WARRANT AGREEMENT
THESE SECURITIES AND THE SECURITIES
ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933
AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION
STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE
REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT
FROM SUCH REGISTRATION.
Hybrid Fuel Systems, Inc.
WARRANT NUMBER. November 101
Dated: November 4, 2005
Hybrid Fuel Systems, Inc.., a corporation
organized under the laws of the State
of Georgia (the "Company"), hereby
certifies that, for value received from
Dutchess Private Equities Fund, II, L.P.,
("Holder"), is entitled, subject to
the terms set forth below, to purchase from
the Company up to a total of eighty
five thousand dollars ($85,000) worth of
shares of Common Stock, $.001 par value
per share (the "Common Stock"), of the
Company (each such share, a "Warrant
Share" and all such shares, the "Warrant
Shares") at an exercise price equal to
the Fixed Conversion Price (as defined in
the Debenture Agreement of even date
between the Company and the original
Holder). The Warrant may be exercised on a
cashless basis anytime after issuance
through and including the fifth (5th)
anniversary of its original issuance (the
"Expiration Date"), subject to the
following terms and conditions:
1. Registration of Warrant. The Company shall register this
Warrant,
upon records to be maintained by the
Company for that purpose (the "Warrant
Register"), in the name of the record
Holder hereof from time to time. The
Company may deem and treat the registered
Holder of this Warrant as the absolute
owner hereof for the purpose of any
exercise hereof or any distribution to the
Holder, and for all other purposes, and the
Company shall not be affected by
notice to the contrary.
2. Registration of Transfers and Exchanges.
(a) The Company or the transfer agent shall enter or record
the transfer of any portion of this Warrant
in the Warrant Register, upon
surrender of this Warrant to the Company at
the office specified in or pursuant
to Section 3(b). Upon any such registration
or transfer, a new warrant to
purchase Common Stock, in substantially the
form of this Warrant (any such new
warrant, a "New Warrant"), evidencing the
portion of this Warrant so transferred
shall be issued to the transferee and a New
Warrant evidencing the remaining
portion of this Warrant not so transferred,
if any, shall be issued to the
transferring Holder. The acceptance of the
New Warrant by the transferee thereof
shall be deemed the acceptance of such
transferee of all of the rights and
obligations of a holder of a Warrant.
1
<PAGE>
(b) This Warrant is exchangeable, upon the surrender hereof by
the Holder to the office of the Company
specified in or pursuant to Section 3(b)
for one or more New Warrants, evidencing in
the aggregate the right to purchase
the number of Warrant Shares which may then
be purchased hereunder. Any such New
Warrant will be dated the date of such
exchange.
3. Duration and Exercise of Warrants.
(a) This Warrant shall be exercisable by the registered Holder
on any business day before 5:00 P.M.,
Boston time, at any time and from time to
time on or after the date hereof to and
including the Expiration Date. At 5:00
P.M., Boston time on the Expiration Date,
the portion of this Warrant not
exercised prior thereto shall be and become
void and of no value. Prior to the
Expiration Date, the Company may not call
or otherwise redeem this Warrant
without the prior written consent of the
Holder.
(b) Subject to Sections 2(b), 6 and 10, upon surrender of this
Warrant, with the Form of Election to
Purchase attached hereto duly completed
and signed, to the Company at its address
for notice set forth in Section 12 and
upon payment of the Exercise Price
multiplied by the number of Warrant Shares
that the Holder intends to purchase
hereunder, in the manner provided hereunder,
all as specified by the Holder in the Form
of Election to Purchase, the Company
shall promptly (but in no event later than
5 business days after the Date of
Exercise (as defined herein)) issue or
cause to be issued and cause to be
delivered to or upon the written order of
the Holder and in such name or names
as the Holder may designate, a certificate
for the Warrant Shares issuable upon
such exercise, free of restrictive legends
except (i) either in the event that a
registration statement covering the resale
of the Warrant Shares and naming the
Holder as a selling stockholder thereunder
is not then effective or the Warrant
Shares are not freely transferable without
volume restrictions pursuant to Rule
144(k) promulgated under the Securities Act
of 1933, as amended (the "Securities
Act"), or (ii) if this Warrant shall have
been issued pursuant to a written
agreement between the original Holder and
the Company, as required by such
agreement. In the case of (i) above, the
Warrant Shares will bear a Securities
Act restrictive legend. Any person so
designated by the Holder to receive
Warrant Shares shall be deemed to have
become holder of record of such Warrant
Shares as of the Date of Exercise (as
defined in this subsection) of this
Warrant. A "Date of Exercise" means the
date on which the Company shall have
received (i) this Warrant (or any New
Warrant, as applicable), with the Form of
Election to Purchase attached hereto (or
attached to such New Warrant)
appropriately completed and duly signed,
and (ii) payment of the Exercise Price
for the number of Warrant Shares so
indicated by the holder hereof to be
purchased.
2
<PAGE>
(c) This Warrant shall be exercisable, either in its entirety
or, from time to time, for a portion of the
number of Warrant Shares. If less
than all of the Warrant Shares which may be
purchased under this Warrant are
exercised at any time, the Company shall
issue or cause to be issued, at its
expense, a New Warrant evidencing the right
to purchase the remaining number of
Warrant Shares for which no exercise has
been evidenced by this Warrant. In the
event the Common Stock representing the
Warrant Shares is not delivered per the
written instructions of the Purchaser,
within three (3) business days after the
Notice of Election and Warrant is received
by the Company (the "Delivery Date"),
then in such event the Company shall pay to
Holder two percent (2.0%) in cash,
of the dollar value of the Warrant Shares
to be issued per each day after the
Delivery Date that the Warrant Shares are
not delivered. The Company
acknowledges that its failure to deliver
the Warrant Shares by the Delivery Date
will cause the Holder to suffer damages in
an amount that will be difficult to
ascertain. Accordingly, the parties agree
that it is appropriate to include in
this Warrant a provision for liquidated
damages. The parties acknowledge and
agree that the liquidated damages provision
set forth in this section represents
the parties' good faith effort to quantify
such damages and, as such, agree that
the form and amount of such liquidated
damages are reasonable and will not
constitute a penalty. The payment of
liquidated damages shall not relieve the
Company from its obligations to deliver the
Common Stock pursuant to the terms
of this Warrant. The Company shall make any
payments incurred under this Section
3 in immediately available funds within
five (5) business days from the date of
issuance of the applicable Warrant Shares.
Nothing herein shall limit Holder's
right to pursue actual damages or cancel
the Notice of Election for the
Company's failure to issue and deliver
Common Stock to the Holder within seven
(7) business days following the Delivery
Date.
4. Registration Rights. During the term of this Warrant, the
Company
agrees to use its best efforts to file,
within twenty-one (21) calendar days of
the demand by Holder, a registration
statement with the Securities and Exchange
Commission covering the resale of the
Warrant Shares and naming the Holder as a
selling stockholder thereunder (unless the
Warrant Shares are otherwise freely
transferable without volume restrictions
pursuant to Rule 144(k) or Rule 144A
promulgated under the Act). The
registration rights granted to the Holder
pursuant to this Section shall continue
until all of the Holder's Warrant Shares
have been sold in accordance with an
effective registration statement or upon
the Expiration Date, or as otherwise
provided in the Debenture Registration
Rights Agreement entered into between the
Company and the original Holder as of
the original issuance date hereof. The
Company will pay all registration
expenses in connection therewith.
5. Payment of Taxes. The Company will pay all documentary stamp
taxes attributable to the issuance of
Warrant Shares upon the exercise of this
Warrant; provided, however, that the
Company shall not be required to pay any
tax that may be payable in respect of any
transfer involved in the registration
of any certificates for Warrant Shares or
Warrants in a name other than that of
the Holder. The Holder shall be responsible
for all other tax liability that may
arise as a result of holding or
transferring this Warrant or receiving Warrant
Shares upon exercise hereof.
3
<PAGE>
6. Replacement of Warrant. If this Warrant is mutilated, lost,
stolen or destroyed, the Company shall
issue or cause to be issued in exchange
and substitution for and upon cancellation
hereof, or in lieu of and
substitution for this Warrant, a New
Warrant, but only upon receipt of evidence
reasonably satisfactory to the Company of
such loss, theft or destruction and
indemnity, if requested, satisfactory to
it. Applicants for a New Warrant under
such circumstances shall also comply with
such other reasonable regulations and
procedures and pay such other reasonable
charges as the Company may prescribe.
7. Reservation of Warrant Shares. The Company covenants that it
will
at all times reserve and keep available out
of the aggregate of its authorized
but unissued Common Stock, solely for the
purpose of enabling it to issue
Warrant Shares upon exercise of this
Warrant as herein provided, the number of
Warrant Shares which are then issuable and
deliverable upon the exercise of this
entire Warrant, free from preemptive rights
or any other actual contingent
purchase rights of persons other than the
Holder (taking into account the
adjustments and restrictions of Section 8).
The Company covenants that all
Warrant Shares that shall be so issuable
and deliverable shall, upon issuance
and the payment of the applicable Exercise
Price in accordance with the terms
hereof, be duly and validly authorized,
issued and fully paid and nonassessable.
If the Company does not have a sufficient
amount of Common Stock authorized to
reserve for the Warrant Shares, it shall
use its best efforts to place before
shareholder vote a proposal to increase the
number of its authorized shares as
soon as reasonably practicable.
8. Certain Adjustments. The Exercise Price and number of
Warrant
Shares issuable upon exercise of this
Warrant are subject to adjustment from
time to time as set forth in this Section
8. Upon each such adjustment of the
Exercise Price pursuant to this Section 8,
the Holder shall thereafter prior to
the Expiration Date be entitled to
purchase, at the Exercise Price resulting
from such adjustment, the number of Warrant
Shares obtained by multiplying the
Exercise Price in effect immediately prior
to such adjustment by the number of
Warrant Shares issuable upon exercise of
this Warrant immediately prior to such
adjustment and dividing the product thereof
by the Exercise Price resulting from
such adjustment.
(a) If the Company, at any time while this Warrant is
outstanding, (i) shall pay a stock dividend
(except scheduled dividends paid on
outstanding preferred stock as of the date
hereof which contain a stated
dividend rate) or otherwise make a
distribution or distributions on shares of
its Common Stock or on any other class of
capital stock and not the Common Stock
payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common
Stock into a larger number of shares, or
(iii) combine outstanding shares of
Common Stock into a smaller number of
shares, the Exercise Price shall be
multiplied by a fraction of which the
numerator shall be the number of shares of
Common Stock (excluding treasury shares, if
any) outstanding before such event
and of which the denominator shall be the
number of shares of Common Stock
(exc
