EXHIBIT 10.2
FORM OF NOTE
EXHIBIT A
FORM OF NOTE
THE SECURITIES REPRESENTED HEREBY
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE
ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR (II) UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING,
THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES. ANY TRANSFEREE OF THIS NOTE SHOULD CAREFULLY REVIEW THE
TERMS OF THIS NOTE, INCLUDING SECTION 2(d)(viii) HEREOF. THE
PRINCIPAL AMOUNT REPRESENTED BY THIS NOTE MAY BE LESS THAN THE
AMOUNTS SET FORTH ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(viii)
HEREOF.
SENIOR SECURED CONVERTIBLE
NOTE
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_________ __, 2005
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$____________
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FOR VALUE RECEIVED,
GALAXY ENERGY CORPORATION , a
Colorado corporation (the “ Company ”), hereby
promises to pay to the order of __________________ or registered
assigns (the “ Holder ”) the principal amount of
___________________ United States Dollars ($________________) when
due, whether upon maturity, acceleration, redemption or otherwise,
and to pay interest (“ Interest ”) on the unpaid
principal balance hereof on each Interest Payment Date (as defined
below) and upon maturity, or earlier upon conversion, acceleration
or redemption pursuant to the terms hereof, at the Applicable
Interest Rate (as defined below). Interest on this Note payable on
each Interest Payment Date and upon maturity, or earlier upon
conversion, acceleration, or redemption pursuant to the terms
hereof, shall accrue from the Issuance Date (as defined below) and
shall be computed on the basis of a 365-day year and actual days
elapsed. Interest shall be payable in cash or stock in accordance
with the above sentence and Section 6.
(1)
Payments of Principal . All payments of principal of this
Note (to the extent such principal is not converted into Shares (as
defined below) in accordance with the terms hereof) shall be made
in lawful money of the United States of America by wire transfer of
immediately available funds to such account as the Holder may from
time to time designate by written notice in accordance with the
provisions of this Note. Except as provided in Section 7, the
Company has no right, but under certain circumstances may have an
obligation, to make payments of principal of this Note prior to the
Maturity Date (as defined below). Whenever any amount expressed to
be due by the terms of this Note is due on any day that is not a
Business Day (as defined below), the same shall instead be due on
the next succeeding day that is a
Business Day. Each capitalized term
used herein, and not otherwise defined, shall have the meaning
ascribed thereto in the Securities Purchase Agreement, dated as of
May 31, 2005, pursuant to which this Note and the Other Notes (as
defined below) were originally issued (as such agreement may be
amended from time to time as provided in such agreement, the
“ Securities Purchase Agreement ”). This Note
and all Other Notes issued by the Company pursuant to the
Securities Purchase Agreement and all convertible notes issued in
exchange therefor or replacement thereof are collectively referred
to in this Note as the “ Notes .”
(2)
Conversion of this
Note . This Note shall be
converted into Shares on the terms and conditions set forth in this
Section 2.
(a)
Certain Defined Terms
. For purposes of this Note, the
following terms shall have the following meanings:
(i)
“ 2004 Notes ”
means the senior secured convertible notes issued by the Company
pursuant to the 2004 Securities Purchase Agreement, as such notes
may be amended from time to time as provided in such
notes.
(ii)
“ 2004 Securities Purchase
Agreement ” means the Securities Purchase Agreement,
dated as of August 19, 2004, between the Company and the buyers
named therein, as such agreement may be amended from time to time
as provided in such agreement.
(iii)
“ 2004 Warrants ”
means the warrants issued pursuant to the 2004 Securities Purchase
Agreement and all warrants issued in exchange or substitution
therefor or replacement thereof (including any warrants issued
pursuant to Section 3(b) of any such warrants or any similar
provisions of any warrants issued in exchange or substitution
therefor or in replacement thereof), as such warrants may be
amended from time to time as provided in such warrants.
(iv)
“ Allocation Percentage
” means, with respect to each holder of Notes, a fraction of
which the numerator is the aggregate principal amount of the Notes
initially purchased by such holder on the Issuance Date and of
which the denominator is the aggregate principal amount of the
Notes purchased by all holders on the Issuance Date.
(v)
“Applicable Interest
Rate” initially
shall be 13.0%; provided, however, that on the second Business Day
of each calendar quarter commencing after the Issuance Date, such
rate shall be adjusted to the per annum rate equal to the Prime
Rate in effect on such date, plus seven and one-quarter percent
(7.25%).
(vi)
“ Business Day ”
means any day other than Saturday, Sunday or other day on which
commercial banks in the city of New York are authorized or required
by law to remain closed.
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(vii)
“ Common Stock ”
means (A) the Company’s common stock, $0.001 par value per
share, and (B) any capital stock resulting from a reclassification
of such common stock.
(viii)
“ Company Alternative
Redemption Rate ” means (A) on any date during the period
beginning on and including the Issuance Date through and including
the date that is one year after the Issuance Date, 110%, (B) on any
date during the period beginning on and including the first day
after the date that is one year after the Issuance Date through and
including the date that is two years after the Issuance Date, 107%,
and (C) on any date during the period beginning on and including
the first day after the date that is two years after the Issuance
Date through and including the Business Day immediately preceding
the Maturity Date, 105%.
(ix)
“ Company Conversion
Price ” means, as of any Conversion Date (as defined in
Section 2(d)(i)) or other date of determination, 93% of the
Weighted Average Price of the Common Stock on the Trading Day
immediately preceding the Conversion Date applicable to the
conversion for which such determination is being made.
(x)
“ Conversion Amount
” means (A) the sum of (1) the principal amount of this Note
to be converted, redeemed or otherwise with respect to which this
determination is being made and (2) the Interest Amount with
respect to the amount referred to in the immediately preceding
clause (1); or (B) in the case of an Interest Conversion (as
defined in Section 6), the Interest Amount to be
converted.
(xi)
“ Conversion Price
” means (A) as of any Conversion Date or other date of
determination (other than with respect to an Interest Conversion
pursuant to Section 6) during the period beginning on the Issuance
Date and ending on and including the Maturity Date, the Fixed
Conversion Price as in effect as of such date, and (B) as of any
Conversion Date with respect to any Interest Conversion pursuant to
Section 6, the lesser of the Fixed Conversion Price and the Company
Conversion Price, each as in effect as of such date and subject to
adjustment as provided herein.
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(xii)
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“ Dollars ” or “
$ ” means United States dollars.
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(xiii)
“ Domestic Subsidiaries
” means any of the Subsidiaries (as defined in the Securities
Purchase Agreement) of the Company that are organized or formed
under the laws of one of the states, territories or other
jurisdictions of the United States of America.
(xiv)
“ Expected Trading Days
” means, with respect to any Interest Conversion Period (as
defined in Section 6(a)), the number of regularly
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scheduled Business Days in such
period on which the Principal Market is scheduled to be open for
trading of the Common Stock.
(xv)
“Fixed Conversion
Price ” means as of
any Conversion Date or other date of determination, $1.88, subject
to adjustment as provided herein.
(xvi)
“ Interest Amount
” means, with respect to any Principal as of the date of any
determination, all accrued and unpaid interest (including any
Default Interest (as defined in Section 6)) on such Principal
through and including such date of determination.
(xvii)
“ Interest Payment Date
” means the first Business Day of each calendar quarter,
beginning with the calendar quarter that commences on July 1, 2005,
through and including the last calendar quarter that commences
prior to the Maturity Date.
(xviii)
“ Issuance Date ”
means the original date of issuance of this Note pursuant to the
Securities Purchase Agreement, regardless of any exchange or
replacement hereof.
(xix)
“ March 2005 Notes
” means the senior subordinated convertible notes of the
Company issued pursuant to the Securities Purchase Agreement, dated
as of March 1, 2005, between the Company and the buyers named
therein, as such notes are in effect on the date of the Securities
Purchase Agreement.
(xx)
“ Maturity Date ”
means the earliest to occur of (a) [INSERT Date that is 5 years
after issuance date] , (b) the date of a Maturity Date
Acceleration Event, or (c) such date as all amounts due under this
Note have been fully paid.
(xxi)
“ Maturity Date
Acceleration Event ” means any principal amount of the
March 2005 Notes is outstanding on the Business Day immediately
preceding April 30, 2007 (the scheduled maturity date of the March
2005 Notes), unless (A) on the Trading Day immediately preceding
April 30, 2007 and on at least 15 of the 20 consecutive Trading
Days immediately preceding April 30, 2007 the Weighted Average
Price of the Common Stock equals or exceeds 150% of the Fixed
Conversion Price (as defined in the March 2005 Notes), then in
effect, or (B) with respect to all or any portion of this Note, on
or before the 2 nd Business Day immediately preceding
April 30, 2007, the Holder notifies the Company that there shall
not be a Maturity Date Acceleration Event with respect to all or a
specific amount of this Note.
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(xxii)
“Other Notes
” means the convertible
notes, other than this Note, issued by the Company pursuant to the
Securities Purchase Agreement and all convertible notes issued in
exchange therefor or replacement thereof.
(xxiii)
“ Person ” means
an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization or
a government or any department or agency thereof or any other legal
entity.
(xxiv)
“ Prime Rate ”
shall mean the Prime Rate as published from time to time in The
Wall Street Journal , as such rate may vary from time to time.
If such rate is expressed in a range in said publication, the
higher rate of the reported range will apply.
(xxv)
“ Principal ”
means the outstanding principal amount of this Note as of any date
of determination.
(xxvi)
“ Principal Market
” means the principal securities exchange or trading market
for a security.
(xxvii)
“ Registration Rights
Agreement ” means that certain registration rights
agreement, dated as of May 31, 2005, between the Company and the
initial holders of the Notes relating to the filing of registration
statements covering, among other things, the resale of the Shares
issuable upon conversion of the Notes, as such agreement may be
amended from time to time as provided in such agreement.
(xxviii) “ SEC ” means the United
States Securities and Exchange Commission, or any successor
thereto.
(xxix)
“ Security Agreement
” means that certain security agreement, dated as of August
19, 2004, among the Company, the Domestic Subsidiaries and the
initial holders of the 2004 Notes relating to the granting by the
Company and the Domestic Subsidiaries of a first-priority security
interest in all the assets of the Company and the Domestic
Subsidiaries, as such agreement has been amended as of May 31, 2005
(which amendment, among other things, made the initial holder of a
Note that is not a holder of 2004 Notes a party to the Security
Agreement) and as such agreement may be amended from time to time
as provided in such agreement.
(xxx)
“ Security Documents
” means any agreement, document or instrument executed prior
hereto, concurrently herewith or at any time hereafter pursuant to
which the Company, its Domestic Subsidiaries or any other Person
either (i) guarantees payment or performance of all or any
portion of the obligations hereunder or under any other instruments
delivered in connection with the transactions contemplated hereby
and by the Securities Purchase Agreement, and/or (ii) provides, as
security for all or any portion of such obligations, a lien
on
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any of its assets in favor of the
Holder, as any or all of the same has been and may be amended,
supplemented, restated or otherwise modified from time to
time.
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(xxxi)
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“ Shares ” means shares of
Common Stock.
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(xxxii)
“ Trading Day ”
means any day on which the Common Stock is traded on the principal
securities exchange or securities market on which the Common Stock
is then traded; provided that “Trading Day” shall not
include any day on which the Common Stock is scheduled to trade, or
actually trades, on such exchange or market for less than 4.5
hours.
(xxxiii) “ Warrants ” means (A) any
warrants issued pursuant to the Securities Purchase Agreement and
all warrants issued in exchange or substitution therefor or
replacement thereof and (B) any warrants issued pursuant to Section
7 hereof and all warrants issued in exchange or substitution
therefor or replacement thereof.
(xxxiv) “ Weighted Average Price ”
means, for any security as of any date, the dollar volume-weighted
average price for such security on its Principal Market during the
period beginning at 9:30 a.m. New York Time (or such other time as
its Principal Market publicly announces is the official open of
trading) and ending at 4:00 p.m. New York Time (or such other time
as its Principal Market publicly announces is the official close of
trading) as reported by Bloomberg Financial Markets (“
Bloomberg ”) through its “Volume at Price”
functions, or if the foregoing does not apply, the dollar
volume-weighted average price of such security in the
over-the-counter market on the electronic bulletin board for such
security during the period beginning at 9:30 a.m. New York Time (or
such other time as such over-the-counter market publicly announces
is the official open of trading), and ending at 4:00 p.m. New York
Time (or such other time as such over-the-counter market publicly
announces is the official close of trading) as reported by
Bloomberg, or, if no dollar volume-weighted average price is
reported for such security by Bloomberg for such hours, the average
of the highest closing bid price and the lowest closing ask price
of any of the market makers for such security as reported in the
“pink sheets” by the National Quotation Bureau, Inc. If
the Weighted Average Price cannot be calculated for such security
on such date on any of the foregoing bases, the Weighted Average
Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of Notes
representing at least two-thirds (2/3) of the aggregate principal
amount of the Notes then outstanding as to which such determination
is being made. If the Company and the holders of the Notes
representing at least two-thirds (2/3) of the aggregate principal
amount of the Notes then outstanding as to which such determination
is being made are unable to agree upon the fair market value of the
Common Stock, then such dispute shall be resolved pursuant to
Section 2(d)(iii) below with the term “Weighted Average
Price” being substituted for the term “Conversion
Price.” All
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such determinations shall be
appropriately adjusted for any stock dividend, stock split, stock
combination or other similar transaction during any period during
which the Weighted Average Price is being determined.
(b)
Holder’s Conversion Right;
Mandatory Redemption at Maturity . Subject to the provisions of Section 5, at any
time or times on or after the Issuance Date, the Holder shall be
entitled to convert all or any part of the Principal (and the
Interest Amount relating thereto) into fully paid and nonassessable
Shares in accordance with Section 2(d), at the Conversion Rate (as
defined below). The Company shall not issue any fraction of a Share
upon any conversion. If the issuance would result in the issuance
of a fraction of a Share, then the Company shall round such
fraction of a Share up or down to the nearest whole share. If any
Principal remains outstanding on the Maturity Date, then all such
Principal shall be redeemed as of such date in accordance with
Section 2(d)(vii).
(c)
Conversion Rate
. The number of Shares issuable upon
conversion of any portion of this Note pursuant to Section 2 shall
be determined according to the following formula (the “
Conversion Rate ”):
Conversion
Amount
Conversion Price
(d)
Mechanics of
Conversion . The
conversion of this Note shall be conducted in the following
manner:
(i)
Holder’s Delivery
Requirements . To convert
a Conversion Amount into Shares on any date (the “
Conversion Date ”), the Holder shall (A) transmit
by facsimile (or otherwise deliver), for receipt on or prior to
11:59 p.m. New York Time on such date, a copy of an executed
conversion notice in the form attached hereto as Exhibit I
(the “ Conversion Notice ”) to the Company and
(B) if required by Section 2(d)(viii), surrender to a common
carrier for delivery to the Company as soon as practicable
following such date the original Note being converted (or an
indemnification undertaking reasonably acceptable to the Company
with respect to this Note in the case of its loss, theft or
destruction).
(ii)
Company’s
Response . Upon receipt
or deemed receipt (which for purposes hereof shall mean pursuant to
Section 6(b)) by the Company of a copy of a Conversion Notice, the
Company (I) shall immediately send, via facsimile, a confirmation
of receipt of such Conversion Notice to the Holder and the
Company’s designated transfer agent (the “ Transfer
Agent ”), which confirmation shall constitute an
instruction to the Transfer Agent to process such Conversion Notice
in accordance with the terms herein and (II) on or before the
second (2 nd ) Business Day following the date of
receipt or deemed receipt by the Company of such Conversion Notice
(the “ Share Delivery Date ”) (A) provided that
the Transfer Agent is participating in The Depository Trust Company
(“ DTC ”) Fast Automated Securities Transfer
Program and provided that the Holder is eligible to receive Shares
through DTC, credit such aggregate number
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of Shares to which the Holder shall
be entitled to the Holder’s or its designee’s balance
account with DTC through its Deposit Withdrawal Agent Commission
system or (B) if the foregoing shall not apply, issue and deliver
to the address as specified in the Conversion Notice, a
certificate, registered in the name of the Holder or its designee,
for the number of Shares to which the Holder shall be entitled. If
this Note is submitted for conversion, as may be required by
Section 2(d)(viii), and the Principal represented by this Note is
greater than the Principal being converted, then the Company shall,
as soon as practicable and in no event later than three (3)
Business Days after receipt of this Note (the “ Note
Delivery Date ”) and at its own expense, issue and
deliver to the Holder a new Note representing the Principal not
converted.
(iii)
Dispute Resolution
. In the case of a dispute as to
the determination of the Conversion Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct the
Transfer Agent to issue to the Holder the Shares representing the
number of Shares that is not disputed and shall transmit an
explanation of the disputed determinations or arithmetic
calculations to the Holder via facsimile within one (1) Business
Day of receipt or deemed receipt of the Holder’s Conversion
Notice or other date of determination. If the Holder and the
Company are unable to agree upon the determination of the
Conversion Price or arithmetic calculation of the Conversion Rate
within one (1) Business Day of such disputed determination or
arithmetic calculation being transmitted to the Holder, then the
Company shall immediately submit via facsimile (A) the disputed
determination of the Conversion Price to an independent, reputable
investment banking firm agreed to by the Company and the holders of
the Notes representing at least two-thirds (2/3) of the aggregate
principal amounts of the Notes then outstanding as to which such
determination is being made, or (B) the disputed arithmetic
calculation of the Conversion Rate to the Company’s
independent, outside accountant, as the case may be. The Company
shall cause the investment bank or the accountant, as the case may
be, to perform the determinations or calculations and notify the
Company and the Holder of the results no later than two (2)
Business Days from the time it receives the disputed determinations
or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding
upon all parties absent error.
(iv)
Record Holder
. The person or persons entitled to
receive the Shares issuable upon a conversion of this Note shall be
treated for all purposes as the legal and record holder or holders
of such Shares on the Conversion Date.
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(v)
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Company’s Failure to Timely
Convert .
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(A)
Cash Damages
. If within three (3) Business Days
after the Company’s receipt of the facsimile copy of a
Conversion Notice or deemed receipt of a Conversion Notice the
Company shall fail to issue and deliver a certificate to the Holder
for, or
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credit the Holder’s or its
designee’s balance account with DTC with, the number of
Shares to which the Holder is entitled upon the Holder’s
conversion of any Conversion Amount, or if the Company fails to
issue and deliver a new Note representing the Principal to which
such Holder is entitled on or before the Note Delivery Date
pursuant to Section 2(d)(ii), then in addition to all other
available remedies that the Holder may pursue hereunder and under
the Securities Purchase Agreement (including indemnification
pursuant to Section 8 thereof or at law or in equity), the Company
shall pay additional damages to the Holder for each day after the
Share Delivery Date such conversion is not timely effected and/or
each day after the Note Delivery Date such Note is not delivered in
an amount equal to 0.5% of the sum of (a) the product of (I) the
number of Shares not issued to the Holder or its designee on or
prior to the Share Delivery Date and to which the Holder is
entitled and (II) the Weighted Average Price of the Common Stock on
the Share Delivery Date (such product is referred to herein as the
“ Share Product Amount ”), and (b) in the event
the Company has failed to deliver a Note to the Holder on or prior
to the Note Delivery Date, the product of (y) the number of Shares
issuable upon conversion of the Principal represented by the Note
as of the Note Delivery Date and (z) the Weighted Average Price of
the Common Stock on the Note Delivery Date; provided that in no
event shall cash damages accrue pursuant to this Section 2(d)(v)(A)
with respect to the Share Product Amount during the period, if any,
in which the Conversion Price or the arithmetic calculation of the
Conversion Rate is subject to a bona fide dispute that is subject
to and being resolved pursuant to, and in compliance with the time
periods and other provisions of, the dispute resolution provisions
of Section 2(d)(iii), provided that the Shares are delivered to the
Holder within one (1) Business Day of the resolution of such bona
fide dispute. Alternatively, subject to Section 2(d)(iii), at the
election of the Holder made in the Holder’s sole discretion,
the Company shall pay to the Holder, in lieu of the additional
damages referred to in the preceding sentence (but in addition to
all other available remedies that the Holder may pursue hereunder
and under the Securities Purchase Agreement (including
indemnification pursuant to Section 8 thereof or at law or in
equity)), 110% of the amount by which (A) the Holder’s total
purchase price (including brokerage commissions, if any) for the
Shares purchased to make delivery in satisfaction of a sale by such
holder of the Shares to which such holder is entitled but has not
received upon a conversion exceeds (B) the net proceeds received by
such holder from the sale of the Shares to which the Holder is
entitled but has not received upon such conversion. If the Company
fails to pay the additional damages set forth in this Section
2(d)(v)(A) within five (5) Business Days of the date incurred, then
the Holder entitled to such payments shall have the right at any
time, so long as the Company continues to fail to make such
payments, to require the Company, upon written notice, to
immediately issue, in lieu of such cash damages, the number of
Shares equal to the quotient of (X) the aggregate amount of the
damages payments described herein divided by (Y) the Conversion
Price in effect on such Conversion Date as specified by the Holder
in the Conversion Notice.
(B)
Void Conversion Notice;
Adjustment to Conversion Price . If for any reason the Holder has not received
all of the Shares prior to the tenth (10th) Business Day after the
Share Delivery Date with respect to a conversion of this Note, then
the Holder, upon written notice to the Company (a “ Void
Conversion Notice ”), may void its Conversion Notice with
respect to, and retain or have returned, as the case may be, any
portion of this Note that has not been converted pursuant to the
Holder’s Conversion Notice; provided
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that the voiding of the
Holder’s Conversion Notice shall not affect the
Company’s obligations to make any payments that have accrued
prior to the date of such notice pursuant to
Section 2(d)(v)(A) or otherwise. Thereafter, the Fixed
Conversion Price with respect to all of the Principal shall be
adjusted to the lesser of (I) the Fixed Conversion Price as in
effect on the date on which the Holder voided the Conversion Notice
and (II) the lowest Weighted Average Price during the period
beginning on the Conversion Date and ending on the date such holder
voided the Conversion Notice, subject to further adjustment as
provided in this Note; provided that in no event shall an
adjustment to the Fixed Conversion Price with respect to any
Principal be made pursuant to this Section 2(d)(v)(B) with respect
to any conversion of this Note that is the subject of a bona fide
dispute that is subject to and being resolved pursuant to, and in
compliance with the time periods and other provisions of, the
dispute resolution provisions of Section 2(d)(iii), provided the
Shares are delivered to the Holder within one (1) Business Day of
the resolution of such bona fide dispute.
(C)
Redemption
. If for any reason the Holder has
not received all of the Shares prior to the tenth (10th) Business
Day after the Share Delivery Date with respect to a conversion of
this Note (a “ Conversion Failure ”), then the
Holder, upon written notice to the Company, may require that the
Company redeem, in accordance with Section 3(a), all of the
Principal, including the Principal previously submitted for
conversion and with respect to which the Company has not delivered
shares of Common Stock; provided that the Holder shall not be
entitled to require redemption of any Principal pursuant to this
clause (C) solely as a result of a Conversion Failure caused by any
Principal being the subject of a bona fide dispute that is subject
to and being resolved pursuant to, and in compliance with the time
periods and other provisions of, the dispute resolution provisions
of Section 2(d)(iii), provided the Shares are delivered to the
Holder within one (1) Business Day of the resolution of such bona
fide dispute.
(vi)
Interest Conversion
. In the event the Company receives
a Conversion Notice from more than one holder of the Notes for the
same Conversion Date and the Company can convert some, but not all,
of such Notes, then, the Company shall convert from each holder of
the Notes electing to have Notes converted at such time a pro rata
amount of such holder’s Note submitted for conversion based
on the principal amount of the Note submitted for conversion on
such date by such holder relative to the principal amount of the
Notes submitted for conversion on such date.
(vii)
Mechanics of Mandatory
Redemption . If any
Principal remains outstanding on the Maturity Date, then the Holder
shall surrender this Note, duly endorsed for cancellation, to the
Company, and such Principal shall be redeemed by the Company as of
the Maturity Date by payment on the Maturity Date to the Holder of
an amount equal to the sum of (A) 100% of such Principal plus (B)
the Interest Amount with respect to such Principal.
(viii)
Book-Entry
. Notwithstanding anything to the
contrary set forth herein, upon conversion of this Note in
accordance with the terms hereof,
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the Holder shall not be required to
physically surrender this Note to the Company unless all of the
Principal is being converted. The Holder and the Company shall
maintain records showing the principal amount converted or redeemed
and the dates of such conversions or redemptions or shall use such
other method, reasonably satisfactory to the Holder and the
Company, so as not to require physical surrender of this Note upon
each such conversion or redemption. In the event of any dispute or
discrepancy, such records of the Company establishing the Principal
to which the Holder is entitled shall be controlling and
determinative in the absence of error. Notwithstanding the
foregoing, if this Note is converted or redeemed as aforesaid, the
Holder may not transfer this Note unless the Holder first
physically surrenders this Note to the Company, whereupon the
Company will forthwith issue and deliver upon the order of the
Holder a new Note of like tenor, registered as the Holder may
request, representing in the aggregate the remaining Principal
represented by this Note. The Holder and any assignee, by
acceptance of this Note, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion or
redemption of any portion of this Note, the Principal of this Note
may be less than the principal amount stated on the face hereof.
Each Note shall bear the following legend:
ANY TRANSFEREE OF THIS NOTE SHOULD
CAREFULLY REVIEW THE TERMS OF THIS NOTE, INCLUDING SECTION
2(d)(viii) HEREOF. THE PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS
THAN THE PRINCIPAL AMOUNT STATED ON THE FACE HEREOF PURSUANT TO
SECTION 2(d)(viii) HEREOF.
(e)
Taxes . The Company shall pay any and all taxes that
may be payable with respect to the issuance and delivery of Shares
upon the conversion of this Note.
(f)
Adjustments to Conversion
Price . The Conversion
Price will be subject to adjustment from time to time as provided
in this Section 2(f).
(i)
Adjustment of Fixed Conversion
Price upon Issuance of Common Stock . If and whenever on or after the Issuance Date,
the Company issues or sells, or in accordance with this Section
2(f)(i) is deemed to have issued or sold, any Shares (including the
issuance or sale of Shares owned or held by or for the account of
the Company, but excluding Exempted Issuances (as defined below))
for a consideration per share less than a price (the “
Applicable Price ”) equal to the Fixed Conversion
Price in effect immediately prior to such time, then immediately
after such issue or sale, the Fixed Conversion Price then in effect
shall be reduced to an amount equal to such consideration per
share. For purposes of determining the adjusted Fixed Conversion
Price under this Section 2(f)(i) (which, for the avoidance of
doubt, the Company and the Holder agree shall mean, at least as of
any date after the Issuance Date, for all purposes of this Section
2(f), including for purposes of determining whether the Company
has
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issued or sold, or shall be deemed
to have issued or have sold, any Shares for a consideration per
share less than a price equal to the Applicable Price), the
following shall be applicable:
(A)
Issuance of Options
. If the Company in any manner
grants or sells any Options (as defined below) and the lowest price
per share for which one Share is issuable upon the exercise of any
such Option or upon conversion, exchange or exercise of any
Convertible Securities (as defined below) issuable upon exercise of
such Option is less than the Applicable Price, then such Share
shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the granting or sale of such Option
for such price per share. For purposes of this Section 2(f)(i)(A),
the “lowest price per share for which one Share is issuable
upon the exercise of any such Option or upon conversion, exchange
or exercise of any Convertible Securities issuable upon exercise of
such Option” shall be equal to the sum of the lowest amounts
of consideration (if any) received or receivable by the Company
with respect to any one Share upon granting or sale of the Option,
upon exercise of the Option and upon conversion, exchange or
exercise of any Convertible Security issuable upon exercise of such
Option. No further adjustment of the Fixed Conversion Price shall
be made upon the actual issuance of such Share or of such
Convertible Securities upon the exercise of such Options or upon
the actual issuance of such Share upon conversion, exchange or
exercise of such Convertible Securities.
(B)
Issuance of Convertible
Securities . If the
Company in any manner issues or sells any Convertible Securities
and the lowest price per share for which one Share is issuable upon
such conversion, exchange or exercise thereof is less than the
Applicable Price, then such Share shall be deemed to be outstanding
and to have been issued and sold by the Company at the time of the
issuance or sale of such Convertible Securities for such price per
share. For the purposes of this Section 2(f)(i)(B), the
“lowest price per share for which one Share is issuable upon
such conversion, exchange or exercise” shall be equal to the
sum of the lowest amounts of consideration (if any) received or
receivable by the Company with respect to any one Share upon the
issuance or sale of the Convertible Security and upon the
conversion, exchange or exercise of such Convertible Security. No
further adjustment of the Fixed Conversion Price shall be made upon
the actual issuance of such Share upon conversion, exchange or
exercise of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any
Options for which adjustment of the Fixed Conversion Price had been
or are to be made pursuant to other provisions of this Section
2(f)(i), then no further adjustment of the Fixed Conversion Price
shall be made by reason of such issue or sale.
(C)
Change in Option Price or Rate of
Conversion . If the
purchase, exchange or exercise price provided for in any Options,
the additional consideration, if any, payable upon the issue,
conversion, exchange or exercise of any Convertible Securities, or
the rate at which any Options or Convertible Securities are
convertible into or exchangeable or exercisable for Shares changes
at any time, then the Fixed Conversion Price in effect at the time
of such change shall be adjusted to the Fixed Conversion Price that
would have been in effect at such time had such Options or
Convertible Securities provided for
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such changed purchase, exchange or
exercise price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or
sold. For purposes of this Section 2(f)(i)(C), if the terms of any
Option or Convertible Security that was outstanding as of the
Issuance Date are changed in the manner described in the
immediately preceding sentence, then such Option or Convertible
Security and the Shares deemed issuable upon exercise, conversion
or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment shall be made if such adjustment
would result in an increase of the Fixed Conversion Price then in
effect.
(D)
Calculation of Consideration
Received . In case any
Options are issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated
transaction or series of related transactions, (A) the Options will
be deemed to have been issued for a consideration equal to the
greater of $0.01 and the specific aggregate consideration, if any,
allocated to such Options (in either case, the “ Option
Consideration ”) and, for purposes of applying the
provisions of this Section 2(f), the Option Consideration shall be
allocated pro rata among all the shares of Common Stock issuable
upon exercise of such Options to determine the consideration per
share of Common Stock, and (B) the other securities will be deemed
to have been issued for an aggregate consideration equal to the
aggregate consideration received by the Company for the Options and
other securities (determined as provided below), less the sum of
(1) the Black-Scholes Value (as defined below) of such Options and
(2) the Option Consideration. If any Shares, Options or Convertible
Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be
the net amount received by the Company therefor. If any Shares,
Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration
other than cash received by the Company will be the fair value of
such consideration, except where such consideration received by the
Company consists of marketable securities, in which case the amount
of consideration received by the Company will be the Weighted
Average Price of such securities on the date of receipt of such
securities. If any Shares, Options or Convertible Securities are
issued to the owners of the non-surviving entity in connection with
any merger in which the Company is the surviving entity, the amount
of consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving
entity as is attributable to such Shares, Options or Convertible
Securities, as the case may be. The fair value of any consideration
other than cash or securities will be determined jointly by the
Company and the holders of Notes, 2004 Notes, Warrants and 2004
Warrants representing at least two-thirds (2/3) of the aggregate
number of shares of Common Stock obtainable upon conversion of the
Notes (at the Fixed Conversion Price) and the 2004 Notes (at the
Fixed Conversion Price set forth therein) then outstanding and
exercise of the Warrants and the 2004 Warrants then outstanding. If
such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the “
Valuation Event ”), the fair value of such
consideration will be determined within five (5) Business Days
after the tenth (10th) day following the Valuation Event by an
independent, reputable appraiser jointly selected by the Company
and the holders representing at least two-thirds (2/3) of the
aggregate principal amount of the Notes then outstanding. The
determination of such appraiser shall be final and binding upon all
parties absent error, and the fees and expenses of such appraiser
shall be borne by the Company.
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(E)
Record Date
. If the Company takes a record of
the holders of Shares for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Shares, Options
or in Convertible Securities or (2) to subscribe for or purchase
Shares, Options or Convertible Securities, then such record date
will be deemed to be the date of the issue or sale of the Shares
deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of
the granting of such right of subscription or purchase, as the case
may be.
(F)
Certain Definitions
. For purposes of this Section
2(f), the following terms have the respective meanings set forth
below:
(I)
“ Approved Stock Plan
” means any employee benefit plan that has been approved by
the Board of Directors and stockholders of the Company prior to the
date of the Securities Purchase Agreement and listed on Schedule
3(c) thereto, pursuant to which the Company’s securities may
be issued to any employee, officer or director for services
provided to the Company.
(II)
“ Black-Scholes Value
” of any Options shall mean the sum of the amounts resulting
from applying the Black-Scholes pricing model to each such
Option, which calculation is made with the following inputs: (i)
the “option striking price” being equal to the lowest
exercise price possible under the terms of such Option on the date
of the issuance of such Option (the “ Valuation Date
”), (ii) the "interest rate" being equal to the Federal
Reserve US H.15 T Note Treasury Constant Maturity 1 Year rate on
the Valuation Date (as reported by Bloomberg through its "ALLX
H15T" function (accessed by typing "ALLX H15T" [GO] on a Bloomberg
terminal, and inserting the date of the Valuation Date and then
looking at the row entitled "Treas Const Mat 1 Year" under the
column entitled "Previous Value")), or if such rate is not
available then such other similar rate as mutually agreed to by the
Company and the holders of Notes, 2004 Notes, Warrants and 2004
Warrants representing at least two-thirds (2/3) of the aggregate
number of shares of Common Stock obtainable upon conversion of the
Notes (at the Fixed Conversion Price) and the 2004 Notes (at the
Fixed Conversion Price set forth therein) then outstanding and
exercise of the Warrants and the 2004 Warrants then outstanding,
(iii) the “time until option expiration” being the time
from the Valuation Date until the expiration date of such Option,
(iv) the “current stock price” being equal to the
Weighted Average Price of the Common Stock on the Valuation Date,
(v) the “volatility” being the 100-day historical
volatility of the Common Stock as of the Valuation Date (as
reported by the Bloomberg “HVT” screen), and (vi) the
“dividend rate” being equal to zero. Within three (3)
Business Days after the Valuation Date, each of the Company and the
holder of this Note shall deliver to the other a written
calculation of its determination of the Black-Scholes Value of the
Options. If the Holder and the Company are unable to agree upon the
calculation of the Black-Scholes Value of the Options within five
(5) Business Days of the Valuation Date, then the Company shall
submit via facsimile the disputed calculation to an investment
banking firm (jointly selected by the Company and the holders of
Notes, 2004 Notes, Warrants and 2004 Warrants representing at least
two-thirds (2/3) of the aggregate number of shares of Common Stock
obtainable upon conversion of the Notes (at the Fixed Conversion
Price) and the 2004 Notes (at the Fixed Conversion Price set forth
therein) then outstanding and exercise of the
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Warrants and the 2004 Warrants then
outstanding) within seven (7) Business Days of the Valuation Date.
The Company shall cause such investment banking firm to perform the
calculations and notify the company and the Holder of the results
no later than ten (10) Business Days after the Valuation Date. Such
investment banking firm’s calculation of the Black-Scholes
Value of the Options shall be deemed conclusive absent error. The
Company shall bear the fees and expenses of such investment banking
firm for providing such calculation.
(III)
“ Convertible
Securities ” means any stock or securities (other than
Options) directly or indirectly convertible into or exchangeable or
exercisable for Shares.
(IV)
“ Exempted Issuances
” shall mean: (A) Shares issued or deemed to have been
issued by the Company pursuant to an Approved Stock Plan; (B)
Shares issued or deemed to have been issued upon the conversion,
exchange or exercise of any Option or Convertible Security
outstanding on the date prior to the Issuance Date and set forth in
Schedule 3(c) to the Securities Purchase Agreement, provided that
the terms of such Option or Convertible Security are not amended or
otherwise modified on or after the date of the Securities Purchase
Agreement, and provided that the conversion price, exchange price,
exercise price or other purchase price is not reduced, adjusted or
otherwise modified and the number of Shares issued or issuable is
not increased (whether by operation of, or in accordance with, the
relevant governing documents or otherwise) on or after the date of
the Securities Purchase Agreement; (C) Shares issued or deemed to
have been issued pursuant to a Qualifying Issuance (as defined
below), provided that the terms of the securities included in such
Qualifying Issuance are not amended or otherwise modified on or
after the date such Qualifying Issuance is consummated and provided
that the conversion price, exchange price, exercise price or other
purchase price is not reduced, adjusted or otherwise modified and
the number of Shares issued or issuable is not increased (whether
by operation of, or in accordance with, the relevant governing
documents or otherwise) on or after the date such Qualifying
Issuance is consummated; and (D) Shares issued or deemed to have
been issued by the Company upon conversion of the Notes or the 2004
Notes or exercise of the Warrants or the 2004 Warrants.
(V)
“ Options ” means
any rights, warrants or options to subscribe for or purchase Shares
or Convertible Securities.
(VI)
“ Qualifying Issuance
” shall mean the issuance by the Company of Shares,
Convertible Securities or Options, or any combination thereof, (A)
which is consummated prior to January 1, 2006, (B) which is for
gross proceeds, which, when added to the gross proceeds from all
prior or concurrent Qualifying Issuances, does not exceed
$20,000,000 in the aggregate, (C) which includes the issuance, or
deemed issuance of Shares (each as determined through the
application of subsections (A), (B), (C), (D), (E) and (F) of
Section 2(f)(i)) at a net price per share of not less than $1.55
(subject to adjustment for stock splits, stock dividends, stock
combination and other similar transactions after the date of the
Securities Purchase Agreement), (D) which does not include
securities which have or may have a Variable Price (as defined in
Section 2(f)(iii)), provided that, for purposes of this definition
of “ Qualifying Issuance ,” a Variable Price
shall not include customary anti-dilution provisions no
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more favorable to the holders of
such securities than those contained in this Section 2(f)(i), (E)
the proceeds of which are used by the Company solely for the
drilling and production of the Company’s and its
Subsidiaries’ hydrocarbon properties in which the original
holders of the Notes were granted overriding royalty interests
pursuant to the Conveyances of Overriding Royalty Interests (as
defined in the Securities Purchase Agreement), (F) at a time at
which the Conveyances of Overriding Royalty Interests are in full
force and effect, and the Company and its Subsidiaries are in
compliance with, and have not breached, the Conveyances of
Overriding Royalty Interests, and (G) subsequent to which the
Company fully complies with its obligations under Section 4(f) of
the Securities Purchase Agreement.
(ii)
Adjustment of Fixed Conversion
Price upon Subdivision or Combination of Common Stock
. If the Company at any time on or
after the Issuance Date subdivides (by any stock split, stock
dividend, recapitalization or otherwise) outstanding Shares into a
greater number of shares, the Fixed Conversion Price in effect
immediately prior to such subdivision will be proportionately
reduced. If the Company at any time on or after the Issuance Date
combines (by combination, reverse stock split or otherwise) its
outstanding Shares into a smaller number of shares, the Fixed
Conversion Price in effect immediately prior to such combination
will be proportionately increased.
(iii)
Holder’s Right of
Alternative Conversion Price Following Issuance of Convertible
Securities . If the
Company in any manner issues or sells any Options or Convertible
Securities at any time on or after the Issuance Date that are
convertible into or exchangeable or exercisable for Shares at a
price that varies or may vary with the market price of the Shares,
including by way of one or more resets to a fixed price or
increases in the number of Shares issued or issuable, or at a price
that upon the passage of time or the occurrence of certain events
automatically is reduced or is adjusted or at the option of any
Person may be reduced or adjusted, whether or not based on a
formulation of the then current market price of the Shares (each of
the formulations, reductions or adjustment provisions for such
variable price being herein referred to as a “ Variable
Price ”), then the Company shall provide written notice
thereof via facsimile and overnight courier to the Holder (“
Variable Notice ”) on the date of issuance of such
Convertible Securities or Options. From and after the date the
Company issues any such Convertible Securities or Options with a
Variable Price, the Holder shall have the right, but not the
obligation, in its sole discretion to substitute the Variable Price
for the Conversion Price upon conversion of any Principal by
designating in the Conversion Notice delivered upon conversion of
such Principal that, solely for purposes of such conversion, the
Holder is relying on the Variable Price rather than the Conversion
Price then in effect. The Holder’s election to rely on a
Variable Price for a particular conversion of Principal shall not
obligate the Holder to rely on a Variable Price for any future
conversions of Principal.
(iv)
Other Events
. If any event occurs of the type
contemplated by the provisions of this Section 2(f) but not
expressly provided for by such
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provisions (including the granting
of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company’s Board of Directors
will make an appropriate adjustment in
