Document:

Exhibit 4.4

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL
IN THE FORM, SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS
NOTE MAY BE SOLD, TRANSFERRED,  OR
OTHERWISE DISPOSED OF, UNDER AN EXEMPTION FROM REGISTRATION UNDER THE ACT AND
SUCH STATE SECURITIES LAWS.

 

APOLLO
RESOURCES INTERNATIONAL, INC.

 

Secured Convertible Promissory
Note

due December    , 2007

 

	
  No. CN-05-

  	
   

  	
  $

  

Dated:  June    ,
2005

 

For
value received, APOLLO
RESOURCES INTERNATIONAL, INC., a Utah corporation (the “Maker”),
hereby promises to pay to the order of
                                          (together
with its successors, representatives, and permitted assigns, the “Holder”),
in accordance with the terms hereinafter provided, the principal amount of
                                               ($                         ),
together with interest thereon. 
Concurrently with the issuance of this Note, the Maker is issuing
separate secured convertible promissory notes (the “Other Notes”) to
separate purchasers (the “Other Holders”) pursuant to the Purchase
Agreement (as defined in Section 1.1 hereof).

 

All
payments under or pursuant to this Note shall be made in United States Dollars
in immediately available funds to the Holder at the address of the Holder first
set forth above or at such other place as the Holder may designate from time to
time in writing to the Maker or by wire transfer of funds to the Holder’s
account, instructions for which are attached hereto as Exhibit A.  The outstanding principal balance of this
Note shall be due and payable on December     , 2007
(the “Maturity Date”) or at such earlier time as provided herein.

 

ARTICLE I

 

Section 1.1                                      Purchase
Agreement.  This Note has been
executed and delivered pursuant to the Note and Warrant Purchase Agreement
dated as of June 30, 2005 (the “Purchase Agreement”) by and among
the Maker and the purchasers listed therein. 
Capitalized terms used and not otherwise defined herein shall have the
meanings set forth for such terms in the Purchase Agreement.

 

Section 1.2                                      Interest.  Beginning on the issuance date of this Note
(the “Issuance Date”), the outstanding principal balance of this Note
shall bear interest, in arrears, at a rate per annum equal to eight percent
(8%), payable semi-annually on December 1 and June 1 of each year
commencing December 1, 2005 at the option of the Maker in cash or in
registered

 

 

shares of the Maker’s common stock, par value $0.001 per share (the “Common
Stock”), in accordance with terms of Section 1.3 below.  Interest shall be computed on the basis of a
360-day year of twelve (12) 30-day months and shall accrue commencing on the
Issuance Date.  Furthermore, upon the
occurrence of an Event of Default (as defined in Section 2.1 hereof), then
to the extent permitted by law, the Maker will pay interest to the Holder,
payable on demand, on the outstanding principal balance of the Note from the
date of the Event of Default until such Event of Default is cured at the rate
of the lesser of fifteen percent (15%) and the maximum applicable legal rate
per annum.

 

Section 1.3                                      Payment
of Principal and Interest.

 

(a)                                  Commencing
on the sixth (6th) month following the Issuance Date and continuing
thereafter on the first (1st) business day of
each month until the Maturity Date (each, a “Principal Payment Date”),
the Maker shall pay an amount to the Holder equal to 1/24th of the original principal amount of this Note
plus any accrued but unpaid interest (the “Principal Installment Amount”);
provided, however, if on any Principal Payment Date, the
outstanding principal amount of this Note plus any accrued but unpaid interest
is less than the Principal Installment Amount, then the Maker shall pay to the
Holder such lesser amount.  The Maker may
pay such Principal Installment Amount in cash or registered shares of Common
Stock.  If the Maker elects to pay the
Principal Installment Amount in cash such amount shall be wired in immediately
available funds on the Principal Payment Date; provided, however,
that if the Holder has delivered a Conversion Notice to the Maker or delivers a
Conversion Notice prior to the Principal Payment Date, the Holder shall
indicate in such Conversion Notice whether the principal amount of this Note to
be so converted shall be applied against the final Principal Installment Amount
or some other Principal Installment Amount. 
The Maker shall provide irrevocable written notice to the Holder of the
form of payment of the Principal Installment Amount on the tenth (10th)
business day prior to each Principal Payment Date for which a Principal
Installment Amount is made by the Maker (the “Announcement Date”).

 

(b)                                 If
the Maker elects to pay the Principal Installment Amount in registered shares
of Common Stock, the number of registered shares of Common Stock to be issued
to the Holder shall be an amount equal to the Principal Installment Amount
divided by ninety-two and one-half percent (92.5%) of the average of the VWAP
(as defined in Section 1.3(c) hereof) for the five (5) Trading
Days immediately preceding the Principal Payment Date; provided, however,
that if the Holder has delivered a Conversion Notice to the Maker or delivers a
Conversion Notice prior to the Principal Payment Date, the Holder shall
indicate in such Conversion Notice whether the principal amount of this Note to
be so converted shall be applied against the final Principal Installment Amount
or some other Principal Installment Amount. 
Not later than three (3) Trading Days prior to any Principal
Payment Date (the “Share Advance Date”) in which the Maker elects to
issue registered shares of Common Stock in satisfaction of the Principal
Installment Amount, the Company shall have issued and delivered to the
Depository Trust Company (“DTC”) account on the Holder’s behalf via the
Deposit Withdrawal Agent Commission System (“DWAC”) a number of shares
of Common Stock to be applied against such Principal Installment Amount equal
to the quotient of (x) one hundred fifty percent (150%) of the applicable
Principal Installment Amount divided by (y) ninety-two and one-half percent
(92.5%) of the average of the VWAP for the five (5) Trading Days
immediately preceding the Share Advance Date (the “Advanced Shares”).  In the event that the number of

 

2

 

Advanced Shares issued to the Holder exceed the number
of shares of Common Stock the Holder was entitled in connection with such
Principal Installment Amount, the Holder shall deliver such excess shares of
Common Stock to the Maker within three (3) Trading Days of such Principal
Payment Date.  In the event that the
number of Advanced Shares are less than the number of shares of Common Stock
such Holder was entitled in connection with such Principal Installment Amount,
the Maker shall deliver such additional shares of Common Stock to the Holder
within three (3) Trading Days of such Principal Payment Date.  Notwithstanding the foregoing to the
contrary, the Maker may elect to pay the Principal Installment Amount in
registered shares of Common Stock on any Principal Payment Date or Share Advance
Date only if (A) the registration statement providing for the resale of
the shares of Common Stock issuable upon conversion of this Note is effective
and has been effective, without lapse or suspension of any kind, for a period
of twenty (20) consecutive calendar days, (B) trading in the Common Stock
shall not have been suspended by the Securities and Exchange Commission or the
OTC Bulletin Board (or other exchange or market on which the Common Stock is
trading), (C) the Maker is in material compliance with the terms and
conditions of this Note and the other Transaction Documents, and (D) the
issuance of shares of Common Stock on the Principal Payment Date does not
violate the provisions of Section 3.4 hereof.

 

(c)                                  For
purposes hereof, “VWAP” means, for any date, (i) the daily volume
weighted average price of the Common Stock for such date on the OTC Bulletin
Board as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m.
Eastern Time to 4:02 p.m. Eastern Time); (ii) if the Common Stock is
not then listed or quoted on the OTC Bulletin Board and if prices for the
Common Stock are then reported in the “Pink Sheets” published by the Pink
Sheets, LLC (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the Common Stock so
reported; or (iii) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in good faith
by the Holder and reasonably acceptable to the Maker.

 

Section 1.4                                      Security
Agreement.  The obligations of the
Maker hereunder are secured by a continuing security interest in certain assets
of the Maker pursuant to the terms of a security agreement dated as of June 30,
2005 by and among the Maker, its wholly owned subsidiaries, BC&D Oil and
Gas Corporation and OGC Pipeline LLC, on the one hand, and the Holder and the
Other Holders, on the other hand.

 

Section 1.5                                      Payment
on Non-Business Days.  Whenever any
payment to be made shall be due on a Saturday, Sunday or a public holiday under
the laws of the State of New York, such payment may be due on the next
succeeding business day and such next succeeding day shall be included in the
calculation of the amount of accrued interest payable on such date.

 

Section 1.6                                      Transfer.  This Note may be transferred or sold, subject
to the provisions of Section 4.8 of this Note, or pledged, hypothecated or
otherwise granted as security by the Holder.

 

Section 1.7                                      Replacement.  Upon receipt of a duly executed, notarized
and unsecured written statement from the Holder with respect to the loss, theft
or destruction of this Note (or any replacement hereof) and a standard
indemnity, or, in the case of a mutilation of this

 

3

 

Note, upon surrender and cancellation of such Note, the Maker shall
issue a new Note, of like tenor and amount, in lieu of such lost, stolen,
destroyed or mutilated Note.

 

ARTICLE II

 

EVENTS OF
DEFAULT;  REMEDIES

 

Section 2.1                                      Events
of Default.  The occurrence of any of
the following events shall be an “Event of Default” under this Note:

 

(a)                                  the
Maker shall fail to make the Principal Installment Amount on a Principal
Payment Date and such default is not fully cured within one (1) business
day after the occurrence thereof; or

 

(b)                                 the
failure of the Registration Statement to be declared effective by the
Securities and Exchange Commission on or prior to the date which is one hundred
twenty (120) days after the Issuance Date; or

 

(c)                                  the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or The New York Stock Exchange, Inc. for a period of five (5) consecutive
Trading Days; or

 

(d)                                 the
Maker’s notice to the Holder, including by way of public announcement, at any
time, of its inability to comply (including for any of the reasons described in
Section 3.8(a) hereof) or its intention not to comply with proper
requests for conversion of this Note into shares of Common Stock; or

 

(e)                                  the
Maker shall fail to (i) timely deliver the shares of Common Stock upon
conversion of the Note or any interest accrued and unpaid, (ii) file the
Registration Statement in accordance with the terms of the Registration Rights
Agreement or (iii) make the payment of any fees and/or liquidated damages
under this Note, the Purchase Agreement or the Registration Rights Agreement,
which failure in the case of items (i) and (iii) of this Section 2.1(e) is
not remedied within three (3) business days after the incurrence thereof;
or

 

(f)                                    while
the Registration Statement is required to be maintained effective pursuant to
the terms of the Registration Rights Agreement, the effectiveness of the
Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the Holder for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten (10) consecutive Trading
Days, provided that the Maker has not exercised its rights pursuant to Section 3(n)
of the Registration Rights Agreement; or

 

(g)                                 default
shall be made in the performance or observance of (i) any material
covenant, condition or agreement contained in this Note (other than as set
forth in clause (f) of this Section 2.1) and such default is not
fully cured within three (3) business days after the

 

4

 

Maker receives notice from the Holder of the
occurrence thereof or (ii) any material covenant, condition or agreement
contained in the Purchase Agreement, the Other Notes, the Registration Rights
Agreement or any other Transaction Document which is not covered by any other
provisions of this Section 2.1 and such default is not fully cured within
three (3) business days after the 
Maker receives notice from the Holder of the occurrence thereof;  or

 

(h)                                 any
material representation or warranty made by the Maker herein or in the Purchase
Agreement, the Registration Rights Agreement, the Other Notes or any other
Transaction Document shall prove to have been false or incorrect or breached in
a material respect on the date as of which made; or

 

(i)                                     the
Maker shall (A) default in any payment of any amount or amounts of
principal of or interest on any Indebtedness (other than the Indebtedness
hereunder) the aggregate principal amount of which Indebtedness is in excess of
$100,000 or (B) default in the observance
or performance of any other agreement or condition relating to any Indebtedness
or contained in any instrument or agreement evidencing, securing or relating
thereto, or any other event shall occur or condition exist, the effect of which
default or other event or condition is to cause, or to permit the holder or
holders or beneficiary or beneficiaries of such Indebtedness to cause with the
giving of notice if required, such Indebtedness to become due prior to its
stated maturity; or

 

(j)                                     the
Maker shall (i) apply for or consent to the appointment of, or the taking
of possession by, a receiver, custodian, trustee or liquidator of itself or of
all or a substantial part of its property or assets, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary
case under the United States Bankruptcy Code (as now or hereafter in effect) or
under the comparable laws of any jurisdiction (foreign or domestic), (iv) file
a petition seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors’
rights generally, (v) acquiesce in writing to any petition filed against
it in an involuntary case under United States Bankruptcy Code (as now or
hereafter in effect) or under the comparable laws of any jurisdiction (foreign
or domestic), (vi) issue a notice of bankruptcy or winding down of its
operations or issue a press release regarding same, or (vii) take any
action under the laws of any jurisdiction (foreign or domestic) analogous to
any of the foregoing; or

 

(k)                                  a
proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or
composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets in connection with the liquidation or
dissolution of the Maker or (iii) similar relief in respect of it under
any law providing for the relief of debtors, and such proceeding or case
described in clause (i), (ii) or (iii) shall continue undismissed, or
unstayed and in effect, for a period of thirty (30) days or any order for
relief shall be entered in an involuntary case under United States Bankruptcy
Code (as now or hereafter in effect) or under the comparable laws of any
jurisdiction (foreign or domestic) against the Maker or action under the laws
of any jurisdiction (foreign or domestic) analogous to any of the foregoing
shall be taken with respect to the Maker and shall continue undismissed, or
unstayed and in effect for a period of thirty (30) days; or

 

5

 

(l)                                     the
failure of the Maker to instruct its transfer agent to remove any legends from
shares of Common Stock eligible to be sold under Rule 144 of the
Securities Act and issue such unlegended certificates to the Holder within
three (3) business days of the Holder’s request so long as the Holder has
provided reasonable assurances to the Maker that such shares of Common Stock
can be sold pursuant to Rule 144; or

 

(m)                               the
failure of the Maker to pay any amounts due to the Holder herein or in the
Purchase Agreement or the Registration Rights Agreement within three (3) business
days of the date such payments are due; or

 

(n)                                 the
occurrence of an Event of Default under the Other Notes.

 

Section 2.2                                      Remedies
Upon An Event of Default.  If an
Event of Default shall have occurred and shall be continuing, the Holder of
this Note may at any time at its option, (a) declare the entire unpaid
principal balance of this Note, together with all interest accrued hereon, due
and payable, and thereupon, the same shall be accelerated and so due and
payable, without presentment, demand, protest, or notice, all of which are
hereby expressly unconditionally and irrevocably waived by the Maker; provided,
however, that upon the occurrence of an Event of Default described in (i) Sections
2.1 (j) or (k), the outstanding principal balance and accrued interest
hereunder shall be automatically due and payable and (ii) Sections 2.1
(b)-(i), demand the prepayment of this Note pursuant to Section 3.7
hereof, (b) demand that the principal amount of this Note then outstanding
and all accrued and unpaid interest thereon shall be converted into shares of
Common Stock at a Conversion Price per share calculated pursuant to Section 3.1
hereof assuming that the date that the Event of Default occurs is the
Conversion Date (as defined in Section 3.1 hereof), or (c) exercise
or otherwise enforce any one or more of the Holder’s rights, powers,
privileges, remedies and interests under this Note, the Purchase Agreement, the
Registration Rights Agreement or applicable law.  No course of delay on the part of the Holder
shall operate as a waiver thereof or otherwise prejudice the right of the
Holder.  No remedy conferred hereby shall
be exclusive of any other remedy referred to herein or now or hereafter
available at law, in equity, by statute or otherwise.

 

ARTICLE III

 

CONVERSION; ANTIDILUTION;
PREPAYMENT

 

Section 3.1                                      Conversion
Option.

 

(a)                                  At any time on or
after the Issuance Date, this Note shall be convertible (in whole or in part),
at the option of the Holder (the “Conversion Option”), into such number
of fully paid and non-assessable shares of Common Stock (the “Conversion
Rate”) as is determined by dividing (x) that portion of the outstanding
principal balance plus any accrued but unpaid interest under this Note as of
such date that the Holder elects to convert by (y) the Conversion Price (as
defined in Section 3.2(a) hereof) then in effect on the date on which
the Holder faxes a notice of conversion (the “Conversion Notice”), duly
executed, to the Maker (facsimile number (214) 389-9806, Attn.: Chief Executive
Officer) (the “Voluntary Conversion Date”), provided, however,
that the Conversion Price shall be subject to adjustment as described in Section 3.6
below.  The Holder shall deliver this
Note to the Maker at the address designated

 

6

 

in the Purchase Agreement at such time that this Note is fully
converted.  With respect to partial
conversions of this Note, the Maker shall keep written records of the amount of
this Note converted as of each Conversion Date.

 

(b)                                 On the Mandatory
Conversion Date (as defined below), the Maker may cause the principal amount of
this Note plus all accrued and unpaid interest to convert into a number of
fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the
principal amount of this Note plus all accrued and unpaid interest outstanding
on the Mandatory Conversion Date divided by (ii) the Conversion Price in
effect on the Mandatory Conversion Date by providing five business (5) days
prior written notice of such Mandatory Conversion Date.  As used herein, a “Mandatory Conversion
Date” shall be a date commencing six (6) months following the
effective date of the registration statement providing for the resale of the
shares of Common Stock issuable upon conversion of this Note in which the
Closing Bid Price (as defined below) exceeds two hundred percent (200%) of the
Conversion Price (as may be adjusted hereunder) for a period of twenty (20)
consecutive Trading Days; provided, that (A) the
registration statement providing for the resale of the shares of Common Stock
issuable upon conversion of this Note is effective and has been effective,
without lapse or suspension of any kind, for a period sixty (60) consecutive
calendar days immediately preceding the Mandatory Conversion Date, (B) trading
in the Common Stock shall not have been suspended by the Securities and
Exchange Commission or the OTC Bulletin Board (or other exchange or market on
which the Common Stock is trading), (C) the Maker is in material
compliance with the terms and conditions of this Note and the other Transaction
Documents, (D) the issuance of shares of Common Stock on the Mandatory
Conversion Date pursuant to such mandatory conversion does not violate the
provisions of Section 3.4 hereof, and (E) the Maker is not in
possession of any material non-public information.  Notwithstanding the foregoing to the
contrary, the Mandatory Conversion Date shall be extended for as long as a
Triggering Event (as defined in Section 3.7(f) hereof) shall have
occurred and be continuing.  The
Mandatory Conversion Date and the Voluntary Conversion Date collectively are
referred to in this Note as the “Conversion Date.”

 

(c)                                  The term “Closing
Bid Price” shall mean, on any particular date (i) the closing bid
price per share of the Common Stock on such date on the OTC Bulletin Board or
another registered national stock exchange on which the Common Stock is then
listed, or if there is no such price on such date, then the closing bid price
on such exchange or quotation system on the date nearest preceding such date,
or (ii) if the Common Stock is not listed then on the OTC Bulletin Board
or any registered national stock exchange, the closing bid price for a share of
Common Stock in the over-the-counter market, as reported by the OTC Bulletin
Board or in the National Quotation Bureau Incorporated or similar organization
or agency succeeding to its functions of reporting prices) at the close of
business on such date, or (iii) if the Common Stock is not then reported
by the OTC Bulletin Board or the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting
prices), then the average of the “Pink Sheet” quotes for the relevant
conversion period, as determined in good faith by the Holder, or (iv) if
the Common Stock is not then publicly traded the fair market value of a share
of Common Stock as determined by the Holder and reasonably acceptable to the
Maker.

 

7

 

Section 3.2                                      Conversion
Price.

 

(a)                                  The
term “Conversion Price” shall mean $0.25, subject to adjustment under Section 3.6
hereof.

 

(b)                                 Notwithstanding
any of the foregoing to the contrary, if during any period (a “Black-out
Period”), a Holder is unable to trade any Common Stock issued or issuable
upon conversion of this Note immediately due to the postponement of filing or
delay or suspension of effectiveness of a registration statement or because the
Maker has otherwise informed such Holder that an existing prospectus cannot be
used at that time in the sale or transfer of such Common Stock (provided that
such postponement, delay, suspension or fact that the prospectus cannot be used
is not due to factors solely within the control of the Holder of this Note or
due to the Maker exercising its rights under Section 3(n) of the
Registration Rights Agreement), such Holder shall have the option but not the
obligation on any Conversion Date within ten (10) Trading Days following
the expiration of the Black-out Period of using the Conversion Price applicable
on such Conversion Date or any Conversion Price selected by such Holder that
would have been applicable had such Conversion Date been at any earlier time
during the Black-out Period or within the ten (10) Trading Days
thereafter.  In no event shall the
Black-out Period have any effect on the Maturity Date of this Note.

 

Section 3.3                                      Mechanics
of Conversion.   

 

(a)                                  Not
later than three (3) Trading Days after any Conversion Date, the Maker or
its designated transfer agent, as applicable, shall issue and deliver to the
DTC account on the Holder’s behalf via DWAC as specified in the Conversion
Notice, registered in the name of the Holder or its designee, for the number of
shares of Common Stock to which the Holder shall be entitled.  In the alternative, not later than three (3) Trading
Days after any Conversion Date, the Maker shall deliver to the applicable
Holder by express courier a certificate or certificates which shall be free of
restrictive legends and trading restrictions (other than those required by Section 5.1
of the Purchase Agreement) representing the number of shares of Common Stock
being acquired upon the conversion of this Note (the “Delivery Date”).  Notwithstanding the foregoing to the
contrary, the Maker or its transfer agent shall only be obligated to issue and
deliver the shares to the DTC on the Holder’s behalf via DWAC (or certificates
free of restrictive legends) if such conversion is in connection with a sale
and the Holder has complied with the applicable prospectus delivery
requirements (as evidenced by documentation furnished to and reasonably
satisfactory to the Maker).  If in the
case of any Conversion Notice such certificate or certificates are not
delivered to or as directed by the applicable Holder by the Delivery Date, the
Holder shall be entitled by written notice to the Maker at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Maker shall immediately return this Note
tendered for conversion, whereupon the Maker and the Holder shall each be
restored to their respective positions immediately prior to the delivery of
such notice of revocation, except that any amounts described in Sections 3.3(b) and
(c) shall be payable through the date notice of rescission is given to the
Maker.

 

(b)                                 The
Maker understands that a delay in the delivery of the shares of Common Stock
upon conversion of this Note beyond the Delivery Date could result in economic
loss to

 

8

 

the Holder.  If
the Maker fails to deliver to the Holder such shares via DWAC or a certificate
or certificates pursuant to this Section hereunder by the Delivery Date,
the Maker shall pay to such Holder, in cash, an amount per Trading Day for each
Trading Day until such shares are delivered via DWAC or certificates are
delivered, together with interest on such amount at a rate of 10% per annum,
accruing until such amount and any accrued interest thereon is paid in full,
equal to the greater of (A) (i) 1% of the aggregate principal amount
of the Notes requested to be converted for the first five (5) Trading Days
after the Delivery Date and (ii) 2% of the aggregate principal amount of
the Notes requested to be converted for each Trading Day thereafter and (B) $2,000
per day (which amount shall be paid as liquidated damages and not as a
penalty).  Nothing herein shall limit a
Holder’s right to pursue actual damages for the Maker’s failure to deliver
certificates representing shares of Common Stock upon conversion within the
period specified herein and such Holder shall have the right to pursue all
remedies available to it at law or in equity (including, without limitation, a
decree of specific performance and/or injunctive relief).  Notwithstanding anything to the contrary
contained herein, the Holder shall be entitled to withdraw a Conversion Notice,
and upon such withdrawal the Maker shall only be obligated to pay the
liquidated damages accrued in accordance with this Section 3.3(b) through
the date the Conversion Notice is withdrawn.

 

(c)                                  In
addition to any other rights available to the Holder, if the Maker fails to
cause its transfer agent to transmit to the Holder a certificate or
certificates representing the shares of Common Stock issuable upon conversion
of this Note on or before the Delivery Date, and if after such date the Holder
is required by its broker to purchase (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
the shares of Common Stock issuable upon conversion of this Note which the
Holder anticipated receiving upon such exercise (a “Buy-In”), then the
Maker shall (1) pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying (A) the number of shares of Common Stock issuable upon
conversion of this Note that the Maker was required to deliver to the Holder in
connection with the conversion at issue times (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at
the option of the Holder, either reinstate the portion of the Note and
equivalent number of shares of Common Stock for which such conversion was not
honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Maker timely complied with its conversion and
delivery obligations hereunder.  For
example, if the Holder purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted conversion of shares of
Common Stock with an aggregate sale price giving rise to such purchase
obligation of $10,000, under clause (1) of the immediately preceding
sentence the Maker shall be required to pay the Holder $1,000. The Holder shall
provide the Maker written notice indicating the amounts payable to the Holder
in respect of the Buy-In, together with applicable confirmations and other
evidence reasonably requested by the Maker. 
Nothing herein shall limit a Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the
Maker’s failure to timely deliver certificates representing shares of Common
Stock upon conversion of this Note as required pursuant to the terms hereof.

 

9

 

Section 3.4                                      Ownership
Cap and Certain Conversion Restrictions. 

 

(a)                                  Notwithstanding
anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of
Common Stock to be issued pursuant to such conversion would exceed, when
aggregated with all other shares of Common Stock owned by the Holder at such
time, the number of shares of Common Stock which would result in the Holder
beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) more than 4.99% of all of the
Common Stock outstanding at such time; provided, however, that
upon the Holder providing the Maker with sixty-one (61) days notice (pursuant
to Section 4.1 hereof) (the “Waiver Notice”) that the Holder would
like to waive this Section 3.4(a) with regard to any or all shares of
Common Stock issuable upon conversion of this Note, this Section 3.4(a) will
be of no force or effect with regard to all or a portion of the Note referenced
in the Waiver Notice; provided, further, that this provision
shall be of no further force or effect during the sixty-one (61) days
immediately preceding the Maturity Date.

 

(b)                                 Notwithstanding
anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of
Common Stock to be issued pursuant to such conversion, when aggregated with all
other shares of Common Stock owned by the Holder at such time, would result in
the Holder beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules thereunder) in excess of 9.99% of the then
issued and outstanding shares of Common Stock outstanding at such time; provided,
however, that upon the Holder providing the Maker with a Waiver Notice
that the Holder would like to waive Section 3.4(b) of this Note with
regard to any or all shares of Common Stock issuable upon conversion of this
Note, this Section 3.4(b) shall be of no force or effect with regard
to all or a portion of the Note referenced in the Waiver Notice; provided,
further, that this provision shall be of no further force or effect
during the sixty-one (61) days immediately preceding the Maturity Date.

 

Section 3.5                                      Intentionally
Omitted.

 

Section 3.6                                      Adjustment
of Conversion Price.

 

(a)                                  The
Conversion Price shall be subject to adjustment from time to time as follows:

 

(i)                                     Adjustments
for Stock Splits and Combinations.  If
the Maker shall at any time or from time to time after the Issuance Date,
effect a stock split of the outstanding Common Stock, the applicable Conversion
Price in effect immediately prior to the stock split shall be proportionately
decreased.  If the Maker shall at any
time or from time to time after the Issuance Date, combine the outstanding
shares of Common Stock, the applicable Conversion Price in effect immediately
prior to the combination shall be proportionately increased.  Any adjustments under this Section 3.6(a)(i) shall
be effective at the close of business on the date the stock split or
combination occurs.

 

(ii)                                  Adjustments
for Certain Dividends and Distributions. 
If the Maker shall at any time or from time to time after the Issuance
Date, make or issue or set a record date

 

10

 

for the determination of holders of Common Stock
entitled to receive a dividend or other distribution payable in shares of
Common Stock, then, and in each event, the applicable Conversion Price in
effect immediately prior to such event shall be decreased as of the time of
such issuance or, in the event such record date shall have been fixed, as of
the close of business on such record date, by multiplying, the applicable
Conversion Price then in effect by a fraction:

 

(1)                                  the
numerator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date; and

 

(2)                                  the
denominator of which shall be the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution.

 

(iii)                               Adjustment
for Other Dividends and Distributions. 
If the Maker shall at any time or from time to time after the Issuance
Date, make or issue or set a record date for the determination of holders of
Common Stock entitled to receive a dividend or other distribution payable in
other than shares of Common Stock, then, and in each event, an appropriate
revision to the applicable Conversion Price shall be made and provision shall
be made (by adjustments of the Conversion Price or otherwise) so that the
holders of this Note shall receive upon conversions thereof, in addition to the
number of shares of Common Stock receivable thereon, the number of securities
of the Maker which they would have received had this Note been converted into
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the Conversion Date, retained such
securities (together with any distributions payable thereon during such
period), giving application to all adjustments called for during such period
under this Section 3.6(a)(iii) with respect to the rights of the
holders of this Note and the Other Notes; provided, however, that
if such record date shall have been fixed and such dividend is not fully paid
or if such distribution is not fully made on the date fixed therefor, the
Conversion Price shall be adjusted pursuant to this paragraph as of the time of
actual payment of such dividends or distributions.

 

(iv)                              Adjustments
for Reclassification, Exchange or Substitution.  If the Common Stock issuable upon conversion
of this Note at any time or from time to time after the Issuance Date shall be
changed to the same or different number of shares of any class or classes of
stock, whether by reclassification, exchange, substitution or otherwise (other
than by way of a stock split or combination of shares or stock dividends
provided for in Sections 3.6(a)(i), (ii) and (iii), or a reorganization,
merger, consolidation, or sale of assets provided for in Section 3.6(a)(v)),
then, and in each event, an appropriate revision to the Conversion Price shall
be made and provisions shall be made (by adjustments of the Conversion Price or
otherwise) so that the Holder shall have the right thereafter to convert this
Note into the kind and amount of shares of stock and other securities
receivable upon reclassification, exchange, substitution or other change, by
holders of the number of shares of Common Stock into which such Note might have
been converted immediately prior to such reclassification, exchange,
substitution or other change, all subject to further adjustment as provided
herein.

 

11

 

(v)                                 Adjustments
for Reorganization, Merger, Consolidation or Sales of  Assets.  If at any time or from time to time after the
Issuance Date there shall be a capital reorganization of the Maker (other than
by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 3.6(a)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in Section 3.6(a)(iv)),
or a merger or consolidation of the Maker with or into another corporation
where the holders of outstanding voting securities prior to such merger or
consolidation do not own over fifty percent (50%) of the outstanding voting
securities of the merged or consolidated entity, immediately after such merger
or consolidation, or the sale of all or substantially all of the Maker’s
properties or assets to any other person (an “Organic Change”), then as
a part of such Organic Change, (A) if the surviving entity in any such
Organic Change is a public company that is registered pursuant to the
Securities Exchange Act of 1934, as amended, and its common stock is listed or quoted
on a national exchange or the OTC Bulletin Board, an appropriate revision to
the Conversion Price shall be made and provision shall be made (by adjustments
of the Conversion Price or otherwise) so that the Holder shall have the right
thereafter to convert such Note into the kind and amount of shares of stock and
other securities or property of the Maker or any successor corporation
resulting from Organic Change, and (B) if the surviving entity in any such
Organic Change is not a public company that is registered pursuant to the
Securities Exchange Act of 1934, as amended, or its common stock is not listed
or quoted on a national exchange or the OTC Bulletin Board, the Holder shall
have the right to demand prepayment pursuant to Section 3.7(b) hereof.
 In any such case, appropriate adjustment
shall be made in the application of the provisions of this Section 3.6(a)(v) with
respect to the rights of the Holder after the Organic Change to the end that
the provisions of this Section 3.6(a)(v) (including any adjustment in
the applicable Conversion Price then in effect and the number of shares of
stock or other securities deliverable upon conversion of this Note and the
Other Notes) shall be applied after that event in as nearly an equivalent
manner as may be practicable.

 

(vi)                              Adjustments
for Issuance of Additional Shares of Common Stock. In the event the Maker,
shall, at any time, from time to time, issue or sell any additional shares of
common stock (otherwise than as provided 
in the foregoing subsections (i) through (v) of this Section 3.6(a) or
pursuant to Common Stock Equivalents (hereafter defined) granted or issued
prior to the Issuance Date) (“Additional Shares of Common Stock”), at a
price per share less than the Conversion Price then in effect or without
consideration, then the Conversion Price upon each such issuance shall be
reduced to a price equal to the consideration per share paid for such
Additional Shares of Common Stock.

 

(vii)                           Issuance
of Common Stock Equivalents.  The
provisions of this Section 3.6(a)(vii) shall apply if (a) the
Maker, at any time after the Issuance Date, shall issue any securities
convertible into or exchangeable for, directly or indirectly, Common Stock (“Convertible
Securities”), other than the Notes, or (b) any rights or warrants or
options to purchase any such Common Stock or Convertible Securities
(collectively, the “Common Stock Equivalents”) shall be issued or
sold.  If the price per share for which
Additional Shares of Common Stock may be issuable pursuant to any such Common
Stock Equivalent shall be less than the applicable Conversion Price then in
effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable
thereafter is amended or adjusted, and such price as so amended shall be less
than the applicable Conversion Price in effect at the time of such amendment or
adjustment, then the

 

12

 

applicable Conversion Price upon each such issuance or
amendment shall be adjusted as provided in the first sentence of subsection (vi) of
this Section 3.6(a).  No adjustment
shall be made to the Conversion Price upon the issuance of Common Stock
pursuant to the exercise, conversion or exchange of any Convertible Security or
Common Stock Equivalent where an adjustment to the Conversion Price was made as
a result of the issuance or purchase of any Convertible Security or Common
Stock Equivalent.

 

(viii)                        Consideration
for Stock.  In case any shares of Common
Stock or any Common Stock Equivalents shall be issued or sold:

 

(1)                                  in
connection with any merger or consolidation in which the Maker is the surviving
corporation (other than any consolidation or merger in which the previously
outstanding shares of Common Stock of the Maker shall be changed to or
exchanged for the stock or other securities of another corporation), the amount
of consideration therefor shall be, deemed to be the fair value, as determined
reasonably and in good faith by the Board of Directors of the Maker, of such
portion of the assets and business of the nonsurviving corporation as such
Board may determine to be attributable to such shares of Common Stock,
Convertible Securities, rights or warrants or options, as the case may be; or

 

(2)                                  in
the event of any consolidation or merger of the Maker in which the Maker is not
the surviving corporation or in which the previously outstanding shares of
Common Stock of the Maker shall be changed into or exchanged for the stock or
other securities of another corporation, or in the event of any sale of all or
substantially all of the assets of the Maker for stock or other securities of
any corporation, the Maker shall be deemed to have issued a number of shares of
its Common Stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio on which the
transaction was predicated, and for a consideration equal to the fair market
value on the date of such transaction of all such stock or securities or other
property of the other corporation.  If
any such calculation results in adjustment of the applicable Conversion Price,
or the number of shares of Common Stock issuable upon conversion of the Notes,
the determination of the applicable Conversion Price or the number of shares of
Common Stock issuable upon conversion of the Notes immediately prior to such
merger, consolidation or sale, shall be made after giving effect to such
adjustment of the number of shares of Common Stock issuable upon conversion of
the Notes.  In the event Common Stock is
issued with other shares or securities or other assets of the Maker for
consideration which covers both, the consideration computed as provided in this
Section 3.6(viii) shall be allocated among such securities and assets
as determined in good faith by the Board of Directors of the Maker.

 

(b)                                 Record
Date.  In case the Maker shall take
record of the holders of its Common Stock for the purpose of entitling them to
subscribe for or purchase Common Stock or Convertible Securities, then the date
of the issue or sale of the shares of Common Stock shall be deemed to be such
record date.

 

(c)                                  Certain
Issues Excepted.  Anything herein to
the contrary notwithstanding, the Maker shall not be required to make any
adjustment to the Conversion Price in connection with (i) securities
issued (other than for cash) in connection with a merger, acquisition, or
consolidation, (ii) securities issued pursuant to a bona fide firm
underwritten public offering of

 

13

 

the Maker’s securities, (iii) securities issued
pursuant to the conversion or exercise of convertible or excercisable
securities issued or outstanding on or prior to the date hereof or issued
pursuant to the Purchase Agreement, (iv) the shares of Common Stock
issuable upon the exercise of Warrants, (v) securities issued in
connection with strategic license agreements or other partnering arrangements
so long as such issuances are not for the purpose of raising capital, (vi) Common
Stock issued or options to purchase Common Stock granted or issued pursuant to
the Maker’s stock option plans and employee stock purchase plans as they now
exist, (vii) any warrants issued to the placement agent and its designees
for the transactions contemplated by the Purchase Agreement, (viii) the
payment of any principal and accrued interest in shares of Common Stock
pursuant to this Note, and (ix) the issuance of up to 6,000,000 shares of
Common Stock to the Maker’s officers, directors and employees so long as such
shares of Common Stock are not offered, sold, assigned, transferred or pledged,
directly or indirectly, for a period of one (1) year following the
effective date of the registration statement providing for the resale of the
shares of Common Stock issuable upon conversion of this Note.

 

(d)                                 No Impairment.  The Maker shall not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Maker, but will at
all times in good faith, assist in the carrying out of all the provisions of
this Section 3.6 and in the taking of all such action as may be necessary
or appropriate in order to protect the Conversion Rights of the Holder against
impairment.  In the event a Holder shall
elect to convert any Notes as provided herein, the Maker cannot refuse
conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law, violation
of an agreement to which such Holder is a party or for any reason whatsoever,
unless, an injunction from a court, or notice, restraining and or adjoining
conversion of all or of said Notes shall have issued and the Maker posts a
surety bond for the benefit of such Holder in an amount equal to one hundred
thirty percent (130%) of the amount of the Notes the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Holder (as liquidated damages) in the event it obtains
judgment.

 

(e)                                  Certificates
as to Adjustments.  Upon occurrence
of each adjustment or readjustment of the Conversion Price or number of shares
of Common Stock issuable upon conversion of this Note pursuant to this Section 3.6,
the Maker at its expense shall promptly compute such adjustment or readjustment
in accordance with the terms hereof and furnish to the Holder a certificate
setting forth such adjustment and readjustment, showing in detail the facts
upon which such adjustment or readjustment is based.  The Maker shall, upon written request of the
Holder, at any time, furnish or cause to be furnished to the Holder a like
certificate setting forth such adjustments and readjustments, the applicable
Conversion Price in effect at the time, and the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon the conversion of this Note.  Notwithstanding the foregoing, the Maker
shall not be obligated to deliver a certificate unless such certificate would
reflect an increase or decrease of at least one percent (1%) of such adjusted
amount.

 

14

 

(f)                                    Issue
Taxes.  The Maker shall pay any and
all issue and other taxes, excluding federal, state or local income taxes, that
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of this Note pursuant thereto; provided, however, that
the Maker shall not be obligated to pay any transfer taxes resulting from any
transfer requested by the Holder in connection with any such conversion.

 

(g)                                 Fractional
Shares.  No fractional shares of
Common Stock shall be issued upon conversion of this Note.  In lieu of any fractional shares to which the
Holder would otherwise be entitled, the Maker shall pay cash equal to the product
of such fraction multiplied by the average of the Closing Bid Prices of the
Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.

 

(h)                                 Reservation
of Common Stock.  The Maker shall at
all times when this Note shall be outstanding, reserve and keep available out
of its authorized but unissued Common Stock, such number of shares of Common
Stock as shall from time to time be sufficient to effect the conversion of this
Note and all interest accrued thereon; provided that the number of
shares of Common Stock so reserved shall at no time be less than one hundred
twenty percent (120%) of the number of shares of Common Stock for which this
Note and all interest accrued thereon are at any time convertible.  The Maker shall, from time to time in
accordance with the Utah Revised Business Corporation Act, increase the
authorized number of shares of Common Stock if at any time the unissued number
of authorized shares shall not be sufficient to satisfy the Maker’s obligations
under this Section 3.6(h).

 

(i)                                     Regulatory
Compliance.  If any shares of Common
Stock to be reserved for the purpose of conversion of this Note or any interest
accrued thereon require registration or listing with or approval of any
governmental authority, stock exchange or other regulatory body under any
federal or state law or regulation or otherwise before such shares may be
validly issued or delivered upon conversion, the Maker shall, at its sole cost
and expense, in good faith and as expeditiously as possible, endeavor to secure
such registration, listing or approval, as the case may be.

 

Section 3.7                                      Prepayment.

 

(a)                                  Prepayment
Upon an Event of Default. 
Notwithstanding anything to the contrary contained herein, upon the
occurrence of an Event of Default described in Sections 2.1(b)-(k) hereof, the
Holder shall have the right, at such Holder’s option, to require the Maker to
prepay in cash all or a portion of this Note at a price equal to the Triggering
Event Prepayment Price (as defined in Section 3.7(c) below)
applicable at the time of such request. 
Nothing in this Section 3.7(a) shall limit the Holder’s rights
under Section 2.2 hereof.

 

(b)                                 Prepayment Option
Upon Major Transaction.  In addition
to all other rights of the Holder contained herein, simultaneous with the
occurrence of a Major Transaction (as defined below), the Holder shall have the
right, at the Holder’s option, to require the Maker to prepay all or a portion
of the Holder’s Notes at a price equal to one hundred ten percent (110%) of the
aggregate principal amount of this Note plus all accrued and unpaid interest
(the “Major Transaction Prepayment Price”); provided that the Holder
shall have the sole option to receive payment of the Major Transaction
Prepayment Price in cash or shares of Common Stock.  If the

 

15

 

Holder elects to receive payment of the Major Transaction Prepayment
Price in shares of Common Stock, the price per share shall be based upon the
Conversion Price then in effect on the day preceding the date of delivery of
the Notice of Prepayment at Option of Holder Upon Major Transaction (as
hereafter defined) and the Holder shall have demand registration rights with
respect to such shares.

 

(c)                                  Prepayment Option
Upon Triggering Event.  In addition
to all other rights of the Holder contained herein, after a Triggering Event
(as defined below), the Holder shall have the right, at the Holder’s option, to
require the Maker to prepay all or a portion of this Note in cash at a price equal
to the sum of (i) the greater of (A) one hundred twenty percent
(120%) of the aggregate principal amount of this Note plus all accrued and
unpaid interest and (B) in the event at such time the Holder is unable to
obtain the benefit of its conversion rights through the conversion of this Note
and resale of the shares of Common Stock issuable upon conversion hereof in
accordance with the terms of this Note and the other Transaction Documents, the
aggregate principal amount of this Note plus all accrued but unpaid interest
hereon, divided by the Conversion Price on (x) the date the Prepayment Price
(as defined below) is demanded or otherwise due or (y) the date the Prepayment
Price is paid in full, whichever is less, multiplied by the VWAP on (x) the date
the Prepayment Price is demanded or otherwise due, and (y) the date the
Prepayment Price is paid in full, whichever is greater, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of this Note and
the other Transaction Documents (the “Triggering Event Prepayment Price,”
and, collectively with the “Major Transaction Prepayment Price,” the “Prepayment
Price”).

 

(d)                                 Intentionally
Omitted.

 

(e)                                  “Major Transaction.”  A “Major Transaction” shall be deemed
to have occurred at such time as any of the following events:

 

(i)                                     the
consolidation, merger or other business combination of the Maker with or into
another Person (as defined in Section 4.13 hereof) (other than (A) pursuant
to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Maker or (B) a consolidation, merger
or other business combination in which holders of the Maker’s voting power
immediately prior to the transaction continue after the transaction to hold,
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).

 

(ii)                                  the
sale or transfer of more than fifty percent (50%) of the Maker’s assets (based
on the fair market value as determined in good faith by the Maker’s Board of
Directors) other than inventory in the ordinary course of business in one or a
related series of transactions; or

 

(iii)                               closing
of a purchase, tender or exchange offer made to the holders of more than fifty
percent (50%) of the outstanding shares of Common Stock in which more than
fifty percent (50%) of the outstanding shares of Common Stock were tendered and
accepted.

 

16

 

(f)                                    “Triggering
Event.”  A “Triggering Event”
shall be deemed to have occurred at such time as any of the following events:

 

(i)                                     so long as any
Notes are outstanding, the effectiveness of the Registration Statement, after
it becomes effective, (i) lapses for any reason (including, without
limitation, the issuance of a stop order) or (ii) is unavailable to the
Holder for sale of the shares of Common Stock, and such lapse or unavailability
continues for a period of twenty (20) consecutive Trading Days, and the shares
of Common Stock into which the Holder’s Notes can be converted cannot be sold
in the public securities market pursuant to Rule 144(k), provided that the
cause of such lapse or unavailability is not due to factors primarily within
the control of the Holder of the Notes; and provided further that a Triggering
Event shall not have occurred if and to the extent the Maker exercised its
rights set forth in Section 3(n) of the Registration Rights Agreement;

 

(ii)                                  the
suspension from listing, without subsequent listing on any one of, or the
failure of the Common Stock to be listed on at least one of the OTC Bulletin
Board, the American Stock Exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market or The New York Stock Exchange, Inc., for a period of five
(5) consecutive Trading Days;

 

(iii)                               the
Maker’s notice to any holder of the Notes, including by way of public
announcement, at any time, of its inability to comply (including for any of the
reasons described in Section 3.8) or its intention not to comply with
proper requests for conversion of any Notes into shares of Common Stock; or

 

(iv)                              the
Maker’s failure to comply with a Conversion Notice tendered in accordance with
the provisions of this Note within ten (10) business days after the
receipt by the Maker of the Conversion Notice.

 

(g)                                 Intentionally
Omitted.

 

(h)                                 Mechanics of
Prepayment at Option of Holder Upon Major Transaction.  No sooner than fifteen (15) days nor later
than ten (10) days prior to the consummation of a Major Transaction, but
not prior to the public announcement of such Major Transaction, the Maker shall
deliver written notice thereof via facsimile and overnight courier (“Notice
of Major Transaction”) to the Holder of this Note.  At any time after receipt of a Notice of
Major Transaction (or, in the event a Notice of Major Transaction is not
delivered at least ten (10) days prior to a Major Transaction, at any time
within ten (10) days prior to a Major Transaction), any holder of the
Notes then outstanding may require the Maker to prepay, effective immediately
prior to the consummation of such Major Transaction, all of the holder’s Notes
then outstanding by delivering written notice thereof via facsimile and
overnight courier (“Notice of Prepayment at Option of Holder Upon Major
Transaction”) to the Maker, which Notice of Prepayment at Option of Holder
Upon Major Transaction shall indicate (i) the principal amount of the
Notes that such holder is electing to have prepaid and (ii) the applicable
Major Transaction Prepayment Price, as calculated pursuant to Section 3.7(b) above.

 

(i)                                     Mechanics of
Prepayment at Option of Holder Upon Triggering Event.  Within one (1) business day after the
occurrence of a Triggering Event, the Maker shall deliver

 

17

 

written notice thereof via facsimile and overnight courier (“Notice
of Triggering Event”) to each holder of the Notes.  At any time after the earlier of a holder’s
receipt of a Notice of Triggering Event and such holder becoming aware of a
Triggering Event, any holder of this Note and the Other Notes then outstanding
may require the Maker to prepay all of the Notes on a pro rata basis by
delivering written notice thereof via facsimile and overnight courier (“Notice
of Prepayment at Option of Holder Upon Triggering Event”) to the Maker,
which Notice of Prepayment at Option of Holder Upon Triggering Event shall
indicate (i) the amount of the Note that such holder is electing to have
prepaid and (ii) the applicable Triggering Event Prepayment Price, as
calculated pursuant to Section 3.7(c) above.  A holder shall only be permitted to require
the Maker to prepay the Note pursuant to Section 3.7 hereof for the
greater of a period of ten (10) days after receipt by such holder of a
Notice of Triggering Event or for so long as such Triggering Event is
continuing.

 

(j)                                     Intentionally
Omitted.

 

(k)                                  Payment of
Prepayment Price.  Upon the Maker’s
receipt of a Notice(s) of Prepayment at Option of Holder Upon Triggering Event
or a Notice(s) of Prepayment at Option of Holder Upon Major Transaction from
any holder of the Notes, the Maker shall immediately notify each holder of the
Notes by facsimile of the Maker’s receipt of such Notice(s) of Prepayment at
Option of Holder Upon Triggering Event or Notice(s) of Prepayment at Option of
Holder Upon Major Transaction and each holder which has sent such a notice
shall promptly submit to the Maker such holder’s certificates representing the
Notes which such holder has elected to have prepaid.  The Maker shall deliver the applicable
Triggering Event Prepayment Price, in the case of a prepayment pursuant to Section 3.7(i),
to such holder within five (5) business days after the Maker’s receipt of
a Notice of Prepayment at Option of Holder Upon Triggering Event and, in the
case of a prepayment pursuant to Section 3.7(h), the Maker shall deliver
the applicable Major Transaction Prepayment Price immediately prior to the
consummation of the Major Transaction; provided that a holder’s original Note
shall have been so delivered to the Maker; provided further that if the Maker
is unable to prepay all of the Notes to be prepaid, the Maker shall prepay an
amount from each holder of the Notes being prepaid equal to such holder’s
pro-rata amount (based on the number of Notes held by such holder relative to
the number of Notes outstanding) of all Notes being prepaid.  If the Maker shall fail to prepay all of the
Notes submitted for prepayment (other than pursuant to a dispute as to the
arithmetic calculation of the Prepayment Price), in addition to any remedy such
holder of the Notes may have under this Note and the Purchase Agreement, the
applicable Prepayment Price payable in respect of such Notes not prepaid shall
bear interest at the rate of two percent (2%) per month (prorated for partial
months) until paid in full.  Until the
Maker pays such unpaid applicable Prepayment Price in full to a holder of the
Notes submitted for prepayment, such holder shall have the option (the “Void
Optional Prepayment Option”) to, in lieu of prepayment, require the Maker
to promptly return to such holder(s) all of the Notes that were submitted for
prepayment by such holder(s) under this Section 3.7 and for which the
applicable Prepayment Price has not been paid, by sending written notice
thereof to the Maker via facsimile (the “Void Optional Prepayment Notice”).  Upon the Maker’s receipt of such Void
Optional Prepayment Notice(s) and prior to payment of the full applicable
Prepayment Price to such holder, (i) the Notice(s) of Prepayment at Option
of Holder Upon Triggering Event or the Notice(s) of Prepayment at Option of
Holder Upon Major Transaction, as the case may be, shall be null and void with
respect to those Notes submitted for prepayment and for which the applicable

 

18

 

Prepayment Price has not been paid, (ii) the Maker shall
immediately return any Notes submitted to the Maker by each holder for
prepayment under this Section 3.7(k) and for which the applicable
Prepayment Price has not been paid and (iii) the Conversion Price of such
returned Notes shall be adjusted to the lesser of (A) the Conversion Price
as in effect on the date on which the Void Optional Prepayment Notice(s) is
delivered to the Maker and (B) the lowest Closing Bid Price during the
period beginning on the date on which the Notice(s) of Prepayment of Option of
Holder Upon Major Transaction or the Notice(s) of Prepayment at Option of
Holder Upon Triggering Event, as the case may be, is delivered to the Maker and
ending on the date on which the Void Optional Prepayment Notice(s) is delivered
to the Maker; provided that no adjustment shall be made if such adjustment
would result in an increase of the Conversion Price then in effect.  A holder’s delivery of a Void Optional
Prepayment Notice and exercise of its rights following such notice shall not
effect the Maker’s obligations to make any payments which have accrued prior to
the date of such notice.  Payments
provided for in this Section 3.7 shall have priority to payments to other
stockholders in connection with a Major Transaction.

 

(l)                                     Maker
Prepayment Option.  Commencing nine (9) months
following the effective date of the registration statement providing for the
resale of the shares of Common Stock issuable upon conversion of this Note, the
Maker may prepay in cash all or any portion of the outstanding principal amount
of this Note together with all accrued and unpaid interest thereon upon thirty
(30) days prior written notice to the Holder (the “Maker’s Prepayment Notice”)
at a price equal to one hundred twenty percent (120%) of the aggregate
principal amount of this Note plus any accrued but unpaid interest (the “Maker’s
Prepayment Price”); provided, however, that if a holder has
delivered a Conversion Notice to the Maker or delivers a Conversion Notice
within such thirty (30) day period following delivery of the Maker’s Prepayment
Notice, the principal amount of the Notes plus any accrued but unpaid interest
designated to be converted may not be prepaid by the Maker and shall be
converted in accordance with Section 3.3 hereof; provided  further
that if during the period between delivery of the Maker’s Prepayment Notice and
the Maker’s Prepayment Date (as defined below), a holder shall become entitled
to deliver a Notice of Prepayment at Option of Holder Upon Major Transaction or
Notice of Prepayment at Option of Holder upon Triggering Event, then the such
rights of the holders shall take precedence over the previously delivered Maker
Prepayment Notice.  The Maker’s
Prepayment Notice shall state the date of prepayment which date shall be the
thirty-first (31st) day after the Maker has delivered the Maker’s
Prepayment Notice (the “Maker’s Prepayment Date”), the Maker’s
Prepayment Price and the principal amount of Notes plus any accrued but unpaid
interest to be prepaid by the Maker.  The
Maker shall deliver the Maker’s Prepayment Price on the Maker’s Prepayment
Date, provided, that if the holder(s) delivers a Conversion Notice
before the Maker’s Prepayment Date, then the portion of the Maker’s Prepayment
Price which would be paid to prepay the Notes covered by such Conversion Notice
shall be returned to the Maker upon delivery of the Common Stock issuable in
connection with such Conversion Notice to the holder(s).  On the Maker’s Prepayment Date, the Maker
shall pay the Maker’s Prepayment Price, subject to any adjustment pursuant to
the immediately preceding sentence, to the holder(s) on a pro rata basis.  If the Maker fails to pay the Maker’s
Prepayment Price by the thirty-first (31st) day after the Maker has
delivered the Maker’s Prepayment Notice, the prepayment will be declared null
and void and the Maker  shall lose its
right to serve a Maker ‘s Prepayment Notice pursuant to this Section 3.7(l)
in the future.  Notwithstanding the
foregoing to the contrary, the Maker may effect a prepayment pursuant to

 

19

 

this Section 3.7(l) only if (A) the
registration statement providing for the resale of the shares of Common Stock issuable
upon conversion of this Note is effective and has been effective, without lapse
or suspension of any kind, for a period sixty (60) consecutive calendar days
immediately preceding the Maker’s Prepayment Notice through the Maker’s
Prepayment Date, (B) trading in the Common Stock shall not have been
suspended by the Securities and Exchange Commission or the OTC Bulletin Board
(or other exchange or market on which the Common Stock is trading), (C) the
Maker is in material compliance with the terms and conditions of this Note and
the other Transaction Documents, and (D) the Maker is not in possession of
any material non-public information.

 

Section 3.8                                      Inability
to Fully Convert.

 

(a)                                  Holder’s
Option if Maker Cannot Fully Convert. 
If, upon the Maker’s receipt of a Conversion Notice, the Maker cannot
issue shares of Common Stock registered for resale under the Registration
Statement for any reason, including, without limitation, because the Maker (w)
does not have a sufficient number of shares of Common Stock authorized and
available, (x) is otherwise prohibited by applicable law or by the rules or
regulations of any stock exchange, interdealer quotation system or other
self-regulatory organization with jurisdiction over the Maker or any of its
securities from issuing all of the Common Stock which is to be issued to the
Holder pursuant to a Conversion Notice or (y) fails to have a sufficient number
of shares of Common Stock registered for resale under the Registration
Statement, then the Maker shall issue as many shares of Common Stock as it is
able to issue in accordance with the Holder’s Conversion Notice and, with
respect to the unconverted portion of this Note, the Holder, solely at Holder’s
option, can elect to:

 

(i)                                     require
the Maker to prepay that portion of this Note for which the Maker is unable to
issue Common Stock in accordance with the Holder’s Conversion Notice (the “Mandatory
Prepayment”) at a price per share equal to the Triggering Event Prepayment
Price as of such Conversion Date (the “Mandatory Prepayment Price”);

 

(ii)                                  if
the Maker’s inability to fully convert is pursuant to Section 3.8(a)(x)
above, require the Maker to issue restricted shares of Common Stock in
accordance with such holder’s Conversion Notice;

 

(iii)                               void
its Conversion Notice and retain or have returned, as the case may be, this
Note that was to be converted pursuant to the Conversion Notice (provided that
the Holder’s voiding its Conversion Notice shall not effect the Maker’s
obligations to make any payments which have accrued prior to the date of such
notice);

 

(iv)                              exercise
its Buy-In rights pursuant to and in accordance with the terms and provisions
of Section 3.3(c) of this Note.

 

In the event a Holder shall elect to convert any portion of its Notes
as provided herein, the Maker cannot refuse conversion based on any claim that
such Holder or any one associated or affiliated with such Holder has been
engaged in any violation of law, violation of an agreement to which such Holder
is a party or for any reason whatsoever, unless, an injunction from a court, on
notice, restraining and or adjoining conversion of all or of said Notes shall
have been issued and

 

20

 

the Maker posts a surety bond for the benefit of such Holder in an amount
equal to 130% of the principal amount of the Notes the Holder has elected to
convert, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Holder in the event it obtains judgment.

 

(b)                                 Mechanics
of Fulfilling Holder’s Election.  The
Maker shall immediately send via facsimile to the Holder, upon receipt of a
facsimile copy of a Conversion Notice from the Holder which cannot be fully
satisfied as described in Section 3.8(a) above, a notice of the Maker’s
inability to fully satisfy the Conversion Notice (the “Inability to Fully
Convert Notice”).  Such Inability to
Fully Convert Notice shall indicate (i) the reason why the Maker is unable
to fully satisfy such holder’s Conversion Notice, (ii) the amount of this
Note which cannot be converted and (iii) the applicable Mandatory
Prepayment Price.  The Holder shall
notify the Maker of its election pursuant to Section 3.8(a) above by
delivering written notice via facsimile to the Maker (“Notice in Response to
Inability to Convert”).

 

(c)                                  Payment
of Prepayment Price.  If the Holder
shall elect to have its Notes prepaid pursuant to Section 3.8(a)(i) above,
the Maker shall pay the Mandatory Prepayment Price to the Holder within thirty
(30) days of the Maker’s receipt of the Holder’s Notice in Response to
Inability to Convert, provided that prior to the Maker’s receipt of the
Holder’s Notice in Response to Inability to Convert the Maker has not delivered
a notice to the Holder stating, to the satisfaction of the Holder, that the
event or condition resulting in the Mandatory Prepayment has been cured and all
Conversion Shares issuable to the Holder can and will be delivered to the
Holder in accordance with the terms of this Note.  If the Maker shall fail to pay the applicable
Mandatory Prepayment Price to the Holder on the date that is one (1) business
day following the Maker’s receipt of the Holder’s Notice in Response to
Inability to Convert (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Prepayment Price), in addition to any
remedy the Holder may have under this Note and the Purchase Agreement, such
unpaid amount shall bear interest at the rate of two percent (2%) per month
(prorated for partial months) until paid in full.  Until the full Mandatory Prepayment Price is
paid in full to the Holder, the Holder may (i) void the Mandatory
Prepayment with respect to that portion of the Note for which the full
Mandatory Prepayment Price has not been paid, (ii) receive back such Note,
and (iii) require that the Conversion Price of such returned Note be
adjusted to the lesser of (A) the Conversion Price as in effect on the
date on which the Holder voided the Mandatory Prepayment and (B) the lowest
Closing Bid Price during the period beginning on the Conversion Date and ending
on the date the Holder voided the Mandatory Prepayment.

 

(d)                                 Pro-rata
Conversion and Prepayment.  In the
event the Maker receives a Conversion Notice from more than one holder of the
Notes on the same day and the Maker can convert and prepay some, but not all,
of the Notes pursuant to this Section 3.8, the Maker shall convert and
prepay from each holder of the Notes electing to have its Notes converted and
prepaid at such time an amount equal to such holder’s pro-rata amount (based on
the principal amount of the Notes held by such holder relative to the principal
amount of the Notes outstanding) of all the Notes being converted and prepaid
at such time.

 

Section 3.9                                      No
Rights as Shareholder.  Nothing
contained in this Note shall be construed as conferring upon the Holder, prior
to the conversion of this Note, the right to vote or to receive dividends or to
consent or to receive notice as a shareholder in respect of any meeting

 

21

 

of shareholders for the election of directors of the Maker or of any
other matter, or any other rights as a shareholder of the Maker.

 

ARTICLE IV

 

MISCELLANEOUS

 

Section 4.1                                      Notices.  Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery, telecopy or facsimile at
the address or number designated in the Purchase Agreement (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur.  The Maker will give written notice to the
Holder at least ten (10) days prior to the date on which the Maker takes a
record (x) with respect to any dividend or distribution upon the Common Stock,
(y) with respect to any pro rata subscription offer to holders of Common Stock
or (z) for determining rights to vote with respect to any Organic Change,
dissolution, liquidation or winding-up and in no event shall such notice be
provided to such holder prior to such information being made known to the
public.  The Maker will also give written
notice to the Holder at least ten (10) days prior to the date on which any
Organic Change, dissolution, liquidation or winding-up will take place and in
no event shall such notice be provided to the Holder prior to such information
being made known to the public. The Maker shall promptly notify the Holder of
this Note of any notices sent or received, or any actions taken with respect to
the Other Notes.

 

Section 4.2                                      Governing
Law.  This Note shall be governed by
and construed in accordance with the internal laws of the State of New York,
without giving effect to any of the conflicts of law principles which would
result in the application of the substantive law of another jurisdiction.  This Note shall not be interpreted or
construed with any presumption against the party causing this Note to be drafted.

 

Section 4.3                                      Headings.  Article and section headings in
this Note are included herein for purposes of convenience of reference only and
shall not constitute a part of this Note for any other purpose.

 

Section 4.4                                      Remedies,
Characterizations, Other Obligations, Breaches and Injunctive Relief.  The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note, at
law or in equity (including, without limitation, a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall
be deemed a waiver of compliance with the provisions giving rise to such remedy
and nothing herein shall limit a holder’s right to pursue actual damages for
any failure by the Maker to comply with the terms of this Note.  Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the holder thereof and shall not, except
as expressly provided herein, be subject to any other obligation of the Maker
(or the performance thereof).  The Maker
acknowledges that a

 

22

 

breach by it of its obligations hereunder will cause irreparable and
material harm to the Holder and that the remedy at law for any such breach may
be inadequate. Therefore the Maker agrees that, in the event of any such breach
or threatened breach, the Holder shall be entitled, in addition to all other
available rights and remedies, at law or in equity, to seek and obtain such
equitable relief, including but not limited to an injunction restraining any
such breach or threatened breach, without the necessity of showing economic
loss and without any bond or other security being required.

 

Section 4.5                                      Enforcement
Expenses.  The Maker agrees to pay
all costs and expenses of enforcement of this Note, including, without
limitation, reasonable attorneys’ fees and expenses.

 

Section 4.6                                      Binding
Effect.   The obligations of the
Maker and the Holder set forth herein shall be binding upon the successors and
assigns of each such party, whether or not such successors or assigns are
permitted by the terms hereof.

 

Section 4.7                                      Amendments.  This Note may not be modified or amended in
any manner except in writing executed by the Maker and the Holder.

 

Section 4.8                                      Compliance
with Securities Laws.  The Holder of
this Note acknowledges that this Note is being acquired solely for the Holder’s
own account and not as a nominee for any other party, and for investment, and that
the Holder shall not offer, sell or otherwise dispose of this Note.  This Note and any Note issued in substitution
or replacement therefor shall be stamped or imprinted with a legend in
substantially the following form:

 

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES
LAWS, AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR RECEIPT BY THE MAKER OF AN OPINION OF COUNSEL IN THE FORM,
SUBSTANCE AND SCOPE REASONABLY SATISFACTORY TO THE MAKER THAT THIS NOTE MAY BE
SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF, UNDER AN EXEMPTION
FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.”

 

Section 4.9                                      Consent
to Jurisdiction.  Each of the Maker
and the Holder (i) hereby irrevocably submits to the exclusive
jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in New
York county for the purposes of any suit, action or proceeding arising out of
or relating to this Note and (ii) hereby waives, and agrees not to assert
in any such suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of such court, that the suit, action or proceeding
is brought in an inconvenient forum or that the venue of the suit, action or
proceeding is improper.  Each of the
Maker and the Holder consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under the Purchase Agreement and agrees that such service
shall constitute good and sufficient

 

23

 

service of process and notice thereof. 
Nothing in this Section 4.9 shall affect or limit any right to
serve process in any other manner permitted by law.  Each of the Maker and the Holder hereby agree
that the prevailing party in any suit, action or proceeding arising out of or
relating to this Note shall be entitled to reimbursement for reasonable legal
fees from the non-prevailing party.

 

Section 4.10                                Parties
in Interest.  This Note shall be
binding upon, inure to the benefit of and be enforceable by the Maker, the
Holder and their respective successors and permitted assigns.

 

Section 4.11                                Failure
or Indulgence Not Waiver.  No failure
or delay on the part of the Holder in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.

 

Section 4.12                                Maker
Waivers.  Except as otherwise
specifically provided herein, the Maker and all others that may become liable
for all or any part of the obligations evidenced by this Note, hereby waive
presentment, demand, notice of nonpayment, protest and all other demands’ and
notices in connection with the delivery, acceptance, performance and
enforcement of this Note, and do hereby consent to any number of renewals of
extensions of the time or payment hereof and agree that any such renewals or
extensions may be made without notice to any such persons and without affecting
their liability herein and do further consent to the release of any person liable
hereon, all without affecting the liability of the other persons, firms or
Maker liable for the payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY.

 

(a)                                  No
delay or omission on the part of the Holder in exercising its rights under this
Note, or course of conduct relating hereto, shall operate as a waiver of such
rights or any other right of the Holder, nor shall any waiver by the Holder of
any such right or rights on any one occasion be deemed a waiver of the same
right or rights on any future occasion.

 

(b)                                 THE
MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

 

Section 4.13                                Definitions.  For the purposes hereof, the following terms
shall have the following meanings:

 

“Person” means an individual or a
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or
an agency or political subdivision thereof) or other entity of any kind.

 

“Trading Day” means (a) a day on
which the Common Stock is traded on the OTC Bulletin Board, or (b) if the
Common Stock is not traded on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); provided, however, that in
the event that the Common Stock is not

 

24

 

listed or quoted as set forth in (a) or (b) hereof, then
Trading Day shall mean any day except Saturday, Sunday and any day which shall
be a legal holiday or a day on which banking institutions in the State of New
York are authorized or required by law or other government action to close.

 

 

	
   

  	
  APOLLO RESOURCES INTERNATIONAL, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

25

 

EXHIBIT A

 

WIRE INSTRUCTIONS.

 

Payee:

 

Bank: 

 

Address: 

 

 

Bank No.:

 

Account No.:  

 

Account Name: 

 

26

 

FORM OF

 

NOTICE OF CONVERSION

 

(To be Executed by the
Registered Holder in order to Convert the Note)

 

The undersigned hereby irrevocably elects to convert $                     
of the principal amount of the above Note No.       
into shares of Common Stock of Apollo Resources International, Inc. (the “Maker”)
according to the conditions hereof, as of the date written below.

 

	
  Date of Conversion 

  	
   

  	
   

  
	
   

  
	
  Applicable Conversion Price 

  	
   

  	
   

  
	
   

  
	
  Number of shares of Common Stock
  beneficially owned or deemed beneficially owned by the Holder on the Date of Conversion:

  
	
   

  
	
   

  
	
  Signature

  	
   

  	
   

  
	
   

  
	
  [Name]

  
	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
								

 

27Exhibit 10.1

 

REGISTRATION
RIGHTS AGREEMENT

 

This Registration Rights
Agreement (this “Agreement”) is made and entered into as of June 30,
2005, by and among Apollo Resources International, Inc., a Utah
corporation (the “Company”), and the purchasers listed on Schedule I
hereto (the “Purchasers”).

 

This Agreement is being
entered into pursuant to the Note and Warrant Purchase Agreement dated as of the date hereof among the Company and the
Purchasers (the “Purchase Agreement”).

 

The Company and the
Purchasers hereby agree as follows:

 

1.                                       Definitions.

 

Capitalized terms used
and not otherwise defined herein shall have the meanings given such terms in
the Purchase Agreement.  As used in this
Agreement, the following terms shall have the following meanings:

 

“Advice” shall
have meaning set forth in Section 3(m).

 

“Affiliate” means,
with respect to any Person, any other Person that directly or indirectly
controls or is controlled by or under common control with such Person.  For the purposes of this definition, “control,”
when used with respect to any Person, means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms of “affiliated,” “controlling” and “controlled”
have meanings correlative to the foregoing.

 

“Board” shall have
meaning set forth in Section 3(n).

 

“Business Day”
means any day except Saturday, Sunday and any day which shall be a legal holiday
or a day on which banking institutions in the state of New York generally are
authorized or required by law or other government actions to close.

 

“Closing Date”
means the date of the closing of the purchase and sale of the Notes and the
Warrants pursuant to the Purchase Agreement.

 

“Commission” means
the Securities and Exchange Commission.

 

“Common Stock”
means the Company’s Common Stock, par value $.001 per share.

 

“Effectiveness Date”  means with respect to the Registration
Statement the earlier of the ninetieth (90th) day following the
Closing Date or the date which is within three (3) Business Days of the
date on which the Commission informs the Company that the Commission (i) will
not review the Registration Statement or (ii) that the Company may request
the

 

 

acceleration of the
effectiveness of the Registration Statement and the Company makes such request.

 

“Effectiveness Period”
shall have the meaning set forth in Section 2.

 

“Event” shall have
the meaning set forth in Section 7(d).

 

“Event Date” shall
have the meaning set forth in Section 7(d).

 

“Exchange Act”
means the Securities Exchange Act of 1934, as amended.

 

“Filing Date”
means the thirtieth (30th) day following the Closing Date.

 

“Holder” or “Holders”
means the holder or holders, as the case may be, from time to time of
Registrable Securities.

 

“Indemnified Party”
shall have the meaning set forth in Section 5(c).

 

“Indemnifying Party”
shall have the meaning set forth in Section 5(c).

 

“Losses” shall
have the meaning set forth in Section 5(a).

 

“Person” means an
individual or a corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or political subdivision thereof) or other entity of
any kind.

 

“Proceeding” means
an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.

 

“Prospectus” means
the prospectus included in the Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by the
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference in such Prospectus.

 

“Registrable
Securities” means (i) the shares of Common Stock issuable upon
conversion of the Notes and the Option
Notes, (ii) the shares of Common Stock issuable upon repayment of the
principal amount of the Notes and the Option Notes, including any interest
accrued thereon, and (iii) the shares of Common Stock issuable upon
exercise of the Warrants and the Additional Warrants.

 

“Registration
Statement” means the registration statements and any additional
registration statements contemplated by Section 2, including (in each
case) the Prospectus,

 

2

 

amendments and
supplements to such registration statement or Prospectus, including pre- and
post-effective amendments, all exhibits thereto, and all material incorporated
by reference in such registration statement.

 

“Rule 144”
means Rule 144 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

“Rule 158”
means Rule 158 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

“Rule 415”
means Rule 415 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

“Rule 424”
means Rule 424 promulgated by the Commission pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.

 

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

 

“Special Counsel”
means Kramer Levin Naftalis & Frankel LLP, for which the Holders will
be reimbursed by the Company pursuant to Section 4.

 

“Warrants” means
the warrants to purchase shares of Common Stock issued to the Purchasers
pursuant to the Purchase Agreement.

 

2.                                       Resale
Registration.

 

On or prior to the Filing
Date the Company shall prepare and file with the Commission a “resale”
Registration Statement providing for the resale of all Registrable Securities for
an offering to be made on a continuous basis pursuant to Rule 415.  The Registration Statement shall be on Form SB-2
(except if the Company is not then eligible to register for resale the
Registrable Securities on Form SB-2, in which case such registration shall
be on another appropriate form in accordance with the Securities Act and the rules promulgated
thereunder).  The Company shall (i) not
permit any securities other than the Registrable Securities and the securities
to be listed on Schedule II hereto to be included in the
Registration Statement and (ii) use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act as
promptly as possible after the filing thereof, but in any event prior to the
Effectiveness Date, and to keep such Registration Statement continuously
effective under the Securities Act until such date as is the earlier of (x) the
date when all Registrable Securities covered by such Registration Statement
have been sold or (y) the date on which the Registrable Securities may be sold
without any restriction pursuant to Rule 144(k) as determined by the
counsel to the Company pursuant to a written opinion letter, addressed to the
Company’s transfer agent to such effect (the “Effectiveness Period”).

 

3

 

3.                                       Registration
Procedures.

 

In connection with the
Company’s registration obligations hereunder, the Company shall:

 

(a)                                  Prepare
and file with the Commission on or prior to the Filing Date, a Registration
Statement on Form SB-2 (or if the Company is not then eligible to register
for resale the Registrable Securities on Form SB-2 such registration shall
be on another appropriate form in accordance with the Securities Act and the rules promulgated
thereunder) in accordance with the method or methods of distribution thereof as
specified by the Holders (except if otherwise directed by the Holders), and use
its reasonable best efforts to cause the Registration Statement to become
effective and remain effective as provided herein; provided, however,
that not less than five (5) Business Days prior to the filing of the
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated therein by reference),
the Company shall (i) furnish to the Holders and the Special Counsel,
copies of all such documents proposed to be filed, which documents (other than
those incorporated by reference) will be subject to the review of such Holders
and such Special Counsel, and (ii) cause its officers and directors,
counsel and independent certified public accountants to respond to such
inquiries as shall be necessary, in the reasonable opinion of Special Counsel,
to conduct a reasonable investigation within the meaning of the Securities
Act.  The Company shall not file the
Registration Statement or any such Prospectus or any amendments or supplements
thereto to which the Holders of a majority of the Registrable Securities or the
Special Counsel shall reasonably object in writing within three (3) Business
Days of their receipt thereof.

 

(b)                                 (i) Prepare
and file with the Commission such amendments, including post-effective
amendments, to the Registration Statement as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the
Commission such additional Registration Statements as necessary in order to
register for resale under the Securities Act all of the Registrable Securities;
(ii) cause the related Prospectus to be amended or supplemented by any
required Prospectus supplement, and as so supplemented or amended to be filed
pursuant to Rule 424 (or any similar provisions then in force) promulgated
under the Securities Act; (iii) respond as promptly as possible, but in no
event later than ten (10) Business Days, to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as possible provide the Holders true and complete copies of all
correspondence from and to the Commission relating to the Registration
Statement; and (iv) comply in all material respects with the provisions of
the Securities Act and the Exchange Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement during the
applicable period in accordance with the intended methods of disposition by the
Holders thereof set forth in the Registration Statement as so amended or in
such Prospectus as so supplemented.

 

(c)                                  Notify
the Holders of Registrable Securities to be sold and the Special Counsel as
promptly as possible (and, in the case of (i)(A) below, not less than five
(5) days prior to such filing) and (if requested by any such Person)
confirm such notice in writing no later than one (1) Business Day following
the day (i)(A) when a Prospectus or any Prospectus supplement

 

4

 

or post-effective
amendment to the Registration Statement is filed; (B) when the Commission
notifies the Company whether there will be a “review” of such Registration
Statement and whenever the Commission comments in writing on such Registration
Statement and (C) with respect to the Registration Statement or any
post-effective amendment, when the same has become effective; (ii) of any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to the Registration Statement or Prospectus or
for additional information; (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement covering
any or all of the Registrable Securities or the initiation of any Proceedings
for that purpose; (iv) if at any time any of the representations and
warranties of the Company contained in any agreement contemplated hereby ceases
to be true and correct in all material respects; (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Registrable Securities for sale
in any jurisdiction, or the initiation or threatening of any Proceeding for
such purpose; and (vi) of the occurrence of any event that makes any
statement made in the Registration Statement or Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires any revisions to the Registration Statement,
Prospectus or other documents so that, in the case of the Registration
Statement or the Prospectus, as the case may be, it will not contain any untrue
statement of a material fact or omit to state any 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.

 

(d)                                 Use
its reasonable best efforts to avoid the issuance of, or, if issued, obtain the
withdrawal of, (i) any order suspending the effectiveness of the
Registration Statement or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities
for sale in any jurisdiction, at the earliest practicable moment.

 

(e)                                  If
requested by the Holders of a majority in interest of the Registrable
Securities, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as the
Company reasonably agrees should be included therein and (ii) make all
required filings of such Prospectus supplement or such post-effective amendment
as soon as practicable after the Company has received notification of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment.

 

(f)                                    Furnish
to each Holder and the Special Counsel, without charge, at least one conformed
copy of each Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.

 

(g)                                 Promptly
deliver to each Holder and the Special Counsel, without charge, as many copies
of the Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such Persons may reasonably request; and the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders in connection with the
offering and sale of the Registrable Securities covered by such Prospectus and
any amendment or supplement thereto.

 

5

 

(h)                                 Prior
to any public offering of Registrable Securities, use its reasonable best
efforts to register or qualify or cooperate with the selling Holders and the
Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder requests in writing, to
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, however,
that the Company shall not be required to qualify generally to do business in
any jurisdiction where it is not then so qualified or to take any action that
would subject it to general service of process in any such jurisdiction where
it is not then so subject or subject the Company to any material tax in any
such jurisdiction where it is not then so subject.

 

(i)                                     Cooperate
with the Holders to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold pursuant to a
Registration Statement, which certificates shall be free of all restrictive
legends (provided that the issuance of such unlegended certificates is in
compliance with applicable securities laws), and to enable such Registrable
Securities to be in such denominations and registered in such names as any
Holder may request in writing at least two (2) Business Days prior to any
sale of Registrable Securities.

 

(j)                                     Upon
the occurrence of any event contemplated by Section 3(c)(vi), as promptly
as possible, prepare a supplement or amendment, including a post-effective
amendment, to the Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference, and file any other required document so that, as thereafter
delivered, neither the Registration Statement nor such Prospectus will contain
an 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 light of the circumstances under which they were made, not misleading.

 

(k)                                  Use
its reasonable best efforts to cause all Registrable Securities relating to the
Registration Statement to be listed on the OTC Bulletin Board or any other securities exchange, quotation system or
market, if any, on which similar securities issued by the Company are then
listed or traded as and when required pursuant to the Purchase Agreement.

 

(l)                                     Comply
in all material respects with all applicable rules and regulations of the
Commission and make generally available to its security holders earning
statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 not later than 45 days after the end of any 12-month
period (or 90 days after the end of any 12-month period if such period is a
fiscal year) commencing on the first day of the first fiscal quarter of the
Company after the effective date of the Registration Statement, which statement
shall conform to the requirements of Rule 158.

 

(m)                               The
Company may require each selling Holder to furnish to the Company information
regarding such Holder and the distribution of such Registrable Securities as is
required by law to be disclosed in the Registration Statement, and the Company
may exclude

 

6

 

from such registration
the Registrable Securities of any such Holder who unreasonably fails to furnish
such information within a reasonable time after receiving such request.

 

If the Registration
Statement refers to any Holder by name or otherwise as the holder of any
securities of the Company, then such Holder shall have the right to require (if
such reference to such Holder by name or otherwise is not required by the
Securities Act or any similar federal statute then in force) the deletion of
the reference to such Holder in any amendment or supplement to the Registration
Statement filed or prepared subsequent to the time that such reference ceases
to be required.

 

Each Holder covenants and
agrees that (i) it will not sell any Registrable Securities under the
Registration Statement until it has received copies of the Prospectus as then
amended or supplemented as contemplated in Section 3(g) and notice
from the Company that such Registration Statement and any post-effective
amendments thereto have become effective as contemplated by Section 3(c) and
(ii) it and its officers, directors or Affiliates, if any, will comply
with the prospectus delivery requirements of the Securities Act as applicable
to them in connection with sales of Registrable Securities pursuant to the
Registration Statement.

 

Each Holder agrees by its
acquisition of such Registrable Securities that, upon receipt of a notice from
the Company of the occurrence of any event of the kind described in Section 3(c)(ii),
3(c)(iii), 3(c)(iv), 3(c)(v), 3(c)(vi) or 3(n), such Holder will forthwith
discontinue disposition of such Registrable Securities under the Registration
Statement until such Holder’s receipt of the copies of the supplemented
Prospectus and/or amended Registration Statement contemplated by Section 3(j),
or until it is advised in writing (the “Advice”) by the Company that the
use of the applicable Prospectus may be resumed, and, in either case, has
received copies of any additional or supplemental filings that are incorporated
or deemed to be incorporated by reference in such Prospectus or Registration
Statement.

 

(n)                                 If
(i) there is material non-public information regarding the Company which
the Company’s Board of Directors (the “Board”) reasonably determines not
to be in the Company’s best interest to disclose and which the Company is not
otherwise required to disclose, or (ii) there is a significant business
opportunity (including, but not limited to, the acquisition or disposition of
assets (other than in the ordinary course of business) or any merger,
consolidation, tender offer or other similar transaction) available to the
Company which the Board reasonably determines not to be in the Company’s best
interest to disclose, then the Company may (x) postpone or suspend filing of a
registration statement for a period not to exceed thirty (30) consecutive days
or (y) postpone or suspend effectiveness of a registration statement for a
period not to exceed twenty (20) consecutive days; provided that the Company
may not postpone or suspend effectiveness of a registration statement under
this Section 3(n) for more than forty-five (45) days in the aggregate
during any three hundred sixty (360) day period; provided, however,
that no such postponement or suspension shall be permitted for consecutive twenty
(20) day periods arising out of the same set of facts, circumstances or
transactions.

 

7

 

4.                                       Registration
Expenses.

 

All fees and expenses
incident to the performance of or compliance with this Agreement by the
Company, except as and to the extent specified in this Section 4, shall be
borne by the Company whether or not the Registration Statement is filed or
becomes effective and whether or not any Registrable Securities are sold
pursuant to the Registration Statement. 
The fees and expenses referred to in the foregoing sentence shall
include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the OTC Bulletin Board and
each other securities exchange or market on which Registrable Securities are
required hereunder to be listed, (B) with respect to filing fees required
to be paid to the National Association of Securities Dealers, Inc. and the
NASD Regulation, Inc. and (C) in compliance with state securities or
Blue Sky laws (including, without limitation, fees and disbursements of counsel
for the Holders in connection with Blue Sky qualifications of the Registrable
Securities and determination of the eligibility of the Registrable Securities
for investment under the laws of such jurisdictions as the Holders of a
majority of Registrable Securities may designate)), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is requested by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel
for the Company and Special Counsel for the Holders, in the case of the Special
Counsel, up to a maximum amount of $7,500, (v) Securities Act liability
insurance, if the Company so desires such insurance, and (vi) fees and
expenses of all other Persons retained by the Company in connection with the
consummation of the transactions contemplated by this Agreement, including,
without limitation, the Company’s independent public accountants (including the
expenses of any comfort letters or costs associated with the delivery by
independent public accountants of a comfort letter or comfort letters).  In addition, the Company shall be responsible
for all of its internal expenses incurred in connection with the consummation
of the transactions contemplated by this Agreement (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.

 

5.                                       Indemnification.

 

(a)                                  Indemnification
by the Company.  The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment
advisors and employees of each of them, each Person who controls any such
Holder (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) and the officers, directors, agents and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs
(including, without limitation, costs of preparation and attorneys’ fees) and
expenses (collectively, “Losses”), as incurred, arising out of or
relating to any untrue or alleged untrue statement of a material fact contained
in the Registration Statement, any Prospectus or any form of prospectus or in
any amendment or supplement thereto or in any preliminary prospectus, or
arising out of or relating to any omission or alleged omission of a material
fact required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus or form of prospectus or supplement thereto, in the
light of the circumstances under which they were

 

8

 

made) not misleading,
except to the extent, but only to the extent, that (i) such untrue
statements or omissions are based solely upon information regarding such Holder
or such other Indemnified Party furnished in writing to the Company by such
Holder expressly for use therein and (ii) that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any untrue
statement, allegedly untrue statement, omission or alleged omission made in any
preliminary prospectus but eliminated or remedied in the final prospectus
(filed pursuant to Rule 424 of the Securities Act), such indemnity
agreement shall not inure to the benefit of any Holder, underwriter, broker or
other Person acting on behalf of holders of the Registrable Securities, from
whom the Person asserting any loss, claim, damage, liability or expense
purchased the Registrable Securities which are the subject thereof, if a copy
of such final prospectus had been made available to such Person and such
Holder, underwriter, broker or other Person acting on behalf of holders of the
Registrable Securities and such final prospectus was not delivered to such
Person with or prior to the written confirmation of the sale of such
Registrable Securities to such Person. 
The Company shall notify the Holders promptly of the institution, threat
or assertion of any Proceeding of which the Company is aware in connection with
the transactions contemplated by this Agreement.

 

(b)                                 Indemnification
by Holders.  Each Holder shall,
severally and not jointly, indemnify and hold harmless the Company, its
directors, officers, agents and employees, each Person who controls the Company
(within the meaning of Section 15 of the Securities Act and Section 20
of the Exchange Act), and the directors, officers, agents and employees of such
controlling Persons, to the fullest extent permitted by applicable law, from
and against all Losses (as determined by a court of competent jurisdiction in a
final judgment not subject to appeal or review), as incurred, arising solely
out of or based solely upon any untrue statement of a material fact contained
in the Registration Statement, any Prospectus, or any form of prospectus, or
arising solely out of or based solely upon any omission of a material fact
required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus or form of prospectus or supplement thereto, in the
light of the circumstances under which they were made) not misleading, to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information so furnished in writing by such Holder or other
Indemnifying Party to the Company specifically for inclusion in the
Registration Statement or such Prospectus. 
Notwithstanding anything to the contrary contained herein, each Holder
shall be liable under this Section 5(b) for only that amount as does
not exceed the net proceeds to such Holder as a result of the sale of
Registrable Securities pursuant to such Registration Statement.

 

(c)                                  Conduct
of Indemnification Proceedings.  If
any Proceeding shall be brought or asserted against any Person entitled to
indemnity hereunder (an “Indemnified Party”), such Indemnified Party
promptly shall notify the Person from whom indemnity is sought (the “Indemnifying
Party) in writing, and the Indemnifying Party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of all fees and expenses incurred in connection with
defense thereof; provided, that the failure of any Indemnified Party to give
such notice shall not relieve the Indemnifying Party of its obligations or
liabilities pursuant to this Agreement, except (and only) to the extent that it
shall be finally determined by a court of competent jurisdiction (which
determination is not subject to appeal or further review) that such failure
shall have proximately and materially adversely prejudiced the Indemnifying
Party.

 

9

 

An Indemnified Party
shall have the right to employ separate counsel in any such Proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party or Parties unless: (1) the
Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the
Indemnifying Party shall have failed promptly to assume the defense of such
Proceeding and to employ counsel reasonably satisfactory to such Indemnified
Party in any such Proceeding; or (3) the named parties to any such
Proceeding (including any impleaded parties) include both such Indemnified
Party and the Indemnifying Party, and such Indemnified Party shall have been
advised by counsel (which shall be reasonably acceptable to the Indemnifying
Party) that a conflict of interest is likely to exist if the same counsel were
to represent such Indemnified Party and the Indemnifying Party (in which case,
if such Indemnified Party notifies the Indemnifying Party in writing that it
elects to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and
such counsel shall be at the expense of the Indemnifying Party).  The Indemnifying Party shall not be liable
for any settlement of any such Proceeding effected without its written consent,
which consent shall not be unreasonably withheld or delayed.  No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability on claims that are the subject matter of such Proceeding.

 

All fees and expenses of
the Indemnified Party (including reasonable fees and expenses to the extent incurred
in connection with investigating or preparing to defend such Proceeding in a
manner not inconsistent with this Section) shall be paid to the Indemnified
Party, as incurred, within ten (10) Business Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party
may require such Indemnified Party to undertake to reimburse all such fees and
expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).

 

(d)                                 Contribution.  If a claim for indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party because of a failure or
refusal of a governmental authority to enforce such indemnification in
accordance with its terms (by reason of public policy or otherwise), then each
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses, in such proportion as is appropriate to reflect the relative
benefits received by the Indemnifying Party on the one hand and the Indemnified
Party on the other from the offering of the Notes and Warrants.  If, but only if, the allocation provided by
the foregoing sentence is not permitted by applicable law, the allocation of
contribution shall be made in such proportion as is appropriate to reflect not only
the relative benefits referred to in the foregoing sentence but also the
relative fault, as applicable, of the Indemnifying Party and Indemnified Party
in connection with the actions, statements or omissions that resulted in such
Losses as well as any other relevant equitable considerations.  The relative fault of such Indemnifying Party
and Indemnified Party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission of a material
fact, has been taken or made by, or relates to information supplied by, such
Indemnifying Party or Indemnified Party, and the parties’
relative intent, knowledge, access to information and opportunity to correct or
prevent such action, statement or omission. 
The

 

10

 

amount paid or payable by
a party as a result of any Losses shall be deemed to include, subject to the
limitations set forth in Section 5(c), any reasonable attorneys’ or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees
or expenses if the indemnification provided for in this Section was
available to such party in accordance with its terms.  In no event shall any selling Holder be
required to contribute an amount under this Section 5(d) in excess of
the net proceeds received by such Holder upon sale of such Holder’s Registrable
Securities pursuant to the Registration Statement giving rise to such
contribution obligation.

 

The parties hereto agree
that it would not be just and equitable if contribution pursuant to this Section 5(d) were
determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to in the
immediately preceding paragraph.  No
Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation.

 

The indemnity and
contribution agreements contained in this Section are in addition to any
liability that the Indemnifying Parties may have to the Indemnified
Parties.  Notwithstanding anything to the
contrary contained herein, the Holders shall be liable under this Section 5(d) for
only that amount as does not exceed the net proceeds to such Holder as a result
of the sale of Registrable Securities pursuant to such Registration Statement.

 

6.                                       Rule 144.

 

As long as any Holder
owns any Registrable Securities, Notes, Option Notes or Warrants, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to Section 13(a) or 15(d) of
the Exchange Act and to promptly furnish the Holders with true and complete
copies of all such filings.  As long as
any Holder owns any Registrable Securities, Notes, Option Notes or Warrants, if
the Company is not required to file reports pursuant to Section 13(a) or
15(d) of the Exchange Act, it will prepare and furnish to the Holders and
make publicly available in accordance with Rule 144(c) promulgated
under the Securities Act annual and quarterly financial statements, together
with a discussion and analysis of such financial statements in form and
substance substantially similar to those that would otherwise be required to be
included in reports required by Section 13(a) or 15(d) of the
Exchange Act, as well as any other information required thereby, in the time
period that such filings would have been required to have been made under the
Exchange Act.  The Company further
covenants that it will take such further action as any Holder may reasonably
request all to the extent required from time to time to enable such Person to
sell the Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by Rule 144 promulgated
under the Securities Act, including providing any legal opinions relating to
such sale pursuant to Rule 144.

 

7.                                       Miscellaneous.

 

(a)                                  Remedies.  In the event of a breach by the Company or by
a Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be,

 

11

 

in addition to being
entitled to exercise all rights granted by law and under this Agreement,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement.  The Company and each Holder agree that
monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of
any action for specific performance in respect of such breach, it shall waive
the defense that a remedy at law would be adequate.

 

(b)                                 No
Inconsistent Agreements.  Neither the
Company nor any of its subsidiaries has, as of the date hereof entered into and
currently in effect, nor shall the Company or any of its subsidiaries, on or
after the date of this Agreement, enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof.  Except as disclosed in Schedule 2.1(c) of
the Purchase Agreement, neither the Company nor any of its subsidiaries has
previously entered into any agreement currently in effect granting any
registration rights with respect to any of its securities to any Person.  Without limiting the generality of the
foregoing, without the written consent of the Holders of a majority of the then
outstanding Registrable Securities, the Company shall not grant to any Person
the right to request the Company to register any securities of the Company,
under the Securities Act unless the rights so granted are subject in all
respects to the prior rights in full of the Holders set forth herein, and are
not otherwise in conflict with the provisions of this Agreement.

 

(c)                                  No
Piggyback on Registrations.  Neither
the Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto or as disclosed on Schedule 2.1(c) of
the Purchase Agreement or Schedule II hereto) may include
securities of the Company in the Registration Statement, and the Company shall
not after the date hereof enter into any agreement providing such right to any
of its securityholders, unless the right so granted is subject in all respects
to the prior rights in full of the Holders set forth herein, and is not
otherwise in conflict with the provisions of this Agreement.

 

(d)                                 Failure
to File Registration Statement and Other Events.  The Company and the Purchasers agree that the
Holders will suffer damages if the Registration Statement is not filed on or
prior to the Filing Date and not declared effective by the Commission on or
prior to the date that is thirty (30) days following the Effectiveness Date and
maintained in the manner contemplated herein during the Effectiveness Period or
if certain other events occur.  The
Company and the Holders further agree that it would not be feasible to
ascertain the extent of such damages with precision.  Accordingly, if (A) the Registration
Statement is not filed on or prior to the Filing Date, or (B) the
Registration Statement is not declared effective by the Commission on or prior
to the date that is one hundred twenty (120) days following the Closing Date,
or (C) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 461 promulgated under the Securities
Act within three (3) Business Days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the Commission that a
Registration Statement will not be “reviewed,” or not subject to further
review, or (D) the Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities at any time prior to the expiration of the Effectiveness
Period, without being succeeded immediately by a subsequent Registration
Statement filed with and declared effective by the Commission, or (E) the
Company

 

12

 

has breached Section 3(n),
or (F) trading in the Common Stock shall be suspended or if the Common
Stock is delisted from the OTC Bulletin Board (or other principal exchange on
which the Common Stock is traded) for any reason for more than three (3) Business
Days in the aggregate (any such failure or breach being referred to as an “Event,”
and for purposes of clauses (A) and (B) the date on which such Event
occurs, or for purposes of clause (C) the date on which such three (3) Business
Day period is exceeded, or for purposes of clause (D) after more than
fifteen (15) Business Days, or for purposes of clause (F) the date on
which such three (3) Business Day period is exceeded, being referred to as
“Event Date”), the Company shall pay an amount as liquidated damages to
each Holder equal to two percent (2.0%) of the amount of the Holder’s initial investment
in the Notes for the first calendar month or portion thereof and one percent (1.0%)
of the amount of the Holder’s initial investment in the Notes per calendar
month or portion thereof thereafter from the Event Date (provided that, with
respect to the Event described in clause (B), the “first calendar month” shall
be deemed to commence on the thirtieth (30th) day prior to the
applicable Event Date) until the applicable Event is cured.  Notwithstanding anything to the contrary in
this paragraph (e), if (i) any of the Events described in clauses (A), (B) or
(C) shall have occurred, (ii) on or prior to the applicable Event
Date, the Company shall have exercised its rights under Section 3(n)
hereof and (iii) the postponement or suspension permitted pursuant to such
Section 3(n) shall remain effective as of such applicable Event Date, then
the applicable Event Date shall be deemed instead to occur on the second
Business Day following the termination of such postponement or suspension.

 

(e)                                  Amendments
and Waivers.  The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by the
Company and the Holders of three-fourths (3/4) of the Registrable Securities
outstanding.

 

(f)                                    Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earlier of (i) the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified for notice prior to 5:00 p.m.,
New York City time, on a Business Day, (ii) the Business Day after the
date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified for notice later than
5:00 p.m., New York City time, on any date and earlier than 11:59 p.m.,
New York City time, on such date, (iii) the Business Day following the
date of mailing, if sent by nationally recognized overnight courier service or (iv) actual
receipt by the party to whom such notice is required to be given.  The addresses for such communications shall
be with respect to each Holder at its address set forth under its name on Schedule I
attached hereto, or with respect to the Company, addressed to:

 

Apollo Resources
International, Inc.

3001
Knox Street, Suite 403

Dallas, TX 75205

Attention: Chief
Executive Officer

Tel. No.: (214) 389-9800

Fax
No.: (214) 389-9806

 

13

 

with copies (which copies

shall not constitute
notice

to the Company) to:                                                                                      Scheef &
Stone, LLP

5956 Sherry Lane, Suite 1400

Dallas,
Texas  75225

Attention: Roger A. Crabb

Tel. No.: (214) 706-4224

Fax No.: (214) 706-4242

 

or to such other address
or addresses or facsimile number or numbers as any such party may most recently
have designated in writing to the other parties hereto by such notice.  Copies of notices to the Holders shall be
sent to Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the
Americas, New York, New York 10036, Attention: 
Christopher S. Auguste, Tel. No.: (212) 715-9100, Fax. No.: (212) 715-8000.

 

(g)                                 Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns and shall inure to the benefit of each Holder and its successors
and assigns.  The Company may not assign
this Agreement or any of its rights or obligations hereunder without the prior
written consent of each Holder.  Each
Purchaser may assign its rights hereunder in the manner and to the Persons as
permitted under the Purchase Agreement.

 

(h)                                 Assignment
of Registration Rights.  The rights
of each Holder hereunder, including the right to have the Company register for
resale Registrable Securities in accordance with the terms of this Agreement,
shall be automatically assignable by each Holder to any Affiliate of such
Holder or any other Holder or Affiliate
of any other Holder of all or a portion of the Registrable Securities if:  (i) the Holder 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) following
such transfer or assignment the further disposition of such securities by the
transferee or assignees is restricted under the Securities Act and applicable
state securities laws, (iv) at or before the time the Company receives the
written notice contemplated by clause (ii) of this Section, the transferee
or assignee agrees in writing with the Company to be bound by all of the
provisions of this Agreement, and (v) such transfer shall have been made
in accordance with the applicable requirements of the Purchase Agreement.  In addition, each Holder shall have the right
to assign its rights hereunder to any other Person with the prior written
consent of the Company, which consent shall not be unreasonably withheld.  The rights to assignment shall apply to the
Holders (and to subsequent) successors and assigns.

 

(i)                                     Counterparts.  This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement.  In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature were the original thereof.

 

14

 

(j)                                     Governing
Law; Jurisdiction.  This Agreement
shall be governed by and construed in accordance with the internal laws of the
State of New York, without giving effect to any of the conflicts of law
principles which would result in the application of the substantive law of
another jurisdiction.  This Agreement
shall not be interpreted or construed with any presumption against the party
causing this Agreement to be drafted.  The Company and the Holders agree that venue for
any dispute arising under this Agreement will lie exclusively in the state or
federal courts located in New York County, New York, and the parties
irrevocably waive any right to raise forum non conveniens
or any other argument that New York is not the proper venue.  The Company and the Holders irrevocably
consent to personal jurisdiction in the state and federal courts of the state
of New York.  The Company and the
Holders consent to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for notices to
it under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing in this Section 7(j) shall
affect or limit any right to serve process in any other manner permitted by
law.  The Company and the Holders hereby
agree that the prevailing party in any suit, action or proceeding arising out
of or relating to the this Agreement or the Purchase Agreement, shall be
entitled to reimbursement for reasonable legal fees from the non-prevailing
party.  The parties hereby waive all
rights to a trial by jury.

 

(k)                                  Cumulative
Remedies.  The remedies provided
herein are cumulative and not exclusive of any remedies provided by law.

 

(l)                                     Severability.
If any term, provision, covenant or restriction of this Agreement is held to be
invalid, illegal, void or unenforceable in any respect, the remainder of the
terms, provisions, covenants and restrictions set forth herein shall remain in
full force and effect and shall in no way be affected, impaired or invalidated,
and the parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction.  It is hereby stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.

 

(m)                               Headings.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.

 

(n)                                 Shares
Held by the Company and its Affiliates. Whenever the consent or approval of
Holders of a specified percentage of Registrable Securities is required
hereunder, Registrable Securities held by the Company or its Affiliates (other
than any Holder or transferees or successors or assigns thereof if such Holder
is deemed to be an Affiliate solely by reason of its holdings of such
Registrable Securities) shall not be counted in determining whether such
consent or approval was given by the Holders of such required percentage.

 

(o)                                 Independent
Nature of Purchasers.  The Company
acknowledges that the obligations of each Purchaser under the Transaction
Documents are several and not joint with the obligations of any other
Purchaser, and no Purchaser shall be responsible in any way for the performance
of the obligations of any other Purchaser under the Transaction Documents.  The

 

15

 

Company acknowledges that
the decision of each Purchaser to purchase Securities pursuant to the Purchase
Agreement has been made by such Purchaser independently of any other purchase
and independently of any information, materials, statements or opinions as to
the business, affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the Company or
of its Subsidiaries which may have made or given by any other Purchaser or by
any agent or employee of any other Purchaser, and no Purchaser or any of its
agents or employees shall have any liability to any Purchaser (or any other
person) relating to or arising from any such information, materials, statements
or opinions.  The Company acknowledges
that nothing contained herein, or in any Transaction Document, and no action
taken by any Purchaser pursuant hereto or thereto (including, but not limited
to, the (i) inclusion of a Purchaser in the Registration Statement and (ii) review
by, and consent to, such Registration Statement by a Purchaser) shall be deemed
to constitute the Purchasers as a partnership, an association, a joint venture
or any other kind of entity, or create a presumption that the Purchasers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents.  The Company acknowledges that each Purchaser
shall be entitled to independently protect and enforce its rights, including
without limitation, the rights arising out of this Agreement or out of the
other Transaction Documents, and it shall not be necessary for any other
Purchaser to be joined as an additional party in any proceeding for such
purpose.  The Company acknowledges that
for reasons of administrative convenience only, the Transaction Documents have
been prepared by counsel for one of the Purchasers and such counsel does not
represent all of the Purchasers but only such Purchaser and the other
Purchasers have retained their own individual counsel with respect to the
transactions contemplated hereby.  The Company acknowledges that it has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.  The Company
acknowledges that such procedure with respect to the Transaction Documents in
no way creates a presumption that the Purchasers are in any way acting in
concert or as a group with respect to the Transaction Documents or the
transactions contemplated hereby or thereby.

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK]

 

16

 

IN WITNESS WHEREOF, the
parties hereto have caused this Registration Rights Agreement to be duly
executed by their respective authorized persons as of the date first indicated
above.

 

	
   

  	
  APOLLO RESOURCES
  INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  PURCHASER:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

17

 

Schedule I

List of Purchasers 

 

18

 

Schedule II

Securities Permitted to
be Included on the Registration Statement 

 

1.                                       Shares
of Common Stock issuable upon the exercise of warrants issuable to the
placement agent and its designees in connection with the transactions contemplated
by the Purchase Agreement.

 

19

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