants, issues or sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of its capital stock
(the “Purchase Rights”), then the holder of this Warrant will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights that such holder could have acquired if such holder had held the
number of shares of Common Stock acquirable upon complete exercise of this
Warrant immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.

(b)             Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company’s assets
to another Person or other transaction that is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as “Organic Change.” Prior to
the consummation of any (i) sale of all or substantially all of the Company’s
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the “Acquiring Entity”) a written agreement (in form and substance
satisfactory to the holders of SPA Warrants representing at least two-thirds
(2/3) of the shares of Common Stock obtainable upon exercise of the Warrants
then outstanding) to deliver to each holder of SPA Warrants in exchange for each
such SPA Warrant, a security of the Acquiring Entity evidenced by a written
instrument substantially similar in form and substance to this Warrant and
satisfactory to the holders of such SPA Warrant (including, an adjusted warrant
exercise price equal to the value for the Common Stock reflected by the terms of
such consolidation, merger or sale, and exercisable for a corresponding number
of shares of Common Stock acquirable and receivable upon exercise of such SPA
Warrant (without regard to any limitations on exercises), if the value so
reflected is less than the Warrant Exercise Price in effect immediately prior to
such consolidation, merger or sale). Prior to the consummation of any other
Organic Change, the Company shall make appropriate provision (in form and
substance satisfactory to the holders of such SPA Warrants representing at least
two-thirds (2/3) of the shares of Common Stock obtainable upon exercise of the
SPA Warrants then outstanding) to ensure that each of the holders of the SPA
Warrants will thereafter have the right to acquire and receive in lieu of or in
addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the exercise of such holder’s SPA
Warrants (without regard to any limitations on exercises), such shares of stock,
securities or assets that would have been issued or payable in such Organic
Change with respect to or in exchange for the number of shares of Common Stock
that would have been acquirable and receivable upon the exercise of such
holder’s Warrant as of the date of such Organic Change (without taking into
account any limitations or restrictions on the exerciseability of this Warrant).

 

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Section 10.           Lost, Stolen, Mutilated or Destroyed Warrant. If this
Warrant is lost, stolen, mutilated or destroyed, the Company shall promptly, on
receipt of an indemnification undertaking (or in the case of a mutilated
Warrant, the Warrant), issue a new Warrant of like denomination and tenor as
this Warrant so lost, stolen, mutilated or destroyed.

Section 11.           Notice. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this Warrant
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 copy to:

 

Dill Dill Carr Stonbraker & Hutchings, P.C.

455 Sherman Street, Suite 300

Denver, Colorado 80203

Telephone:

303-777-3737

 

Facsimile:

303-777-3823

 

Attention:

Fay Matsukage, Esq.

 

If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Buyers to the Securities Purchase Agreement, with
copies to such holder’s representatives as set forth on such Schedule of Buyers,
or, in the case of the holder or any other Person 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 to the other party at least
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.

 

Section 12.           Date. The date of this Warrant is [INSERT: the date of
issuance of this Warrant] (the “Warrant Date”). This Warrant, in all events,
shall be wholly void and of no effect after 11:59 P.M., New York Time, on the
Expiration Date, except that notwithstanding any

 

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other provisions hereof, the provisions of Section 7 shall continue in full
force and effect after such date as to any Warrant Shares or other securities
issued upon the exercise of this Warrant.

Section 13.           Amendment and Waiver. Except as otherwise provided herein,
the provisions of the SPA Warrants may be amended and the Company may take any
action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of SPA Warrants representing at least two-thirds (2/3) of the shares of
Common Stock obtainable upon exercise of the SPA Warrants then outstanding;
provided that no such action may increase the Warrant Exercise Price of any SPA
Warrant or decrease the number of shares or change the class of stock obtainable
upon exercise of any SPA Warrant without the written consent of the holder of
such SPA Warrant.

Section 14.           Descriptive Headings; Governing Law. The descriptive
headings of the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. All questions
concerning the construction, validity, enforcement and interpretation of this
Warrant shall be governed by the internal laws of the State of New York, without
giving effect to any choice of law or conflict of 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.

Section 15.           Rules of Construction. 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 Warrant, (b) each
accounting term not otherwise defined in this Warrant 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 Warrant shall be by way of example rather than
limitation.

 

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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
__________, its __________, as of the __ day of ______, 200_.

 

GALAXY ENERGY CORPORATION

 

 

By:

 

Name:

Title:

 

 

 

60364325

20

 

 

 

EXHIBIT A TO WARRANT

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT

GALAXY ENERGY CORPORATION

The undersigned holder hereby exercises the right to purchase _________________
of the shares of Common Stock (“Warrant Shares”) of Galaxy Energy Corporation, a
Colorado corporation (the “Company”), evidenced by the attached Warrant (the
“Warrant”). Capitalized terms used herein and not otherwise defined shall have
the respective meanings set forth in the Warrant.

1. Form of Warrant Exercise Price. The holder intends that payment of the
Warrant Exercise Price shall be made as:

____________

a “Cash Exercise” with respect to ___________________ Warrant Shares; and/or

 

____________

a “Cashless Exercise” with respect to ______________ Warrant Shares (to the
extent permitted by the terms of the Warrant).

2. Payment of Warrant Exercise Price. In the event that the holder has elected a
Cash Exercise with respect to some or all of the Warrant Shares to be issued
pursuant hereto, the holder shall pay the Aggregate Exercise Price in the sum of
$___________________ to the Company in accordance with the terms of the Warrant.

3. Delivery of Warrant Shares. The Company shall deliver __________ Warrant
Shares in accordance with the terms of the Warrant in the following name and to
the following address:

Issue to:

 

 

Facsimile Number:

 

 

DTC Participant Number and Name (if electronic book entry transfer):

 

Account Number (if electronic book entry transfer):

 

Date: _______________ __, ______

 

Name of Registered Holder

 

By:

Name:

Title:

 

60364325

 

 

 

 

ACKNOWLEDGMENT

 

The Company hereby acknowledges this Exercise Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated ________________, 200_
from the Company and acknowledged and agreed to by [TRANSFER AGENT].

 

GALAXY ENERGY CORPORATION

 

 

By:

 

Name:

Title:

 

 

60364325

 

 

 

EXHIBIT B TO WARRANT

 

FORM OF WARRANT POWER

 

FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of Galaxy Energy Corporation., a
Colorado corporation, represented by warrant certificate no. _____, standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint ______________, attorney to
transfer the warrants of said corporation, with full power of substitution in
the premises.

 

Dated: _________, 200_

 

 

____________________________________

 

Name:

_____________________________

Title:

_____________________________

 

 

 

60364325