UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
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14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
GALAXY ENERGY CORPORATION
(Name of Registrant As Specified in its Charter)
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GALAXY ENERGY CORPORATION
1331 - 17TH STREET, SUITE 730
DENVER, COLORADO 80202
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 21, 2004
To the Shareholders of Galaxy Energy Corporation:
A special meeting of shareholders of Galaxy Energy Corporation, a
Colorado corporation (the "Company"), will be held on Thursday, October 21,
2004, at 10:00 a.m., local time, at the offices of the Galaxy, 1001 Brickell Bay
Drive, Suite 2202, Miami, Florida, for the following purposes:
1. To consider and vote upon a proposal to amend the Company's 2003
Stock Option Plan to increase from 3,500,000 to 6,500,000 the aggregate number
of shares of Common Stock authorized for issuance under the Plan;
2. To consider and vote upon a proposal to approve the issuance of
shares of Common Stock upon conversion of the Company's issued or issuable
convertible notes, in lieu of cash payments on the convertible notes, and upon
the exercise of the Company's issued or issuable warrants, to the extent that
such issuance would require shareholder approval under the rules of the American
Stock Exchange;
3. To consider and vote upon a proposal to amend the Articles of
Incorporation of the Company to increase from 100,000,000 to 400,000,000 the
number of authorized shares of Common Stock; and
4. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed September 21, 2004 as the record date
for the determination of shareholders entitled to notice of and to vote at the
meeting or any adjournment thereof. Only shareholders of record at the close of
business on the record date are entitled to notice of and to vote at the
meeting. A complete list of such shareholders will be available for examination
at the offices of the Company in Denver, Colorado, during ordinary business
hours for a period beginning September 23, 2004 and continuing through the
meeting.
All shareholders are cordially invited to attend the meeting.
SHAREHOLDERS ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING, TO
COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND TO RETURN IT PROMPTLY IN THE
POSTAGE-PAID RETURN ENVELOPE PROVIDED. If a shareholder who has returned a proxy
attends the meeting in person, such shareholder may revoke the proxy and vote in
person on all matters submitted at the meeting.
By order of the Board of Directors,
Marc E. Bruner
President and Chief Executive Officer
Denver, Colorado
September 21, 2004
Galaxy Energy Corporation Proxy Statement - Page 19
GALAXY ENERGY CORPORATION
1331 - 17TH STREET, SUITE 730
DENVER, COLORADO 80202
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD OCTOBER 21, 2004
INTRODUCTION
The accompanying proxy is solicited by and on behalf of the Board of
Directors of the Company for use at a special meeting of shareholders of the
Company to be held at the time and place and for the purposes set forth in the
foregoing notice. The approximate date on which this proxy statement and the
accompanying proxy were first sent to shareholders of the Company is September
21, 2004.
Shares represented by valid proxies will be voted at the meeting in
accordance with the directions given. If no direction is indicated, the shares
will be voted for the three proposals described in the foregoing notice.
The Board of Directors is not aware of any other matter to be presented
for consideration at the meeting. If any other matter is properly presented for
action at the meeting, the proxy holders will vote the proxies in accordance
with their best judgment in such matters. The proxy holders may also, if it is
deemed to be advisable, vote such proxies to adjourn the meeting or to recess
the meeting from time to time.
Any shareholder of the Company returning a proxy has the right to
revoke the proxy at any time before it is exercised by giving written notice of
such revocation to the Company addressed to Richard E. Kurtenbach, Vice
President - Administration, Galaxy Energy Corporation, 1331 - 17th Street, Suite
730, Denver, Colorado 80202; however, no such revocation shall be effective
until such notice of revocation has been received by the Company at or prior to
the meeting.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
Only holders of record of Common Stock at the close of business on
September 21, 2004, the record date for the meeting, are entitled to notice of
and to vote at the meeting or any adjournment(s) thereof. The presence of a
majority of the Common Stock outstanding on the record date is necessary to
constitute a quorum. On the record date for the meeting, there were issued and
outstanding 58,817,509 shares of Common Stock. At the meeting, each shareholder
of record on the record date will be entitled to one vote for each share
registered in such shareholder's name on the record date. The Articles of
Incorporation of the Company deny cumulative voting rights. The following table
provides certain information as to the share ownership of officers and directors
individually and as a group, and the holders of more than 5% of the our Common
Stock as of September 21, 2004:
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)<F2>
Marc A. Bruner 12,628,354 (3)<F3> (4)<F4> 21.4%
29 Blauenweg
Metzerlen, Switzerland 4116
Galaxy Energy Corporation Proxy Statement - Page 1
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)<F1> BENEFICIAL OWNERSHIP PERCENT OF CLASS (2)<F2>
Resource Venture Management 5,222,729 (4)<F4> 8.9%
29 Blauenweg
Metzerlen, Switzerland 4116
Bruner Group, LLP 4,500,000 (4)<F4> 7.7%
1775 Sherman Street #1375
Denver, Colorado 80203
DL Family Partnership 3,000,000 5.1%
P.O. Box 656
Casper, Wyoming 82602
Marc E. Bruner 1,612,500 (4)<F4>(5)<F5> 2.7%
Carmen Lotito 1,075,000 (4)<F4>(6)<F6> 1.8%
Dr. James Edwards 127,500 (7)<F7> *
Robert Thomas Fetters, Jr. 107,500 (8)<F8> *
Thomas W. Rollins 107,500 (8)<F8> *
Nathan C. Collins 107,500 (8)<F8> *
Cecil D. Gritz 93,750 (9)<F9> *
Richard E. Kurtenbach 56,250 (10)<F10> *
Gerri Baratz 18,750 (11)<F11> *
All officers and directors as a group (9 persons) 3,306,250 (12)<F12> 5.5%
*less than one percent (1%)
- --------------
<FN>
(1)<F1> To our knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named
in the table has sole voting and investment power with respect to the
shares set forth opposite such person's name.
(2)<F2> This table is based on 58,817,509 shares of Common Stock outstanding
as of September 21, 2004. If a person listed on this table has the
right to obtain additional shares of Common Stock within sixty (60)
days from September 21, 2004, the additional shares are deemed to be
outstanding for the purpose of computing the percentage of class owned
by such person, but are not deemed to be outstanding for the purpose
of computing the percentage of any other person.
(3)<F3> Included in Mr. Bruner's share ownership are shares owned of record by
Resource Venture Management and Bruner Group, LLP. Mr. Bruner is a
control person of both these entities. Also included in Mr. Bruner's
share ownership are 203,390 shares issuable upon exercise of warrants.
(4)<F4> This shareholder has signed a lock-up agreement restricting the sale
or transfer of one-half of the shares owned until September 24, 2004
and the remaining half until March 24, 2005.
(5)<F5> Includes 112,500 shares issuable upon exercise of stock options.
(6)<F6> Includes 75,000 shares issuable upon exercise of stock options.
(7)<F7> Includes 127,500 shares issuable upon exercise of stock options.
(8)<F8> Includes 107,500 shares issuable upon exercise of stock options.
Galaxy Energy Corporation Proxy Statement - Page 2
(9)<F9> Includes 93,750 shares issuable upon exercise of stock options.
(10)<F10> Includes 56,250 shares issuable upon exercise of stock options.
(11)<F11> Includes 18,750 shares issuable upon exercise of stock options.
(12)<F12> Includes 806,250 shares issuable upon exercise of stock options.
</FN>
CHANGES IN CONTROL
There are no agreements known to management that may result in a change
of control of our company.
VOTING PROCEDURES AND TABULATION
The Company will appoint one or more inspectors of election to act at
the meeting and to make a written report thereof. Prior to the meeting, the
inspectors will sign an oath to perform their duties in an impartial manner and
to the best of their abilities. The inspectors will ascertain the number of
shares outstanding and the voting power of each of such shares, determine the
shares represented at the meeting and the validity of proxies and ballots, count
all votes and ballots and perform certain other duties as required by law. The
inspectors will tabulate the number of votes cast for, against or abstained from
the three proposals described in the foregoing notice.
The proposals to amend the Company's Stock Option Plan and to issue
shares of Common Stock upon the conversion of convertible notes and upon the
exercise of warrants to the extent such issuance would require shareholder
approval under the rules of the American Stock Exchange must be approved by a
majority of the shares of Common Stock present or represented and voting on the
applicable proposal at the meeting. If a shareholder abstains from voting on
this proposal, it will have the same effect as a vote cast "AGAINST" such
proposal.
Votes cast in favor of the amendment to the Articles of Incorporation
of the Company to increase the number of authorized shares of Common Stock must
exceed votes cast against such amendment for the amendment to be approved by the
shareholders. If a shareholder abstains from voting on this proposal, it will
not have any effect.
If the Company receives a signed proxy card with no indication of the
manner in which shares are to be voted on a particular proposal, such shares
will be voted in accordance with the recommendation of the Board of Directors
for such proposal.
Brokers who hold shares in street name only have the authority to vote
on certain items when they have not received instructions from beneficial
owners. Any "broker non-votes" will have no effect on the proposal regarding
amendment of the Articles of Incorporation, but would have the same effect as a
vote cast "AGAINST" the proposals regarding amendment of the Stock Option Plan
and issuance of shares.
Galaxy Energy Corporation Proxy Statement - Page 3
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q. WHAT PROPOSALS ARE SHAREHOLDERS BEING ASKED TO CONSIDER AT THE UPCOMING
SPECIAL MEETING?
A. Shareholders will vote upon a proposal to amend the Company's 2003
Stock Option Plan to increase from 3,500,000 to 6,500,000 the aggregate
number of shares of Common Stock authorized for issuance under such
plan. The Company is also seeking approval to issue Common Stock at a
price below the greater of the Common Stock's book or market value on
August 19, 2004 upon the conversion of or in lieu of cash payments on
the convertible notes and the exercise of the warrants, each of which
were or may be issued pursuant to the terms of a Securities Purchase
Agreement entered into on August 19, 2004, to the extent such issuance
equals or exceeds 20% of the Company's outstanding Common Stock before
the issuance of the convertible notes and warrants on August 19, 2004.
Finally, the Company is seeking approval to amend the Articles of
Incorporation of the Company to increase from 100,000,000 to
400,000,000 the number of authorized shares of Common Stock.
Q. WHY IS THE COMPANY PROPOSING TO AMEND THE STOCK OPTION PLAN?
A. The purposes of the Company's 2003 Stock Option Plan are to attract and
retain the best available individuals for positions of substantial
responsibility, to provide additional incentive to such individuals,
and to promote the success of the Company's business by aligning the
financial interests of employees and consultants providing personal
services to the Company or its affiliates with long-term shareholder
value. As of August 12, 2004, options for all of the 3,500,000 shares
authorized for issuance under the Stock Option Plan had been granted.
The Company is seeking approval to amend the Stock Option Plan to
increase from 3,500,000 to 6,500,000 the number of shares of Common
Stock authorized for issuance thereunder so that it may continue to use
the Stock Option Plan to provide an incentive to the employees of the
Company and its subsidiaries, which would align the interests of the
employees with the objectives of the shareholders.
Q. WHY IS THE COMPANY SEEKING SHAREHOLDER APPROVAL TO ISSUE COMMON STOCK
UPON THE CONVERSION OF OR IN LIEU OF CASH PAYMENTS ON THE CONVERTIBLE
NOTES AND EXERCISE OF WARRANTS TO THE EXTENT SUCH ISSUANCE EQUALS OR
EXCEEDS 20% OF THE COMPANY'S OUTSTANDING COMMON STOCK?
A. The Company is applying for listing of its Common Stock on the American
Stock Exchange ("AMEX"). The AMEX rules require shareholder approval
for any sale, issuance, or potential issuance of stock at a price below
the greater of the book or market value, where the amount of stock
being issued or potentially issuable is equal to or in excess of 20% of
the common stock or outstanding before the issuance. Because of this
rule, the Company is seeking approval to issue Common Stock upon the
conversion of or in lieu of cash payments on the convertible notes and
the exercise of the warrants to the extent such issuance would equal or
exceed 20% of the Company's outstanding Common Stock before the
issuance of the convertible notes and warrants. If due to the 20% AMEX
limitation the Company is unable to issue sufficient shares of Common
Stock to satisfy exercise of the warrants, conversion of the
convertible notes, or payments required on the convertible notes that
the Company cannot satisfy in cash, the Company would, in the case of
the convertible notes, be in default and subject to penalties, and, in
the case of the warrants, be subject to an obligation to redeem that
portion of the warrants with respect to which shares cannot be issued.
Galaxy Energy Corporation Proxy Statement - Page 4
Q. WHY WAS THE PRIVATE PLACEMENT DONE?
A. The Company issued $15 million in convertible notes and related
warrants in August 2004 and plans to issue the $5 million of additional
convertible notes in the near future (subject to the prior satisfaction
of certain conditions) to fund the Company's coal bed methane
development program in the Powder River Basin of Wyoming. More
specifically, the funds will be used to drill 108 new wells and to
complete and connect these and 75 existing wells on the Company's
Leiter Area, Pipeline Ridge and Tower (West Recluse and Glasgow)
properties.
Q. WHAT HAPPENS IF THE SECOND PROPOSAL IS APPROVED?
A. If the second proposal is approved, then the owners of the convertible
notes may, at their option, convert their convertible notes into Common
Stock, and they may exercise their warrants for Common Stock, even if
the number of shares issued equals or exceeds 20% of the Company's
outstanding Common Stock before the issuance of the convertible notes
and warrants. Since the initial conversion price of the convertible
notes by the holders is $1.87 per share and the initial exercise price
of the warrants is $1.54 per share, the aggregate percentage of Common
Stock for which they would be convertible or exercisable could exceed
the 20% threshold.
Q. WHAT IF THE SECOND PROPOSAL IS NOT APPROVED?
A. If the second proposal does not receive shareholder approval, and if
the issuance equals or exceeds 20% of the Company's outstanding Common
Stock before the issuance of the convertible notes and warrants, then
the Company may be required to redeem for cash the portion of the
convertible notes and the portion of the warrants that is not
convertible or exercisable due to such 20% limitation. If the Company
does not have sufficient cash at such time to effect a redemption, the
Company will default on its obligations under the convertible notes and
warrants.
Q. CAN THE CONVERSION OF THE CONVERTIBLE NOTES AND THE EXERCISE OF THE
WARRANTS ALLOW THE INVESTORS TO OBTAIN CONTROL OF THE COMPANY?
A. No. The terms of the convertible notes and the warrants prohibit the
conversion of any principal under the convertible notes or the exercise
of any warrants which, after giving effect to such conversion or
exercise, would cause a note or warrant holder and its affiliates to
beneficially own at any time more than 4.99% of the outstanding Common
Stock of the Company. Accordingly, no note or warrant holder could ever
obtain control of the Company through conversion of the convertible
notes or exercise of the warrants.
Q. WHY DOES THE BOARD OF DIRECTORS RECOMMEND AMENDING THE ARTICLES OF
INCORPORATION OF THE COMPANY TO INCREASE ITS AUTHORIZED COMMON STOCK?
A. The total of the number of outstanding shares and the number of shares
issuable upon conversion of the notes and exercise of outstanding
options and warrants is approaching 100,000,000, which is the number of
shares of Common Stock presently authorized. The proposed amendment
would increase the number of authorized shares to 400,000,000 to
accommodate the anticipated future growth of the Company.
Galaxy Energy Corporation Proxy Statement - Page 5
PROPOSAL 1 - TO APPROVE AMENDMENT TO THE COMPANY'S
STOCK OPTION PLAN
The Company's 2003 Stock Option Plan (the "Stock Option Plan") was
adopted by the Board of Directors as of March 13, 2003. The Stock Option Plan
has been approved by the Company's shareholders. On August 12, 2004, the Board
of Directors adopted, subject to shareholder approval, an amendment to the Stock
Option Plan to increase from 3,500,000 to 6,500,000 the number of shares of
Common Stock authorized for issuance thereunder. A copy of the Stock Option
Plan, as amended, may be obtained upon written request to the Company at the
address listed on the front page of this Proxy Statement.
As of August 12, 2004, options for all of the 3,500,000 shares
authorized for issuance under the Stock Option Plan had been granted as set
forth below:
- --------------------------------------------------------------------------------------------------------------------
EXERCISE EXPIRATION
GRANTEE NUMBER PRICE DATE VESTING
- --------------------------------------------------------------------------------------------------------------------
Marc E. Bruner 750,000 $2.64 04/06/2014 Quarterly over 5 years
- --------------------------------------------------------------------------------------------------------------------
All executive officers as a group 2,375,000 $2.64 04/06/2014 Quarterly over 5 years
- --------------------------------------------------------------------------------------------------------------------
All directors who are not executive officers as 60,000 $1.00 05/15/2013 Immediate
a group 180,000 $3.51 03/02/2014 Immediate
60,000 $2.24 06/25/2014 Immediate
190,000 $1.30 08/12/2014 Immediate
- --------------------------------------------------------------------------------------------------------------------
Thomas G. Fails 75,000 $1.55 07/01/2014 Immediate
250,000 $1.55 07/01/2014 Quarterly over 5 years
- --------------------------------------------------------------------------------------------------------------------
Dirk Tromp 250,000 $1.50 04/28/2014 Quarterly over 5 years
- --------------------------------------------------------------------------------------------------------------------
All employees or consultants who are not 50,000 $1.50 04/28/2014 Quarterly over 1 year
executive officers 10,000 $1.30 08/12/2014 Quarterly over 1 year
- --------------------------------------------------------------------------------------------------------------------
The purposes of the Stock Option Plan are to attract and retain the
best available individuals for positions of substantial responsibility, to
provide additional incentive to such individuals, and to promote the success of
the Company's business by aligning the financial interests of employees and
consultants providing personal services to the Company or its affiliates with
long-term shareholder value. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
PROPOSED AMENDMENT TO THE STOCK OPTION PLAN. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS WILL BE VOTED IN FAVOR OF THE PROPOSAL UNLESS SHAREHOLDERS SPECIFY
OTHERWISE.
DESCRIPTION OF THE STOCK OPTION PLAN AS AMENDED BY THE PROPOSED AMENDMENT
The following is a summary of the Stock Option Plan incorporating the
proposed amendment and is qualified in its entirety by reference to the full
text of the Stock Option Plan as set forth in Appendix A to this proxy
statement.
GENERAL. Stock options granted under the Plan may be either "incentive
stock options," as defined in Section 422 of the Internal Revenue Code ("Code"),
or non-statutory options.
ADMINISTRATION. The Plan is administered by the Compensation Committee
of the board of directors (the "Committee").
PLAN BENEFITS. Because benefits under the Plan will depend on the
Committee's actions and the fair market value of Common Stock at various future
dates, it is not possible to determine the benefits that will be received by
officers and other employees if the Plan is approved by the shareholders.
Galaxy Energy Corporation Proxy Statement - Page 6
ELIGIBILITY. Incentive stock options may be granted only to employees
of the Company or its subsidiaries. Non-statutory stock options may be granted
under the Plan to employees, advisors and consultants of the Company, its
affiliates and subsidiaries, as well as to persons to whom offers of employment
as employees have been granted. The Committee, in its discretion, will select
the individuals to whom options will be granted, the time or times at which such
options are granted, and the number of shares subject to each grant.
SHARES SUBJECT TO THE PLAN. The Company may grant optionees from time
to time options to purchase an aggregate of up to 6,500,000 shares of Common
Stock. As of the date of this Proxy Statement, options to purchase 3,500,000
have been granted.
LIMITATIONS. The Plan provides that the maximum aggregate number of
Company common shares underlying all options to be granted to any one person may
not exceed 60% of authorized options.
TERMS AND CONDITIONS OF OPTION GRANTS. Each option is to be evidenced
by an option agreement between the Company and the individual optionee and is
subject to the following additional terms and conditions:
EXERCISE PRICE. The Committee will determine the exercise
price for the shares of Common Stock underlying each option at the time
the option is granted. The exercise price for shares under an incentive
stock option may not be less than 100% of the fair market value of the
Common Stock on the date such option is granted. The fair market value
price for a share of Company Common Stock underlying each option is the
closing price per share on the date the option is granted.
EXERCISE OF OPTION; FORM OF CONSIDERATION. The Committee will
determine when options become exercisable. The means of payment for
shares issued upon exercise of an option will be specified in each
option agreement. The Plan permits payment to be made by cash, check,
broker assisted same day sales, and by delivery of other shares of
Company stock which they have owned for six (6) months or more as of
the exercise date.
TERM OF OPTION. The term of an option may be no more than ten
(10) years from the date of grant. No option may be exercised after the
expiration of its term.
TERMINATION OF OPTION EXERCISE PERIOD. Unless otherwise
expressly provided in any option agreement, the unexercised portion of
any option granted to an optionee shall automatically terminate one
year after the date on which the optionee's employment or service is
terminated for any reason, other than by reason of cause, voluntary
termination of employment or service by the optionee, or the optionee's
death. Options shall terminate immediately upon the termination of an
optionee's employment for cause or 30 days after the voluntary
termination of employment or service by the optionee. If an optionee's
employment or consulting relationship terminates as a result of his or
her death, then all options he or she could have exercised at the date
of death, or would have been able to exercise within the following year
if the employment or consulting relationship had continued, may be
exercised within the one year period following the optionee's death by
his or her estate or by the person who acquired the exercise right by
bequest or inheritance.
NONTRANSFERABILITY OF OPTIONS. Options granted under the Plan
are not transferable other than by will or the laws of descent and
distribution and may be exercised during the optionee's lifetime only
by the optionee, except that a non-statutory stock option may be
transferred to a
Galaxy Energy Corporation Proxy Statement - Page 7
family member or trust for the benefit of a family member if the
Committee's prior written consent is obtained.
OTHER PROVISIONS. An option agreement may contain other terms,
provisions, and conditions not inconsistent with the Plan, as may be
determined by the Committee.
REDEMPTION OF SHARES BY THE COMPANY. The Company has the right to
redeem any shares issues to any optionee upon exercise of the option granted to
him under the Plan immediately upon the termination of optionee's employment or
service arising from disability, the death of the optionee, the voluntary
termination of employment or services of the optionee, or the termination of
employment or services of the optionee for cause. The redemption price is the
fair market value of the shares on the date of the event of redemption.
ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR SALE OF ASSETS.
In the event that the Company's stock changes by reason of any stock split,
dividend, combination, reclassification or other similar change in the Company's
capital structure effected without the receipt of consideration, appropriate
adjustments shall be made in the number and class of shares of stock subject to
the Plan, the number and class of shares of stock subject to any option
outstanding under the Plan, and the exercise price for shares subject to any
such outstanding option.
In the event of a merger in which the Company's shareholders
immediately before the merger own 50% or more of the issued and outstanding
shares of stock of the resulting entity after the merger, then existing options
shall automatically convert into options to receive stock of the resulting
entity. Unless otherwise expressly provided in any option, the Committee in its
sole discretion may cancel, effective upon the date of the consummation of any
change of control, any option that remains unexercised on such date.
AMENDMENT AND TERMINATION OF THE PLAN. The Board may amend, alter,
suspend, or terminate the Plan, or any part thereof, at any time and for any
reason. However, the Company shall obtain shareholder approval for any amendment
to the Plan to the extent necessary and desirable to comply with applicable
laws. No such action by the Board or shareholders may alter or impair any option
previously granted under the Plan without the written consent of the optionee.
The Plan shall remain in effect until terminated by action of the Board or
operation of law.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE STOCK OPTION PLAN
The federal income tax consequences to the Company and its employees of
options granted under the Plan are complex and subject to change. The following
discussion is only a summary of the general rules applicable to the Plan.
Recipients of options granted under the Plan should consult their own tax
advisors since a taxpayer's particular situation may be such that some variation
of the rules described below will apply.
As noted above, options granted under the Stock Plan may be either
incentive stock options or non-qualified stock options. Incentive stock options
are options which are designated as such by the Company and which meet certain
requirements under Section 422 of the Code and the regulations thereunder. Any
option that does not satisfy these requirements will be treated as a
non-qualified stock option.
INCENTIVE STOCK OPTIONS. If an option granted under the Stock Plan is
treated as an incentive stock option, the optionee will not recognize any income
upon either the grant or the exercise of the option, and the Company will not be
allowed a deduction for federal tax purposes. Upon a sale of the shares, the tax
Galaxy Energy Corporation Proxy Statement - Page 8
treatment to the optionee and the Company will depend primarily upon whether the
optionee has met certain holding period requirements at the time he or she sells
the shares. In addition, as discussed below, the exercise of an incentive stock
option may subject the optionee to alternative minimum tax liability.
If an optionee exercise an incentive stock option and does not dispose
of the shares received within two years after the date such option was granted
or within one year after the transfer of the shares to him or her, any gain
realized upon the disposition will be characterized as long-term capital gain
and, in such case, the Company will not be entitled to a federal tax deduction.
If the optionee disposes of the shares either within two years after
the date the option is granted or within one year after the transfer of the
shares to him or her, such disposition will be treated as a disqualifying
disposition and an amount equal to the lesser of (1) the fair market value of
the shares on the date of exercise minus the exercise price, or (2) the amount
realized on the disposition minus the exercise price, will be taxed as ordinary
income to the optionee in the taxable year in which the disposition occurs.
(However, in the case of gifts, sales to related parties, and certain other
transactions, the full difference between the fair market value of the stock and
the purchase price will be treated as compensation income.) The excess, if any,
of the amount realized upon disposition over the fair market value at the time
of the exercise of the option will be treated as long-term capital gain if the
shares have been held for more than one year following the exercise of the
option. In the event of a disqualifying disposition, the Company may withhold
income taxes from the optionee's compensation with respect to the ordinary
income realized by the optionee as a result of the disqualifying disposition.
The exercise of an incentive stock option may subject an optionee to
alternative minimum tax liability. The excess of the fair market value of the
shares at the time an incentive stock option is exercised over the purchase
price of the shares is included in income for purposes of the alternative
minimum tax even though it is not included in taxable income for purposes of
determining the regular tax liability of an employee. Consequently, an optionee
may be obligated to pay alternative minimum tax in the year he or she exercises
an incentive stock option.
In general, there will be no federal income tax deductions allowed to
the Company upon the grant, exercise, or termination of an incentive stock
option. However, in the event an optionee sells or otherwise disposes of stock
received on the exercise of an incentive stock option in a disqualifying
disposition, the Company will be entitled to a deduction for federal income tax
purposes in an amount equal to the ordinary income, if any, recognized by the
optionee upon disposition of the shares, provided that the deduction is not
otherwise disallowed under the Code.
NONQUALIFIED STOCK OPTIONS. Nonqualified stock options granted under
the Stock Plan do not qualify as "incentive stock options" and will not qualify
for any special tax benefits to the optionee. An optionee generally will not
recognize any taxable income at the time he or she is granted a nonqualified
option. However, upon its exercise, the optionee will recognize ordinary income
for federal income tax purposes measured by the excess of the then fair market
value of the shares over the exercise price. The income realized by the optionee
will be subject to income and other employee withholding taxes.
The optionee's basis for determination of gain or loss upon the
subsequent disposition of shares acquired upon the exercise of a nonqualified
stock option will be the amount paid for such shares plus any ordinary income
recognized as a result of the exercise of such option. Upon disposition of any
shares acquired pursuant to the exercise of a nonqualified stock option, the
difference between the sale price and the optionee's basis in the shares will be
treated as a capital gain or loss and generally will be characterized as
long-term capital gain or loss if the shares have been held for more than one
year at their disposition.
Galaxy Energy Corporation Proxy Statement - Page 9
In general, there will be no federal income tax deduction allowed to
the Company upon the grant or termination of a nonqualified stock option or a
sale or disposition of the shares acquired upon the exercise of a nonqualified
stock option. However, upon the exercise of a nonqualified stock option, the
Company will be entitled to a deduction for federal income tax purposes equal to
the amount of ordinary income that an optionee is required to recognize as a
result of the exercise, provided that the deduction is not otherwise disallowed
under the Code.
EXECUTIVE COMPENSATION
The following table sets forth information about the remuneration of
our chief executive officers for the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
- -------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------------------------------------------
SECURITIES
OTHER RESTRICTED UNDER-
NAME AND ANNUAL STOCK LYING LTIP ALL OTHER
PRINCIPAL COMPENSA AWARD(S) OPTIONS/ PAYOUTS COMPENSA
POSITION YEAR SALARY ($) BONUS ($) -TION($) ($) SARS (#) ($) -TION($)
- -------------------------------------------------------------------------------------------------------------------
Marc E. Bruner 2003 $72,000 -0- -0- -0- -0- -0- -0-
President (1)<F1> 2002 $47,000 -0- -0- -0- -0- -0- -0-
- -------------------------------------------------------------------------------------------------------------------
Gregory C. 2002 -0- -0- -0- -0- -0- -0- -0-
Burnett 2001 -0- -0- -0- -0- -0- -0- -0-
President (2)<F2>
- -------------------------------------------------------------------------------------------------------------------
- ---------------
<FN>
(1)<F1> Mr. Bruner has been the President from November 13, 2002. The salary
shown above includes consulting fees paid to Mr. Bruner.
(2)<F2> Mr. Burnett was the President from December 17, 1999 to November 13,
2002.
</FN>
During the last fiscal year, there were no grants of stock options,
stock appreciation rights, benefits under long-term incentive plans or other
forms of compensation involving our officers. We reimburse our officers and
directors for reasonable expenses incurred during the course of their
performance.
DIRECTOR COMPENSATION
From April 1, 2003 through February 29, 2004, we paid our two outside
directors a stipend of $1,500 per month. On May 15, 2003, we also granted each
of them options to purchase 60,000 shares at $1.00 per share, exercisable
through May 15, 2013. One-third of these options vests each year beginning May
15, 2004.
Beginning March 1, 2004, we pay our outside directors $2,500 per month,
plus an additional $500 per month for each committee on which they serve.
Outside directors were also granted 60,000 stock options, which vested
immediately and are exercisable through March 2, 2014 at $3.51 per share. Each
January 1, beginning January 1, 2005, we will grant our outside directors
options to purchase 60,000 shares of Common Stock, which shall vest immediately
and be exercisable for ten years at the market price as of date of grant.
Galaxy Energy Corporation Proxy Statement - Page 10
PROPOSAL 2 - TO APPROVE THE ISSUANCE OF SHARES OF COMMON STOCK
UPON CONVERSION OF THE CONVERTIBLE NOTES, IN LIEU OF CASH PAYMENTS
ON THE CONVERTIBLE NOTES, AND UPON THE EXERCISE OF THE WARRANTS
TO THE EXTENT SUCH ISSUANCE WOULD REQUIRE SHAREHOLDER APPROVAL UNDER
THE RULES OF THE AMERICAN STOCK EXCHANGE
On August 19, 2004, the Company issued in a private placement $15
million of secured convertible notes initially convertible by the holders into
8,021,390 shares of Common Stock and warrants initially exercisable for
5,194,806 shares of Common Stock. These investors have agreed to purchase, and
the Company has agreed to sell, an additional $5 million of secured convertible
notes (with substantially the same terms) upon approval of this proposal and
subject to satisfaction of certain customary closing conditions. These
additional notes would be initially convertible by the holders into 2,673,797
shares of Common Stock (based on the current conversion price of the existing
convertible notes). The initially issued convertible notes and the additional
convertible notes that may be issued will be referred to in this proxy statement
as the convertible notes. Under the terms of the convertible notes, the Company
may make certain payments of principal and interest through the issuance of
Common Stock in partial conversion of the notes. Under the terms of the
warrants, once the Company's Common Stock trades at or above 150% of the warrant
exercise price for any 20 consecutive trading days, the holder would
automatically be required to exercise its warrants for cash. The holder would
then receive back the same number of replacement warrants having substantially
the same terms as the initial warrants, but at a new warrant exercise price at a
15% premium to the then current price. In addition, once the Company's Common
Stock trades at or above 150% the holders may exercise their warrants for cash
and receive replacement warrants, but at a new warrant exercise price at a 15%
premium to the then current price. The initial warrants and any additional
warrants issued in replacement of such warrants are referred to in this proxy
statement as the warrants. The issuance of shares of Common Stock upon the
conversion of or in lieu of cash payments on the convertible notes and upon the
exercise of the warrants under certain circumstances could equal 20% or more of
the Company's Common Stock outstanding (calculated as of the date prior to the
date the Securities Purchase Agreement was entered into, or August 19, 2004).
The Company is applying for listing of its Common Stock on the American
Stock Exchange ("AMEX"). The AMEX rules require shareholder approval for any
sale, issuance, or potential issuance of stock at a price that is below the
greater of the book or market value, where the amount of stock being issued is
at least 20% of the outstanding common stock (calculated as of the date prior to
the date the Securities Purchase Agreement was entered into, or August 19,
2004). Because under certain circumstances conversion of the convertible notes
and exercise of the warrants could result in the issuance of Common Stock below
the book value or market price and because of this rule and a related
contractual commitment by the Company to the purchasers of the convertible notes
and warrants, the Company is seeking shareholder approval to issue Common Stock
upon the conversion of or in lieu of cash payments on the convertible notes and
the exercise of the warrants to the extent such issuance equals or exceeds 20%
of the Company's outstanding Common Stock (calculated as of the date prior to
the date the Securities Purchase Agreement was entered into, or August 19,
2004). THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE ISSUANCE
OF SHARES OF COMMON STOCK UPON CONVERSION OF THE COMPANY'S OUTSTANDING
CONVERTIBLE NOTES, IN LIEU OF CASH PAYMENTS ON THE CONVERTIBLE NOTES, AND UPON
THE EXERCISE OF THE WARRANTS TO THE EXTENT SUCH ISSUANCE WOULD REQUIRE
SHAREHOLDER APPROVAL UNDER THE AMEX RULES. Set forth below is certain
information with respect to the issuance of the convertible notes and the
warrants.
Galaxy Energy Corporation Proxy Statement - Page 11
REASON FOR ISSUANCE OF CONVERTIBLE NOTES AND WARRANTS
The Company issued $15 million of the convertible notes and related
warrants in August 2004 and plans to issue the $5 million of additional
convertible notes in the near future to fund the Company's coal bed methane
development program in the Powder River Basin of Wyoming. More specifically, the
funds will be used to drill 108 new wells and to complete and connect these and
75 existing wells on the Company's Leiter Area, Pipeline Ridge and Tower (West
Recluse and Glasgow) properties.
PRINCIPAL TERMS OF CONVERTIBLE NOTES AND WARRANTS
$15 million in principal amount of convertible notes were issued on
August 19, 2004. They have a term of 24 months and bear interest at the prime
rate plus 7.25%, adjusted quarterly. If the additional $5 million of notes are
issued, all of the convertible notes will have a term of 30 months. The
Company's obligation to pay interest on the convertible notes begins on January
14, 2005 and the Company's obligation to pay principal and interest under the
convertible notes begins March 1, 2005. The Company may meet its payment
obligations under the convertible notes in either cash or by issuing Common
Stock through mandatory conversions, provided certain conditions are met. The
Company also has the right under specified circumstances to make voluntary
prepayments of all or any portion of the outstanding principal under the
convertible notes. The note holders have the right at any time to convert the
convertible notes into shares of Common Stock of the Company at an initial
conversion price of $1.87 (subject to adjustment to prevent dilution), which was
140% of the average of the volume weighted average price of the Common Stock for
the 20 consecutive trading days immediately preceding August 19, 2004. All of
the convertible notes, excluding accrued interest, are initially convertible
into 10,695,187 shares of Common Stock (the "Initial Conversion Shares"). This
number of conversion shares is subject to adjustment from time to time upon the
occurrence of certain events described in the convertible notes. The terms of
the convertible notes prohibit the conversion of any principal in excess of that
amount of principal which, after giving effect to such conversion, would cause a
note holder and its affiliates to beneficially own at any time more than 4.99%
of the outstanding Common Stock of the Company.
The convertible notes are secured by a security interest in all of the
assets of the Company and its subsidiaries. In addition, the Company's
subsidiaries have guaranteed payment of the convertible notes. Accordingly, on
August 19, 2004, the Company and/or its subsidiaries executed and delivered a
security agreement, an account control agreement, a guaranty, a pledge
agreement, and mortgages to create a valid security interest with respect to all
of the assets.
The warrants were also issued on August 19, 2004. They may be exercised
for a term of three years. The number of shares of Common Stock of the Company
initially issuable upon exercise of the warrants is 5,194,806 shares at an
initial per share exercise price of $1.54. Both the number of warrant shares and
the exercise price are subject to adjustment from time to time upon the
occurrence of certain events described in the warrants.
In connection with the issuance of the convertible notes and the
warrants, the Company also entered into a registration rights agreement under
which it is required to register 110% of the number of shares of Common Stock
issuable upon exercise of the warrants and 175% of the greater of (i) the number
of shares of Common Stock issuable upon conversion of the convertible notes, at
an assumed conversion price approximately equal to the market price of the
Common Stock and (ii) the Initial Conversion Shares.
Galaxy Energy Corporation Proxy Statement - Page 12
WHY THE COMPANY NEEDS SHAREHOLDER APPROVAL
In accordance with Section 713 of the AMEX Company Guide, which
requires shareholder approval for the sale, issuance, or potential issuance of
common stock (or securities convertible into, or exercisable for, common stock)
representing 20% or more of an issuer's common stock or voting power outstanding
before such issuance at a price below the greater of the common stock's book or
market value, and under the terms of the agreement pursuant to which the Company
sold the convertible notes and the warrants, the Company is soliciting
shareholder approval of the issuance of shares of Common Stock upon conversion
of, or in lieu of cash payments on, the convertible notes and exercise of the
warrants, to the extent such issuance would equal or exceed 20% of the Company's
outstanding Common Stock before the issuance of the convertible notes and
warrants. If the Company obtains shareholder approval, there is no limit over
time on the number of shares that could be issued upon conversion of, or in lieu
of cash payments on, the convertible notes and exercise of the warrants, and
such issuance of shares of Common Stock will no longer be subject to shareholder
approval under Section 713 of the AMEX Company Guide. If the Company does not
obtain shareholder approval and in the event the Company's Common Stock is
listed on the American Stock Exchange (and its shareholder approval requirement
is applied to this issuance), the Company will not be obligated to issue any
shares representing 20% or more of the outstanding Common Stock prior to the
issuance of the convertible notes and warrants due to restrictions relating to
Section 713. If the Company does not obtain the shareholder approval, the
investors would not be obligated to acquire the $5 million of additional
convertible notes. The holders would, however, have the right under such
circumstances to require the Company to redeem in cash the portion of the
remaining balance of the convertible notes and the portion of the warrants with
respect to which shares cannot be issued, but there is no assurance that the
Company would have sufficient cash at such time to effect the redemption. If the
shareholders do not approve this proposal, and the Company does not have
sufficient cash at such time to effect a redemption, the Company will default on
its obligations under the convertible notes and warrants.
PROVISIONS OF THE CONVERTIBLE NOTES AND WARRANTS THAT COULD RESULT IN THE
ISSUANCE OF SHARES
Both the convertible notes and the warrants contain a number of
provisions that could require or result in the issuance of, respectively, more
than 10,695,187 shares of Common Stock into which the notes are initially
convertible by the holders and the 5,194,806 shares of Common Stock for which
the warrants, excluding accrued interest, are initially exercisable. These
provisions are summarized below.
CONVERTIBLE NOTES
CONVERSION OF CONVERTIBLE NOTES IN LIEU OF CASH PAYMENTS; ADJUSTMENTS.
The repayment of the convertible notes could result in the issuance of shares of
Common Stock equal to or in excess of 20% of the Company's outstanding Common
Stock prior to the private placement and at a price below the greater of the
book or market value of the Common Stock. On January 14, 2005, the Company is
obligated to pay accrued interest on the principal amount of the then
outstanding convertible notes at the prime rate plus 7.25% per annum. Beginning
March 1, 2005, and ending March 1, 2007, the Company is obligated to repay the
convertible notes in monthly installments of principal in the amount of
$833,333.33, plus accrued interest on the principal amount of the then
outstanding convertible notes at the prime rate plus 7.25% per annum, assuming
the issuance of the additional $5 million of convertible notes. At the Company's
option, it may pay its monthly installments in cash or through a partial
conversion of the convertible notes into shares of the Company's Common Stock at
a conversion rate equal to the lesser of $1.87 (as may be adjusted to prevent
dilution), or 93% of the weighted average trading price of the Company's Common
Stock on the trading day preceding the conversion, assuming the satisfaction of
certain conditions. Among other things, the Company's Common Stock must be
trading above $1.00 per share, the Common Stock to be issued must be registered
in a currently effective registration statement,
Galaxy Energy Corporation Proxy Statement - Page 13
and the conversion must not result in the holder converting an amount that
exceeds 10% of the trading volume at the time of conversion. If the weighted
average trading price remains low, the payment of the monthly installments
through partial conversion of the convertible notes could result in the issuance
of shares of Common Stock equal to or in excess of 20% of the Company's
outstanding Common Stock (calculated as of the date prior to the date the
Securities Purchase Agreement was entered into, or August 19, 2004).
Certain events may transpire that lower the applicable conversion price
under the convertible notes or otherwise give the holders rights to additional
shares of Common Stock, which could result in the issuance of shares of Common
Stock at a price below the greater of the book or market value of the Common
Stock and equal to or in excess of 20% of the Company's outstanding Common Stock
(calculated as of the date prior to the date the Securities Purchase Agreement
was entered into, or August 19, 2004). Any determination of the number of shares
of the Company's Common Stock into which the convertible notes may be converted
is subject to adjustment in the event of certain future issuances of securities
or derivative securities, stock dividends, stock splits, stock combinations and
other similar transactions. Any adjustments that lower the applicable conversion
price could result in the issuance of shares of Common Stock at a price below
the greater of the book or market value of the Common Stock and equal to or in
excess of 20% of the Company's outstanding Common Stock (calculated as of the
date prior to the date the Securities Purchase Agreement was entered into, or
August 19, 2004). The convertible notes give the holders the right to any
additional rights, including those obtained through the consolidation, merger or
sale of assets of the Company or a similar transaction, that are granted, issued
or sold to the Company's shareholders as if the holders had held the number of
shares of Common Stock acquirable upon the complete conversion of the
convertible notes at the time such rights become available to the shareholders.
The convertible notes also give the holders the right to any dividends or
distributions that are made to the Company's shareholders as if the holders had
held the number of shares of Common Stock acquirable upon the complete
conversion of the convertible notes at the time such rights become available to
the shareholders. These additional rights could result in the issuance of shares
of Common Stock equal to or in excess of 20% of the Company's total outstanding
Common Stock (calculated as of the date prior to the date the Securities
Purchase Agreement was entered into, or August 19, 2004).
CONVERSION OF CONVERTIBLE NOTES AT THE OPTION OF THE HOLDER. The notes
are convertible at the option of the holder, in whole or in part, at any time
prior to their maturity at the initial conversion price of $1.87. Any
determination of the number of shares of the Company's Common Stock into which
the convertible notes may be converted is subject, however, to adjustment in the
event of certain future issuances of securities or derivative securities, stock
dividends, stock splits, stock combinations and other similar transactions. Any
adjustments that lower the applicable conversion price could result in the
issuance of shares of Common Stock at a price below the greater of the book or
market value of the Common Stock and equal to or in excess of 20% of the
Company's outstanding Common Stock (calculated as of the date prior to the date
the Securities Purchase Agreement was entered into, or August 19, 2004). If the
Company does not timely effect a conversion of the convertible notes, it will be
subject to cash penalties, additional adjustments to the applicable conversion
price, and other penalties described in the convertible notes. Moreover, in such
case, the holders of the convertible notes may require the Company to redeem all
of the outstanding principal amount of the convertible notes at that time (as
discussed below), which could ultimately result in a further adjustment to the
applicable conversion price.
MANDATORY CONVERSION OR REDEMPTION. Starting January 1, 2005 and as
measured monthly thereafter, the holders of the convertible notes may elect to
have a portion of the principal amount repaid early by the Company, if the
Company fails to meet an equity liquidity test or a share availability test. The
equity liquidity test means that the product of 20% of the average monthly
dollar trading volume during the prior 3 months and the number of months then
remaining in the term of the convertible notes must be greater than the
outstanding principal balance of and accrued interest on the convertible notes.
Galaxy Energy Corporation Proxy Statement - Page 14
The share availability test means that the product of (i) the average of the
weighted average price for the 10 consecutive trading days immediately preceding
the date of determination multiplied by (ii) the number of shares registered for
resale and reserved for issuance, less the number of warrant shares then
outstanding, must be greater than the outstanding principal balance of and
accrued interest on the convertible notes. In the event of a failure of either
test, the Company would be required to redeem in cash and/or provide for the
early conversion of a sufficient amount of the convertible notes in order to
meet that test. Since the conversion rate would be equal to the lesser of $1.87
(as may be adjusted to prevent dilution), or 93% of the weighted average trading
price of the Company's Common Stock on the trading day preceding the conversion,
such conversion could result in the issuance of shares of Common Stock at a
price below the greater of the book or market value of the Common Stock and
equal to or in excess of 20% of the Company's outstanding Common Stock
(calculated as of the date prior to the date the Securities Purchase Agreement
was entered into, or August 19, 2004).
REDEMPTION AND DEFAULT PROVISIONS IN THE CONVERTIBLE NOTES. Certain
events, referred to as "Triggering Events," could result in an adjustment that
lowers the applicable conversion price and the issuance of shares of Common
Stock at a price below the greater of book or market value and equal to or in
excess of 20% of the Company's outstanding Common Stock (calculated as of the
date prior to the date the Securities Purchase Agreement was entered into, or
August 19, 2004). Upon the occurrence of a Triggering Event, the holders of the
convertible notes may cause the Company to redeem the convertible notes in cash.
Circumstances that are deemed Triggering Events under which the holders may
cause the Company to redeem the convertible notes include: the Company's failure
to obtain and/or maintain the effectiveness of the registration statement
covering the resale of the Common Stock underlying the convertible notes and the
warrants, the failure of the Common Stock to be listed on the OTC Bulletin Board
or listed on a national securities exchange or on the NASDAQ National Market or
the NASDAQ SmallCap Market (if the Common Stock gets listed on a national
securities exchange or on the NASDAQ National Market or the NASDAQ SmallCap
Market), the suspension from trading of the Company's Common Stock for a period
of five consecutive trading days or for more than 10 trading days in any 365-day
period, the Company's failure to timely deliver shares of Common Stock upon
conversion of the convertible notes or exercise of the warrants, material
breaches by the Company under the applicable securities purchase agreement, the
convertible notes, the warrants, the registration rights agreement or any other
agreement entered into in connection with the transactions contemplated by such
agreements, and the Company's failure to make its monthly installments as
provided in the convertible notes.
However, if the Company does not have sufficient cash to effect a
redemption as a result of a Triggering Event, the holders are entitled to void
their redemption notices and receive a reset of their applicable conversion
price to the lesser of the conversion price then in effect, or the lowest
weighted average price of the Company's Common Stock during the period beginning
on the date on which the notice of redemption is delivered to the Company and
ending on the date the holder delivers notice to the Company of its intent to
void the redemption notice. This reset to a lower applicable conversion price
could result in the issuance of shares of Common Stock at a price below the
greater of book or market value and equal to or in excess of 20% of the
Company's outstanding Common Stock (calculated as of the date prior to the date
the Securities Purchase Agreement was entered into, or August 19, 2004).
The occurrence of an event of default under the convertible notes could
also result in the issuance of shares of Common Stock at a price below the
greater of book or market value and equal to or in excess of 20% of the
Company's outstanding Common Stock (calculated as of the date prior to the date
the Securities Purchase Agreement was entered into, or August 19, 2004). If an
event of default occurs, the holders of the convertible notes may declare the
convertible notes, including all amounts due thereunder, to be due and payable
immediately. Such amount shall bear interest at the rate of 2.0% per month until
paid in full. If the Company does not timely pay the amounts due, the holders of
the convertible notes may void the acceleration and the conversion price shall
be adjusted to the lesser of the conversion price
Galaxy Energy Corporation Proxy Statement - Page 15
then in effect, or the lowest weighted average price of the Company's Common
Stock during the period beginning on the date on which the convertible notes
became accelerated and ending on the date on which the holders of the
convertible notes notify the Company of their intent to void the acceleration.
This reset to a lower applicable conversion price could result in the issuance
of shares of Common Stock at a price below the greater of book or market value
and equal to or in excess of 20% of the Company's outstanding Common Stock
(calculated as of the date prior to the date the Securities Purchase Agreement
was entered into, or August 19, 2004), assuming prior shareholder approval. The
events of default include any failure to pay any principal amount of the
convertible notes when due, failure to comply with any material provision of the
convertible notes, some payment defaults of the Company's other indebtedness,
initiation of bankruptcy proceedings by or against the Company and the Company's
failure to timely file any report with the SEC under the Securities Exchange Act
of 1934.
WARRANTS
In connection with the sale of the convertible notes, the Company
issued warrants and may issue additional warrants to the purchasers of the
convertible notes. The warrants give the holders the right to initially purchase
from the Company, for a period of three years, an aggregate of 5,194,806 shares
of the Company's Common Stock for $1.54 per share as of the date of issuance.
Certain events may transpire that lower the applicable exercise price under the
warrants, increase the number of warrants, or otherwise give the holders rights
to additional shares of Common Stock, which could result in the issuance of
shares of Common Stock at a price below the greater of book or market value and
equal to or in excess of 20% of the Company's outstanding Common Stock
(calculated as of the date prior to the date the Securities Purchase Agreement
was entered into, or August 19, 2004). Both the number of warrants and the
exercise price of the warrants are subject to anti-dilution adjustments in the
event of certain future issuances of securities or derivative securities, stock
dividends, stock splits, stock combinations and any other similar transactions.
Any adjustments that increase the number of warrants, result in the issuance of
additional warrants, or lower the exercise price could result in the issuance of
shares of Common Stock at a price below the greater of book or market value and
equal to or in excess of 20% of the Company's outstanding Common Stock
(calculated as of the date prior to the date the Securities Purchase Agreement
was entered into, or August 19, 2004). The warrants also give the holders the
right to any additional rights, including those obtained through the
consolidation, merger or sale of assets of the Company or a similar transaction,
that are granted, issued or sold to the Company's shareholders as if the holders
had held the number of shares of Common Stock acquirable upon the complete
exercise of the warrants at the time such rights become available to the
shareholders. These additional rights could result in the issuance of shares of
Common Stock at a price below the greater of book or market value and equal to
or in excess of 20% of the Company's total outstanding Common Stock (calculated
as of the date prior to the date the Securities Purchase Agreement was entered
into, or August 19, 2004).
POTENTIAL DILUTION AND MARKET CONSEQUENCES
The issuance of shares of Common Stock pursuant to the convertible
notes and warrants could substantially dilute the interests of the Company's
other shareholders. The $15 million in convertible notes the Company issued in
August 2004 and the additional $5 million of notes issuable upon approval of
this proposal are convertible by the holders into Common Stock at any time prior
to their maturity in March 2007 at an initial conversion price of $1.87, subject
to adjustments in the event of certain future issuances of securities or
derivative securities, stock splits, stock dividends, stock combinations and
other similar transactions. Moreover, the conversion price of the convertible
notes could be lowered, perhaps substantially, in a variety of circumstances,
including: the Company's issuance of Common Stock below the convertible notes'
conversion price, either directly or in connection with the issuance of most
securities that are convertible into, or exercisable for, shares of its Common
Stock, the Company's failure to comply with specific registration and listing
obligations applicable to the Common Stock into which
Galaxy Energy Corporation Proxy Statement - Page 16
the convertible notes are convertible, and the Company's breaching other
obligations to the holders of the convertible notes.
Correspondingly, the Company issued to the holders of convertible notes
in August 2004 three-year warrants entitling the warrant holders to purchase
initially an aggregate of 5,194,806 shares of its Common Stock at an exercise
price of $1.54 per share and providing for the issuance of replacement warrants
on terms substantially similar to the initial warrants. Both the number of
warrants and the exercise price are subject to adjustments that could make them
further dilutive to the Company's other shareholders. There is no "ceiling" on
the number of warrants that may be issuable under certain circumstances under
the anti-dilution adjustments in the warrants.
To the extent the holders convert the convertible notes or exercise the
warrants and then sell the shares of the Company's Common Stock they receive
upon conversion or exercise, the Company's stock price could decrease due to the
additional amount of shares available in the market. The subsequent sales of
these shares could encourage short sales by the Company's shareholders and
others, which could place further downward pressure on the Company's stock
price. Moreover, the note and warrant holders, subject to applicable laws, may
hedge their positions in the Company's stock by shorting its stock, which could
further adversely affect the stock price. The effect of these activities on the
Company's stock price could increase the number of shares required to be issued
upon conversion of the convertible notes, in lieu of cash payments on the
convertible notes or upon exercise of the warrants.
Even though no holder may convert any principal amount under its
convertible notes or exercise its warrants if upon such conversion or exercise
such holder, together with its affiliates, would beneficially own at any time
more than 4.99% of the Company's outstanding Common Stock following such
conversion or exercise, this restriction does not prevent a holder from selling
a substantial number of shares in the market. By periodically selling shares
into the market, an individual holder could eventually sell more than 4.99% of
the Company's Common Stock while never holding more than 4.99% at any specific
time. This process could also result in the issuance of shares of Common Stock
at a price below the greater of book or market value and equal to or in excess
of 20% of the Company's outstanding Common Stock (calculated as of the date
prior to the date the Securities Purchase Agreement was entered into, or August
19, 2004).
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The terms of the convertible notes and warrants are complex and only
briefly summarized in this proxy statement. Shareholders wishing further
information concerning the rights, preferences and terms of the convertible
notes and warrants are referred to the documents filed as exhibits to the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on August 20, 2004.
PROPOSAL 3 - TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION
TO INCREASE ITS AUTHORIZED COMMON STOCK
On August 12, 2004, the Board of Directors of the Company approved,
subject to shareholder approval, an amendment to Article IV(a) of the Company's
Articles of Incorporation to increase from 100,000,000 to 400,000,000 the number
of authorized shares of Common Stock. If the amendment is approved, Article
IV(a) of the Company's Articles of Incorporation will be amended to read in its
entirety as follows:
"The aggregate number of shares which the corporation shall have
authority to issue is Four Hundred Million (400,000,000) shares of common stock,
$.001 par value, and Twenty-five Million
Galaxy Energy Corporation Proxy Statement - Page 17
(25,000,000) shares of preferred stock, $.001 par value. These preferred shares
may be issued in one or more series at the discretion of the Board of
Directors."
The total of the number of outstanding shares and the number of shares
issuable upon conversion of the notes and exercise of outstanding options and
warrants is approaching 100,000,000, which is the number of shares of Common
Stock presently authorized. The proposed amendment would increase the number of
authorized shares to 400,000,000 to accommodate the anticipated future growth of
the Company.
As of the date of this proxy statement, 58,817,509 shares of Common
Stock were issued and outstanding, 3,500,000 shares were reserved for issuance
pursuant to outstanding options granted under the Stock Option Plan, 7,195,584
shares were reserved for issuance pursuant to outstanding warrants, and
30,000,000 shares were reserved for issuance pursuant to the conversion of the
convertible notes and exercise of the warrants described in Proposal 2 above.
Accordingly, only 486,907 shares of Common Stock are available for future
issuance.
The Board of Directors anticipates that the Company may issue
additional shares to acquire oil and gas property interests and/or complementary
businesses in the oil and gas industry. The Company may also issue additional
shares to fund acquisitions of property interests, businesses, and/or drilling
operations. Should the Company grow in size and increase its level of activity,
it will need to hire additional personnel. To attract qualified employees, the
Company will need to issue stock options to provide incentive compensation. The
Company proposes to increase from 3,500,000 to 6,500,000 the aggregate number of
shares of Common Stock authorized for issuance under the Stock Option Plan.
The Company does not have any definitive plans to issue the additional
authorized shares. However, the Company is planning to add one member to its
management team and the addition of this person is expected to result in the
issuance of stock options within the next few months.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSED AMENDMENT
TO THE COMPANY'S ARTICLES OF INCORPORATION. PROXIES SOLICITED BY THE BOARD OF
DIRECTORS WILL BE VOTED IN FAVOR OF THE PROPOSAL UNLESS SHAREHOLDERS SPECIFY
OTHERWISE.
SHAREHOLDER PROPOSALS AND OTHER MATTERS
If a shareholder intends to present a proposal for action at the
Company's 2005 annual meeting and wishes to have such proposal considered for
inclusion in the Company's proxy materials in reliance on Rule 14a-8 under the
Securities Exchange Act of 1934, the proposal must be submitted in writing and
received by the Company by December 31, 2004. Such proposals must also meet the
other requirements of the rules of the Securities and Exchange Commission
relating to shareholder proposals.
For any proposal that is not submitted for inclusion in next year's
proxy statement but is instead sought to be presented directly at next year's
annual meeting, Securities and Exchange Commission rules permit management of
the Company to vote proxies in its discretion if (a) the Company receives notice
of the proposal before the close of business on March 14, 2005 and advises
shareholders in next year's proxy statement about the nature of the matter and
how management intends to vote on such matter, or (b) the Company does not
receive notice of the proposal prior to the close of business on March 11, 2005.
Galaxy Energy Corporation Proxy Statement - Page 18
The cost of solicitation of proxies will be borne by the Company.
Solicitation may be made by mail, personal interview, telephone and/or telegraph
by officers and regular employees of the Company, who will receive no additional
compensation therefor. The Company will bear the reasonable expenses incurred by
banks, brokerage firms and custodians, nominees and fiduciaries in forwarding
proxy material to beneficial owners.
The Company will provide, by first class mail or other equally prompt
means, a copy of the information that is incorporated by reference in the proxy
statement, without charge, to each person to whom a proxy statement is delivered
upon written or oral request within one day of receipt of such request. Requests
for such information may be directed to Galaxy Energy Corporation, Attention:
Corporate Secretary, 1331 - 17th Street, Suite 730, Denver, Colorado 80202,
telephone (303) 293-2300.
GALAXY ENERGY CORPORATION
Marc E. Bruner
President and Chief Executive Officer
Denver, Colorado
September 21, 2004
Galaxy Energy Corporation Proxy Statement - Page 19
PROXY
GALAXY ENERGY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Marc E. Bruner and Cecil Gritz, and
either of them, proxies with power of substitution in each, and hereby
authorizes them to represent and to vote, as designated below, all shares of
common stock, $0.001 par value per share ("Common Stock"), of GALAXY ENERGY
CORPORATION, standing in the name of the undersigned at the close of business on
September 21, 2004, at the special meeting of shareholders to be held on October
21, 2004, at Denver, Colorado, and at any adjournment thereof and especially to
vote on the items of business specified herein, as more fully described in the
notice of the meeting dated September 21, 2004, and the proxy statement
accompanying the same, the receipt of which is hereby acknowledged.
This proxy when duly executed will be voted in the manner directed
herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE PROPOSAL TO AMEND THE COMPANY'S STOCK OPTION PLAN, FOR THE
PROPOSAL TO APPROVE ISSUANCE OF SHARES OF COMMON STOCK TO THE EXTENT SUCH
ISSUANCE WOULD REQUIRE APPROVAL UNDER AMERICAN STOCK EXCHANGE RULES, AND FOR THE
AMENDMENT OF THE ARTICLES OF INCORPORATION OF THE COMPANY TO INCREASE ITS NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK.
PLEASE MARK VOTE IN BOX IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
1. PROPOSAL TO AMEND STOCK OPTION PLAN. The undersigned hereby votes in response
to the proposal to amend the Company's Stock Option Plan to increase from
3,500,000 to 6,500,000 the aggregate number of shares of Common Stock authorized
for issuance under the Plan.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. PROPOSAL TO APPROVE ISSUANCE OF SHARES OF COMMON STOCK, TO THE EXTENT
ISSUANCE WOULD REQUIRE APPROVAL UNDER AMERICAN STOCK EXCHANGE RULES. The
undersigned hereby votes in response to the proposal to approve the issuance of
shares of Common Stock upon conversion of the Company's outstanding convertible
notes, in lieu of cash payments on the convertible notes, and upon the exercise
of the Company's outstanding warrants, to the extent that such issuance would
require shareholder approval under the rules of the American Stock Exchange.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO AMEND ARTICLES OF INCORPORATION OF THE COMPANY TO INCREASE ITS
AUTHORIZED COMMON STOCK. The undersigned hereby votes in response to the
proposal to amend the Articles of Incorporation of the Company to increase from
100,000,000 to 400,000,000 the number of authorized shares of Common Stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. In their discretion, the undersigned hereby authorizes the proxies to vote
upon such other business or matters as may properly come before the meeting or
any adjournment thereof.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
AUTHORIZED SIGNATURES - SIGN HERE - THIS SECTION MUST BE COMPLETED FOR YOUR
INSTRUCTIONS TO BE EXECUTED.
The undersigned hereby revokes any proxy or proxies heretofore given to
represent or vote such Common Stock and hereby ratifies and confirms all action
that said proxies, their substitutes, or any of them, might lawfully take in
accordance with the terms hereof.
Signature 1 - Please keep Signature 2 - Please keep
Signature within the box Signature within the box Date (mm/dd/yyyy)
[ ] [ ] [ / / ]
-------------------------- -------------------------- --- --- -------
NOTE: This proxy should be signed exactly as name appears hereon. Joint owners
should both sign. If signed as attorney, executor, guardian, or in some other
representative capacity, or as an officer of a corporation, please indicate full
title or capacity. Please complete, date and return it in the enclosed envelope,
which requires no postage if mailed in the United States.