Document:

Exhibit 10.1

 

INDEMNIFICATION
AGREEMENT

 

THIS INDEMNIFICATION
AGREEMENT is made and entered into this 23rd day of August, 2005 (“Agreement”),
by and between Realty Income Corporation, a Maryland corporation (the “Company”),
and                                         
(“Indemnitee”).

 

WHEREAS, the Company has
previously entered into an indemnification agreement with Indemnitee and this
Agreement hereby supersedes the previous indemnification agreement between
Indemnitee and Company; and

 

WHEREAS, at the request of
the Company, Indemnitee currently serves as a [Director] [Officer]
of the Company and may, therefore, be subjected to claims, suits or proceedings
arising as a result of his service; and

 

WHEREAS, as an inducement to
Indemnitee to continue to serve as such [Director] [Officer],
the Company has agreed to indemnify and to advance expenses and costs incurred
by Indemnitee in connection with any such claims, suits or proceedings to the maximum
extent permitted by law; and

 

WHEREAS, the parties by this
Agreement desire to set forth their agreement regarding indemnification and
advance of expenses;

 

NOW, THEREFORE, in
consideration of the premises and the covenants contained herein, the Company
and Indemnitee do hereby covenant and agree as follows:

 

Section 1.               Definitions.  For purposes of this Agreement:

 

(a)           “Change in Control” means a change in
control of the Company occurring after the Effective Date of a nature that
would be required to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934, as amended (the “Act”),
whether or not the Company is then subject to such reporting requirement;
provided, however, that, without limitation, such a Change in Control shall be
deemed to have occurred if after the Effective Date (i) any “person” (as
such term is used in Sections 13(d) and 14(d) of the Act) is or
becomes the “beneficial owner” (as defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company representing 15% or more
of the combined voting power of the Company’s then outstanding securities
without the prior approval of at least two-thirds of the members of the Board
of Directors in office immediately prior to such person attaining such
percentage interest; (ii) there occurs a proxy contest, or the Company is
a party to a merger, consolidation, sale of assets, plan of liquidation or
other reorganization not approved by at least two-thirds of the members of the
Board of Directors then in office, as a consequence of which members of the
Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter; or (iii) during
any period of two consecutive years, other than as a result of an event
described in clause (a)(ii) of this Section 1, individuals who at the
beginning of such period constituted the Board of Directors (including for this
purpose any new director whose election or nomination for election by the
Company’s stockholders was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of such
period) cease for any reason to constitute at least a majority
of the Board of Directors.

 

 

(b)           “Corporate Status” means the status
of a person who is or was a director, trustee, officer, employee or agent of
the Company or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise for which such person is or was
serving at the request of the Company.

 

(c)           “Disinterested Director” means a
director of the Company who is not and was not a party to the Proceeding in
respect of which indemnification is sought by Indemnitee.

 

(d)           “Effective Date” means the date set
forth in the first paragraph of this Agreement.

 

(e)           “Expenses” shall include all
reasonable and out-of-pocket attorneys’ fees, retainers, court costs,
transcript costs, fees of experts, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery service
fees, and all other disbursements or expenses of the types customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, or being or preparing to be a witness in a Proceeding.

 

(f)            “Independent Counsel” means a law
firm, or a member of a law firm, that is experienced in matters of corporation
law and neither is, nor in the past five years has been, retained to represent:  (i) the Company or Indemnitee in any
matter material to either such party, or (ii) any other party to or
witness in the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term “Independent Counsel” shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitee’s rights under this
Agreement.  If a Change of Control has
not occurred, Independent Counsel shall be selected by the Board of Directors,
with the approval of Indemnitee, which approval will not be unreasonably
withheld.  If a Change of Control has
occurred, Independent Counsel shall be selected by Indemnitee, with the
approval of the Board of Directors, which approval will not be unreasonably
withheld.

 

(g)           “Proceeding” includes any threatened,
pending or completed action, suit, arbitration, alternate dispute resolution
mechanism, investigation, administrative hearing or any other proceeding,
whether civil, criminal, administrative or investigative (including on appeal),
except one pending or completed on or before the Effective Date, unless
otherwise specifically agreed in writing by the Company and Indemnitee.

 

Section 2.               Services by Indemnitee.  Indemnitee will serve as a [Director] [Officer] of the Company.  However, this Agreement shall not impose any
obligation on Indemnitee or the Company to continue Indemnitee’s service to the
Company beyond any period otherwise required by law or by other agreements or
commitments of the parties, if any.

 

Section 3.               Indemnification - General.  The Company shall indemnify, and advance
Expenses to, Indemnitee (a) as provided in this Agreement and (b) otherwise
to the maximum extent permitted by Maryland law in effect on the date hereof
and as amended from time to time; provided, however, that no change in Maryland
law shall have the effect of reducing the benefits available to Indemnitee
hereunder based on Maryland law as in effect on the date hereof.  The rights of Indemnitee provided in this Section 3
shall include, without limitation, the rights set forth in the other sections
of this Agreement, including any additional indemnification permitted by Section 2-418(g) of
the Maryland General Corporation Law (“MGCL”).

 

Section 4.               Proceedings Other Than
Proceedings by or in the Right of the Company.  Indemnitee shall be entitled to the rights of
indemnification provided in this Section 4 if, by reason of his Corporate
Status, he is, or is threatened to be, made a party to or a witness in any
threatened, pending, or completed Proceeding, other than a Proceeding by or in
the right of the Company.  Pursuant to
this 

 

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Section 4, Indemnitee shall be
indemnified against all judgments, penalties, fines and amounts paid in
settlement and all Expenses actually and reasonably incurred by him or on his
behalf in connection with a Proceeding by reason of his Corporate Status unless
it is established that (i) the act or omission of Indemnitee was material
to the matter giving rise to the Proceeding and (a) was committed in bad
faith or (b) was the result of active and deliberate dishonesty, (ii) Indemnitee
actually received an improper personal benefit in money, property or services,
or (iii) in the case of any criminal Proceeding, Indemnitee had reasonable
cause to believe that his conduct was unlawful.

 

Section 5.               Proceedings by or in the Right
of the Company.  Indemnitee shall be
entitled to the rights of indemnification provided in this Section 5 if,
by reason of his Corporate Status, he is, or is threatened to be, made a party
to or a witness in any threatened, pending or completed Proceeding brought by
or in the right of the Company to procure a judgment in its favor.  Pursuant to this Section 5, Indemnitee
shall be indemnified against all amounts paid in settlement and all Expenses
actually and reasonably incurred by him or on his behalf in connection with
such Proceeding unless it is established that (i) the act or omission of
Indemnitee was material to the matter giving rise to such a Proceeding and (a) was
committed in bad faith or (b) was the result of active and deliberate
dishonesty or (ii) Indemnitee actually received an improper personal
benefit in money, property or services.

 

Section 6.               Court-Ordered Indemnification.  Notwithstanding any other provision of this
Agreement, a court of appropriate jurisdiction, upon application of Indemnitee
and such notice as the court shall require, may order indemnification in the
following circumstances:

 

(a)           if it determines Indemnitee is
entitled to reimbursement under Section 2-418(d)(1) of the MGCL, the
court shall order indemnification, in which case Indemnitee shall be entitled
to recover the expenses of securing such reimbursement; or

 

(b)           if it determines that Indemnitee is
fairly and reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not Indemnitee (i) has met the standards of
conduct set forth in Section 2-418(b) of the MGCL or (ii) has
been adjudged liable for receipt of an improper personal benefit under Section 2-418(c) of
the MGCL, the court may order such indemnification as the court shall deem
proper.  However, indemnification with
respect to any Proceeding by or in the right of the Company or in which
liability shall have been adjudged in the circumstances described in Section 2-418(c) of
the MGCL shall be limited to Expenses actually and reasonably incurred by him or
on his behalf in connection with a Proceeding.

 

Section 7.               Indemnification for Expenses
of a Party Who is Wholly or Partly Successful.  Notwithstanding any other provision of this
Agreement, and without limiting any such provision, to the extent that Indemnitee
is, by reason of his Corporate Status, made a party to and is successful, on
the merits or otherwise, in the defense of any Proceeding, he shall be
indemnified for all Expenses actually and reasonably incurred by him or on his
behalf in connection therewith.  If
Indemnitee is not wholly successful in such Proceeding but is successful, on
the merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee under this Section 7
for all Expenses actually and reasonably incurred by him or on his behalf in
connection with each successfully resolved claim, issue or matter, allocated on
a reasonable and proportionate basis. 
For purposes of this Section and without limitation, the termination
of any claim, issue or matter in such a Proceeding by dismissal, with or
without prejudice, shall be deemed to be a successful result as to such claim,
issue or matter.

 

Section 8.               Advance of Expenses.  The Company shall advance all reasonable Expenses
actually and reasonably incurred by or on behalf of Indemnitee in connection
with any Proceeding (other than a Proceeding brought to enforce indemnification
under this Agreement, applicable law, the Charter 

 

3

 

or Bylaws of the Company, any agreement
or a resolution of the stockholders entitled to vote generally in the election
of directors or of the Board of Directors) 
to which Indemnitee is, or is threatened to be, made a party or a
witness, within ten days after the receipt by the Company of a statement or
statements from Indemnitee requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding.  Such statement or statements shall reasonably
evidence the Expenses incurred by Indemnitee and shall include or be preceded
or accompanied by a written affirmation by Indemnitee of Indemnitee’s good
faith belief that the standard of conduct necessary for indemnification by the
Company as authorized by law and by this Agreement has been met and a written
undertaking by or on behalf of Indemnitee, in substantially the form attached
hereto as Exhibit A or in such form as may be required under
applicable law as in effect at the time of the execution thereof, to reimburse
the portion of any Expenses advanced to Indemnitee relating to claims, issues
or matters in the Proceeding as to which it shall ultimately be established
that the standard of conduct has not been met and which have not been
successfully resolved as described in Section 7.  To the extent that Expenses advanced to
Indemnitee do not relate to a specific claim, issue or matter in the
Proceeding, such Expenses shall be allocated on a reasonable and proportionate
basis.  The undertaking required by this Section 8
shall be an unlimited general obligation by or on behalf of Indemnitee and
shall be accepted without reference to Indemnitee’s financial ability to repay
such advanced Expenses and without any requirement to post security therefor.

 

Section 9.               Procedure for Determination of
Entitlement to Indemnification.

 

(a)           To obtain indemnification under this
Agreement, Indemnitee shall submit to the Company a written request, including
therein or therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine whether and to
what extent Indemnitee is entitled to indemnification.  The Secretary of the Company shall, promptly
upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.

 

(b)           Upon written request by Indemnitee
for indemnification pursuant to the first sentence of Section 9(a) hereof,
a determination, if required by applicable law, with respect to Indemnitee’s
entitlement thereto shall promptly be made in the specific case: (i) if a
Change in Control shall have occurred, by Independent Counsel in a written
opinion to the Board of Directors, a copy of which shall be delivered to
Indemnitee; or (ii) if a Change of Control shall not have occurred, (A) by
the Board of Directors (or a duly authorized committee thereof) by a majority
vote of a quorum consisting of Disinterested Directors (as herein defined), or (B) if
a quorum of the Board of Directors consisting of Disinterested Directors is not
obtainable or, even if obtainable, such quorum of Disinterested Directors so
directs, by Independent Counsel in a written opinion to the Board of Directors,
a copy of which shall be delivered to Indemnitee, or (C) if so directed by
a majority of the members of the Board of Directors, by the stockholders of the
Company.  If it is so determined that
Indemnitee is entitled to indemnification, payment to Indemnitee shall be made
within ten days after such determination. 
Indemnitee shall cooperate with the person, persons or entity making
such determination with respect to Indemnitee’s entitlement to indemnification,
including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise
protected from disclosure and which is reasonably available to Indemnitee and
reasonably necessary to such determination in the discretion of the Board of
Directors or Independent Counsel if retained pursuant to clause (ii)(B) of
this Section 9.  Any Expenses actually
and reasonably incurred by Indemnitee in so cooperating with the person,
persons or entity making such determination shall be borne by the Company
(irrespective of the determination as to Indemnitee’s entitlement to
indemnification) and the Company shall indemnify and hold Indemnitee harmless
therefrom.

 

4

 

Section 10.             Presumptions and Effect of
Certain Proceedings.

 

(a)           In making a determination with respect
to entitlement to indemnification hereunder, the person or persons or entity
making such determination shall presume that Indemnitee is entitled to
indemnification under this Agreement if Indemnitee has submitted a request for
indemnification in accordance with Section 9(a) of this Agreement,
and the Company shall have the burden of proof to overcome that presumption in
connection with the making of any determination contrary to that presumption.

 

(b)           The termination of any Proceeding by
judgment, order, settlement, conviction, a plea of nolo  contendere
or its equivalent, or an entry of an order of probation prior to judgment, does
not create a presumption that Indemnitee did not meet the requisite standard of
conduct described herein for indemnification.

 

Section 11.             Remedies of Indemnitee.

 

(a)           If (i) a determination is made
pursuant to Section 9 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advance of Expenses is not
timely made pursuant to Section 8 of this Agreement, (iii) no
determination of entitlement to indemnification shall have been made pursuant
to Section 9(b) of this Agreement within 45 days after receipt by the
Company of the request for indemnification, (iv) payment of
indemnification is not made pursuant to Section 7 of this Agreement within
ten days after receipt by the Company of a written request therefor, or (v) payment
of indemnification is not made within ten days after a determination has been
made that Indemnitee is entitled to indemnification, Indemnitee shall be
entitled to an adjudication in an appropriate court located in the State of
Maryland, or in any other court of competent jurisdiction, of his entitlement
to such indemnification or advance of Expenses. 
Alternatively, Indemnitee, at his option, may seek an award in
arbitration to be conducted by a single arbitrator pursuant to the commercial
Arbitration Rules of the American Arbitration Association.  Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within 180 days following
the date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 11(a); provided, however, that the foregoing
clause shall not apply to a proceeding brought by Indemnitee to enforce his
rights under Section 7 of this Agreement.

 

(b)           In any judicial proceeding or
arbitration commenced pursuant to this Section 11 the Company shall have
the burden of proving that Indemnitee is not entitled to indemnification or
advance of Expenses, as the case may be.

 

(c)           If a determination shall have been
made pursuant to Section 9(b) of this Agreement that Indemnitee is
entitled to indemnification, the Company shall be bound by such determination
in any judicial proceeding or arbitration commenced pursuant to this Section 11,
absent a misstatement by Indemnitee of a material fact, or an omission of a
material fact necessary to make Indemnitee’s statement not materially
misleading, in connection with the request for indemnification.

 

(d)           In the event that Indemnitee,
pursuant to this Section 11, seeks a judicial adjudication of or an award
in arbitration to enforce his rights under, or to recover damages for breach
of, this Agreement, Indemnitee shall be entitled to recover from the Company,
and shall be indemnified by the Company for, any and all Expenses actually and
reasonably incurred by him in such judicial adjudication or arbitration.  If it shall be determined in such judicial
adjudication or arbitration that Indemnitee is entitled to receive part but not
all of the indemnification or advance of Expenses sought, the Expenses incurred
by Indemnitee in connection with such judicial adjudication or arbitration
shall be appropriately prorated.

 

5

 

Section 12.             Defense of the Underlying
Proceeding.

 

(a)           Indemnitee shall notify the Company
promptly upon being served with or receiving any summons, citation, subpoena,
complaint, indictment, information, notice, request or other document relating
to any Proceeding which may result in the right to indemnification or the
advance of Expenses hereunder; provided, however, that the failure to give any
such notice shall not disqualify Indemnitee from the right, or otherwise affect
in any manner any right of Indemnitee, to indemnification or the advance of
Expenses under this Agreement unless the Company’s ability to defend in such
Proceeding or to obtain proceeds under any insurance policy is materially and
adversely prejudiced thereby, and then only to the extent the Company is
thereby actually so prejudiced.

 

(b)           Subject to the provisions of the last
sentence of this Section 12(b) and of Section 12(c) below,
the Company shall have the right to defend Indemnitee in any Proceeding which
may give rise to indemnification hereunder; provided, however, that the Company
shall notify Indemnitee of any such decision to defend within 15 calendar days
following receipt of notice of any such Proceeding under Section 12(a) above.  The Company shall not, without the prior
written consent of Indemnitee, which shall not be unreasonably withheld or
delayed, consent to the entry of any judgment against Indemnitee or enter into
any settlement or compromise which (i) includes an admission of fault of
Indemnitee or (ii) does not include, as an unconditional term thereof, the
full release of Indemnitee from all liability in respect of such Proceeding,
which release shall be in form and substance reasonably satisfactory to
Indemnitee.  This Section 12(b) shall
not apply to a Proceeding brought by Indemnitee under Section 11 above or Section 18
below.

 

(c)           Notwithstanding the provisions of Section 12(b) above,
if in a Proceeding to which Indemnitee is a party by reason of Indemnitee’s
Corporate Status, (i) Indemnitee reasonably concludes, based upon an
opinion of counsel approved by the Company, which approval shall not be
unreasonably withheld, that he may have separate defenses or counterclaims to
assert with respect to any issue which may not be consistent with other
defendants in such Proceeding, (ii) Indemnitee reasonably concludes, based
upon an opinion of counsel approved by the Company, which approval shall not be
unreasonably withheld, that an actual or apparent conflict of interest or
potential conflict of interest exists between Indemnitee and the Company, or (iii) if
the Company fails to assume the defense of such Proceeding in a timely manner,
Indemnitee shall be entitled to be represented by separate legal counsel of
Indemnitee’s choice, subject to the prior approval of the Company, which shall
not be unreasonably withheld, at the expense of the Company.  In addition, if the Company fails to comply
with any of its obligations under this Agreement or in the event that the
Company or any other person takes any action to declare this Agreement void or
unenforceable, or institutes any Proceeding to deny or to recover from
Indemnitee the benefits intended to be provided to Indemnitee hereunder,
Indemnitee shall have the right to retain counsel of Indemnitee’s choice,
subject to the prior approval of the Company, which shall not be unreasonably
withheld, at the expense of the Company (subject to Section 11(d)), to
represent Indemnitee in connection with any such matter.

 

Section 13.             Non-Exclusivity; Survival of
Rights; Subrogation; Insurance.

 

(a)           The rights of indemnification and
advance of Expenses as provided by this Agreement shall not be deemed exclusive
of any other rights to which Indemnitee may at any time be entitled under
applicable law, the Charter or Bylaws of the Company, any agreement or a
resolution of the stockholders entitled to vote generally in the election of
directors or of the Board of Directors, or otherwise.  No amendment, alteration or repeal of this
Agreement or of any provision hereof shall limit or restrict any right of
Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal.

 

6

 

(b)           In the event of any payment under
this Agreement, the Company shall be subrogated to the extent of such payment
to all of the rights of recovery of Indemnitee, who shall execute all papers
required and take all action necessary to secure such rights, including
execution of such documents as are necessary to enable the Company to bring
suit to enforce such rights.

 

(c)           The Company shall not be liable under
this Agreement to make any payment of amounts otherwise indemnifiable or
payable or reimbursable as Expenses hereunder if and to the extent that
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.

 

Section 14.             Insurance.  The Company will use its reasonable best
efforts to acquire directors and officers liability insurance, on terms and
conditions deemed appropriate by the Board of Directors of the Company, with
the advice of counsel, covering Indemnitee or any claim made against Indemnitee
for service as a director or officer of the Company and covering the Company for
any indemnification or advance of Expenses made by the Company to Indemnitee
for any claims made against Indemnitee for service as a director or officer of
the Company.  Without in any way limiting
any other obligation under this Agreement, the Company shall indemnify
Indemnitee for any payment by Indemnitee arising out of the amount of any
deductible or retention and the amount of any excess of the aggregate of all
judgments, penalties, fines, settlements and reasonable Expenses actually and
reasonably incurred by Indemnitee in connection with a Proceeding over the
coverage of any insurance referred to in the previous sentence.

 

Section 15.             Indemnification for Expenses of
a Witness.  Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is or may be, by
reason of his Corporate Status, a witness in any Proceeding, whether instituted
by the Company or any other party, and to which Indemnitee is not a party but
in which the Indemnitee receives a subpoena to testify, he shall be advanced
all reasonable Expenses and indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith.

 

Section 16.             Duration of Agreement; Binding
Effect.

 

(a)           This Agreement shall continue until
and terminate ten years after the date that Indemnitee’s Corporate Status shall
have ceased; provided, that the rights of Indemnitee hereunder shall continue
until the final termination of any Proceeding then pending in respect of which
Indemnitee is granted rights of indemnification or advance of Expenses
hereunder and of any proceeding commenced by Indemnitee pursuant to Section 11
of this Agreement relating thereto.

 

(b)           The indemnification and advance of
Expenses provided by, or granted pursuant to, this Agreement shall be binding
upon and be enforceable by the parties hereto and their respective successors
and assigns (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or
assets of the Company), shall continue as to an Indemnitee who has ceased to be
a director, trustee, officer, employee or agent of the Company or of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise which such person is or was serving at the written request of the
Company, and shall inure to the benefit of Indemnitee and his spouse, assigns,
heirs, devisees, executors and administrators and other legal representatives.

 

(c)           The Company shall require and cause
any successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place.

 

7

 

Section 17.             Severability.  If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the validity, legality and enforceability of the remaining
provisions of this Agreement (including, without limitation, each portion of
any section of this Agreement containing any such provision held to be
invalid, illegal or unenforceable that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (b) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any section of this Agreement
containing any such provision held to be invalid, illegal or unenforceable,
that is not itself invalid, illegal or unenforceable) shall be construed so as
to give effect to the intent manifested thereby.

 

Section 18.             Exception to Right of
Indemnification or Advance of Expenses. 
Notwithstanding any other provision of this Agreement, Indemnitee shall
not be entitled to indemnification or advance of Expenses under this Agreement
with respect to any Proceeding brought by Indemnitee, unless (a) the
Proceeding is brought to enforce indemnification under this Agreement, and then
only to the extent in accordance with and as authorized by Sections 8 and 11 of
this Agreement, or (b) the Company’s Bylaws, as amended, the Charter, a
resolution of the stockholders entitled to vote generally in the election of
directors or of the Board of Directors or an agreement approved by the Board of
Directors to which the Company is a party expressly provide otherwise.

 

Section 19.             Identical Counterparts.  This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute one and the same Agreement.  One such counterpart signed by the party
against whom enforceability is sought shall be sufficient to evidence the
existence of this Agreement.

 

Section 20.             Headings.  The headings of the paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction thereof.

 

Section 21.             Modification and Waiver.  No supplement, modification or amendment of
this Agreement shall be binding unless executed in writing by both of the
parties hereto.  No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of
any other provisions hereof (whether or not similar) nor shall such waiver
constitute a continuing waiver.

 

Section 22.             Notices.  All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, or (ii) mailed
by certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:

 

(a)           If to Indemnitee, to:  The address set forth on the signature page hereto.

 

(b)           If to the Company to:

 

Realty Income Corporation

220 West Crest Street

Escondido, California 92025-1707

Attn:  General
Counsel

 

or to such other address as may have been furnished to Indemnitee by
the Company or to the Company by Indemnitee, as the case may be.

 

8

 

Section 23.             Governing Law.  The parties agree that this Agreement shall
be governed by, and construed and enforced in accordance with, the laws of the
State of Maryland, without regard to its conflicts of laws rules.

 

Section 24.             Miscellaneous.  Use of the masculine pronoun shall be deemed
to include usage of the feminine pronoun where appropriate.

 

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the
parties hereto have executed this Agreement on the day and year first above
written.

 

	
  ATTEST:

  	
  Realty Income Corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   (SEAL)

  
	
   

  	
  Name:

  	
  Michael R. Pfeiffer

  
	
   

  	
  Title:

  	
  Executive Vice President, General Counsel

  
	
   

  	
   

  
	
   

  	
   

  
	
  WITNESS:

  	
  INDEMNITEE

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Address:

  
							

 

10

 

EXHIBIT A

 

FORM OF UNDERTAKING TO REPAY EXPENSES
ADVANCED

 

The Board of Directors of Realty Income Corporation

 

Re:          Undertaking to Repay
Expenses Advanced

 

Ladies and Gentlemen:

 

This undertaking is being
provided pursuant to that certain Indemnification Agreement dated the       
day of                             ,
200   , by and between Realty Income Corporation (the “Company”)
and the undersigned Indemnitee (the “Indemnification Agreement”), pursuant to
which I am entitled to advance of expenses in connection with [Description of Proceeding] (the “Proceeding”).

 

Terms used herein and not
otherwise defined shall have the meanings specified in the Indemnification
Agreement.

 

I am subject to the Proceeding
by reason of my Corporate Status or by reason of alleged actions or omissions
by me in such capacity.  I hereby affirm
that at all times, insofar as I was involved as [a director]
[an officer] of the Company, in any of
the facts or events giving rise to the Proceeding, I (1) acted in good
faith and honestly, (2) did not receive any improper personal benefit in
money, property or services and (3) in the case of any criminal
proceeding, had no reasonable cause to believe that any act or omission by me
was unlawful.

 

In consideration of the
advance of Expenses by the Company for reasonable attorneys’ fees and related
expenses incurred by me in connection with the Proceeding (the “Advanced
Expenses”), I hereby agree that if, in connection with the Proceeding, it is
established that (1) an act or omission by me was material to the matter
giving rise to the Proceeding and (a) was committed in bad faith or (b) was
the result of active and deliberate dishonesty or (2) I actually received
an improper personal benefit in money, property or services or (3) in the
case of any criminal proceeding, I had reasonable cause to believe that the act
or omission was unlawful, then I shall promptly reimburse the portion of the
Advanced Expenses relating to the claims, issues or matters in the Proceeding
as to which the foregoing findings have been established and which have not
been successfully resolved as described in Section 7 of the
Indemnification Agreement.  To the extent
that Advanced Expenses do not relate to a specific claim, issue or matter in
the Proceeding, I agree that such Expenses shall be allocated on a reasonable
and proportionate basis.

 

IN WITNESS WHEREOF, I have executed this Affirmation
and Undertaking on this        day of                                         ,
200   .

 

	
  WITNESS:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
  (SEAL)Exhibit 4.1

 

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT
BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL
HAVE RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

 

WARRANT TO
PURCHASE

 

SHARES OF COMMON
STOCK

 

OF

 

APOLLO RESOURCES
INTERNATIONAL, INC.

 

Expires June    ,
2010

 

	
  No.: W-05-          

  	
  Number of
  Shares:                   

  

Date of Issuance: June    ,
2005

 

FOR VALUE RECEIVED, the
undersigned, Apollo Resources International, Inc., a Utah corporation
(together with its successors and assigns, the “Issuer”), hereby
certifies that                                                
or its registered assigns is entitled to subscribe for and purchase, during the
Term (as hereinafter defined), up to                                                                       
(                        )
shares (subject to adjustment as hereinafter provided) of the duly authorized,
validly issued, fully paid and non-assessable Common Stock of the Issuer, at an
exercise price per share equal to the Warrant Price then in effect, subject,
however, to the provisions and upon the terms and conditions hereinafter set
forth.  Capitalized terms used in this
Warrant and not otherwise defined herein shall have the respective meanings
specified in Section 8 hereof.

 

1.                                       Term.  The term of this Warrant shall commence on June    ,
2005 and shall expire at 6:00 p.m., eastern time, on June    ,
2010 (such period being the “Term”).

 

2.                                       Method
of Exercise; Payment; Issuance of New Warrant; Transfer and Exchange.

 

(a)                                  Time
of Exercise.  The purchase rights
represented by this Warrant may be exercised in whole or in part during the
Term.

 

(b)                                 Method
of Exercise.  The Holder hereof may
exercise this Warrant, in whole or in part, by the surrender of this Warrant
(with the exercise form attached hereto duly executed) at 

 

1

 

the principal office of
the Issuer, and by the payment to the Issuer of an amount of consideration
therefor equal to the Warrant Price in effect on the date of such exercise
multiplied by the number of shares of Warrant Stock with respect to which this
Warrant is then being exercised, payable at such Holder’s election (i) by
certified or official bank check or by wire transfer to an account designated
by the Issuer, (ii) by “cashless exercise” in accordance with the
provisions of subsection (c) of this Section 2, but only when a
registration statement under the Securities Act providing for the resale of the
Warrant Stock is not then in effect, or (iii) by a combination of the
foregoing methods of payment selected by the Holder of this Warrant.

 

(c)                                  Cashless
Exercise.  Notwithstanding any
provisions herein to the contrary and commencing one (1) year following
the Original Issue Date if (i) the Per Share Market Value of one share of
Common Stock is greater than the Warrant Price (at the date of calculation as
set forth below) and (ii) a registration statement under the Securities
Act providing for the resale of the Warrant Stock is not then in effect by the
date such registration statement is required to be effective pursuant to the
Registration Rights Agreement (as defined in the Purchase Agreement) or not
effective at any time during the Effectiveness Period (as defined in the
Registration Rights Agreement) in accordance with the terms of the Registration
Rights Agreement, in lieu of exercising this Warrant by payment of cash, the
Holder may exercise this Warrant by a cashless exercise and shall receive the
number of shares of Common Stock equal to an amount (as determined below) by
surrender of this Warrant at the principal office of the Issuer together with
the properly endorsed Notice of Exercise in which event the Issuer shall issue
to the Holder a number of shares of Common Stock computed using the following
formula:

 

	
   

  	
  X = Y 

  	
  (A)(Y)

  	
   

  
	
   

  	
   

  	
  B

  	
   

  
	
   

  	
   

  	
   

  
	
  Where

  	
  X =

  	
  the number of shares of
  Common Stock to be issued to the Holder.

  
	
   

  	
   

  	
   

  
	
   

  	
  Y =

  	
  the number of shares of
  Common Stock purchasable upon exercise of all of the Warrant or, if only a
  portion of the Warrant is being exercised, the portion of the Warrant being
  exercised.

  
	
   

  	
   

  	
   

  
	
   

  	
  A =

  	
  the Warrant Price.

  
	
   

  	
   

  	
   

  
	
   

  	
  B =

  	
  the Per Share Market
  Value of one share of Common Stock.

  

 

(d)                                 Issuance
of Stock Certificates.  In the event
of any exercise of this Warrant in accordance with and subject to the terms and
conditions hereof, (i) certificates for the shares of Warrant Stock so
purchased shall be dated the date of such exercise and delivered to the Holder
hereof within a reasonable time, not exceeding three (3) Trading Days
after such exercise (the “Delivery Date”) or, at the request of the
Holder (provided that a registration statement under the Securities Act
providing for the resale of the Warrant Stock is then in effect), issued and
delivered to the Depository Trust Company (“DTC”) account on the Holder’s
behalf via the Deposit Withdrawal Agent Commission System (“DWAC”)
within a reasonable time, not exceeding three (3) Trading Days after such
exercise, and the Holder hereof shall be deemed for all purposes to be the
holder of the shares of Warrant Stock so purchased as of the date of such
exercise and (ii) unless this Warrant has expired, a new Warrant
representing the number of 

 

2

 

shares of Warrant Stock,
if any, with respect to which this Warrant shall not then have been exercised
(less any amount thereof which shall have been canceled in payment or partial
payment of the Warrant Price as hereinabove provided) shall also be issued to
the Holder hereof at the Issuer’s expense within such time.

 

(e)                                  Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to
the Holder, if the Issuer fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Stock pursuant to
an exercise 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 Warrant Stock which the Holder anticipated receiving upon such
exercise (a “Buy-In”), then the Issuer 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
Warrant Stock that the Issuer was required to deliver to the Holder in
connection with the exercise 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 Warrant and
equivalent number of shares of Warrant Stock for which such exercise was not
honored or deliver to the Holder the number of shares of Common Stock that
would have been issued had the Issuer timely complied with its exercise 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 exercise 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 Issuer shall be required to pay the Holder $1,000. The Holder
shall provide the Issuer 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 Issuer.  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 Issuer’s failure to timely deliver
certificates representing shares of Common Stock upon exercise of this Warrant
as required pursuant to the terms hereof.

 

(f)                                    Transferability
of Warrant.  Subject to Section 2(h),
this Warrant may be transferred by a Holder without the consent of the
Issuer.  If transferred pursuant to this
paragraph, this Warrant may be transferred on the books of the Issuer by the
Holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant at the principal office of the Issuer, properly endorsed (by the Holder
executing an assignment in the form attached hereto) and upon payment of any
necessary transfer tax or other governmental charge imposed upon such
transfer.  This Warrant is exchangeable
at the principal office of the Issuer for Warrants to purchase the same
aggregate number of shares of Warrant Stock, each new Warrant to represent the
right to purchase such number of shares of Warrant Stock as the Holder hereof
shall designate at the time of such exchange. 
All Warrants issued on transfers or exchanges shall be dated the
Original Issue Date and shall be identical with this Warrant except as to the
number of shares of Warrant Stock issuable pursuant thereto.

 

(g)                                 Continuing
Rights of Holder.  The Issuer will,
at the time of or at any time after each exercise of this Warrant, upon the
request of the Holder hereof, acknowledge in writing the 

 

3

 

extent, if any, of its
continuing obligation to afford to such Holder all rights to which such Holder
shall continue to be entitled after such exercise in accordance with the terms
of this Warrant, provided that if any such Holder shall fail to make any
such request, the failure shall not affect the continuing obligation of the
Issuer to afford such rights to such Holder.

 

(h)                                 Compliance
with Securities Laws.

 

(i)                                     The Holder of this
Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of
Warrant Stock to be issued upon exercise hereof are 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 will not offer, sell or otherwise dispose of
this Warrant or any shares of Warrant Stock to be issued upon exercise hereof
except pursuant to an effective registration statement, or an exemption from
registration, under the Securities Act and any applicable state securities
laws.

 

(ii)                                  Except as provided in
paragraph (iii) below, this Warrant and all certificates representing
shares of Warrant Stock issued upon exercise hereof shall be stamped or
imprinted with a legend in substantially the following form:

 

THIS WARRANT AND THE
SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY
STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES
UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED.

 

(iii)                               The Issuer agrees to
reissue this Warrant or certificates representing any of the Warrant Stock,
without the legend set forth above if at such time, prior to making any
transfer of any such securities, the Holder shall give written notice to the
Issuer describing the manner and terms of such transfer.  Such proposed transfer will not be effected
until: (a) either (i) the Issuer has received an opinion of counsel
reasonably satisfactory to the Issuer, to the effect that the registration of
such securities under the Securities Act is not required in connection with
such proposed transfer, (ii) a registration statement under the Securities
Act covering such proposed disposition has been filed by the Issuer with the
Securities and Exchange Commission and has become effective under the
Securities Act, (iii) the Issuer has received other evidence reasonably
satisfactory to the Issuer that such registration and qualification under the
Securities Act and state securities laws are not required, or (iv) the
Holder provides the Issuer with reasonable assurances that such security can be
sold pursuant to Rule 144 under the Securities Act; 

 

4

 

and (b) either (i) the
Issuer has received an opinion of counsel reasonably satisfactory to the
Issuer, to the effect that registration or qualification under the securities
or “blue sky” laws of any state is not required in connection with such
proposed disposition, or (ii) compliance with applicable state securities
or “blue sky” laws has been effected or a valid exemption exists with respect
thereto.  The Issuer will respond to any
such notice from a holder within three (3) business days.  In the case of any proposed transfer under
this Section 2(h), the Issuer will use reasonable efforts to comply with
any such applicable state securities or “blue sky” laws, but shall in no event
be required, (x) to qualify to do business in any state where it is not then
qualified, (y) to take any action that would subject it to tax or to the
general service of process in any state where it is not then subject, or (z) to
comply with state securities or “blue sky” laws of any state for which
registration by coordination is unavailable to the Issuer.  The restrictions on transfer contained in
this Section 2(h) shall be in addition to, and not by way of
limitation of, any other restrictions on transfer contained in any other section of
this Warrant.  Whenever a certificate
representing the Warrant Stock is required to be issued to a the Holder without
a legend, in lieu of delivering physical certificates representing the Warrant
Stock, provided the Issuer’s transfer agent is participating in the DTC Fast
Automated Securities Transfer program, the Issuer shall use its reasonable best
efforts to cause its transfer agent to electronically transmit the Warrant
Stock to the Holder by crediting the account of the Holder’s Prime Broker with
DTC through its DWAC system (to the extent not inconsistent with any provisions
of this Warrant or the Purchase Agreement).

 

(i)                                     In
no event may the Holder exercise this Warrant in whole or in part unless the
Holder is an “accredited investor” as defined in Regulation D under the
Securities Act.

 

3.                                       Stock
Fully Paid; Reservation and Listing of Shares; Covenants.

 

(a)                                  Stock
Fully Paid.  The Issuer represents,
warrants, covenants and agrees that all shares of Warrant Stock which may be
issued upon the exercise of this Warrant or otherwise hereunder will, when
issued in accordance with the terms of this Warrant, be duly authorized,
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges created by or through the Issuer. 
The Issuer further covenants and agrees that during the period within
which this Warrant may be exercised, the Issuer will at all times have
authorized and reserved for the purpose of issuance upon exercise of this
Warrant a number of shares of Common Stock equal to at least one hundred twenty
percent (120%) of the aggregate number of shares of Common Stock to provide for
the exercise of this Warrant.

 

(b)                                 Reservation.  If any shares of Common Stock required to be
reserved for issuance upon exercise of this Warrant or as otherwise provided
hereunder require registration or qualification with any governmental authority
under any federal or state law before such shares may be so issued, the Issuer
will in good faith use its best efforts as expeditiously as possible at its
expense to cause such shares to be duly registered or qualified.  If the Issuer shall list any shares of Common
Stock on any securities exchange or market it will, at its expense, list
thereon, maintain and increase when necessary such listing, of, all shares of
Warrant Stock from time to time issued upon exercise of this Warrant or as
otherwise provided hereunder (provided that such Warrant Stock has been
registered pursuant to a registration statement under the Securities Act then
in effect), and, to the extent permissible under the applicable securities
exchange rules, all 

 

5

 

unissued shares of
Warrant Stock which are at any time issuable hereunder, so long as any shares
of Common Stock shall be so listed.  The
Issuer will also so list on each securities exchange or market, and will maintain
such listing of, any other securities which the Holder of this Warrant shall be
entitled to receive upon the exercise of this Warrant if at the time any
securities of the same class shall be listed on such securities exchange or
market by the Issuer.

 

(c)                                  Covenants.  The Issuer shall not by any action including,
without limitation, amending the Articles of Incorporation or the by-laws of
the Issuer, or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of the Holder hereof against dilution (to the
extent specifically provided herein) or impairment.  Without limiting the generality of the
foregoing, the Issuer will (i) not permit the par value, if any, of its Common
Stock to exceed the then effective Warrant Price, (ii) not amend or modify
any provision of the Articles of Incorporation or by-laws of the Issuer in any
manner that would adversely affect the rights of the Holders of the Warrants, (iii) take
all such action as may be reasonably necessary in order that the Issuer may
validly and legally issue fully paid and nonassessable shares of Common Stock,
free and clear of any liens, claims, encumbrances and restrictions (other than
as provided herein) upon the exercise of this Warrant, and (iv) use its
best efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be reasonably
necessary to enable the Issuer to perform its obligations under this Warrant.

 

(d)                                 Loss,
Theft, Destruction of Warrants.  Upon
receipt of evidence satisfactory to the Issuer of the ownership of and the
loss, theft, destruction or mutilation of any Warrant and, in the case of any
such loss, theft or destruction, upon receipt of indemnity or security
satisfactory to the Issuer or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant, the Issuer will make and deliver,
in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of
like tenor and representing the right to purchase the same number of shares of
Common Stock.

 

4.                                       Adjustment
of Warrant Price.  The price at which
such shares of Warrant Stock may be purchased upon exercise of this Warrant
shall be subject to adjustment from time to time as set forth in this Section 4.
The Issuer shall give the Holder notice of any event described below which
requires an adjustment pursuant to this Section 4 in accordance with the
notice provisions set forth in Section 5.

 

6

 

(a)                                  Recapitalization,
Reorganization, Reclassification, Consolidation, Merger or Sale.

 

(i)  In case
the Issuer after the Original Issue Date shall do any of the following (each, a
“Triggering Event”): (a) consolidate or merge with or into any
other Person and the Issuer shall not be the continuing or surviving
corporation of such consolidation or merger, or (b) permit any other
Person to consolidate with or merge into the Issuer and the Issuer shall be the
continuing or surviving Person but, in connection with such consolidation or
merger, any Capital Stock of the Issuer shall be changed into or exchanged for
Securities of any other Person or cash or any other property, or (c) transfer
all or substantially all of its properties or assets to any other Person, or (d) effect
a capital reorganization or reclassification of its Capital Stock, then, and in
the case of each such Triggering Event, proper provision shall be made so that,
upon the basis and the terms and in the manner provided in this Warrant, the
Holder of this Warrant shall be entitled upon the exercise hereof at any time
after the consummation of such Triggering Event, to the extent this Warrant is
not exercised prior to such Triggering Event, to receive at the Warrant Price
in effect at the time immediately prior to the consummation of such Triggering
Event in lieu of the Common Stock issuable upon such exercise of this Warrant
prior to such Triggering Event, the Securities, cash and property to which such
Holder would have been entitled upon the consummation of such Triggering Event
if such Holder had exercised the rights represented by this Warrant immediately
prior thereto (including the right of a shareholder to elect the type of
consideration it will receive upon a Triggering Event), subject to adjustments
(subsequent to such corporate action) as nearly equivalent as possible to the
adjustments provided for elsewhere in this Section 4.  Notwithstanding the foregoing to the
contrary, this Section 4(a)(i) shall only apply if the surviving
entity pursuant to any such Triggering Event 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.  In the event that the surviving
entity pursuant to any such Triggering Event 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, then the Holder shall have the right to demand that the Issuer pay to
the Holder an amount equal to the value of this Warrant according to the
Black-Scholes formula.

 

(ii)                                  Notwithstanding
anything contained in this Warrant to the contrary and so long as the surviving
entity pursuant to any Triggering Event 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, a
Triggering Event shall not be deemed to have occurred if, prior to the
consummation thereof, each Person (other than the Issuer) which may be required
to deliver any Securities, cash or property upon the exercise of this Warrant
as provided herein shall assume, by written instrument delivered to, and
reasonably satisfactory to, the Holder of this Warrant, (A) the
obligations of the Issuer under this Warrant (and if the Issuer shall survive
the consummation of such Triggering Event, such assumption shall be in addition
to, and shall not release the Issuer from, any continuing obligations of the
Issuer under this Warrant) and (B) the obligation to deliver to such
Holder such Securities, cash or property as, in accordance with the foregoing
provisions of this subsection (a), such Holder shall be entitled to
receive, and such Person shall have similarly delivered to such 

 

7

 

Holder an opinion of
counsel for such Person, which counsel shall be reasonably satisfactory to such
Holder, or in the alternative, a written acknowledgement executed by the
President or Chief Financial Officer of the Issuer, stating that this Warrant
shall thereafter continue in full force and effect and the terms hereof (including,
without limitation, all of the provisions of this subsection (a)) shall be
applicable to the Securities, cash or property which such Person may be
required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.

 

(b)                                 Stock
Dividends, Subdivisions and Combinations. 
If at any time the Issuer shall:

 

                                                                                                (i)                                     make
or issue or set a record date for the holders of the Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, shares of Common Stock,

 

                                                                                                (ii)                                  subdivide
its outstanding shares of Common Stock into a larger number of shares of Common
Stock, or

 

                                                                                                (iii)                               combine
its outstanding shares of Common Stock into a smaller number of shares of
Common Stock,

 

then (1) the number
of shares of Common Stock for which this Warrant is exercisable immediately
after the occurrence of any such event shall be adjusted to equal the number of
shares of Common Stock which a record holder of the same number of shares of
Common Stock for which this Warrant is exercisable immediately prior to the
occurrence of such event would own or be entitled to receive after the
happening of such event, and (2) the Warrant Price then in effect shall be
adjusted to equal (A) the Warrant Price then in effect multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (B) the number of shares of
Common Stock for which this Warrant is exercisable immediately after such
adjustment.

 

(c)                                  Certain
Other Distributions.  If at any time
the Issuer shall make or issue or set a record date for the holders of the Common
Stock for the purpose of entitling them to receive any dividend or other
distribution of:

 

(i)                                     cash
(other than a cash dividend payable out of earnings or earned surplus legally
available for the payment of dividends under the laws of the jurisdiction of
incorporation of the Issuer),

 

(ii)                                  any
evidences of its indebtedness, any shares of stock of any class or any other
securities or property of any nature whatsoever (other than cash, Common Stock
Equivalents or Additional Shares of Common Stock), or

 

(iii)                               any
warrants or other rights to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or
property of any nature whatsoever (other than cash, Common Stock Equivalents or
Additional Shares of Common Stock),

 

8

 

then (1) the number
of shares of Common Stock for which this Warrant is exercisable shall be
adjusted to equal the product of the number of shares of Common Stock for which
this Warrant is exercisable immediately prior to such adjustment multiplied by
a fraction (A) the numerator of which shall be the Per Share Market Value
of Common Stock at the date of taking such record and (B) the denominator
of which shall be such Per Share Market Value minus the amount allocable to one
share of Common Stock of any such cash so distributable and of the fair value (as
determined in good faith by the Board of Directors of the Issuer and supported
by an opinion from an investment banking firm of recognized national standing
acceptable to (but not affiliated with) the Holder) of any and all such
evidences of indebtedness, shares of stock, other securities or property or
warrants or other subscription or purchase rights so distributable, and (2) the
Warrant Price then in effect shall be adjusted to equal (A) the Warrant
Price then in effect multiplied by the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to the adjustment divided
by (B) the number of shares of Common Stock for which this Warrant is
exercisable immediately after such adjustment. 
A reclassification of the Common Stock (other than a change in par
value, or from par value to no par value or from no par value to par value)
into shares of Common Stock and shares of any other class of stock shall be
deemed a distribution by the Issuer to the holders of its Common Stock of such
shares of such other class of stock within the meaning of this Section 4(c) and,
if the outstanding shares of Common Stock shall be changed into a larger or
smaller number of shares of Common Stock as a part of such reclassification,
such change shall be deemed a subdivision or combination, as the case may be,
of the outstanding shares of Common Stock within the meaning of Section 4(b).

 

(d)                                 Issuance
of Additional Shares of Common Stock. 
In the event the Issuer shall at any time following the Original Issue
Date issue any Additional Shares of Common Stock (otherwise than as provided in
the foregoing subsections (b) through (c) of this Section 4), at
a price per share less than the Warrant Price then in effect or without consideration,
then the Warrant Price upon each such issuance shall be adjusted to the price
equal to the consideration per share paid for such Additional Shares of Common
Stock.

 

(e)                                  Issuance
of Common Stock Equivalents.  If at
any time the Issuer shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive a distribution of, or shall in any
manner (whether directly or by assumption in a merger in which the Issuer is
the surviving corporation) issue or sell, any Common Stock Equivalents, whether
or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange shall be less than the Warrant Price in effect
immediately prior to the time of such issue or sale, 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 make be less than the Warrant Price in effect at
the time of such amendment or adjustment, then the Warrant Price then in effect
shall be adjusted as provided in Section 4(d).  No further adjustments of the number of
shares of Common Stock for which this Warrant is exercisable and the Warrant
Price then in effect shall be made upon the actual issue of such Common Stock
upon conversion or exchange of such Common Stock Equivalents.

 

(f)                                    Superseding
Adjustment.  If, at any time after
any adjustment of the number of shares of Common Stock for which this Warrant
is exercisable and the Warrant Price then in 

 

9

 

effect shall have been
made pursuant to Section 4(e) as the result of any issuance of Common
Stock Equivalents, and (i) such Common Stock Equivalents, or the right of
conversion or exchange in such Common Stock Equivalents, shall expire, and all
or a portion of such or the right of conversion or exchange with respect to all
or a portion of such Common Stock Equivalents, as the case may be, shall not have
been exercised, or (ii) the consideration per share for which shares of
Common Stock are issuable pursuant to such Common Stock Equivalents shall be
increased, then such previous adjustment shall be rescinded and annulled and
the Additional Shares of Common Stock which were deemed to have been issued by
virtue of the computation made in connection with the adjustment so rescinded
and annulled shall no longer be deemed to have been issued by virtue of such
computation.  Upon the occurrence of an
event set forth in this Section 4(f) above, there shall be a
recomputation made of the effect of such Common Stock Equivalents on the basis
of: (i) treating the number of Additional Shares of Common Stock
theretofore actually issued or issuable pursuant to the previous exercise of
Common Stock Equivalents or any such right of conversion or exchange, as having
been issued on the date or dates of any such exercise and for the consideration
actually received and receivable therefor, and (ii) treating any such
Common Stock Equivalents which then remain outstanding as having been granted
or issued immediately after the time of such increase of the consideration per
share for which Additional Shares of Common Stock are issuable under such
Common Stock Equivalents; whereupon a new adjustment of the number of shares of
Common Stock for which this Warrant is exercisable and the Warrant Price then
in effect shall be made, which new adjustment shall supersede the previous
adjustment so rescinded and annulled.

 

(g)                                 Purchase
of Common Stock by the Issuer.  If
the Issuer at any time while this Warrant is outstanding shall, directly or
indirectly through a Subsidiary or otherwise, purchase, redeem or otherwise
acquire any shares of Common Stock at a price per share greater than the Per
Share Market Value, then the Warrant Price upon each such purchase, redemption
or acquisition shall be adjusted to that price determined by multiplying such
Warrant Price by a fraction (i) the numerator of which shall be the number
of shares of Outstanding Common Stock immediately prior to such purchase,
redemption or acquisition minus the number of shares of Common Stock which the
aggregate consideration for the total number of such shares of Common Stock so
purchased, redeemed or acquired would purchase at the Per Share Market Value;
and (ii) the denominator of which shall be the number of shares of
Outstanding Common Stock immediately after such purchase, redemption or
acquisition.  For the purposes of this
subsection (g), the date as of which the Per Share Market Price shall be
computed shall be the earlier of (x) the date on which the Issuer shall enter
into a firm contract for the purchase, redemption or acquisition of such Common
Stock, or (y) the date of actual purchase, redemption or acquisition of such
Common Stock.  For the purposes of this
subsection (g), a purchase, redemption or acquisition of a Common Stock
Equivalent shall be deemed to be a purchase of the underlying Common Stock, and
the computation herein required shall be made on the basis of the full
exercise, conversion or exchange of such Common Stock Equivalent on the date as
of which such computation is required hereby to be made, whether or not such
Common Stock Equivalent is actually exercisable, convertible or exchangeable on
such date.

 

(h)                                 Other
Provisions applicable to Adjustments under this Section.  The following provisions shall be applicable
to the making of adjustments of the number of shares of Common Stock for which
this Warrant is exercisable and the Warrant Price then in effect provided for
in this Section 4:

 

10

 

(i)                                     Computation
of Consideration.  To the extent that
any Additional Shares of Common Stock or any Common Stock Equivalents (or any
warrants or other rights therefor) shall be issued for cash consideration, the
consideration received by the Issuer therefor shall be the amount of the cash
received by the Issuer therefor, or, if such Additional Shares of Common Stock
or Common Stock Equivalents are offered by the Issuer for subscription, the
subscription price, or, if such Additional Shares of Common Stock or Common
Stock Equivalents are sold to underwriters or dealers for public offering
without a subscription offering, the initial public offering price (in any such
case subtracting any amounts paid or receivable for accrued interest or accrued
dividends and without taking into account any compensation, discounts or
expenses paid or incurred by the Issuer for and in the underwriting of, or
otherwise in connection with, the issuance thereof).  In connection with any merger or
consolidation in which the Issuer is the surviving corporation (other than any
consolidation or merger in which the previously outstanding shares of Common
Stock of the Issuer shall be changed to or exchanged for the stock or other
securities of another corporation), the amount of consideration therefore shall
be, deemed to be the fair value of such portion of the assets and business of
the nonsurviving corporation as the Board may determine to be attributable to
such shares of Common Stock or Common Stock Equivalents, as the case may
be.  Such determination of the fair value
of such consideration shall be made by an Independent Appraiser.  The consideration for any Additional Shares
of Common Stock issuable pursuant to the terms of any Common Stock Equivalents
shall be the consideration received by the Issuer for issuing such Common Stock
Equivalents, plus the additional consideration, if any, payable to the Issuer
upon the exercise of the right of conversion or exchange in such Common Stock
Equivalents.  In the event of any
consolidation or merger of the Issuer in which the Issuer is not the surviving
corporation or in which the previously outstanding shares of Common Stock of
the Issuer 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 Issuer for stock or other securities of any corporation,
the Issuer 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.  In the event any
consideration received by the Issuer for any securities consists of property
other than cash, the fair market value thereof at the time of issuance or as
otherwise applicable shall be as determined in good faith by the Board.  In the event Common Stock is issued with
other shares or securities or other assets of the Issuer for consideration
which covers both, the consideration computed as provided in this Section 4(h)(i) shall
be allocated among such securities and assets as determined in good faith by
the Board.

 

(ii)                                  When
Adjustments to Be Made.  The
adjustments required by this Section 4 shall be made whenever and as often
as any specified event requiring an adjustment shall occur, except that any
adjustment of the number of shares of Common Stock for which this Warrant is
exercisable that would otherwise be required may be postponed (except in the
case of a subdivision or combination of shares of the Common Stock, as provided
for in Section 4(b)) up to, but not beyond the date of exercise if such
adjustment either by itself or with other adjustments not previously made adds
or subtracts less than one percent (1%) of the shares of Common Stock for which
this Warrant is exercisable immediately prior to the making of such
adjustment.  Any adjustment representing
a change of less than such minimum amount (except 

 

11

 

as aforesaid) which is
postponed shall be carried forward and made as soon as such adjustment,
together with other adjustments required by this Section 4 and not
previously made, would result in a minimum adjustment or on the date of
exercise. For the purpose of any adjustment, any specified event shall be
deemed to have occurred at the close of business on the date of its occurrence.

 

(iii)                               Fractional
Interests.  In computing adjustments
under this Section 4, fractional interests in Common Stock shall be taken
into account to the nearest one one-hundredth (1/100th) of a share.

 

(iv)                              When
Adjustment Not Required.  If the
Issuer shall take a record of the holders of its Common Stock for the purpose
of entitling them to receive a dividend or distribution or subscription or
purchase rights and shall, thereafter and before the distribution to
stockholders thereof, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then thereafter no adjustment
shall be required by reason of the taking of such record and any such
adjustment previously made in respect thereof shall be rescinded and annulled.

 

(i)                                     Form of
Warrant after Adjustments.  The form
of this Warrant need not be changed because of any adjustments in the Warrant
Price or the number and kind of Securities purchasable upon the exercise of
this Warrant.

 

(j)                                     Escrow
of Warrant Stock.  If after any
property becomes distributable pursuant to this Section 4 by reason of the
taking of any record of the holders of Common Stock, but prior to the
occurrence of the event for which such record is taken, and the Holder
exercises this Warrant, any shares of Common Stock issuable upon exercise by
reason of such adjustment shall be deemed the last shares of Common Stock for
which this Warrant is exercised (notwithstanding any other provision to the
contrary herein) and such shares or other property shall be held in escrow for
the Holder by the Issuer to be issued to the Holder upon and to the extent that
the event actually takes place, upon payment of the current Warrant Price.  Notwithstanding any other provision to the
contrary herein, if the event for which such record was taken fails to occur or
is rescinded, then such escrowed shares shall be cancelled by the Issuer and
escrowed property returned.

 

5.                                       Notice
of Adjustments.  Whenever the Warrant
Price or Warrant Share Number shall be adjusted pursuant to Section 4
hereof (for purposes of this Section 5, each an “adjustment”), the
Issuer shall cause its Chief Financial Officer to prepare and execute a
certificate setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Board made
any determination hereunder), and the Warrant Price and Warrant Share Number
after giving effect to such adjustment, and shall cause copies of such
certificate to be delivered to the Holder of this Warrant promptly after each
adjustment.  Any dispute between the
Issuer and the Holder of this Warrant with respect to the matters set forth in
such certificate may at the option of the Holder of this Warrant be submitted
to a national or regional accounting firm reasonably acceptable to the Issuer
and the Holder, provided that the Issuer shall have ten (10) days
after receipt of notice from such Holder of its selection of such firm to
object thereto, in which case such Holder shall select another such firm and
the Issuer 

 

12

 

shall have no such right
of objection.  The firm selected by the
Holder of this Warrant as provided in the preceding sentence shall be
instructed to deliver a written opinion as to such matters to the Issuer and
such Holder within thirty (30) days after submission to it of such
dispute.  Such opinion shall be final and
binding on the parties hereto.  The costs
and expenses of the initial accounting firm shall be paid equally by the Issuer
and the Holder and, in the case of an objection by the Issuer, the costs and
expenses of the subsequent accounting firm shall be paid in full by the Issuer.

 

6.                                       Fractional
Shares.  No fractional shares of
Warrant Stock will be issued in connection with any exercise hereof, but in
lieu of such fractional shares, the Issuer shall make a cash payment therefor
equal in amount to the product of the applicable fraction multiplied by the Per
Share Market Value then in effect.

 

7.                                       Ownership
Cap and Certain Exercise Restrictions. (a)  Notwithstanding anything
to the contrary set forth in this Warrant, at no time may a Holder of this
Warrant exercise this Warrant if the number of shares of Common Stock to be
issued pursuant to such exercise would exceed, when aggregated with all other
shares of Common Stock owned by such Holder at such time, the number of shares
of Common Stock which would result in such Holder beneficially owning (as
determined in accordance with Section 13(d) of the Exchange Act and
the rules  thereunder) in excess of 4.99% of the then issued and
outstanding shares of Common Stock; provided, however, that upon
a holder of this Warrant providing the Issuer with sixty-one (61) days notice
(pursuant to Section 12 hereof) (the “Waiver Notice”) that such
Holder would like to waive this Section 7(a) with regard to any or
all shares of Common Stock issuable upon exercise of this Warrant, this Section 7(a) will
be of no force or effect with regard to all or a portion of the Warrant
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 expiration of the term of this Warrant.

 

(b)                                 The
Holder may not exercise the Warrant hereunder to the extent such exercise 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, including shares issuable upon
exercise of the Warrant held by the Holder after application of this Section; provided,
however, that upon a holder of this Warrant providing the Issuer with a
Waiver Notice that such holder would like to waive this Section 7(b) with
regard to any or all shares of Common Stock issuable upon exercise of this
Warrant, this Section 7(b) shall be of no force or effect with regard
to those shares of Warrant Stock 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 expiration of the term of
this Warrant.

 

8.                                       Definitions.  For the purposes of this Warrant, the
following terms have the following meanings:

 

“Additional
Shares of Common Stock” means all shares of Common Stock issued by the
Issuer after the Original Issue Date, and all shares of Other Common, if any,
issued by the Issuer after the Original Issue Date, except: (i) securities
issued (other than for cash) in connection with a merger, acquisition, or
consolidation, (ii) securities issued 

 

13

 

pursuant to a bona fide
firm underwritten public offering of the Issuer’s securities, (iii) securities
issued pursuant to the conversion or exercise of convertible or exercisable
securities issued or outstanding on or prior to the date hereof or issued
pursuant to the Purchase Agreement, (iv) the Warrant Stock, (v) securities
issued in connection with bona fide 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 Issuer’s stock option plans as they now
exist 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 the secured
convertible promissory notes issued pursuant to the Purchase Agreement, and (ix) the
issuance of up to 6,000,000 shares of Common Stock to the Issuer’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 exercise
of this Warrant and the secured convertible promissory notes issued pursuant to
the Purchase Agreement.

 

“Articles of
Incorporation” means the Articles of Incorporation of the Issuer as in
effect on the Original Issue Date, and as hereafter from time to time amended,
modified, supplemented or restated in accordance with the terms hereof and
thereof and pursuant to applicable law.

 

“Board”
shall mean the Board of Directors of the Issuer.

 

“Capital Stock”
means and includes (i) any and all shares, interests, participations or
other equivalents of or interests in (however designated) corporate stock,
including, without limitation, shares of preferred or preference stock, (ii) all
partnership interests (whether general or limited) in any Person which is a
partnership, (iii) all membership interests or limited liability company
interests in any limited liability company, and (iv) all equity or
ownership interests in any Person of any other type.

 

“Common Stock”
means the Common Stock, par value $.001 per share, of the Issuer and any other
Capital Stock into which such stock may hereafter be changed.

 

“Common Stock
Equivalent” means any Convertible Security or warrant, option or other
right to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Security.

 

“Convertible
Securities” means evidences of Indebtedness, shares of Capital Stock or
other Securities which are or may be at any time convertible into or
exchangeable for Additional Shares of Common Stock.  The term “Convertible Security” means one of
the Convertible Securities.

 

14

 

“Governmental
Authority” means any governmental, regulatory or self-regulatory entity,
department, body, official, authority, commission, board, agency or
instrumentality, whether federal, state or local, and whether domestic or
foreign.

 

“Holders”
mean the Persons who shall from time to time own any Warrant.  The term “Holder” means one of the Holders.

 

“Independent
Appraiser” means a nationally recognized or major regional investment
banking firm or firm of independent certified public accountants of recognized
standing (which may be the firm that regularly examines the financial
statements of the Issuer) that is regularly engaged in the business of
appraising the Capital Stock or assets of corporations or other entities as
going concerns, and which is not affiliated with either the Issuer or the
Holder of any Warrant.

 

“Issuer”
means Apollo Resources International, Inc., a Utah corporation, and its
successors.

 

“Majority
Holders” means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants at the time
outstanding.

 

“Original Issue
Date” means June     , 2005.

 

“OTC Bulletin Board”
means the over-the-counter electronic bulletin board.

 

“Other Common”
means any other Capital Stock of the Issuer of any class which shall be
authorized at any time after the date of this Warrant (other than Common Stock)
and which shall have the right to participate in the distribution of earnings
and assets of the Issuer without limitation as to amount.

 

“Outstanding
Common Stock” means, at any given time, the aggregate amount of outstanding
shares of Common Stock, assuming full exercise, conversion or exchange (as
applicable) of all options, warrants and other Securities which are convertible
into or exercisable or exchangeable for, and any right to subscribe for, shares
of Common Stock that are outstanding at such time.

 

“Person”
means an individual, corporation, limited liability company, partnership, joint
stock company, trust, unincorporated organization, joint venture, Governmental
Authority or other entity of whatever nature.

 

“Per Share
Market Value” means on any particular date (a) 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 (b) 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 

 

15

 

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 (c) 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 five (5) Trading Days preceding such date
of determination, or (d) if the Common Stock is not then publicly traded
the fair market value of a share of Common Stock as determined by an
Independent Appraiser selected in good faith by the Majority Holders; provided,
however, that the Issuer, after receipt of the determination by such
Independent Appraiser, shall have the right to select an additional Independent
Appraiser, in which case, the fair market value shall be equal to the average
of the determinations by each such Independent Appraiser; and provided, further
that all determinations of the Per Share Market Value shall be appropriately
adjusted for any stock dividends, stock splits or other similar transactions
during such period.  The determination of
fair market value by an Independent Appraiser shall be based upon the fair
market value of the Issuer determined on a going concern basis as between a
willing buyer and a willing seller and taking into account all relevant factors
determinative of value, and shall be final and binding on all parties.  In determining the fair market value of any
shares of Common Stock, no consideration shall be given to any restrictions on
transfer of the Common Stock imposed by agreement or by federal or state
securities laws, or to the existence or absence of, or any limitations on,
voting rights.

 

“Purchase
Agreement” means the Note and Warrant Purchase Agreement dated as of June 30,
2005, among the Issuer and the Purchasers.

 

“Purchasers”
means the purchasers of the secured convertible promissory notes and the Warrants issued by the Issuer pursuant to the
Purchase Agreement.

 

“Securities”
means any debt or equity securities of the Issuer, whether now or hereafter
authorized, any instrument convertible into or exchangeable for Securities or a
Security, and any option, warrant or other right to purchase or acquire any
Security.  “Security” means one of the
Securities.

 

“Securities Act”
means the Securities Act of 1933, as amended, or any similar federal statute
then in effect.

 

“Subsidiary”
means any corporation at least 50% of whose outstanding Voting Stock shall at
the time be owned directly or indirectly by the Issuer or by one or more of its
Subsidiaries, or by the Issuer and one or more of its Subsidiaries.

 

“Term” has
the meaning specified in Section 1 hereof.

 

“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 

 

16

 

that the Common Stock is
not 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.

 

“Voting Stock”
means, as applied to the Capital Stock of any corporation, Capital Stock of any
class or classes (however designated) having ordinary voting power for the
election of a majority of the members of the Board of Directors (or other
governing body) of such corporation, other than Capital Stock having such power
only by reason of the happening of a contingency.

 

“Warrants”
means the Warrants issued and sold pursuant to the Purchase Agreement,
including, without limitation, this Warrant, and any other warrants of like
tenor issued in substitution or exchange for any thereof pursuant to the
provisions of Section 2(c), 2(d) or 2(e) hereof or of any of
such other Warrants.

 

“Warrant Price”
initially means $0.30, as such price may be adjusted from time to time as shall
result from the adjustments specified in this Warrant, including Section 4
hereto.

 

“Warrant Share
Number” means at any time the aggregate number of shares of Warrant Stock
which may at such time be purchased upon exercise of this Warrant, after giving
effect to all prior adjustments and increases to such number made or required
to be made under the terms hereof.

 

“Warrant Stock”
means Common Stock issuable upon exercise of any Warrant or Warrants or
otherwise issuable pursuant to any Warrant or Warrants.

 

9.                                       Other
Notices.  In case at any time:

 

(A)                              the
Issuer shall make any distributions to the holders of Common Stock; or

 

(B)                                the
Issuer shall authorize the granting to all holders of its Common Stock of
rights to subscribe for or purchase any shares of Capital Stock of any class or
other rights; or

 

(C)                                there
shall be any reclassification of the Capital Stock of the Issuer; or

 

(D)                               there
shall be any capital reorganization by the Issuer; or

 

(E)                                 there
shall be any (i) consolidation or merger involving the Issuer or (ii) sale,
transfer or other disposition of all or substantially all of the Issuer’s
property, assets or business (except a merger or other reorganization in which
the Issuer shall be the surviving corporation and its shares of Capital 

 

17

 

Stock shall continue to
be outstanding and unchanged and except a consolidation, merger, sale, transfer
or other disposition involving a wholly-owned Subsidiary); or

 

(F)                                 there
shall be a voluntary or involuntary dissolution, liquidation or winding-up of
the Issuer or any partial liquidation of the Issuer or distribution to holders
of Common Stock;

 

then, in each of such
cases, the Issuer shall give written notice to the Holder of the date on which (i) the
books of the Issuer shall close or a record shall be taken for such dividend,
distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, disposition, dissolution, liquidation
or winding-up, as the case may be, shall take place.  Such notice also shall specify the date as of
which the holders of Common Stock of record shall participate in such dividend,
distribution or subscription rights, or shall be entitled to exchange their
certificates for Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding-up, as the case may be.  Such notice shall be given at least twenty
(20) days prior to the action in question and not less than ten (10) days
prior to the record date or the date on which the Issuer’s transfer books are
closed in respect thereto.  This Warrant
entitles the Holder to receive copies of all financial and other information
distributed or required to be distributed to the holders of the Common Stock.

 

10.                                 Amendment
and Waiver.  Any term, covenant,
agreement or condition in this Warrant may be amended, or compliance therewith
may be waived (either generally or in a particular instance and either
retroactively or prospectively), by a written instrument or written instruments
executed by the Issuer and the Majority Holders; provided, however,
that no such amendment or waiver shall reduce the Warrant Share Number,
increase the Warrant Price, shorten the period during which this Warrant may be
exercised or modify any provision of this Section 10 without the consent
of the Holder of this Warrant.  No
consideration shall be offered or paid to any person to amend or consent to a
waiver or modification of any provision of this Warrant unless the same
consideration is also offered to all holders of the Warrants.

 

11.                                 Governing
Law; Jurisdiction.  This Warrant
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 Warrant shall not be
interpreted or construed with any presumption against the party causing this
Warrant to be drafted.  The Issuer and the Holder agree that venue for
any dispute arising under this Warrant 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 Issuer and the Holder irrevocably consent
to personal jurisdiction in the state and federal courts of the state of New
York.  The Issuer and the Holder
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 Warrant and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing in this Section 11 shall affect
or limit any right to serve process in any other manner permitted by law.  The Issuer and the Holder hereby agree that
the prevailing 

 

18

 

party in any suit, action
or proceeding arising out of or relating to the this Warrant 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.

 

12.                                 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.,
eastern time, on a Trading Day, (ii) the Trading 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.,
eastern time, on any date and earlier than 11:59 p.m., eastern time, on
such date, (iii) the Trading Day following the date of mailing, if sent by
overnight delivery by a 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 the Holder of this Warrant or of Warrant Stock issued
pursuant hereto, addressed to such Holder at its last known address or
facsimile number appearing on the books of the Issuer maintained for such
purposes, or with respect to the Issuer, 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

  
	
   

  	
   

  	
   

  
	
  with copies (which
  copies

  	
   

  	
   

  
	
  shall not constitute
  notice

  	
   

  	
   

  
	
  to the Issuer) 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

  

 

Copies of notices to the
Holder 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. 
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days written notice of such changed address to
the other party hereto.

 

13.                                 Warrant
Agent.  The Issuer may, by written
notice to each Holder of this Warrant, appoint an agent having an office in New
York, New York for the purpose of issuing shares of Warrant Stock on the
exercise of this Warrant pursuant to subsection (b) of Section 2
hereof, exchanging this Warrant pursuant to subsection (d) of Section 2
hereof or replacing this Warrant pursuant to subsection (d) of Section 3
hereof, or any of the foregoing, and thereafter any such 

 

19

 

issuance, exchange or
replacement, as the case may be, shall be made at such office by such agent.

 

14.                                 Remedies.  The Issuer stipulates that the remedies at
law of the Holder of this Warrant in the event of any default or threatened
default by the Issuer in the performance of or compliance with any of the terms
of this Warrant are not and will not be adequate and that, to the fullest
extent permitted by law, such terms may be specifically enforced by a decree
for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.

 

15.                                 Successors
and Assigns.  This Warrant and the
rights evidenced hereby shall inure to the benefit of and be binding upon the
successors and assigns of the Issuer, the Holder hereof and (to the extent
provided herein) the Holders of Warrant Stock issued pursuant hereto, and shall
be enforceable by any such Holder or Holder of Warrant Stock.

 

16.                                 Modification
and Severability.  If, in any action
before any court or agency legally empowered to enforce any provision contained
herein, any provision hereof is found to be unenforceable, then such provision
shall be deemed modified to the extent necessary to make it enforceable by such
court or agency.  If any such provision
is not enforceable as set forth in the preceding sentence, the unenforceability
of such provision shall not affect the other provisions of this Warrant, but
this Warrant shall be construed as if such unenforceable provision had never
been contained herein.

 

17.                                 Headings.  The headings of the Sections of this Warrant
are for convenience of reference only and shall not, for any purpose, be deemed
a part of this Warrant.

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK]

 

20

 

IN WITNESS WHEREOF, the
Issuer has executed this Warrant as of the day and year first above written.

 

 

	
   

  	
  APOLLO RESOURCES
  INTERNATIONAL, INC.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

21

 

EXERCISE FORM

 

APOLLO RESOURCES
INTERNATIONAL, INC.

 

The undersigned                               ,
pursuant to the provisions of the within Warrant, hereby elects to purchase           
shares of Common Stock of Apollo Resources International, Inc. covered by
the within Warrant.

 

	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

Number of shares of Common Stock beneficially owned or deemed
beneficially owned by the Holder on the date of Exercise:                                                  

 

ASSIGNMENT

 

FOR VALUE RECEIVED,                           
hereby sells, assigns and transfers unto                                     
the within Warrant and all rights evidenced thereby and does irrevocably
constitute and appoint                            ,
attorney, to transfer the said Warrant on the books of the within named
corporation.

 

	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

PARTIAL ASSIGNMENT

 

FOR VALUE RECEIVED,                           
 hereby sells, assigns and transfers unto
                                    
the right to purchase                 
shares of Warrant Stock evidenced by the within Warrant together with all
rights therein, and does irrevocably constitute and appoint                                 ,
attorney, to transfer that part of the said Warrant on the books of the within
named corporation.

 

	
  Dated:

  	
   

  	
   

  	
  Signature

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Address

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
							

 

FOR USE BY THE
ISSUER ONLY:

 

 

 

22

 

This Warrant No. W-      
canceled (or transferred or exchanged) this          
day of                   ,
          , shares of Common
Stock issued therefor in the name of                     ,
Warrant No. W-          
issued for            shares
of Common Stock in the name of                          .

 

23

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