Document:

Exhibit 10.2

EXECUTION
COPY

REGISTRATION RIGHTS
AGREEMENT

REGISTRATION RIGHTS AGREEMENT
(this “Agreement”), dated as of
July 25, 2006, by and among Apollo Resources International Inc., a Utah
corporation, with headquarters located at 3001 Knox Street, Suite 403, Dallas,
Texas 75205, (the “Company”), and
the undersigned buyers (each, a “Buyer”,
and collectively, the “Buyers”).

WHEREAS:

A.            In connection with the Securities
Purchase Agreement, dated as of July 25, 2006, by and among the Company and the
Buyers (the “Securities Purchase Agreement”),
the Company has agreed, upon the terms and subject to the conditions set forth
in the Securities Purchase Agreement, to issue and sell to each Buyer (i)
shares (the “Common Shares”) of the Company’s
common stock, $0.001 par value per share (the “Common Stock”), and (ii) warrants (the “Warrants”), which will be exercisable to
purchase shares of Common Stock (as exercised collectively, the “Warrant Shares”).

B.            In accordance with the terms of the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the “1933 Act”), and applicable state securities
laws.

NOW,
THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and each
of the Buyers hereby agree as follows:

I.              Definitions.

Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings set forth in the Securities
Purchase Agreement.  As used in this
Agreement, the following terms shall have the following meanings:

a.             “Business Day” means any day other than Saturday, Sunday or
any other day on which commercial banks in The City of New York are authorized
or required by law to remain closed.

b.             “Closing Date” shall have the meaning set forth in the
Securities Purchase Agreement.

c.             “Effective Date” means the date the Registration Statement
has been declared effective by the SEC.

d.             “Effectiveness Deadline” means the date which is (i) in the
event that the Registration Statement is not subject to a review by the SEC,
120 calendar days after the Closing Date or (ii) in the event that the
Registration Statement is subject to a review by the SEC, 180 calendar days
after the Closing Date.

 

e.             “Filing
Deadline” means 90 calendar days after the Closing Date.

f.              “Investor” means a Buyer or any transferee or assignee
thereof to whom a Buyer assigns its rights under this Agreement in accordance
with the requirements of the Transaction Documents and who agrees to become
bound by the provisions of this Agreement in accordance with Section 9 and any
transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement in accordance with the requirements of the
Transaction Documents and who agrees to become bound by the provisions of this
Agreement in accordance with Section 9.

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

h.             “register,” “registered,”
and “registration” refer to a registration
effected by preparing and filing one or more Registration Statements (as
defined below) in compliance with the 1933 Act and pursuant to Rule 415 and the
declaration or ordering of effectiveness of such Registration Statement(s) by
the SEC.

i.              “Registrable Securities” means (i) the Common Shares,
(ii) the Warrant Shares issued or issuable upon exercise of the Warrants,
(iii) any shares of Common Stock issuable upon exercise of warrants issued to
any placement agent as compensation in connection with the financing that is
the subject of the Securities Purchase Agreement, and (iv) any capital
stock of the Company issued or issuable with respect to the Common Shares, the
Warrant Shares, or the Warrants as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, without regard to any
limitations on exercise of the Warrants.

j.              “Registration Statement” means a registration statement or
registration statements of the Company filed under the 1933 Act covering the
Registrable Securities.

k.             “Required Holders” means the holders of at least a majority
of the Registrable Securities.

l.              “Required Registration Amount” means 130% (or such lesser
amount as the SEC may permit as evidenced in comments received to a filed
Registration Statement) of the sum of (i) the number of Common Shares issued
pursuant to the Securities Purchase Agreement and issuable pursuant to the
Warrants as of the trading day immediately preceding the applicable date of
determination, all subject to adjustment as provided in Section 2(e) (without
regard to any limitations on exercise of the Warrants).

m.            “Rule 415” means Rule 415 under the 1933 Act or any successor
rule providing for offering securities on a continuous or delayed basis.

n.             “SEC” means the United States Securities and Exchange
Commission.

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2.             Registration.

a.             Mandatory Registration.  The Company shall prepare, and, as soon as
practicable but in no event later than the Filing Deadline, file with the SEC
the Registration Statement on Form S-3 covering the resale of all of the
Registrable Securities issuable upon then outstanding Securities.  In the event that Form S-3 is unavailable for
such a registration, the Company shall use such other form as is available for
such a registration on another appropriate form reasonably acceptable to the
Required Holders, subject to the provisions of Section 2(d).  The Registration Statement prepared pursuant
hereto shall register for resale at least the number of shares of Common Stock
equal to the Required Registration Amount as of date the Registration Statement
is initially filed with the SEC.  The
Registration Statement shall contain (except if otherwise directed by the
Required Holders) the “Selling Stockholders” and “Plan of
Distribution” sections in substantially the form attached hereto as Exhibit
B.  The Company shall use its best efforts to have the Registration
Statement declared effective by the SEC as soon as practicable, but in no event
later than the Effectiveness Deadline. 
By 9:30 am on the date following the Effective Date, the Company shall
file with the SEC in accordance with Rule 424 under the 1933 Act the final
prospectus to be used in connection with sales pursuant to such Registration
Statement.

b.             Allocation of
Registrable Securities.  The initial
number of Registrable Securities included in any Registration Statement and any
increase in the number of Registrable Securities included therein shall be
allocated pro rata among the Investors based on the number of Registrable
Securities held by each Investor at the time the Registration Statement
covering such initial number of Registrable Securities or increase thereof is
declared effective by the SEC.  In the
event that an Investor sells or otherwise transfers any of such Investor’s
Registrable Securities, each transferee shall be allocated a pro rata portion
of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. 
Any shares of Common Stock included in a Registration Statement and
which remain allocated to any Person which ceases to hold any Registrable
Securities covered by such Registration Statement shall be allocated to the
remaining Investors, pro rata based on the number of Registrable Securities
then held by such Investors which are covered by such Registration
Statement.  Other than as set forth in Schedule
2(b), in no event shall the Company include any securities other than
Registrable Securities on any Registration Statement without the prior written
consent of the Required Holders.

c.             Legal Counsel.  Subject to Section 5 hereof, the Required
Holders shall have the right to select one legal counsel to review and oversee
any registration pursuant to this Section 2 (“Legal Counsel”), which shall be Schulte Roth & Zabel LLP
or such other counsel as thereafter designated by the Required Holders.  The Company and Legal Counsel shall
reasonably cooperate with each other in performing the Company’s obligations
under this Agreement.

d.             Ineligibility
for Form S-3.  In the event that Form
S-3 is not  available for the
registration of the resale of Registrable Securities hereunder, the Company
shall (i) register the resale of the Registrable Securities on another
appropriate form reasonably acceptable to the Required Holders and (ii)
undertake to register the Registrable Securities on Form S-3 as soon as such
form is available, provided that the Company shall maintain the

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effectiveness
of the Registration Statement then in effect until such time as a Registration
Statement on Form S-3 covering the Registrable Securities has been declared
effective by the SEC.

e.             Sufficient
Number of Shares Registered.  In the
event the number of shares available under a Registration Statement filed
pursuant to Section 2(a) is insufficient to cover all of the Registrable
Securities required to be covered by such Registration Statement or an Investor’s
allocated portion of the Registrable Securities pursuant to Section 2(b), the
Company shall amend the applicable Registration Statement, or file a new
Registration Statement (on the short form available therefor, if applicable),
or both, so as to cover at least the Required Registration Amount as of the
trading day immediately preceding the date of the filing of such amendment or
new Registration Statement, in each case, as soon as practicable, but in any
event not later than thirty (30) days after the necessity therefor arises.  The Company shall use its best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable following the filing thereof.  For purposes of the foregoing provision, the
number of shares available under a Registration Statement shall be deemed “insufficient
to cover all of the Registrable Securities” if at any time the number of shares
of Common Stock available for resale under the Registration Statement is less
than the product determined by multiplying (i) the Required Registration Amount
as of such time by (ii) 0.90.  The
calculation set forth in the foregoing sentence shall be made without regard to
any limitations on the exercise of the Warrants and such calculation shall
assume that the Warrants are then exercisable for shares of Common Stock at the
then prevailing Exercise Price (as defined in the Warrants).

f.              Effect of
Failure to File and Obtain and Maintain Effectiveness of Registration Statement.  Subject to Section 4(a), if (i) a
Registration Statement covering all of the Registrable Securities required to
be covered thereby and required to be filed by the Company pursuant to this
Agreement is (A) not filed with the SEC on or before the respective Filing
Deadline (a “Filing Failure”)
or (B) not declared effective by the SEC on or before the respective
Effectiveness Deadline (an “Effectiveness Failure”)
or (ii) on any day after the Effective Date sales of all of the Registrable
Securities required to be included on such Registration Statement cannot be
made (other than during an Allowable Grace Period (as defined in Section 3(r))
pursuant to such Registration Statement or otherwise (including, without
limitation, because of a failure to keep such Registration Statement effective,
to disclose such information as is necessary for sales to be made pursuant to
such Registration Statement, to register a sufficient number of shares of
Common Stock or to maintain the listing of the Common Stock) (a “Maintenance Failure”) then, as partial relief for the
damages to any holder by reason of any such delay in or reduction of its
ability to sell the underlying Shares of Common Stock (which remedy shall not
be exclusive of any other remedies available at law or in equity), the Company
shall pay to each holder of Registrable Securities relating to such
Registration Statement an amount in cash equal to one and one-half percent
(1.5%) of the aggregate Purchase Price (as such term is defined in the
Securities Purchase Agreement) of such Investor’s Common Shares relating to the
Registrable Securities included in such Registration Statement on each of the
following dates: (i) the day of a Filing Failure and on every thirtieth day
(pro rated for periods totaling less than thirty days) after a Filing Failure
until such Filing Failure is cured; (ii) the day of an Effectiveness Failure
and on every thirtieth day (pro rated for periods totaling less than thirty
days) after an Effectiveness Failure until such Effectiveness Failure is cured;
and

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(iii) the
initial day of a Maintenance Failure and on every thirtieth day (pro rated for
periods totaling less than thirty days) after a Maintenance Failure until such
Maintenance Failure is cured; provided, however, that in no event shall the
Company be liable for more than one and one-half percent (1.5%) of penalties
during any thirty day period or for multiple events during any thirty day
period.  The payments to which a holder
shall be entitled pursuant to this Section 2(g) are referred to herein as “Registration Delay Payments.”  Registration Delay Payments shall accrue on
the day of the Filing Failure, Effectiveness Failure and the initial day of a
Maintenance Failure, as applicable, and thereafter shall accrue and be paid on
the earlier of (I) the thirtieth day after the event or failure giving rise to
the Registration Delay Payments has occurred and (II) the Business Day after the
event or failure giving rise to the Registration Delay Payments is cured.  In the event the Company fails to make
Registration Delay Payments in a timely manner, such Registration Delay
Payments shall bear interest at the rate of one and one-half percent (1.5%) per
month (prorated for partial months) until paid in full.  Notwithstanding anything herein to the
contrary, in no event shall the Registration Delay Payments exceed twelve and
one-half percent (12.5%) of the aggregate Purchase Price for all Investors (the
“Registration Delay Payments Cap”).  Any amount in excess of the Registration
Delay Payments Cap (the “Excess Registration
Delay Payments”) shall cause the Exercise Price of the Investor’s
Warrants to be lowered by an amount equal to the quotient of the amount of such
Investors Excess Registration Delay Payments divided by the Purchase Price of
such Investor’s Common Shares. 
Notwithstanding anything to the contrary contained herein, in no event
shall the Company be liable for any damages in connection with the Warrant or
Warrant Shares.

3.             Related Obligations.

At such time as the Company is obligated to file a
Registration Statement with the SEC pursuant to Section 2(a), 2(d) or 2(e), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:

a.             The Company shall
promptly prepare and file with the SEC a Registration Statement with respect to
the Registrable Securities and use its reasonable best efforts to cause such
Registration Statement relating to the Registrable Securities to become
effective as soon as practicable after such filing (but in no event later than
the Effectiveness Deadline).  Subject to
Allowable Grace Periods, the Company shall keep each Registration Statement
effective pursuant to Rule 415 at all times until the earlier of (i) the date
as of which the Investors may sell all of the Registrable Securities covered by
such Registration Statement without restriction pursuant to Rule 144(k) (or any
successor thereto) promulgated under the 1933 Act or (ii) the date on which the
Investors shall have sold all of the Registrable Securities covered by such
Registration Statement (the “Registration
Period”).  The Company shall
ensure that each Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein, or necessary to make the statements therein (in the case
of prospectuses, in the light of the circumstances in which they were made) not
misleading other than such information as provided in writing by Investors for
use in such Registration Statement or prospectus.  The term “best efforts” shall mean, among
other things, that the Company shall submit to the SEC, within two (2) Business
Days after the later of the date that (i) the Company learns that no review of
a particular Registration Statement will be

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made by the staff of the SEC or that the staff has no further comments
on a particular Registration Statement, as the case may be, and (ii) the
approval of Legal Counsel (which shall not be unreasonably withheld or delayed)
pursuant to Section 3(c) (which approval is immediately sought), a request for
acceleration of effectiveness of such Registration Statement to a time and date
not later than two (2) Business Days after the submission of such request.

b.             The Company shall
prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to a Registration Statement and the prospectus used
in connection with such Registration Statement, which prospectus is to be filed
pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to
keep such Registration Statement effective at all times during the Registration
Period, and, during such period, comply with the provisions of the 1933 Act
with respect to the disposition of all Registrable Securities of the Company
covered by such Registration Statement. 
In the case of amendments and supplements to a Registration Statement
which are required to be filed pursuant to this Agreement (including pursuant
to this Section 3(b)) by reason of the Company filing a report on Form 10-QSB,
Form 10-KSB or any analogous report under the Securities Exchange Act of 1934,
as amended (the “1934 Act”), the
Company shall have incorporated such report by reference into such Registration
Statement, if applicable, or shall file such amendments or supplements with the
SEC on the same day on which the 1934 Act report is filed which created the
requirement for the Company to amend or supplement such Registration Statement.

c.             The Company shall
(A) permit Legal Counsel to review and comment upon (i) a Registration
Statement at least three (3) Business Days prior to its filing with the SEC and
(ii) all amendments and supplements to all Registration Statements (except for
Annual Reports on Form 10-KSB, and Reports on Form 10-QSB and any similar or
successor reports) within a reasonable number of days prior to their filing
with the SEC, and (B) not file any Registration Statement or amendment or
supplement thereto in a form to which Legal Counsel reasonably objects; provided,
however, that no liquidated damages under Section 2 shall be due to any
Investor if Legal Counsel shall have unnecessarily objected to the filing or
effectiveness of any Registration Statement such as to delay its filing or
effectiveness.  The Company shall furnish
to Legal Counsel, without charge, (i) copies of any correspondence from the SEC
or the staff of the SEC to the Company or its representatives relating to any
Registration Statement, to the extent containing information which the Company
believes does not constitute material, nonpublic information concerning the
Company and (ii) promptly after the same is prepared and filed with the SEC,
one copy of any Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference, if requested by an Investor (if not available pursuant to Rule
424(b)).  The Company shall reasonably
cooperate with Legal Counsel in performing the Company’s obligations pursuant
to this Section 3.

d.             The Company shall
furnish to each Investor whose Registrable Securities are included in any
Registration Statement, without charge, 
(i) promptly after the same is prepared and filed with the SEC, at least
one copy of such Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by
reference, if requested by an Investor, all exhibits and each preliminary
prospectus, (ii) upon the effectiveness of any Registration Statement, ten (10)
copies of the prospectus included in such Registration Statement and all
amendments and supplements thereto

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(or such other
number of copies as such Investor may reasonably request) and (iii) such other
documents, including copies of any preliminary or final prospectus, as such
Investor may reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.

e.             The Company shall
use its best efforts to (i) register and qualify, unless an exemption from
registration and qualification applies, the resale by Investors of the
Registrable Securities covered by a Registration Statement under such other
securities or “blue sky” laws of all applicable jurisdictions in the United
States, (ii) prepare and file in those jurisdictions, such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during
the Registration Period, and (iv) take all other actions reasonably necessary
or advisable to qualify the Registrable Securities for sale in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (x) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(e), (y) subject itself to general taxation in any such
jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction.  The Company shall promptly
notify Legal Counsel and each Investor who holds Registrable Securities of the
receipt by the Company of any notification with respect to the suspension of
the registration or qualification of any of the Registrable Securities for sale
under the securities or “blue sky” laws of any jurisdiction in the United
States or its receipt of notice of the initiation or threatening of any
proceeding for such purpose.

f.              The Company shall
notify Legal Counsel and each Investor in writing of the happening of any
event, as promptly as practicable after becoming aware of such event, as a
result of which the prospectus included in a Registration Statement, as then in
effect, includes an untrue statement of a material fact or omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (provided that in no event shall such notice contain any material,
nonpublic information), and, subject to Section 3(r), promptly prepare a
supplement or amendment to such Registration Statement to correct such untrue
statement or omission, and deliver ten (10) copies of such supplement or
amendment to Legal Counsel and each Investor (or such other number of copies as
Legal Counsel or such Investor may reasonably request).  The Company shall also promptly notify Legal
Counsel and each Investor in writing (i) when a prospectus or any prospectus
supplement or post-effective amendment has been filed, and when a Registration
Statement or any post-effective amendment has become effective (notification of
such effectiveness shall be delivered to Legal Counsel and each Investor by
facsimile or e-mail on the same day of such effectiveness), (ii) of any request
by the SEC for amendments or supplements to a Registration Statement or related
prospectus or related information, and (iii) of the Company’s determination
that a post-effective amendment to a Registration Statement would be
appropriate.

g.             The Company shall
use its best efforts to prevent the issuance of any stop order or other
suspension of effectiveness of a Registration Statement, or the suspension of
the qualification of any of the Registrable Securities for sale in any
jurisdiction and, if such an order or suspension is issued, to obtain the
withdrawal of such order or suspension at the earliest

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possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of notice of the initiation or threat of any proceeding for such
purpose.

h.             If, after the
execution of this Agreement, an Investor believes, after consultation with its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of such Investor, the Company shall
furnish to such Investor, on the date of the effectiveness of the Registration
Statement and thereafter from time to time on such dates as an Investor may
reasonably request (i) a letter, dated such date, from the Company’s
independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters
in an underwritten public offering, addressed to the Investors, and (ii) an
opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Investors.

i.              If after the
execution of this Agreement an Investor believes, after consultation with its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of such Investor, the Company shall make
available for inspection by (i) any Investor, (ii) Legal Counsel and (iii) one
firm of accountants or other agents retained by the Investors (collectively,
the “Inspectors”),
all pertinent financial and other records, and pertinent corporate documents
and properties of the Company (collectively, the “Records”),
as shall be reasonably deemed necessary by each Inspector, and cause the
Company’s officers, directors and employees to supply all information which any
Inspector may reasonably request; provided, however, that each Inspector shall
agree to hold in strict confidence and shall not make any disclosure (except to
an Investor) or use of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or is otherwise required under the 1933 Act, (b) the release of such
Records is ordered pursuant to a final, non-appealable subpoena or order from a
court or government body of competent jurisdiction, or (c) the information in
such Records has been made generally available to the public other than by
disclosure in violation of this Agreement. 
Each Investor agrees that it shall, upon learning that disclosure of
such Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and
allow the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the Records deemed
confidential.  Nothing herein (or in any
other confidentiality agreement between the Company and any Investor) shall be
deemed to limit the Investors’ ability to sell Registrable Securities in a
manner which is otherwise consistent with applicable laws and regulations.

j.              The Company shall
hold in confidence and not make any disclosure of information concerning an
Investor provided to the Company unless (i) disclosure of such information is
necessary to comply with federal or state securities laws or the rules and
regulations of any applicable trading market, (ii) the disclosure of such
information is necessary to avoid or correct a misstatement or omission in any
Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other final order from a court or governmental body
of competent jurisdiction, or (iv) such information has been made generally

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available to
the public other than by disclosure in violation of this Agreement or any other
agreement.  The Company agrees that it
shall, upon learning that disclosure of such information concerning an Investor
is sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt written notice to such Investor and allow such
Investor, at the Investor’s expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information.

k.             The Company shall
use its best efforts either to (i) cause all of the Registrable Securities
covered by a Registration Statement to be listed on each securities exchange on
which securities of the same class or series issued by the Company are then
listed, if any, if the listing of such Registrable Securities is then permitted
under the rules of such exchange or (ii) secure the inclusion for quotation of
all of the Registrable Securities on the Nasdaq National Market or (iii) if,
despite the Company’s best efforts, the Company is unsuccessful in satisfying
the preceding clauses (i) and (ii), to secure the inclusion for quotation of
all of the Registrable Securities on the American Stock Exchange for such
Registrable Securities and, without limiting the generality of the foregoing,
to use its best efforts to arrange for at least two market makers to register
with the National Association of Securities Dealers, Inc. (“NASD”) as such with respect to such Registrable Securities
or (iv) if, despite the Company’s best efforts, the Company is unsuccessful in
satisfying the preceding clauses (i)-(iii), to secure the inclusion for
quotation of all of the Registrable Securities on the NASD’s OTC Bulletin
Board.  The Company shall pay all fees
and expenses in connection with satisfying its obligation under this Section
3(k).

l.              The Company shall
cooperate with the Investors who hold Registrable Securities being offered and,
to the extent applicable, facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable
Securities to be offered pursuant to a Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
Investors may reasonably request and registered in such names as the Investors
may request.

m.            If requested by an
Investor, the Company shall (i) as soon as practicable incorporate in a
prospectus supplement or post-effective amendment such information as an
Investor reasonably requests to be included therein relating to the sale and
distribution of Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being offered
or sold, the purchase price being paid therefor and any other terms of the
offering of the Registrable Securities to be sold in such offering; (ii) as
soon as practicable make all required filings of such prospectus supplement or
post-effective amendment after being notified of the matters to be incorporated
in such prospectus supplement or post-effective amendment; and (iii) as soon as
practicable, supplement or make amendments to any Registration Statement if
reasonably requested by an Investor holding any Registrable Securities.

n.             The Company shall
use its best efforts to cause the Registrable Securities covered by a
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to consummate the
disposition of such Registrable Securities.

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o.             The Company shall make generally
available to its security holders as soon as practical, but not later than
ninety (90) days after the close of the period covered thereby, an earnings
statement (in form complying with, and in the manner provided by, the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company’s fiscal quarter next
following the effective date of a Registration Statement.

p.             The Company shall
otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC in connection with any registration hereunder.

q.             Within two (2)
Business Days after a Registration Statement which covers Registrable
Securities is declared effective by the SEC, the Company shall deliver, and
shall cause legal counsel for the Company to deliver, to the transfer agent for
such Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) confirmation that such
Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit A.

r.              Notwithstanding
anything to the contrary herein, at any time after the Effective Date, the
Company may delay the disclosure of material, non-public information concerning
the Company the disclosure of which at the time is not, in the good faith
opinion of the Board of Directors of the Company (following consultation with
its counsel), in the best interest of the Company (a “Grace Period”); provided, that the Company shall promptly
(i) notify the Investors in writing that such determination has been made (provided
that in each notice the Company will not disclose the content of such material,
non-public information to the Investors) and the date on which the Grace Period
will begin, and (ii) notify the Investors in writing of the date on which the
Grace Period ends; and, provided further, that during any three hundred sixty
five (365) day period such Grace Periods shall not exceed an aggregate of
thirty (30) days and the first day of any Grace Period must be at least two (2)
trading days after the last day of any prior Grace Period (each, an “Allowable Grace Period”). 
For purposes of determining the length of a Grace Period above, the
Grace Period shall begin on and include the date the Investors receive the
notice referred to in clause (i) and shall end on and include the later of the
date the Investors receive the notice referred to in clause (ii) and the date
referred to in such notice.  The
provisions of Section 3(g) hereof shall not be applicable during the period of
any Allowable Grace Period.  Upon expiration
of the Grace Period, the Company shall again be bound by the first sentence of
Section 3(f) with respect to the information giving rise thereto unless such
material, non-public information is no longer applicable.  Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of an Investor in accordance with the terms of the
Securities Purchase Agreement in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale and delivered a copy of the prospectus included as part of the applicable
Registration Statement (unless an exemption from such prospectus delivery
requirement exists) prior to the Investor’s receipt of the notice of a Grace
Period and for which the Investor has not yet settled.

 

 10

 

 

4.             Obligations of the Investors.

a.             At least five (5)
Business Days prior to the first anticipated filing date of a Registration
Statement, the Company shall notify each Investor in writing of the information
the Company requires from each such Investor if such Investor elects to have
any of such Investor’s Registrable Securities included in such Registration
Statement.  It shall be a condition
precedent to the obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Registrable Securities of a
particular Investor (and to the Company’s liability for damages under Section
2(f) to such Investor) that such Investor shall furnish to the Company a
completed and updated “Selling Stockholder Questionnaire,” in the form attached
hereto as Exhibit C, and such other information regarding itself, the
Registrable Securities held by it and the intended method of disposition of the
Registrable Securities held by it as shall be reasonably required to effect the
effectiveness of the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.

b.             Each Investor, by
such Investor’s acceptance of the Registrable Securities, agrees to cooperate
with the Company as reasonably requested by the Company in connection with the
preparation and filing of any Registration Statement hereunder, unless such
Investor has notified the Company in writing of such Investor’s election to
exclude all of such Investor’s Registrable Securities from such Registration
Statement.

c.             Each Investor
agrees that, upon receipt of any notice from the Company of the happening of
any event of the kind described in Section 3(g) or the first sentence of 3(f),
such Investor will immediately discontinue disposition of Registrable
Securities pursuant to any Registration Statement(s) covering such Registrable
Securities until such Investor’s receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(g) or the first sentence of 3(f)
or receipt of notice that no supplement or amendment is required.  Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of an Investor in accordance with the terms of the
Securities Purchase Agreement in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for
sale prior to the Investor’s receipt of a notice from the Company of the
happening of any event of the kind described in Section 3(g) or the first
sentence of 3(f) and for which the Investor has not yet settled.

d.             Each Investor
covenants and agrees that it will comply with the prospectus delivery
requirements of the 1933 Act as applicable to it or an exemption therefrom in
connection with sales of Registrable Securities pursuant to the Registration
Statement.

5.             Expenses of Registration.

All reasonable expenses, other than underwriting
discounts and commissions, incurred in connection with registrations, filings
or qualifications pursuant to Sections 2 and 3, including, without limitation,
all registration, listing and qualifications fees, printers and accounting
fees, and fees and disbursements of counsel for the Company shall be paid by
the Company.  The Company shall also
reimburse the Investors for the fees and disbursements of 

 11
 

 

Legal Counsel in
connection with registration, filing or qualification pursuant to Sections 2
and 3 of this Agreement which amount shall be limited to $10,000.

6.             Indemnification.

In the event any Registrable Securities are included
in a Registration Statement under this Agreement:

a.             To the fullest
extent permitted by law, the Company will, and hereby does, indemnify, hold
harmless and defend each Investor, the directors, officers, members, partners,
employees, agents, representatives of, and each Person, if any, who controls
any Investor within the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Person”), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’
fees, amounts paid in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating, preparing or defending
any action, claim, suit, inquiry, proceeding, investigation or appeal taken
from the foregoing by or before any court or governmental, administrative or
other regulatory agency, body or the SEC, whether pending or threatened,
whether or not an indemnified party is or may be a party thereto (“Indemnified Damages”), to which any of them may become
subject insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon:  (i) any untrue statement or alleged untrue statement
of a material fact in a Registration Statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other “blue sky” laws of any jurisdiction in
which Registrable Securities are offered (“Blue Sky Filing”),
or the omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained
in any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in the light of the
circumstances under which the statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a Registration Statement or (iv) any
violation of this Agreement (the matters in the foregoing clauses (i) through
(iv) being, collectively, “Violations”).  Subject to Section 6(c), the Company shall
reimburse the Indemnified Persons, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred
by them in connection with investigating or defending any such Claim.  Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section
6(a):  (i) shall not apply to a Claim by
an Indemnified Person arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person for such Indemnified Person expressly for
use in connection with the preparation of the Registration Statement or any
such amendment thereof or supplement thereto, if such prospectus was timely
made available by the Company pursuant to Section 3(d) and (ii) shall not apply
to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld or delayed.  Such 

 12
 

 

indemnity
shall remain in full force and effect regardless of any investigation made by
or on behalf of the Indemnified Person and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 9.

b.             In connection with
any Registration Statement in which an Investor is participating, each such
Investor agrees to severally and not jointly indemnify, hold harmless and
defend, to the same extent and in the same manner as is set forth in Section
6(a), the Company, each of its directors, each of its officers who signs the
Registration Statement and each Person, if any, who controls the Company within
the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Party”), against any Claim or Indemnified
Damages to which any of them may become subject, under the 1933 Act, the 1934
Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or
are based upon any Violation, in each case to the extent, and only to the
extent, that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by such Investor expressly for use
in connection with such Registration Statement; and, subject to Section 6(c),
such Investor will reimburse any legal or other expenses reasonably incurred by
an Indemnified Party in connection with investigating or defending any such
Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) and the agreement with respect to contribution contained in
Section 7 shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor,
which consent shall not be unreasonably withheld or delayed; provided, further,
however, that the Investor shall be liable under this Section 6(b) for only
that amount of a Claim or Indemnified Damages as does not exceed the net
proceeds to such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. 
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.

c.             Promptly after
receipt by an Indemnified Person or Indemnified Party under this Section 6 of
notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving a Claim, such Indemnified Person
or Indemnified Party shall, if a Claim in respect thereof is to be made against
any indemnifying party under this Section 6, deliver to the indemnifying party
a written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses of
not more than one counsel for such Indemnified Person or Indemnified Party to
be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding.  In the case
of an Indemnified Person, legal counsel referred to in the immediately
preceding sentence shall be selected by the Investors holding at least a
majority in interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates.  The Indemnified Party or
Indemnified Person shall cooperate fully with the indemnifying party in
connection with any 

 13
 

 

negotiation or
defense of any such action or Claim by the indemnifying party and shall furnish
to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or
Claim.  The indemnifying party shall keep
the Indemnified Party or Indemnified Person reasonably apprised at all times as
to the status of the defense or any settlement negotiations with respect
thereto.  No indemnifying party shall be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent, provided, however, that the indemnifying party shall
not unreasonably withhold, delay or condition its consent.  No indemnifying party shall, without the
prior written consent of the Indemnified Party or Indemnified Person, consent
to entry of any judgment or enter into any settlement or other compromise which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party or Indemnified Person of a release from all
liability in respect to such Claim or litigation, and such settlement shall not
include any admission as to fault on the part of the Indemnified Party.  Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties,
firms or corporations relating to the matter for which indemnification has been
made.  The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement
of any such action shall not relieve such indemnifying party of any liability
to the Indemnified Person or Indemnified Party under this Section 6, except to
the extent that the indemnifying party is prejudiced in its ability to defend
such action.

d.             The indemnification
required by this Section 6 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills
are received or Indemnified Damages are incurred.

e.             The indemnity
agreements contained herein shall be in addition to  (i) any cause of action or similar right of
the Indemnified Party or Indemnified Person against the indemnifying party or
others, and (ii) any liabilities the indemnifying party may be subject to
pursuant to the law.

7.             Contribution.

To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make
the maximum contribution with respect to any amounts for which it would
otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that:  (i) no
contribution shall be made under circumstances where the maker would not have
been liable for indemnification under the fault standards set forth in Section
6 of this Agreement, (ii) no Person involved in the sale of Registrable
Securities, which Person is guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) in connection with such sale, shall
be entitled to contribution from any Person involved in such sale of
Registrable Securities who was not guilty of fraudulent misrepresentation; and
(iii) contribution by any seller of Registrable Securities shall be limited in
amount to the net amount of proceeds received by such seller from the sale of
such Registrable Securities pursuant to such Registration Statement.

 14
 

 

8.             Reports Under the 1934 Act.

With a view to making available to the Investors the
benefits of Rule 144 promulgated under the 1933 Act or any other similar rule
or regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration (“Rule 144”), the Company agrees to:

a.             make and keep
public information available, as those terms are understood and defined in Rule
144;

b.             file with the SEC
in a timely manner all reports and other documents required of the Company
under the 1933 Act and the 1934 Act so long as the Company remains subject to
such requirements and the filing of such reports and other documents is
required for the applicable provisions of Rule 144; and

c.             furnish to each
Investor so long as such Investor owns Registrable Securities, promptly upon
request, (i) a written statement by the Company, if true, that it has complied
with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act,
(ii) a copy of the most recent annual report of the Company and such other
reports and documents so filed by the Company (but only if such reports are not
publicly available on the EDGAR system), and (iii) such other information as
may be reasonably requested to permit the Investors to sell such securities
pursuant to Rule 144 without registration.

9.             Assignment of Registration Rights.

The rights under this Agreement shall be automatically
assignable by the Investors to any transferee of all or any portion of such
Investor’s Registrable Securities if: 
(i) the Investor agrees in writing with the transferee or assignee to
assign such rights, and a copy of such agreement is furnished to the Company
within a reasonable time after such assignment; (ii) the Company is, within a
reasonable time after such transfer or assignment, furnished with written
notice of (a) the name and address of such transferee or assignee, and (b) the
securities with respect to which such registration rights are being transferred
or assigned; (iii) immediately following such transfer or assignment the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act or applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause
(ii) of this sentence the transferee or assignee agrees in writing with the
Company to be bound by all of the provisions contained herein; and (v) such
transfer shall have been made in accordance with the applicable requirements of
the Securities Purchase Agreement.

10.           Amendment of Registration Rights.

Provisions of this Agreement may be amended and the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of
the Company and the holders of at least two-thirds of the Registrable
Securities.  Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon each Investor
and the Company.  No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the Registrable Securities.  No
consideration shall be offered or paid to any Person to amend or consent to a
waiver or modification of any 

 15
 

 

provision of any of this
Agreement unless the same consideration also is offered to all of the parties
to this Agreement.

11.           Miscellaneous.

a.             A Person is deemed
to be a holder of Registrable Securities whenever such Person owns or is deemed
to own of record such Registrable Securities. 
If the Company receives conflicting instructions, notices or elections
from two or more Persons with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the such record owner of such Registrable Securities.

b.             Any notices,
consents, waivers or other communications required or permitted to be given
under the terms of this Agreement must be in writing and will be deemed to have
been delivered:  (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one 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:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Apollo Resources
  International, Inc.

  
	
   

  	
   

  	
  3001 Knox Street,
  Suite 403

  
	
   

  	
   

  	
  Dallas, Texas 75205

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  (214) 389-9800

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  (214) 389-9806

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  With a copy to:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
   

  	
  5956 Sherry Lane, Suite 1400

  
	
   

  	
   

  	
  Dallas, Texas 75225

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  (214) 706-4200

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  (214) 706-4242

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Roger A. Crabb, Esq.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  If to Legal Counsel:

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Schulte Roth & Zabel LLP

  
	
   

  	
   

  	
  919 Third Avenue

  
	
   

  	
   

  	
  New York, New York 10022

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  (212) 756-2000

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  (212) 593-5955

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Eleazer N. Klein, Esq.

  
							

 

 16
 

 

If to a Buyer, to its address and facsimile number set
forth on the Schedule of Buyers attached hereto, with copies to such Buyer’s
representatives as set forth on the Schedule of Buyers, or to such other
address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party
five (5) days prior to the effectiveness of such change.  Written confirmation of receipt (A) given by
the recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

c.             Failure of any
party to exercise any right or remedy under this Agreement or otherwise, or
delay by a party in exercising such right or remedy, shall not operate as a
waiver thereof.

d.             All questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by the internal laws of the State of New York,
without giving effect to any choice of law or conflict of 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.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein, and hereby irrevocably waives, and agrees not to assert in
any suit, action or proceeding, any claim that it is not personally subject to
the jurisdiction of any such court, that such suit, action or proceeding is
brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof.  Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law.  If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

e.             This Agreement, the
other Transaction Documents (as defined in the Securities Purchase Agreement)
and the instruments referenced herein and therein constitute the entire
agreement among the parties hereto with respect to the subject matter hereof
and thereof.  There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein and therein.  This Agreement, the
other Transaction Documents and 

 17
 

 

the
instruments referenced herein and therein supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof and thereof.

f.              Subject to the
requirements of Section 9, this Agreement shall inure to the benefit of and be
binding upon the permitted successors and assigns of each of the parties
hereto.

g.             The headings in
this Agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.

h.             This Agreement may
be executed in identical counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same agreement.  This Agreement, once executed by a party, may
be delivered to the other party hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.

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

j.              All consents and
other determinations required to be made by the Investors pursuant to this
Agreement shall be made, unless otherwise specified in this Agreement, by the
Required Holders.

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

l.              This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person.

m.            The obligations of
each Buyer hereunder are several and not joint with the obligations of any
other Buyer, and no provision of this Agreement is intended to confer any
obligations on any Buyer vis-à-vis any other Buyer.  Nothing contained herein, and no action taken
by any Buyer pursuant hereto, shall be deemed to constitute the Buyers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Buyers are in any way acting in concert or as a
group with respect to such obligations or the transactions contemplated herein.

[Signature Page Follows]

 

 18

 

IN WITNESS WHEREOF,
each Buyer and the Company have caused their respective signature page to this
Registration Rights Agreement to be duly executed as of the date first written
above.

 

	
  

  	
  COMPANY:

  
	
   

  	
   

  	
   

  
	
   

  	
  APOLLO RESOURCES INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

IN WITNESS WHEREOF,
each Buyer and the Company have caused their respective signature page to this
Registration Rights Agreement to be duly executed as of the date first written
above.

 

	
  

  	
  BUYERS:

  
	
   

  	
   

  	
   

  
	
   

  	
  CASTLERIGG MASTER INVESTMENTS LTD.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

 

 

SCHEDULE OF BUYERS

 

	
  

  Buyer

  	
   

  	
  Buyer’s Address

  and Facsimile Number

  	
   

  	
  Buyer’s Representative’s Address 

  and Facsimile Number

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Castlerigg Master Investments Ltd

  	
   

  	
  c/o Sandell Asset Management Corp.

  40 West 57th Street

  26th Floor

  New York, New York 10019

  Attention: Cem Hacioglu/Matthew Pliskin

  Facsimile: (212) 603-5710

  Telephone: (212) 603-5775

  	
   

  	
  Schulte Roth & Zabel LLP

  919 Third Avenue

  New York, New York 10022

  Attn: Eleazer Klein, Esq.

  Facsimile: (212) 593-5955

  Telephone: (212) 756-2000

  

 

 

 

 

EXHIBIT A

FORM OF NOTICE OF
EFFECTIVENESS

OF REGISTRATION STATEMENT

Colonial Stock Transfer

66 Exchange Place

Salt Lake City, Utah 84111

Re:          APOLLO RESOURCES INTERNATIONAL, INC.

Ladies and Gentlemen:

[We are][I am] counsel to
Apollo Resources International, Inc., a Utah corporation (the “Company”), and have represented the Company
in connection with that certain Securities Purchase Agreement (the “Securities Purchase
Agreement”) entered into by and among the Company and the buyers
named therein (collectively, the “Holders”)
pursuant to which the Company issued to the Holders shares (the “Common Shares”) of the Company’s common stock, $0.001 par
value per share (the ”Common Stock”)
and warrants exercisable for shares of Common Stock (the “Warrants”). 
Pursuant to the Securities Purchase Agreement, the Company also has
entered into a Registration Rights Agreement with the Holders (the “Registration Rights Agreement”) pursuant to
which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the
shares of Common Stock issuable upon exercise of the Warrants, under the
Securities Act of 1933, as amended (the “1933
Act”).  In connection with the
Company’s obligations under the Registration Rights Agreement, on               
   , 200  , the Company filed a Registration Statement
on Form S-3 (File No. 333-           )
(the “Registration Statement”)
with the Securities and Exchange Commission (the “SEC”) relating to the Registrable Securities which names each
of the Holders as a selling stockholder thereunder.

In connection with the foregoing, [we][I] advise you
that a member of the SEC’s staff has advised [us][me] by telephone that the SEC
has entered an order declaring the Registration Statement effective under the
1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and [we][I] have no knowledge, after
telephonic inquiry of a member of the SEC’s staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.

This letter shall serve as our standing opinion to you
that the shares of Common Stock are freely transferable by the Holders pursuant
to the Registration Statement.  You need
not require further letters from us to effect any future legend-free issuance
or reissuance of 

 

shares of Common Stock to
the Holders as contemplated by the Company’s Irrevocable Transfer Agent
Instructions dated July     , 2006.

 

	
  

  	
  Very truly
  yours,

  
	
   

  	
   

  	
   

  
	
   

  	
  [ISSUER’S COUNSEL]

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  

 

CC:           [LIST
NAMES OF HOLDERS]

 

 

 

EXHIBIT B

SELLING STOCKHOLDERS

The
shares of Common Stock being offered by the selling stockholders are those
previously issued to the selling stockholders and those issuable to the selling
stockholders upon exercise of the warrants. 
For additional information regarding the issuance of Common Stock and
the Warrants, see “Private Placement of Common Shares and Warrants” above.  We are registering the shares of Common Stock
in order to permit the selling stockholders to offer the shares for resale from
time to time.  Except for the ownership
of the Common Stock and the Warrants issued pursuant to the Securities Purchase
Agreement, the selling stockholders have not had any material relationship with
us within the past three years.

The
table below lists the selling stockholders and other information regarding the
beneficial ownership of the shares of Common Stock by each of the selling
stockholders.  The second column lists
the number of shares of Common Stock beneficially owned by each selling
stockholder, based on its ownership of the Common Stock and the Warrants, as of
            , 200   ,
assuming exercise of the warrants held by the selling stockholders on that
date, without regard to any limitations on exercise.

The
third column lists the shares of Common Stock being offered by this prospectus
by the selling stockholders.

In
accordance with the terms of a registration rights agreement with the selling
stockholders, this prospectus generally covers the resale of at least 130% of
the sum of (i) the number of shares of Common Stock issued in connection with
the Securities Purchase Agreement and (ii) the number of shares of Common Stock
issuable upon exercise of the related warrants as of the trading day
immediately preceding the date the registration statement is initially filed
with the SEC.  Because the
exercise price of the warrants may be adjusted, the number of shares that will
actually be issued may be more or less than the number of shares being offered
by this prospectus.  The fourth column
assumes the sale of all of the shares offered by the selling stockholders
pursuant to this prospectus.

Under
the terms of the warrants, a selling stockholder may not exercise the warrants
to the extent such exercise would cause such selling stockholder, together with
its affiliates, to beneficially own a number of shares of Common Stock which
would exceed 4.99% of our then outstanding shares of Common Stock following
such exercise, excluding for purposes of such determination shares of Common
Stock issuable upon exercise of the warrants which have not been
exercised.  The number of shares in the
second column does not reflect this limitation. 
The selling stockholders may sell all, some or none of their shares in
this offering.  See “Plan of
Distribution.”

 

 

	
  

  

  Name of Selling Stockholder

  	
   

  	
  

  Number of Shares Owned

  Prior to Offering

  	
   

  	
  Maximum Number of Shares

  to be Sold Pursuant to this

  Prospectus

  	
   

  	
  

  Number of Shares

  Owned After Offering

  
	
  Castlerigg Master Investments (1)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  0

  

(1)             Sandell
Asset Management Corp. is the investment manager of Castlerigg Master
Investment Ltd. (“Castlerigg”) and has shared voting and dispositive power over
the securities owned by Castlerigg. Sandell Asset Management Corp. and Thomas
E. Sandell, its sole shareholder, disclaim beneficial ownership of the
securities owned by Castlerigg.

 

 

 

PLAN OF DISTRIBUTION

We
are registering the shares of Common Stock previously issued and the shares of
Common Stock issuable upon exercise of the warrants to permit the resale of
these shares of Common Stock by the holders of the Common Stock and warrants
from time to time after the date of this prospectus.  We will not receive any of the proceeds from
the sale by the selling stockholders of the shares of Common Stock.  We will bear all fees and expenses incident
to our obligation to register the shares of Common Stock.

The
selling stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents.  If the shares of Common Stock are sold
through underwriters or broker-dealers, the selling stockholders will be
responsible for underwriting discounts or commissions or agent’s
commissions.  The shares of Common Stock
may be sold in one or more transactions at fixed prices, at prevailing market
prices at the time of the sale, at varying prices determined at the time of
sale, or at negotiated prices.  These
sales may be effected in transactions, which may involve crosses or block
transactions,

·                  on
any national securities exchange or quotation service on which the securities
may be listed or quoted at the time of sale;

·                  in
the over-the-counter market;

·                  in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;

·                  through
the writing of options, whether such options are listed on an options exchange
or otherwise;

·                  ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;

·                  block
trades in which the broker-dealer will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction;

·                  purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;

·                  an
exchange distribution in accordance with the rules of the applicable exchange;

·                  privately
negotiated transactions;

·                  to
cover short sales made after the date this Registration Statement is declared
effective by the SEC;

·                  sales
pursuant to Rule 144;

 

·                  broker-dealers
may agree with the selling securityholders to sell a specified number of such
shares at a stipulated price per share;

·                  a
combination of any such methods of sale; and

·                  any
other method permitted pursuant to applicable law.

If
the selling stockholders effect such transactions by selling shares of Common
Stock to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of Common Stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved).  In connection with sales of the shares of
Common Stock or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers, which may in turn engage in short sales of
the shares of Common Stock in the course of hedging in positions they
assume.  The selling stockholders may
also sell shares of Common Stock short and deliver shares of Common Stock
covered by this prospectus to close out short positions and to return borrowed
shares in connection with such short sales. 
The selling stockholders may also loan or pledge shares of Common Stock
to broker-dealers that in turn may sell such shares.

The
selling stockholders may pledge or grant a security interest in some or all of
the warrants or shares of Common Stock owned by them and, if they default in
the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of Common Stock from time to time pursuant to
this prospectus or any amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933, as amended, amending,
if necessary, the list of selling stockholders to include the pledgee,
transferee or other successors in interest as selling stockholders under this
prospectus.  The selling stockholders
also may transfer and donate the shares of Common Stock in other circumstances
in which case the transferees, donees, pledgees or other successors in interest
will be the selling beneficial owners for purposes of this prospectus.

The
selling stockholders and any broker-dealer participating in the distribution of
the shares of Common Stock may be deemed to be “underwriters” within the
meaning of the Securities Act, and any commission paid, or any discounts or
concessions allowed to, any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act.  At the time a particular offering of the
shares of Common Stock is made, a prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of shares of Common Stock
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholders and any discounts, commissions
or concessions allowed or reallowed or paid to broker-dealers.

Under
the securities laws of some states, the shares of Common Stock may be sold in
such states only through registered or licensed brokers or dealers.  In addition, in some states the shares of
Common Stock may not be sold unless such shares have been registered or
qualified 

 

for sale in such
state or an exemption from registration or qualification is available and is
complied with.

There
can be no assurance that any selling stockholder will sell any or all of the
shares of Common Stock registered pursuant to the shelf registration statement,
of which this prospectus forms a part.

The
selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of Common Stock by the selling
stockholders and any other participating person.  Regulation M may also restrict the ability of
any person engaged in the distribution of the shares of Common Stock to engage
in market-making activities with respect to the shares of Common Stock.  All of the foregoing may affect the
marketability of the shares of Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
Common Stock.

We
will pay all expenses of the registration of the shares of Common Stock
pursuant to the registration rights agreement, estimated to be
$[     ] in total, including, without limitation,
Securities and Exchange Commission filing fees and expenses of compliance with
state securities or “blue sky” laws; provided, however, that a selling
stockholder will pay all underwriting discounts and selling commissions, if
any.  We will indemnify the selling
stockholders against liabilities, including some liabilities under the
Securities Act, in accordance with the registration rights agreements, or the
selling stockholders will be entitled to contribution.  We may be indemnified by the selling
stockholders against civil liabilities, including liabilities under the Securities
Act, that may arise from any written information furnished to us by the selling
stockholder specifically for use in this prospectus, in accordance with the
related registration rights agreement, or we may be entitled to contribution.

Once
sold under the shelf registration statement, of which this prospectus forms a
part, the shares of Common Stock will be freely tradable in the hands of
persons other than our affiliates.

 

 

EXHIBIT C

SELLING
STOCKHOLDER QUESTIONNAIRE

The undersigned
hereby provides the following information to the Company and represents and
warrants that such information is accurate:

1.                                      Name.

(a)             Full Legal Name of Selling Securityholder

	
  

  	
   

  
	
   

  	
   

  

 

(b)            Full Legal Name of Registered Holder (if not the same
as (a) above) through which Registrable Securities Listed in Item 3 below are
held:

	
  

  	
   

  
	
   

  	
   

  

 

(c)             Full Legal Name of Natural Control Person (which means
a natural person who directly or indirectly alone or with others has power to
vote or dispose of the securities covered by the questionnaire):

	
  

  	
   

  
	
   

  	
   

  

 

2.                                      Address for Notices to
Selling Securityholder:

	
  

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Telephone:

  	
   

  	
   

  
	
  Fax:

  	
   

  	
   

  	
   

  
	
  Contact Person:

  	
   

  

 

3.                                      Beneficial Ownership of
Registrable Securities:

Type and Principal Amount
of Registrable Securities beneficially owned:

	
  

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

4.                                      Broker-Dealer Status:

 

(a)                                  Are you a broker-dealer?

	
  Yes  o

  	
   

  	
  No  o

  

 

Note:                   If yes, the SEC’s staff has indicated that you should
be identified as an underwriter in the Registration Statement.

(b)                                 Are you an affiliate of a broker-dealer?

	
  Yes  o

  	
   

  	
  No  o

  

 

(c)                                  If you are an affiliate of a
broker-dealer, do you certify that you bought the Registrable Securities in the
ordinary course of business, and at the time of the purchase of the Registrable
Securities to be resold, you had no agreements or understandings, directly or
indirectly, with any person to distribute the Registrable Securities?

	
  Yes  o

  	
   

  	
  No  o

  

 

Note:                   If no, the SEC’s staff has indicated that you should
be identified as an underwriter in the Registration Statement.

5.                                      Beneficial Ownership of
Other Securities of the Company Owned by the Selling Securityholder.

Except as
set forth below in this Item 5, the undersigned is not the beneficial or
registered owner of any securities of the Company other than the Registrable
Securities listed above in Item 3.

Type and Amount of Other Securities beneficially owned
by the Selling Securityholder:

	
  

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

6.                                      Relationships with the
Company:

Except
as set forth below, neither the undersigned nor any of its affiliates,
officers, directors or principal equity holders (owners of 5% of more of the
equity securities of the undersigned) has held any position or office or has
had any other material relationship with the Company (or its predecessors or
affiliates) during the past three years.

State any exceptions
here:

	
  

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

 

The undersigned agrees to promptly notify the Company
of any inaccuracies or changes in the information provided herein that may
occur subsequent to the date hereof and prior to the Effective Date for the
Registration Statement.

By signing below, the undersigned consents to the
disclosure of the information contained herein in its answers to Items 1
through 6 and the inclusion of such information in the Registration Statement
and the related prospectus.  The
undersigned understands that such information will be relied upon by the
Company in connection with the preparation or amendment of the Registration
Statement and the related prospectus.

IN WITNESS WHEREOF the undersigned, by authority duly
given, has caused this Questionnaire to be executed and delivered either in
person or by its duly authorized agent.

	
  Dated:

  	
   

  	
   

  	
  Beneficial Owner:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
   

  
							

 

PLEASE
FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN
THE ORIGINAL BY OVERNIGHT MAIL, TO:

[    ]Exhibit
10.3

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) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE
COMPANY, 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.  ANY TRANSFEREE OF THIS WARRANT SHOULD
CAREFULLY REVIEW THE TERMS OF THIS WARRANT, INCLUDING SECTION 7(d) HEREOF.

APOLLO RESOURCES INTERNATIONAL, INC.

WARRANT TO PURCHASE COMMON
STOCK

Warrant No.: 01

Number of Shares of Common Stock:  16,447,369

Date of Issuance: July 26, 2006 (“Issuance
Date”)

Apollo Resources International, Inc., a Utah
corporation (the “Company”),
hereby certifies that, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, CASTLERIGG MASTER INVESTMENTS 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),
Sixteen Million, Four Hundred and Forty Seven Thousand, Three Hundred and Sixty
Nine (16,447,369) 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 July 25, 2006 (the “Subscription
Date”), by and among the Company and the investors (the “Buyers”) referred to therein (the “Securities Purchase Agreement”).

 

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 (accompanied by the attached Warrant Shares Exercise Log) to the
Company (with a copy to its legal counsel) 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 by 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 (1st) 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”).  For purposes hereof,
any Exercise Delivery Documents delivered on or after 5:00 p.m., New York City
time shall be deemed to have been delivered on the next Business Day.  On or before the third (3rd) 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) if legends are
not required to be placed on certificates of Common Stock pursuant to the
Securities Purchase Agreement, 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 Warrant Shares 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 which certificates shall not bear any restrictive legends unless
required pursuant to Section 2(g) of the Securities Purchase Agreement.  Upon delivery of the Exercise Delivery
Documents, 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 such Warrant Shares are credited
to the Holder’s DTC account or the date of delivery of the certificates
evidencing such Warrant Shares as the case may be.  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 subject to such prior exercise
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 Warrant is exercised. No fractional shares

 2
 

 

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

(b)   Exercise
Price.  For purposes of this Warrant,
“Exercise Price”
means $0.38, subject to adjustment as provided herein.

(c)   Company’s
Failure to Timely Deliver Securities. 
If within three (3) Trading Days after the Company’s receipt of the
facsimile copy of a Exercise Notice the Company shall fail to issue and deliver
a certificate to the Holder and register such shares of Common Stock on the
Company’s share register or credit the Holder’s balance account with DTC for
the number of shares of Common Stock to which the Holder is entitled upon the
Holder’s exercise hereunder, and if on or after such Trading 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) Trading 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 Warrant Shares) shall terminate, or (ii)
promptly honor its obligation to deliver to the Holder a certificate or
certificates or if legends are not required to be placed on certificates of
Common Stock pursuant to the Securities Purchase Agreement, provided that the
Transfer Agent is participating in DTC Fast Automated Securities Transfer
Program, upon the request of the Holder, credit such aggregate number of
Warrant Shares 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 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
during which such Registration Statement is required in accordance with the
Registration Rights Agreement, the Holder may, in its sole discretion during
such time, 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)

 3
 

 

                                         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 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 12.

(f)    Limitations
on Exercises. 

(1)        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 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 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
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, 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

 4
 

 

number of
shares of Common Stock outstanding.  For
any reason at any time, upon the written request of the Holder, the Company
shall within one Business Day confirm in writing to the 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 or exercise of securities of
the Company, including 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 from time to time 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)           Market Regulation.  The Company shall not be obligated to issue
any shares of Common Stock upon exercise of this Warrant, and the Holder of
this Warrant shall not have the right to receive upon exercise of this Warrant
any shares of Common Stock, if the issuance of such shares of Common Stock
would exceed that number of shares of Common Stock which the Company may issue
upon exercise, redemption or conversion, as applicable, of the SPA Warrants or
otherwise without breaching the Company’s obligations under the rules or
regulations of the applicable Eligible Market (the number of shares which may
be issued without violating such rules and regulations, the “Exchange Cap”), except that such limitation shall not apply
in the event that the Company (A) obtains the approval of its stockholders as
required by the applicable rules of the applicable Eligible Market for
issuances of shares of Common Stock in excess of such amount or (B) obtains a
written opinion from outside counsel to the Company that such approval is not
required, which opinion shall be reasonably satisfactory to the Required
Holders.  Unless and until such approval
or written opinion is obtained, no Buyer shall be issued in the aggregate, upon
exercise or conversion, as applicable, of any SPA Warrants, shares of Common
Stock in an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the total number of shares of Common Stock
underlying the SPA Warrants issued to such Buyer pursuant to the Securities
Purchase Agreement on the Issuance Date and the denominator of which is the
aggregate number of shares of Common Stock underlying the SPA Warrants issued
to the Buyers pursuant to the Securities Purchase Agreement on the Issuance
Date (with respect to each Buyer, the “Exchange Cap Allocation”).  In the event that any Buyer shall sell or
otherwise transfer any of such Buyer’s SPA Warrants, the transferee shall be
allocated a pro rata portion of such Buyer’s Exchange Cap Allocation, and the
restrictions of the prior sentence shall apply to such transferee with respect
to the portion of the Exchange Cap Allocation allocated to such
transferee.  In the event that any holder
of SPA Warrants shall exercise all

 5
 

 

of such holder’s
SPA Warrants into a number of shares of Common Stock which, in the aggregate,
is less than such holder’s Exchange Cap Allocation, then the difference between
such holder’s Exchange Cap Allocation and the number of shares of Common Stock
actually issued to such holder shall be allocated to the respective Exchange
Cap Allocations of the remaining holders of SPA Warrants on a pro rata basis in
proportion to the shares of Common Stock underlying the SPA Warrants then held
by each such holder.

(g)   Insufficient
Authorized Shares.  If at any time
while any of the Warrants remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon exercise of the Warrants at
least a number of shares of Common Stock equal to 130% of the number of shares
of Common Stock as shall from time to time be necessary to effect the exercise
of all of the Warrants then outstanding 
(the “Required Reserve Amount”) (an “Authorized Share Failure”), then the Company shall
immediately take all action necessary to increase the Company’s authorized
shares of Common Stock to an amount sufficient to allow the Company to reserve
the Required Reserve Amount for the Warrants then outstanding.  Without limiting the generality of the
foregoing sentence, as soon as practicable after the date of the occurrence of
an Authorized Share Failure, but in no event later than ninety (90) days after
the occurrence of such Authorized Share Failure, the Company shall hold a
meeting of its stockholders for the approval of an increase in the number of
authorized shares of Common Stock.  In
connection with such meeting, the Company shall provide each stockholder with a
proxy statement and shall use its best efforts to solicit its stockholders’
approval of such increase in authorized shares of Common Stock and to cause its
board of directors to recommend to the stockholders that they approve such
proposal.

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 for a consideration per share (the “New Issuance Price”) less than a price equal to the Exercise
Price in effect immediately prior to such issue or sale or deemed issuance or
sale (the “Applicable Price” and 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:

 6
 

 

 

(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 any such Options or upon conversion, exercise or exchange of any Convertible
Securities issuable upon exercise of 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, exercise or
exchange of any Convertible Security issuable upon exercise of such
Option.  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 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,

 7
 

 

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 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
the difference of (x) the aggregate fair market value of such Options and other
securities issued or sold in such integrated transaction, less (y) the fair
market value of the securities other than such Option, issued or sold in such
transaction and the other securities issued or sold in such integrated
transaction will be deemed to have been issued or sold for the balance of the
consideration received by the Company. 
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 gross amount raised by the Company; provided,
however, that such gross amount is not greater than 110% of 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

 8
 

 

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

(b)   Adjustment
upon Subdivision or Combination 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

 9
 

 

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
shares 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 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.

 

 10

 

(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
reasonably 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 reasonably
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
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.  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
Change of Control, if the Holder has not exercised the Warrant in full prior to
the consummation of the Change of Control, then the Holder shall have
the right to

 11
 

 

require
such Successor Entity to purchase this Warrant from the Holder by paying
to the Holder, simultaneously with the consummation of the Change of Control
and in lieu of the warrant referred to in Section 4(b) cash in the amount equal
to the value of the remaining unexercised portion of this Warrant on the date
of such consummation, which value shall be determined by use of the
Black-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 100 day volatility obtained from the HVT function on Bloomberg;
provided that if such function yields a volatility (x) less than 50%, the
expected volatility shall be equal to 50% and (y) greater than 80%, the
expected volatility shall be equal to 80%.

5.     NONCIRCUMVENTION.  The Company hereby covenants and agrees that
the Company will not, by amendment of its Certificate 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 Common Stock upon the exercise of this Warrant, and
(iii) shall, 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 number of 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.

 12
 

 

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 subject to the satisfaction of the transfer provisions of the
Securities Purchase Agreement forthwith issue and deliver upon the order of the
Holder a new Warrant (in accordance with Section 7(d)), registered in the name
of the registered transferee or assignee, 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 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

 13
 

 

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.  No term of this Warrant may be amended,
modified or waived unless pursuant to a writing signed by the Company and the
Required Holders; provided that no such action may increase the exercise price
of any SPA Warrants or decrease the number of shares or class of stock
obtainable upon exercise of any SPA Warrants 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.   GOVERNING LAW.  This Warrant shall be governed by and
construed and enforced in accor­dance with, and all questions concerning the
construction, validity, 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.

11.   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.

12.   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.

13.   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

 14
 

 

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.

14.   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.

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

(a)   “Approved Stock Plan” means any employee benefit plan
which has been approved by the Board of Directors of the Company, pursuant to
which the Company’s securities may be issued to any employee, consultant,
officer or director for services provided to the Company.

(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)   “Change of Control” means any Fundamental Transaction other
than (i) any
reorganization, recapitalization or reclassification of the Common Stock or
business combination in which the Company is the publicly traded surviving
entity in which the holders of the Company’s voting power immediately prior to
such reorganization, recapitalization or reclassification or business
combination continue after such reorganization, recapitalization or
reclassification or business combination to hold publicly traded securities
and, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or entities
(except where Apollo Resources International or its affiliates becomes
the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 70% or greater of the aggregate Voting Stock of the
Company),
or (ii) pursuant to a migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the Company.

(e)   “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

 15
 

 

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.

(f)    “Common Shares” means the Common Shares
issued pursuant to the Securities Purchase Agreement.

(g)   “Common Stock” means (i) the Company’s shares of Common
Stock, par value $0.001 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.

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

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

(j)    “Excluded
Securities”
means any Common Stock issued or issuable: (i) in connection with any Approved
Stock Plan; (ii) upon exercise of the Warrants; (iii) pursuant to a bona fide
firm commitment underwritten public offering with a nationally recognized
underwriter which generates gross proceeds to the Company in excess of
$50,000,000 (other than an “at-the-market offering” as defined in Rule
415(a)(4) under the 1933 Act and “equity lines”); (iv) in connection with any
acquisition by the Company, whether through an acquisition of stock or a merger
of any business, assets or technologies the primary purpose of which is not to
raise equity capital; (v) in connection with any other strategic transaction or
alliance the primary purpose of which is not to raise equity capital; and (vii)
upon conversion or exercise of any Options or Convertible Securities which are
outstanding on the day immediately preceding the Subscription Date, provided
that the conversion or exercise price of such Options or Convertible Securities
is not amended, modified or changed on or after the Subscription Date.

(k)   “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.

 16
 

 

(l)    “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
Persons, 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 50% of the outstanding shares of Voting
Stock (not including any shares of Voting 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 Voting Stock (not including any shares of
Voting 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 or (vi) any “person” or “group” (as
these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange
Act) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of 50% of the aggregate Voting Stock
of the Company.

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

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

(o)   “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.

(p)   “Principal Market” means OTC Bulletin Board.

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

(r)    “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.

(s)   “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.

[Signature
Page Follows]

 

 17

 

 

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.

	
   

  	
   

  	
  APOLLO RESOURCES INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  

 

 

EXHIBIT A

EXERCISE NOTICE

TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE
THIS

WARRANT TO PURCHASE COMMON STOCK

APOLLO
RESOURCES INTERNATIONAL, INC.

The undersigned holder hereby exercises the right to
purchase                   
of the shares of Common Stock (“Warrant
Shares”) of Apollo
Resources International, Inc., a Utah 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.

4.    By its
delivery of this Exercise Notice, the undersigned represents and warrants to
the Company that in giving effect to the exercise evidenced hereby the Holder
will not beneficially own in excess of the number of shares of Common Stock
(determined in accordance with Section 13(d) of the Securities Exchange Act of
1934) permitted to be owned under Section 1(f)(1) of this Warrant to which this
notice relates.

Date:                ,
    

	
   

  	
   

  	
   

  	
   

  
	
  Name of Registered Holder

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  

 

 

ACKNOWLEDGMENT

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

	
   

  	
   

  	
  APOLLO RESOURCES INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
     

  	
   

  	
  By:

  	
   

  	
   

  
	
     

  	
   

  	
  Name:

  	
   

  	
   

  
	
     

  	
   

  	
  Title:

  	
   

  	
   

  

 

 

Warrant Shares Exercise Log

	
   Date

  	
   

  	
  Number of Warrant

  Shares Available

  to be Exercised

  	
   

  	
  Number of Warrant

  Shares Exercised

  	
   

  	
  Number of Warrant

  Shares Remaining

  to be Exercised

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