exv10w4



 







Exhibit 10.4




[FORM OF SERIES B WARRANT]



NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES
INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE 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 (B) THE PROVISION OF REASONABLE
ASSURANCES THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE
144 OR RULE 144A 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.



TOUCHSTONE RESOURCES USA, INC.

Warrant To Purchase Common Stock




Warrant No.:                    

Number of Shares of Common Stock:                    

Date of Issuance: April 4, 2006 (“Issuance Date”)




          Touchstone Resources USA, Inc., a Delaware corporation (the “Company”), hereby certifies that,
for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged,
[KINGS ROAD HOLDINGS II LLC] [CAPITAL VENTURES INTERNATIONAL] [SF CAPITAL PARTNERS LTD.] [RHP
MASTER FUND, LTD], the registered holder hereof or its permitted assigns (the “Holder”), is
entitled, subject to the terms set forth below, to purchase from the Company, at the Exercise Price
(as defined below) then in effect, upon surrender of this Warrant to Purchase Common Stock
(including any Warrants to Purchase Common Stock issued in exchange, transfer or replacement
hereof, the “Warrant”), 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 below), [FOUR MILLION ONE HUNDRED FIFTY THOUSAND
NINE HUNDRED AND FORTY FOUR (4,150,944)] [ONE MILLION FIVE HUNDRED AND NINE THOUSAND FOUR HUNDRED
AND THIRTY FOUR (1,509,434)] [ONE MILLION FIVE HUNDRED AND NINE THOUSAND FOUR HUNDRED AND THIRTY
FOUR (1,509,434)] [ONE MILLION ONE HUNDRED THIRTY TWO THOUSAND AND SEVENTY SIX (1,132,076)] ( fully
paid nonassessable shares of Common Stock (as defined below) (the “Warrant Shares”). Except as
otherwise defined herein, capitalized terms in this Warrant shall have the meanings set forth in
Section 15. This Warrant is one of the Warrants to purchase Common Stock (the “SPA Warrants”)
issued pursuant to Section 1 of that certain Securities Purchase Agreement, dated as of April 4,
2006 (the “Subscription Date”), by and among the Company and the investors (the “Buyers”) referred
to therein (the “Securities Purchase Agreement”). Notwithstanding any other provision of this
Warrant to the contrary, this Warrant is not exercisable upon issuance and will not become
exercisable unless and until the Company




 









 







requires the Holder to undertake a Mandatory Conversion (as defined in the SPA Securities)
under the Notes issued pursuant to the Securities Purchase Agreement; provided, however, that if
the Holder of this Warrant no longer owns any outstanding SPA Securities, then this Warrant shall
not become exercisable.




          1. EXERCISE OF WARRANT.




               (a) Mechanics of Exercise. Subject to the terms and conditions hereof (including,
without limitation, the limitations set forth in Section 1(f)), this Warrant may be exercised by
the Holder on any day on or after the date hereof, in whole or in part, by (i) delivery of a
written notice, in the form attached hereto as Exhibit A (the “Exercise Notice”), of the
Holder’s election to exercise this Warrant and (ii) (A) payment to the Company of an amount equal
to the applicable Exercise Price multiplied by the number of Warrant Shares as to which this
Warrant is being exercised (the “Aggregate Exercise Price”) in cash or wire transfer of immediately
available funds or (B) by notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 1(d)). The Holder shall not be required to deliver the
original Warrant in order to effect an exercise hereunder. Execution and delivery of the Exercise
Notice with respect to less than all of the Warrant Shares shall have the same effect as
cancellation of the original Warrant and issuance of a new Warrant evidencing the right to purchase
the remaining number of Warrant Shares. On or before the first Business Day following the date on
which the Company has received each of the Exercise Notice and the Aggregate Exercise Price (or
notice of a Cashless Exercise) (the “Exercise Delivery Documents”), the Company shall transmit by
facsimile an acknowledgment of confirmation of receipt of the Exercise Delivery Documents to the
Holder and the Company’s transfer agent (the “Transfer Agent”). On or before the third Business
Day following the date on which the Company has received all of the Exercise Delivery Documents
(the “Share Delivery Date”), the Company shall (X) provided that the Transfer Agent is
participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program,
upon the request of the Holder, credit such aggregate number of shares of Common Stock to which the
Holder is entitled pursuant to such exercise to the Holder’s or its designee’s balance account with
DTC through its Deposit Withdrawal Agent Commission system, or (Y) if the Transfer Agent is not
participating in the DTC Fast Automated Securities Transfer Program, issue and dispatch by
overnight courier to the address as specified in the Exercise Notice, a certificate, registered in
the Company’s share register in the name of the Holder or its designee, for the number of shares of
Common Stock to which the Holder is entitled pursuant to such exercise. Upon delivery of the
Exercise Notice and Aggregate Exercise Price referred to in clause (ii)(A) above or notification to
the Company of a Cashless Exercise referred to in Section 1(d), the Holder 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, irrespective of the date of delivery of the certificates
evidencing such Warrant Shares. If this Warrant is submitted in connection with any exercise
pursuant to this Section 1(a) and the number of Warrant Shares represented by this Warrant
submitted for exercise is greater than the number of Warrant Shares being acquired upon an
exercise, then the Company shall as soon as practicable and in no event later than three Business
Days after any exercise and at its own expense, issue a new Warrant (in accordance with Section
7(d)) representing the right 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 this



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Warrant is exercised. 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 to be issued shall be rounded
up to the nearest whole number. The Company shall pay any and all taxes which may be payable with
respect to the issuance and delivery of Warrant Shares upon exercise of this Warrant.
Notwithstanding any provision of this Warrant to the contrary, no more than the Maximum Eligibility
Number of Warrant Shares shall be exercisable hereunder.




               (b) Exercise Price. For purposes of this Warrant, “Exercise Price” means $1.38,
subject to adjustment as provided herein.



               (c) Company’s Failure to Timely Deliver Securities. If the Company shall fail for any
reason or for no reason to issue 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 and register such shares of Common Stock on the Company’s share register 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, and if on or after such Business Day
the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver
in satisfaction of a sale by the Holder of shares of Common Stock issuable upon such exercise that
the Holder anticipated receiving from the Company (a
“Buy-In”), then the Company shall, within
three (3) Business Days after the Holder’s request and in the Holder’s discretion, either (i) pay
cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased (the
“Buy-In Price”), at which
point the Company’s obligation to deliver such certificate (and to issue such shares of Common
Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a
certificate or certificates representing such shares of Common Stock and pay cash to the Holder in
an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock, times (B) the Closing Bid Price on the date of exercise.



               (d) Cashless Exercise. Notwithstanding anything contained herein to the contrary, if
a Registration Statement (as defined in the Registration Rights Agreement) covering the Warrant
Shares that are the subject of the Exercise Notice (the “Unavailable Warrant Shares”) is not
available for the resale of such Unavailable Warrant Shares at any time after the earlier of the
Effective Date and the Effectiveness Deadline (each as defined in the Registration Rights
Agreement), the Holder may, 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”):



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	 	Net Number = (A x B) – (A x C)
	 

	 	                                   B
	 
	 	 
	 

	 	For purposes of the foregoing formula:







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




B = the Closing Sale Price of the shares of Common Stock (as reported by Bloomberg)
on the date immediately preceding the date of the Exercise Notice.




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



               (e) Disputes. In the case of a dispute as to the determination of the Exercise Price
or the arithmetic calculation of the Warrant Shares, the Company shall promptly issue to the Holder
the number of Warrant Shares that are not disputed and resolve such dispute in accordance with
Section 13.



               (f) Limitations on Exercises; Beneficial Ownership. The Company shall not effect the
exercise of this Warrant, and the Holder shall not have the right to exercise this Warrant, to the
extent that after giving effect to such exercise, such Person (together with such Person’s
affiliates) would beneficially own (directly or indirectly through Warrant Shares or otherwise) in
excess of 4.99% of the shares of Common Stock outstanding immediately after giving effect to such
exercise. For purposes of the foregoing sentence, the aggregate number of shares of Common Stock
beneficially owned (directly or indirectly through Warrant Shares or otherwise) by such Person 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 sentence is being made, but shall exclude
shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised
portion of this Warrant beneficially owned by such Person and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of the Company
beneficially owned by such Person and its affiliates (including, without limitation, any
convertible notes or convertible preferred stock or warrants) subject to a limitation on conversion
or exercise analogous to the limitation contained herein. Except as set forth in the preceding
sentence, for purposes of this subsection, 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, the Holder may rely on
the number of outstanding shares of Common Stock as reflected in (1) the Company’s most recent Form
10-KSB, Form 10-QSB, Current Report on Form 8-K or other public filing with the Securities and
Exchange Commission, as the case may be, (2) a more recent public announcement by the Company or
(3) any other notice by the Company or the Transfer Agent setting forth the number of shares of
Common Stock outstanding. For any reason at any time, upon the written or oral request of the
Holder, the Company shall within one Business Day confirm orally and in writing to the Holder the
number of shares of Common Stock then outstanding. In any case, the number of outstanding shares
of



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Common Stock shall be determined after giving effect to the conversion or exercise of securities
of the Company, including the SPA Securities and the SPA Warrants, by the Holder and its
affiliates since the date as of which such number of outstanding shares of Common Stock was
reported. By written notice to the Company, the Holder may increase or decrease the Maximum
Percentage to any other percentage not in excess of 9.99% specified in such notice; provided that
(i) any such increase will not be effective until the sixty-first (61st) day after such
notice is delivered to the Company, and (ii) any such increase or decrease will apply only to the
Holder and not to any other holder of SPA Warrants.




          2. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The Exercise Price and
the number of Warrant Shares shall be adjusted from time to time as follows:



               (a) Adjustment upon Issuance of shares of Common Stock. If and whenever on or after
the Subscription Date the Company issues or sells, or in accordance with this Section 2 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 shares of Common
Stock deemed to have been issued by the Company in connection with any Excluded Securities (as
defined in the SPA Securities) for a consideration per share (the “New Issuance Price”) less than a
price (the “Applicable Price”) equal to the Exercise Price in effect immediately prior to such
issue or sale or deemed issuance or sale (the foregoing a “Dilutive Issuance"), then immediately
after such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an amount equal
to the New Issuance Price. Upon each such adjustment of the Exercise Price hereunder, the number
of Warrant Shares shall be adjusted to the number of shares of Common Stock determined by
multiplying the Exercise Price in effect immediately prior to such adjustment by the number of
Warrant Shares acquirable upon exercise of this Warrant immediately prior to such adjustment and
dividing the product thereof by the Exercise Price resulting from such adjustment. For purposes of
determining the adjusted Exercise Price under this Section 2(a), the following shall be applicable:




(i) Issuance of Options. If the Company in any manner grants
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,
exercise or exchange 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 2(a)(i), the “lowest price
per share for which one share of Common Stock is issuable upon exercise of
such Options or upon conversion, exercise or exchange of such Convertible
Securities” 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, exercise or exchange of any Convertible
Security issuable upon exercise of such Option. No further adjustment of
the Exercise Price



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or number of Warrant Shares shall be made upon the actual
issuance of such shares of Common Stock or of such Convertible Securities
upon the exercise of such Options or upon the actual issuance of such shares of
Common Stock upon conversion, exercise or exchange 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 Common Stock is issuable upon the conversion,
exercise or exchange 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 2(a)(ii), the “lowest price per share for which one share of Common
Stock is issuable upon the conversion, exercise or exchange” 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, exercise
or exchange of such Convertible Security. No further adjustment of the
Exercise Price or number of Warrant Shares shall be made upon the actual
issuance of such shares of Common Stock upon conversion, exercise or
exchange 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 this Warrant has been or is to be made pursuant to other
provisions of this Section 2(a), no further adjustment of the Exercise Price
or number of Warrant Shares shall be made by reason of such issue or sale.




(iii) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exercise or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exercisable or exchangeable for shares of Common Stock
increases or decreases at any time, the Exercise Price and the number of
Warrant Shares in effect at the time of such increase or decrease shall be
adjusted to the Exercise Price and the number of Warrant Shares which would
have been in effect at such time had such Options or Convertible Securities
provided for such increased or decreased purchase price, additional
consideration or increased or decreased conversion rate, as the case may be,
at the time initially granted, issued or sold. For purposes of this Section
2(a)(iii), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of this Warrant are increased or
decreased in the manner described in the immediately preceding sentence,
then such Option or Convertible Security and the shares of Common Stock
deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of



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such increase or decrease. No
adjustment pursuant to this Section 2(a) shall be made if such adjustment
would result in an increase of the
Exercise Price then in effect or a decrease in the number of Warrant Shares.




(iv) Calculation of Consideration Received. In case any Option
is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $0.01. If
any shares of 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 shares of 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
securities, in which case the amount of consideration received by the
Company will be the Closing Sale Price of such security on the date of
receipt. If any shares of 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 shares of 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
Required Holders. 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 day following the Valuation
Event by an independent, reputable appraiser jointly selected by the Company
and the Required Holders. The determination of such appraiser shall be
final and binding upon all parties absent manifest error and the fees and
expenses of such appraiser shall be borne by the Company.




(v) Record Date. If the Company takes a record of the holders
of shares of Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in shares of Common Stock, Options or
in Convertible Securities or (B) to subscribe for or purchase shares of
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



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the date of the granting of such
right of subscription or purchase, as the case may be.



               (b) Adjustment upon Subdivision or Combination of shares of Common Stock. If the
Company at any time on or after the Subscription Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common
Stock into a greater number of shares, the Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced and the number of Warrant Shares will be
proportionately increased. If the Company at any time on or after the Subscription Date combines
(by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of
Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to
such combination will be proportionately increased and the number of Warrant Shares will be
proportionately decreased. Any adjustment under this Section 2(b) shall become effective at the
close of business on the date the subdivision or combination becomes effective.



               (c) Other Events. If any event occurs of the type contemplated by the provisions of
this Section 2 but not expressly provided for by such provisions (including, without limitation,
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
Exercise Price and the number of Warrant Shares so as to protect the rights of the Holder; provided
that no such adjustment pursuant to this Section 2(c) will increase the Exercise Price or decrease
the number of Warrant Shares as otherwise determined pursuant to this Section 2.



          3. RIGHTS UPON 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 shares
of Common Stock, by way of return of capital or otherwise (including, without limitation, any
distribution of cash, stock or other securities, property or options by way of a dividend, spin
off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction)
(a “Distribution”), at any time after the issuance of this Warrant, then, in each such case:




               (a) any Exercise Price in effect immediately prior to the close of business on the record date
fixed for the determination of holders of shares of Common Stock entitled 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 Exercise Price by a fraction of which (i) the numerator shall
be the Closing Bid Price of the shares of 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 (ii) the denominator shall be the
Closing Bid Price of the shares of Common Stock on the trading day immediately preceding such
record date; and



               (b) the number of Warrant Shares 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 shares of Common Stock entitled to receive the
Distribution multiplied by the reciprocal of the fraction set forth in the



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immediately preceding paragraph (a); provided that in the event that the Distribution is of shares of Common Stock (or
common stock) (“Other Shares of Common Stock”) of a company whose common shares are traded on a
national securities exchange or a national automated quotation system, then the Holder may elect to
receive a warrant to purchase Other Shares of
Common Stock in lieu of an increase in the number of Warrant Shares, the terms of which shall
be identical to those of this Warrant, except that such warrant shall be exercisable into the
number of shares of Other Shares of Common Stock that would have been payable to the Holder
pursuant to the Distribution had the Holder exercised this Warrant immediately prior to such record
date and with an aggregate exercise price equal to the product of 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 paragraph (a) and the number of Warrant Shares calculated in accordance with
the first part of this paragraph (b).




          4. PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS.




               (a) Purchase Rights. In addition to any adjustments pursuant to Section 2 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 shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder
could have acquired if the Holder had held the number of shares of Common Stock acquirable upon
complete exercise of this Warrant (without regard to any limitations on the 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
shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.



               (b) Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless (i) the Successor Entity assumes in writing all of the obligations
of the Company under this Warrant and the other Transaction Documents in accordance with the
provisions of this Section (4)(b) pursuant to written agreements in form and substance satisfactory
to the Required Holders and approved by the Required Holders prior to such Fundamental Transaction,
including agreements to deliver to each holder of Warrants in exchange for such Warrants a security
of the Successor Entity evidenced by a written instrument substantially similar in form and
substance to this Warrant, including, without limitation, an adjusted exercise price equal to the
value for the shares of Common Stock reflected by the terms of such Fundamental Transaction, and
exercisable for a corresponding number of shares of capital stock equivalent to the shares of
Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and
satisfactory to the Required Holders and (ii) the Successor Entity (including its Parent Entity) is
a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible
Market. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to,
and be substituted for (so that from and after the date of such Fundamental Transaction, the
provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity),
and may exercise every right and power of the Company and shall assume all of the obligations of
the Company under this Warrant with



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the same effect as if such Successor Entity had been named as
the Company herein. Upon consummation of the Fundamental Transaction, the Successor Entity shall
deliver to the Holder confirmation that there shall be issued upon exercise of this Warrant at any
time after the consummation of the Fundamental Transaction, in lieu of the shares of the Common
Stock (or other securities, cash, assets or other property) issuable upon the exercise of the
Warrant prior to
such Fundamental Transaction, such shares of the publicly traded Common Stock (or its
equivalent) of the Successor Entity (including its Parent Entity) which the Holder would have been
entitled to receive upon the happening of such Fundamental Transaction had this Warrant been
converted immediately prior to such Fundamental Transaction, as adjusted in accordance with the
provisions of this Warrant. In addition to and not in substitution for any other rights hereunder,
prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of
Common Stock are entitled to receive securities or other assets with respect to or in exchange for
shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to
insure that the Holder will thereafter have the right to receive upon an exercise of this Warrant
at any time after the consummation of the Fundamental Transaction but prior to the Expiration Date,
in lieu of the shares of the Common Stock (or other securities, cash, assets or other property)
issuable upon the exercise of the Warrant prior to such Fundamental Transaction, such shares of
stock, securities, cash, assets or any other property whatsoever (including warrants or other
purchase or subscription rights) which the Holder would have been entitled to receive upon the
happening of such Fundamental Transaction had the Warrant been exercised immediately prior to such
Fundamental Transaction. Provision made pursuant to the preceding sentence shall be in a form and
substance reasonably satisfactory to the Required Holders. The provisions of this Section shall
apply similarly and equally to successive Fundamental Transactions and Corporate Events and shall
be applied without regard to any limitations on the exercise of this Warrant.




               (c) Notwithstanding the foregoing and the provisions of Section 4(b) above, in the event of a
Fundamental Transaction, if the Holder has not exercised the Warrant in full prior to the
consummation of the Fundamental Transaction where the consideration per share of Common Stock is
less than $4.14 (as adjusted for stock splits, stock dividends, reverse stock splits, combinations,
recapitalizations, reclassifications and similar events), at the request of the Holder delivered
before the 90th day after such Fundamental Transaction, the Company (or the Successor Entity) shall
purchase this Warrant from the Holder by paying to the Holder, cash in an amount equal to the Black
Scholes Value of the remaining unexercised portion of this Warrant on the date of such Fundamental
Transaction.



          5. NONCIRCUMVENTION. The Company hereby covenants and agrees that the Company will
not, by amendment of its Articles of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities,
or any other voluntary action, avoid or seek to avoid the observance or performance of any of the
terms of this Warrant, and will at all times in good faith carry out all the provisions of this
Warrant and take all action as may be required to protect the rights of the Holder. Without
limiting the generality of the foregoing, the Company (i) shall not increase the par value of any
shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then
in effect, (ii) shall 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





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Common Stock upon the
exercise of this Warrant and (iii) shall, from and after the receipt of the Capital Increase, so
long as any of the SPA Warrants are outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the SPA Warrants 130% of the shares of Common Stock as shall from time to
time be necessary to effect the exercise of the SPA Warrants then outstanding (without regard to
any limitations on exercise).




          6. WARRANT HOLDER NOT DEEMED A STOCKHOLDER. Except as otherwise specifically provided
herein, the Holder, solely in such Person’s capacity as a holder of this Warrant, shall not be
entitled to vote or receive dividends or be deemed the holder of share capital of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder,
solely in such Person’s capacity as the Holder of this Warrant, 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 issuance to the Holder of the Warrant Shares which such Person 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 the 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 6, the
Company shall provide the Holder 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.




          7. REISSUANCE OF WARRANTS.




               (a) Transfer of Warrant. If this Warrant is to be transferred, the Holder shall
surrender this Warrant to the Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new Warrant (in accordance with Section 7(d)), registered as the Holder
may request, representing the right to purchase the number of Warrant Shares being transferred by
the Holder and, if less then the total number of Warrant Shares then underlying this Warrant is
being transferred, a new Warrant (in accordance with Section 7(d)) to the Holder representing the
right to purchase the number of Warrant Shares not being transferred.



               (b) Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon
surrender and cancellation of this Warrant, the Company shall execute and deliver to the Holder a
new Warrant (in accordance with Section 7(d)) representing the right to purchase the Warrant Shares
then underlying this Warrant.



               (c) Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new Warrant or
Warrants (in accordance with Section 7(d)) representing in the aggregate



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the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant will represent the
right to purchase such portion of such Warrant Shares as is designated by the Holder at the time of
such surrender; provided, however, that no Warrants for fractional shares of Common Stock shall be
given.




               (d) Issuance of New Warrants. Whenever the Company is required to issue a new Warrant
pursuant to the terms of this Warrant, such new Warrant (i) shall be of like tenor with this
Warrant, (ii) shall represent, as indicated on the face of such new Warrant, the right to purchase
the Warrant Shares then underlying this Warrant (or in the case of a new Warrant being issued
pursuant to Section 7(a) or Section 7(c), the Warrant Shares designated by the Holder which, when
added to the number of shares of Common Stock underlying the other new Warrants issued in
connection with such issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such new Warrant which is
the same as the Issuance Date, and (iv) shall have the same rights and conditions as this Warrant.



          8. NOTICES. Whenever notice is required to be given under this Warrant, unless
otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the
Securities Purchase Agreement. The Company shall provide the Holder with prompt written notice of
all actions taken pursuant to this Warrant, including in reasonable detail a description of such
action and the reason therefore. Without limiting the generality of the foregoing, the Company
will give written notice to the Holder (i) immediately upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at
least fifteen 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 shares of Common Stock, (B) with respect to
any grants, issuances or sales of any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property to holders of shares of Common Stock or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in
each case that such information shall be made known to the public prior to or in conjunction with
such notice being provided to the Holder.




          9. AMENDMENT AND WAIVER. Except as otherwise provided herein, the provisions of this
Warrant 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 Required Holders; provided that no such action may increase the exercise price of any SPA
Warrant or decrease the number of shares or class of stock obtainable upon exercise of any SPA
Warrant without the written consent of the Holder. No such amendment shall be effective to the
extent that it applies to less than all of the holders of
the SPA Warrants then outstanding.




          10. SEVERABILITY. If any provision of this Warrant or the application thereof becomes
or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the
remainder of the terms of this Warrant will continue in full force and effect.




          11. GOVERNING LAW. This Warrant shall be governed by and construed and enforced in
accordance with, and all questions concerning the construction, validity,





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interpretation and
performance 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 jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.




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          12. CONSTRUCTION; HEADINGS. This Warrant shall be deemed to be jointly drafted by the
Company and all the Buyers and shall not be construed against any person as the drafter hereof.
The headings of this Warrant are for convenience of reference and shall not form part of, or affect
the interpretation of, this Warrant.




          13. DISPUTE RESOLUTION. In the case of a dispute as to the determination of the
Exercise Price or the arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two Business Days of
receipt of the Exercise Notice giving rise to such dispute, as the case may be, to the Holder. If
the Holder and the Company are unable to agree upon such determination or calculation of the
Exercise Price or the Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall, within two Business
Days submit via facsimile (a) the disputed determination of the Exercise Price to an independent,
reputable investment bank selected by the Company and approved by the Holder or (b) the disputed
arithmetic calculation of the Warrant Shares to the Company’s independent, outside accountant. The
Company shall cause at its expense the investment bank 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 ten Business Days from the time it receives the disputed determinations or calculations.
Such investment bank’s or accountant’s determination or calculation, as the case may be, shall be
binding upon all parties absent demonstrable error.




          14. REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF. The remedies
provided in this Warrant shall be cumulative and in addition to all other remedies available under
this Warrant and the other Transaction Documents, at law or in equity (including a decree of
specific performance and/or other injunctive relief), and nothing herein shall limit the right of
the Holder right to pursue actual damages for any failure by the Company to comply with the terms
of this Warrant. The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Holder and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach or threatened
breach, the holder of this Warrant shall be entitled, in addition to all other available remedies,
to an injunction restraining any breach, without the necessity of showing economic loss and without
any bond or other security being required.




          15. TRANSFER. This Warrant may be offered for sale, sold, transferred or assigned
without the consent of the Company, except as may otherwise be required by Section 2(f) of the
Securities Purchase Agreement.




          16. CERTAIN DEFINITIONS. For purposes of this Warrant, the following terms shall have
the following meanings:




               (a) “Black Scholes Value” means the Black and Scholes Option Pricing Model reflecting (i) a
risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining
term of this Warrant as of such date of request and (ii) an expected volatility equal to the
greater of 60% and the 100 day volatility obtained from the HVT function on Bloomberg.



-14-









 





               (b) “Bloomberg” means Bloomberg Financial Markets.



               (c) “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.



               (d) “Closing Bid Price” and “Closing Sale Price” means, for any security as of any date, the
last closing bid price and last closing trade price, respectively, for such security on the
Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing trade price, as
the case may be, then the last bid price or last trade price, respectively, of such security prior
to 4:00:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last closing bid price or
last trade price, respectively, of such security on the principal securities exchange or trading
market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not
apply, the last closing bid price or last trade price, respectively, of such security in the
over-the-counter market on the electronic bulletin board for such security as reported by
Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any
market makers for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be
calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price
or the Closing Sale Price, as the case may be, of such security on such date shall be the fair
market value as mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such dispute shall be
resolved pursuant to Section 12. All such determinations to be appropriately adjusted for any
stock dividend, stock split, stock combination or other similar transaction during the applicable
calculation period.



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



               (f) “Common Stock Deemed Outstanding” means, at any given time, the number of shares of Common
Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(a)(i) and 2(a)(ii) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any shares of Common
Stock owned or held by or for the account of the Company or issuable upon conversion and exercise,
as applicable, of the SPA Securities and the Warrants.



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



-15-









 





               (h) “Eligible Market” means the Principal Market, the American Stock Exchange, The New York
Stock Exchange, Inc., the Nasdaq National Market or The Nasdaq Capital Market.



               (i) “Expiration Date” means the date sixty months after the Issuance Date or, if such date
falls on a day other than a Business Day or on which trading does not take place on the Principal
Market (a “Holiday”), the next date that is not a Holiday.



               (j) “Fundamental Transaction” means that the Company shall, directly or indirectly, in one or
more related transactions, (i) consolidate or merge with or into (whether or not the Company is the
surviving corporation) another Person, or (ii) sell, assign, transfer, convey or otherwise dispose
of all or substantially all of the properties or assets of the Company to another Person, or (iii)
allow another Person to make a purchase, tender or exchange offer that is accepted by the holders
of more than the 50% of either the outstanding shares of Common Stock (not including any shares of
Common Stock held by the Person or Persons making or party to, or associated or affiliated with the
Persons making or party to, such purchase, tender or exchange offer), or (iv) consummate a stock
purchase agreement or other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person
acquires more than the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or associated or
affiliated with the other Persons making or party to, such stock purchase agreement or other
business combination), or (v) reorganize, recapitalize or reclassify its Common Stock.



               (k) “Maximum Eligibility Number” means initially zero and shall be increased each time that
the Company elects a Mandatory Conversion (as defined in the Notes) pursuant to the Holders’ Notes
by an amount equal to (i) in the event the Stock Price as of the Mandatory Conversion Date (as
defined in the Notes) is equal to no less than 125% and no greater than 175% of the Conversion
Price (as defined in the Notes) on the Issuance Date (as defined in the Notes), 40% of the number
of Conversion Shares (as defined in the Securities Purchase Agreement) issued in connection with
such Mandatory Conversion, (ii) in the event the Stock Price as of the Mandatory Conversion Date is
greater than 175% and no greater than 225% of the Conversion Price on the Issuance Date, 30% of the
number of Conversion Shares issued in connection with such Mandatory Conversion, (iii) in the event
the Stock Price as of the Mandatory Conversion Date is greater than 225% and no greater than 300%
of the Conversion Price on the Issuance Date, 20% of the number of Conversion Shares issued in
connection with such Mandatory Conversion, or (iv) in the event the Stock Price as of the Mandatory
Conversion Date is greater than 300% of the Conversion Price on the Issuance Date, 10% of the
number of Conversion Shares issued in connection with such Mandatory Conversion.



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



               (m) “Parent Entity” of a Person means an entity that, directly or indirectly, controls the
applicable Person and whose common stock or equivalent equity security is quoted or listed on an
Eligible Market, or, if there is more than one such Person or Parent



-16-









 







Entity, the Person or Parent Entity with the largest public market capitalization as of the
date of consummation of the Fundamental Transaction.



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



               (o) “Principal Market” means the NASD’s OTC Bulletin Board.



               (p) “Registration Rights Agreement” means that certain registration rights agreement by and
among the Company and the Buyers.



               (q) “Required Holders” means the holders of the SPA Warrants representing at least a majority
of shares of Common Stock underlying the SPA Warrants then outstanding.



               (r) “SPA Securities” means the Notes issued pursuant to the Securities Purchase Agreement.



               (s) “SPA Warrants” means the Warrants issued pursuant to the Securities Purchase Agreement.



               (t) “Successor Entity” means the Person (or, if so elected by the Required Holders, the Parent
Entity) formed by, resulting from or surviving any Fundamental Transaction or the Person (or, if so
elected by the Required Holders, the Parent Entity) with which such Fundamental Transaction shall
have been entered into.



               (u) “Stock Price” means the arithmetic average of the Weighted Average Price for the 10
Trading Days immediately prior to the Mandatory Conversion Notice Date (as defined in the Notes).



               (v) “Trading Day” means any day on which the Common Shares are traded on the Principal Market,
or, if the Principal Market is not the principal trading market for the Common Shares, then on the
principal securities exchange or securities market on which the Common Shares are then traded;
provided that “Trading Day” shall not include any day on which the Common Shares are scheduled to
trade on such exchange or market for less than 4.5 hours or any day that the Common Shares are
suspended from trading during the final hour of trading on such exchange or market (or if such
exchange or market does not designate in advance the closing time of trading on such exchange or
market, then during the hour ending at 4:00:00 p.m., New York time).



               (w) “Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during the period beginning
at 9:30:01 a.m., New York City time, and ending at 4:00:00 p.m., New York City time, as reported by
Bloomberg through its “Volume at Price” function 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 9:30:01



-17-









 




a.m., New York City time,
and ending at 4:00:00 p.m., New York City time, 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 Pink Sheets
LLC (formerly 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 Required Holders. If the Company and the Required Holders are unable to agree upon the
fair market value of the such security, then such dispute shall be resolved pursuant to Section 13
with the term “Weighted Average Price” being substituted for the term “Exercise Price.” All such
determinations shall be appropriately adjusted for any share dividend, share split or other similar
transaction during such period.



[Signature Page Follows]





-18-









 








     IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock to be duly
executed as of the Issuance Date set out above.



	 	 	 	 	 	 	 
	 	 	TOUCHSTONE RESOURCES USA, INC.	 	 
	 
	 

	 	By:	 	 	 	 
	 

	 	Name:
	 	 

	 	 
	 	 	Title:	 	 







 









 








EXHIBIT A



EXERCISE NOTICE



TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS

WARRANT TO PURCHASE COMMON STOCK



TOUCHSTONE RESOURCES USE, INC.




     The undersigned holder hereby exercises the right to purchase ___of the shares
of Common Stock (“Warrant Shares”) of Touchstone Resources USA, Inc., a Delaware corporation (the
“Company”), evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”).
Capitalized terms used herein and not otherwise defined shall have the respective meanings set
forth in the Warrant.



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



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




                              a “Cashless Exercise” with respect to                     Warrant Shares.




     2. Payment of 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 to the holder                     Warrant
Shares in accordance with the terms of the Warrant.



Date:                     ,                    




	 	 	 	 	 
	 	 	 
	     Name of Registered Holder	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 

Name:
	 	 
	 

	 	Title:	 	 






 









 





ACKNOWLEDGMENT




     The Company hereby acknowledges this Exercise Notice and hereby directs StockTrans, Inc. to
issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent
Instructions dated April 4, 2006 from the Company and acknowledged and agreed to by StockTrans,
Inc.



	 	 	 	 	 	 	 
	 	 	TOUCHSTONE RESOURCES USA, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

     Name:
	 	 
	 

	 	 	 	     Title: