EXHIBIT 10.2
FORM OF DEBENTURE
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE
SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER
LOAN SECURED BY SUCH SECURITIES.
THIS DEBENTURE AND THE INDEBTEDNESS EVIDENCED HEREBY ARE SUBORDINATE IN THE
MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION AGREEMENT (THE
"SUBORDINATION AGREEMENT") DATED AS OF APRIL 25, 2006 AMONG GALAXY ENERGY
CORPORATION, THE SUBORDINATED CREDITORS NAMED THEREIN, THE LENDERS NAMED
THEREIN, AND PROMETHEAN ASSET MANAGEMENT L.L.C., TO THE SENIOR INDEBTEDNESS (AS
DEFINED IN THE SUBORDINATION AGREEMENT); AND EACH HOLDER OF THIS DEBENTURE, BY
ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE PROVISIONS OF THE SUBORDINATION
AGREEMENT.
Date of Issuance: April 25, 2006
$
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15% SUBORDINATED CONVERTIBLE DEBENTURE
DUE OCTOBER 25, 2008
THIS DEBENTURE is one of a series of duly authorized and issued 15%
Subordinated Convertible Debentures of Galaxy Energy Corporation, a Colorado
corporation, having a principal place of business at 1331 - 17th Street, Suite
1050, Denver, Colorado 80202 (the "COMPANY"), designated as its 15% Subordinated
Convertible Debenture, due October 25, 2008 (the "DEBENTURES").
FOR VALUE RECEIVED, the Company promises to pay to ________________ or
its registered assigns (the "HOLDER"), the principal sum of $__________ on the
Maturity Date (as defined herein), and to pay interest to the Holder on the
aggregate unconverted and then outstanding principal amount of this Debenture at
the rate of 15% per annum, payable on each
Debenture - page 1
Conversion Date (as to that principal amount then being converted) and on the
Maturity Date (except that, if any such date is not a Business Day, then such
payment shall be due on the next succeeding Business Day), in cash, so long as
such payment shall not violate the terms of any provisions of the debt
instruments and agreements with the holders of the Company's Senior Debt.
Specifically, if any part of this Debenture shall be converted prior to the
Maturity Date no interest on this Debenture shall be paid until the Maturity
Date, which shall be automatically extended to the earliest date on which no
Senior Debt is outstanding.
In the event that any portion of this Debenture is paid after the date
that is 30 months from the Original Issue Date, the Company shall pay an
additional amount to the Holder equal to the product of (a) the principal amount
of the Debenture being retired multiplied by (b) the sum of 25% plus .75% for
each month (or part thereof) in excess of 30 months that the Debenture has
remained outstanding.
Interest shall be calculated on the basis of a 365-day year and shall
accrue daily commencing on the Original Issue Date until payment in full of the
principal sum, together with all accrued and unpaid interest and other amounts
which may become due hereunder, has been made. Interest shall cease to accrue
with respect to any principal amount converted, provided that the Company in
fact delivers the Underlying Shares within the time period required by Section
4(b)(i). Interest hereunder will be paid to the Person in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of Debentures (the "DEBENTURE REGISTER").
This Debenture is subject to the following additional provisions:
SECTION 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration of transfer or exchange.
SECTION 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and applicable federal and state securities laws and regulations. Prior to due
presentment to the Company for transfer of this Debenture, the Company and any
agent of the Company may treat the Person in whose name this Debenture is duly
registered on the Debenture Register as the owner hereof for the purpose of
receiving payment as herein provided and for all other purposes, whether or not
this Debenture is overdue, and neither the Company nor any such agent shall be
affected by notice to the contrary.
SECTION 3. EVENTS OF DEFAULT.
a) "EVENT OF DEFAULT", wherever used herein, means any one of
the following events (whatever the reason and whether it shall be
voluntary or involuntary or effected by operation of law or pursuant to
any judgment, decree or order of any court, or any order, rule or
regulation of any administrative or governmental body):
Debenture - page 2
(i) any default in the payment of the principal of,
interest on, or liquidated damages in respect of, any
Debentures, as and when the same shall become due and payable
(whether on a Conversion Date or the Maturity Date or by
acceleration or otherwise) which default is not cured, if
possible to cure, within 3 days of notice of such default sent
by the Holder; provided, that no notice need be given, nor any
period allowed for cure, in the case of the failure to pay
principal plus accrued interest on the Maturity Date;
(ii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or
otherwise commit any breach of any of the Transaction
Documents (other than a breach by the Company of its
obligations to deliver shares of Common Stock to the Holder
upon conversion or interest payment which breach is addressed
in clause (x) below) which is not cured, if possible to cure,
within 5 days of notice of such default sent by the Holder;
(iii) the Company or any of its subsidiaries shall
commence, or there shall be commenced against the Company or
any such subsidiary a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor
thereto, or the Company commences any other proceeding under
any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law
of any jurisdiction whether now or hereafter in effect
relating to the Company or any subsidiary thereof or there is
commenced against the Company or any subsidiary thereof any
such bankruptcy, insolvency or other proceeding which remains
undismissed for a period of 30 days; or the Company or any
subsidiary thereof is adjudicated insolvent or bankrupt; or
any order of relief or other order approving any such case or
proceeding is entered; or the Company or any subsidiary
thereof suffers any appointment of any custodian or the like
for it or any substantial part of its property which continues
undischarged or unstayed for a period of 30 days; or the
Company or any subsidiary thereof makes a general assignment
for the benefit of creditors; or the Company shall fail to
pay, or shall state that it is unable to pay, or shall be
unable to pay, its debts generally as they become due; or the
Company or any subsidiary thereof shall call a meeting of its
creditors with a view to arranging a composition, adjustment
or restructuring of its debts; or the Company or any
subsidiary thereof shall by any act or failure to act
expressly indicate its consent to, approval of or acquiescence
in any of the foregoing; or any corporate or other action is
taken by the Company or any subsidiary thereof for the purpose
of effecting any of the foregoing;
(iv) the Company shall default in any of its
obligations under any other Debenture or any mortgage, credit
agreement or other facility, indenture agreement, factoring
agreement or other instrument under which there may be issued,
or by which there may be secured or evidenced any indebtedness
for borrowed money or money due under any long term leasing or
factoring arrangement of the Company in an amount exceeding
$100,000, whether such indebtedness now exists or shall
hereafter be created and such default shall result
Debenture - page 3
in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become
due and payable; or
(v) an Event (as defined in the Purchase Agreement)
shall not have been cured to the satisfaction of the Holder
prior to the expiration of thirty days from the Event Date (as
defined in the Purchase Agreement).
(b) If any Event of Default occurs and is continuing, all
amounts due under this Debenture, together with interest and other
amounts owing in respect thereof, to the date of acceleration shall
become at the Holder's election, immediately due and payable in cash.
Interest shall accrue on the amounts due from the day after such amount
is due (being the date of an Event of Default), retroactive to the
Original Issue Date through the date of prepayment in full thereof in
an amount equal to the 25% per annum, to accrue daily from the Original
Issue Date through and including the date of payment. All Debentures
for which the full prepayment price hereunder shall have been paid in
accordance herewith shall promptly be surrendered to or as directed by
the Company. The Holder need not provide and the Company hereby waives
any presentment, demand, protest or other notice of any kind, and the
Holder may immediately and without expiration of any grace period
enforce any and all of its rights and remedies hereunder and all other
remedies available to it under applicable law. Such declaration may be
rescinded and annulled by Holder at any time prior to payment hereunder
and the Holder shall have all rights as a Debenture holder until such
time, if any, as the full payment under this Section shall have been
received by it. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon.
SECTION 4. CONVERSION.
a) (i) At any time after the Closing Date, this Debenture
shall be convertible into shares of Common Stock at the option
of the Holder, in whole or in part at any time and from time
to time (subject to the limitations on conversion set forth in
Section 4(a)(ii) hereof), so long as such conversion shall not
violate the terms of any provisions of the debt instruments
and agreements with the holders of the Company's Senior Debt.
The Holder shall effect conversions by delivering to the
Company the form of Notice of Conversion attached hereto as
ANNEX A (a "NOTICE OF CONVERSION"), specifying therein the
principal amount of Debentures to be converted and the date on
which such conversion is to be effected (a "CONVERSION DATE").
If no Conversion Date is specified in a Notice of Conversion,
the Conversion Date shall be the date that such Notice of
Conversion is provided hereunder. To effect conversions
hereunder, the Holder shall not be required to physically
surrender Debentures to the Company unless the entire
principal amount of this Debenture plus all accrued and unpaid
interest thereon has been so converted. Conversions hereunder
shall have the effect of lowering the outstanding principal
amount of this Debenture in an amount equal to the applicable
conversion. The Holder and the Company shall maintain records
showing the principal amount converted and the date of such
conversions. The Company shall deliver any objection to any
Notice of Conversion within 1
Debenture - page 4
Business Day of receipt of such notice. In the event of any
dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of manifest
error. The Holder and any assignee, by acceptance of this
Debenture, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of a
portion of this Debenture, the unpaid and unconverted
principal amount of this Debenture may be less than the amount
stated on the face hereof.
(ii) CONVERSION LIMITATION. The Company shall not
effect any conversion of this Debenture, and the Holder shall
not have the right to convert any portion of this Debenture,
pursuant to Section 4(a)(i) or otherwise, to the extent that
after giving effect to such conversion, the Holder (together
with the Holder's affiliates), as set forth on the applicable
Notice of Conversion, would beneficially own in excess of
4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For
purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by the Holder and its
affiliates shall include the number of shares of Common Stock
issuable upon conversion of this Debenture with respect to
which the determination of such sentence is being made, but
shall exclude the number of shares of Common Stock which would
be issuable upon (A) conversion of the remaining, nonconverted
portion of this Debenture beneficially owned by the Holder or
any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of
the Company (including, without limitation, any other
Debentures or the Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained
herein beneficially owned by the Holder or any of its
affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 4(a)(ii), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Exchange
Act. To the extent that the limitation contained in this
section applies, the determination of whether this Debenture
is convertible (in relation to other securities owned by the
Holder) and of which a portion of this Debenture is
convertible shall be in the sole discretion of such Holder. To
ensure compliance with this restriction, the Holder will be
deemed to represent to the Company each time it delivers a
Notice of Conversion that such Notice of Conversion has not
violated the restrictions set forth in this paragraph and the
Company shall have no obligation to verify or confirm the
accuracy of such determination. For purposes of this Section
4(a)(ii), in determining the number of outstanding shares of
Common Stock, the Holder may rely on the number of outstanding
shares of Common Stock as reflected in (x) the Company's most
recent Form 10-Q or Form 10-K, as the case may be, (y) a more
recent public announcement by the Company or (z) any other
notice by the Company or the Company's Transfer Agent setting
forth the number of shares of Common Stock outstanding. Upon
the written or oral request of the Holder, the Company shall
within two Trading Days confirm orally and in writing to the
Holder the number of shares of Common Stock then outstanding.
In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or
exercise of securities of the Company, including this
Debenture - page 5
Debenture, by the Holder or its affiliates since the date as
of which such number of outstanding shares of Common Stock was
reported. The provisions of this Section 4(a)(ii) may be
waived by the Holder upon, at the election of the Holder, not
less than 61 days' prior notice to the Company, and the
provisions of this Section 4(a)(iiii) shall continue to apply
until such 61st day (or such later date, as determined by the
Holder, as may be specified in such notice of waiver).
In addition, the Company shall not effect
any conversion of this Debenture, and the Holder shall not
have the right to convert any portion of this Debenture,
pursuant to Section 4(a)(i) or otherwise, to the extent that
after giving effect to such conversion of this Debenture and
any other Debentures issued under the Purchase Agreement, and
the exercise of any of the Warrants issued under the Purchase
Agreement, the Company will have issued in the aggregate a
number of shares of its Common Stock that is 20% or more of
the number of shares of the Common Stock.
(iii) UNDERLYING SHARES ISSUABLE UPON CONVERSION OF
PRINCIPAL AMOUNT. The number of shares of Common Stock
issuable upon a conversion shall be determined by the quotient
obtained by dividing (x) the outstanding principal amount of
this Debenture to be converted by (y) the Set Price.
(b) (i) Not later than five Trading Days after any Conversion
Date, the Company will deliver to the Holder a certificate or
certificates representing the Underlying Shares which shall be
free of restrictive legends and trading restrictions (other
than those required by the Purchase Agreement) representing
the number of shares of Common Stock being acquired upon the
conversion of Debentures (including, if so timely elected by
the Company, shares of Common Stock representing the payment
of accrued interest) and (B) a bank check in the amount of
accrued and unpaid interest (if the Company is required to pay
accrued interest in cash). The Company shall, if available and
if allowed under applicable securities laws, use its best
efforts to deliver any certificate or certificates required to
be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another
established clearing corporation performing similar functions.
If in the case of any Notice of Conversion such certificate or
certificates are not delivered to or as directed by the
applicable Holder by the fifth Trading Day after a Conversion
Date, the Holder shall be entitled by written notice to the
Company at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such
conversion, in which event the Company shall immediately
return the certificates representing the principal amount of
Debentures tendered for conversion.
(ii) If the Company fails for any reason to deliver
to the Holder such certificate or certificates pursuant to
Section 4(b)(i) by the fifth Trading Day after the Conversion
Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $5,000 of
principal amount being converted, $50 per Trading Day
(increasing to $100 per Trading Day after 3
Debenture - page 6
Trading Days after such damages begin to accrue and increasing
to $200 per Trading Day 6 Trading Days after such after such
damages begin to accrue) for each Trading Day after such fifth
Trading Day until such certificates are delivered. The
Company's obligations to issue and deliver the Underlying
Shares upon conversion of this Debenture in accordance with
the terms hereof are absolute and unconditional, irrespective
of any action or inaction by the Holder to enforce the same,
any waiver or consent with respect to any provision hereof,
the recovery of any judgment against any Person or any action
to enforce the same, or any setoff, counterclaim, recoupment,
limitation or termination, or any breach or alleged breach by
the Holder or any other Person of any obligation to the
Company or any violation or alleged violation of law by the
Holder or any other person, and irrespective of any other
circumstance which might otherwise limit such obligation of
the Company to the Holder in connection with the issuance of
such Underlying Shares; PROVIDED, HOWEVER, such delivery shall
not operate as a waiver by the Company of any such action the
Company may have against the Holder. In the event a Holder of
this Debenture shall elect to convert any or all of the
outstanding principal amount hereof, the Company may not
refuse conversion based on any claim that the Holder or any
one associated or affiliated with the Holder of has been
engaged in any violation of law, agreement or for any other
reason, unless, an injunction from a court, on notice,
restraining and or enjoining conversion of all or part of this
Debenture shall have been sought and obtained and the Company
posts a surety bond for the benefit of the Holder in the
amount of 150% of the principal amount of this Debenture
outstanding, which is subject to the injunction, which bond
shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of
which shall be payable to such Holder to the extent it obtains
judgment. In the absence of an injunction precluding the same,
the Company shall issue Conversion Shares or, if applicable,
cash, upon a properly noticed conversion. Nothing herein shall
limit a Holder's right to pursue actual damages or declare an
Event of Default pursuant to Section 3 herein for the
Company's failure to deliver Conversion Shares within the
period specified herein and such Holder shall have the right
to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific
performance and/or injunctive relief. The exercise of any such
rights shall not prohibit the Holders from seeking to enforce
damages pursuant to any other Section hereof or under
applicable law.
(iii) In addition to any other rights available to
the Holder, if the Company fails for any reason to deliver to
the Holder such certificate or certificates pursuant to
Section 4(b)(i) by the fifth Trading Day after the Conversion
Date, and if after such fifth Trading Day the Holder is
required by its brokerage firm to purchase (in an open market
transaction or otherwise) Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares
which the Holder anticipated receiving upon such conversion (a
"BUY-IN"), then the Company shall (A) pay in cash to the
Holder (in addition to any remedies available to or elected by
the Holder) the amount by which (x) the Holder's total
purchase price (including brokerage commissions, if any) for
the Common Stock
Debenture - page 7
so purchased exceeds (y) the product of (1) the aggregate
number of shares of Common Stock that such Holder anticipated
receiving from the conversion at issue multiplied by (2) the
actual sale price of the Common Stock at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation and (B) at the option of the Holder,
either reissue Debentures in principal amount equal to the
principal amount of the attempted conversion or deliver to the
Holder the number of shares of Common Stock that would have
been issued had the Company timely complied with its delivery
requirements under Section 4(b)(i). For example, if the Holder
purchases Common Stock having a total purchase price of
$11,000 to cover a Buy-In with respect to an attempted
conversion of Debentures with respect to which the actual sale
price of the Underlying Shares at the time of the sale
(including brokerage commissions, if any) giving rise to such
purchase obligation was a total of $10,000 under clause (A) of
the immediately preceding sentence, the Company shall be
required to pay the Holder $1,000. The Holder shall provide
the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In. Notwithstanding anything
contained herein to the contrary, if a Holder requires the
Company to make payment in respect of a Buy-In for the failure
to timely deliver certificates hereunder and the Company
timely pays in full such payment, the Company shall not be
required to pay such Holder liquidated damages under Section
4(b)(ii) in respect of the certificates resulting in such
Buy-In.
(c) (i) The conversion price in effect on any Conversion Date
shall be equal to $1.56 (subject to adjustment herein)(the
"SET PRICE").
(ii) If the Company, at any time while the Debentures
are outstanding: (A) shall pay a stock dividend or otherwise
make a distribution or distributions on shares of its Common
Stock or any other equity or equity equivalent securities
payable in shares of Common Stock (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by
the Company pursuant to this Debenture, including as interest
thereon), (B) subdivide outstanding shares of Common Stock
into a larger number of shares, (C) combine (including by way
of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issue by
reclassification of shares of the Common Stock any shares of
capital stock of the Company, then the Set 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
outstanding after such event. Any adjustment made pursuant to
this Section shall become effective immediately after the
record date for the determination of stockholders entitled to
receive such dividend or distribution and shall become
effective immediately after the effective date in the case of
a subdivision, combination or re-classification.
(iii) If at any time while the Debentures are
outstanding and during the period commencing from the Original
Issue Date of this Debenture and ending upon the later of (A)
24 months from the Original Issue Date or (B) the completion
Debenture - page 8
of new financing of at least $25,000,000 at a stock price
greater than 200% of the Set Price (the "FULL RATCHET
ADJUSTMENT PERIOD"), the Company shall issue or sell, or in
accordance with Section 4(c)(iv) hereof is deemed to have
issued or sold, any shares of Common Stock by means of Capital
Shares Equivalents (as defined in the Purchase Agreement),
except for Excepted Issuances (as defined in Section
4(c)(iv)(E) hereof), for an effective consideration per share
of less than the then Set Price or for no consideration (such
lower price, the "BASE SHARE PRICE" and such issuances
collectively, a "DILUTIVE ISSUANCE"), then, the Set Price
shall be reduced to equal the Base Share Price. Such
adjustment shall be made whenever such shares of Common Stock
or Capital Shares Equivalent are issued. If at any time while
the Debentures are outstanding and during the period
commencing after the Full Ratchet Adjustment Period the
Company shall issue or sell, or in accordance with this
Section 4(c)(iv) hereof is deemed to have issued or sold by
shares of Common Stock by means of Capital Shares Equivalents,
except for Excepted Issuances (as defined in Section
4(c)(iv)(E) hereof), for a consideration less than the then
Set Price or for no consideration, then, and thereafter
successively upon each such issue, the Set Price shall be
reduced as follows: (X) the number of shares of Common Stock
outstanding immediately prior to such issue shall be
multiplied by the Set Price in effect at the time of such
issue and the product shall be added to the aggregate
consideration, if any, received by the Company upon such issue
of additional shares of Common Stock; and (Y) the sum so
obtained shall be divided by the number of shares of Common
Stock outstanding immediately after such issue. The resulting
quotient shall be the adjusted Set Price. The Company shall
notify the Holder in writing, no later than the business day
following the issuance of any Capital Shares or Capital Shares
Equivalent subject to this section, indicating therein the
adjusted Set Price.
(iv) For purposes of determining the adjusted Set
Price under Section 4(c)(iii) hereof, the following will be
applicable:
(A) ISSUANCE OF RIGHTS OR OPTIONS. If the
Company in any manner issues or grants any warrants,
rights or options, whether or not immediately
exercisable, to subscribe for or to purchase Common
Stock or Capital Shares Equivalent (such warrants,
rights and options to purchase Common Stock or
Capital Shares Equivalent are hereinafter referred to
as "OPTIONS") and the effective price per share for
which Common Stock is issuable upon the exercise of
such Options is less than the Set Price ("BELOW BASE
PRICE OPTIONS"), then the maximum total number of
shares of Common Stock issuable upon the exercise of
all such Below Base Price Options (assuming full
exercise, conversion or exchange of Capital Shares
Equivalent, if applicable) will, as of the date of
the issuance or grant of such Below Base Price
Options, be deemed to be outstanding and to have been
issued and sold by the Company for such price per
share and the maximum consideration payable to the
Company upon such exercise (assuming full exercise,
conversion or exchange of Capital Shares Equivalent,
if applicable) will be deemed to have been received
by the
Debenture - page 9
Company. For purposes of the preceding sentence,
the "effective price per share for which Common
Stock is issuable upon the exercise of such Below
Base Price Options" is determined by dividing (i)
the total amount, if any, received or receivable by
the Company as consideration for the issuance or
granting of all such Below Base Price Options, plus
the minimum aggregate amount of additional
consideration, if any, payable to the Company upon
the exercise of all such Below Base Price Options,
plus, in the case of Capital Shares Equivalent
issuable upon the exercise of such Below Base Price
Options, the minimum aggregate amount of additional
consideration payable upon the exercise, conversion
or exchange thereof at the time such Capital Shares
Equivalent first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise of
all such Below Base Price Options (assuming full
conversion of Capital Shares Equivalent, if
applicable). No further adjustment to the Set Price
will be made upon the actual issuance of such Common
Stock or Convertible Securities upon the exercise of
such Below Base Price Options or upon the exercise,
conversion or exchange of Capital Shares Equivalent
issuable upon exercise of such Below Base Price
Options.
(B) ISSUANCE OF CAPITAL SHARES EQUIVALENT.
If the Company in any manner issues or sells any
Capital Shares Equivalent, whether or not immediately
convertible (other than where the same are treated as
Options or are issuable upon the exercise of Options
under Section 4(c)(iv)(A)) and the effective price
per share for which Common Stock is issuable upon
such exercise, conversion or exchange is less than
the Set Price, then the maximum total number of
shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Capital Shares
Equivalent will, as of the date of the issuance of
such Capital Shares Equivalent, be deemed to be
outstanding and to have been issued and sold by the
Company for such price per share and the maximum
consideration payable to the Company upon such
exercise (assuming full exercise, conversion or
exchange of Capital Shares Equivalent, if applicable)
will be deemed to have been received by the Company.
For the purposes of the preceding sentence, the
"effective price per share for which Common Stock is
issuable upon such exercise, conversion or exchange"
is determined by dividing (i) the total amount, if
any, received or receivable by the Company as
consideration for the issuance or sale of all such
Capital Shares Equivalent, plus the minimum aggregate
amount of additional consideration, if any, payable
to the Company upon the exercise, conversion or
exchange thereof at the time such Capital Shares
Equivalent first become exercisable, convertible or
exchangeable, by (ii) the maximum total number of
shares of Common Stock issuable upon the exercise,
conversion or exchange of all such Capital Shares
Equivalent. No further adjustment to the Set Price
will be made upon the actual
Debenture - page 10
issuance of such Common Stock upon exercise,
conversion or exchange of such Capital Shares
Equivalent.
(C) CHANGE IN OPTION PRICE OR CONVERSION
RATE. If there is a change at any time in (i) the
amount of additional consideration payable to the
Company upon the exercise of any Options; (ii) the
amount of additional consideration, if any, payable
to the Company upon the exercise, conversion or
exchange of any Capital Shares Equivalent; or (iii)
the rate at which any Capital Shares Equivalent are
convertible into or exchangeable for Common Stock (in
each such case, other than under or by reason of
provisions designed to protect against dilution), the
Set Price in effect at the time of such change will
be readjusted to the Set Price which would have been
in effect at such time had such Options or Capital
Shares Equivalent still outstanding provided for such
changed additional consideration or changed
conversion rate, as the case may be, at the time
initially granted, issued or sold.
(D) CALCULATION OF CONSIDERATION RECEIVED.
If any Common Stock, Options or Capital Shares
Equivalent are issued, granted or sold for cash, the
consideration received therefor for purposes of this
Debenture will be the amount received by the Company
therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other
reasonable expenses paid or incurred by the Company
in connection with such issuance, grant or sale. In
case any Common Stock, Options or Capital Shares
Equivalent are issued or sold for a consideration
part or all of which shall be other than cash, the
amount of the consideration other than cash received
by the Company will be the fair market value of such
consideration, except where such consideration
consists of securities, in which case the amount of
consideration received by the Company will be the
fair market value (closing bid price, if traded on
any market) thereof as of the date of receipt. In
case any Common Stock, Options or Capital Shares
Equivalent are issued in connection with any merger
or consolidation in which the Company is the
surviving corporation, the amount of consideration
therefor will be deemed to be the fair market value
of such portion of the net assets and business of the
non-surviving corporation as is attributable to such
Common Stock, Options or Capital Shares Equivalent,
as the case may be. The fair market value of any
consideration other than cash or securities will be
determined in good faith by an investment banker or
other appropriate expert of national reputation
selected by the Company and reasonably acceptable to
the holder hereof, with the costs of such appraisal
to be borne by the Company.
(E) EXCEPTED ISSUANCES. Notwithstanding the
foregoing, no adjustment will be made under this
Section 4(c)(iii) in respect of (1) the granting or
exercise of options to employees, officers and
directors of the Company pursuant to any stock option
plan duly adopted by a majority of
Debenture - page 11
the non-employee members of the Board of Directors of
the Company or a majority of the members of a
committee of non-employee directors established for
such purpose, (2) the conversion of the Debentures
or any Debentures of this series or of any other
series or the conversion or exercise of any other
security issued by the Company in connection with
the offer and sale of the Company's securities
pursuant to the Purchase Agreement, (3) the
amendment, exercise, conversion or redemption of
any Capital Shares Equivalent or Options issued and
outstanding on the Original Issue Date, (4) the
payment of interest on any Senior Debt in shares of
the Company's Common Stock, (5) the issuance of
any shares or Capital Shares Equivalent pursuant
to the terms of any convertible securities issued
and outstanding on the Original Issue Date, or (6)
the issuance of securities in connection with
acquisitions or strategic investments, the primary
purpose of which is not to raise capital.
(v) All calculations under this Section 4 shall be
made to the nearest cent or the nearest 1/100th of a share, as
the case may be. For purposes of this Section 4, the number of
shares of Common Stock outstanding as of a given date shall be
the sum of the number of shares of Common Stock (excluding
treasury shares, if any) outstanding.
(vi) Whenever the Set Price is adjusted pursuant to
Section 4(c), the Company shall promptly mail to each Holder a
notice setting forth the Set Price after such adjustment and
setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security,
despite the prohibition thereon in the Purchase Agreement, the
Company shall be deemed to have issued Capital Shares or
Capital Shares Equivalents at the lowest possible conversion
or exercise price at which such securities may be converted or
exercised.
(vii) If (A) the Company shall declare a dividend (or
any other distribution) on the Common Stock; (B) the Company
shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock; (C) the Company shall
authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights; (D) the approval
of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of
the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or
property; (E) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the
affairs of the Company; then, in each case, the Company shall
cause to be filed at each office or agency maintained for the
purpose of conversion of the Debentures, and shall cause to be
mailed to the Holders at their last addresses as they shall
appear upon the stock books of the Company, at least 10
Business Days prior to the applicable record or effective
Debenture - page 12
date hereinafter specified, a notice stating (x) the date on
which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if
a record is not to be taken, the date as of which the holders
of the Common Stock of record to be entitled to such dividend,
distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is
expected to become effective or close, and the date as of
which it is expected that holders of the Common Stock of
record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; PROVIDED, that the failure
to mail such notice or any defect therein or in the mailing
thereof shall not affect the validity of the corporate action
required to be specified in such notice. Holders are entitled
to convert Debentures during the 20-day period commencing the
date of such notice to the effective date of the event
triggering such notice.
(viii) If, at any time while this Debenture is
outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B)
any tender offer or exchange offer (whether by the Company or
another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares
for other securities, cash or property, or (C) the Company
effects any reclassification of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock
is effectively converted into or exchanged for other
securities, cash or property (in any such case, a "FUNDAMENTAL
TRANSACTION"), then upon any subsequent conversion of this
Debenture, the Holder shall have the right to receive, for
each Underlying Share that would have been issuable upon such
conversion absent such Fundamental Transaction, the same kind
and amount of securities, cash or property as it would have
been entitled to receive upon the occurrence of such
Fundamental Transaction if it had been, immediately prior to
such Fundamental Transaction, the holder of one share of
Common Stock (the "ALTERNATE CONSIDERATION"). For purposes of
any such conversion, the determination of the Set Price shall
be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such
Fundamental Transaction, and the Company shall apportion the
Set Price among the Alternate Consideration in a reasonable
manner reflecting the relative value of any different
components of the Alternate Consideration. If holders of
Common Stock are given any choice as to the securities, cash
or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this
Debenture following such Fundamental Transaction. To the
extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such
Fundamental Transaction shall issue to the Holder a new
debenture consistent with the foregoing provisions and
evidencing the Holder's right to convert such debenture into
Alternate Consideration. The terms of any agreement pursuant
to which a Fundamental Transaction is effected
Debenture - page 13
shall include terms requiring any such successor or surviving
entity to comply with the provisions of this paragraph (c) and
insuring that this Debenture (or any such replacement
security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction. If any
Fundamental Transaction constitutes or results in a Change of
Control Transaction, then at the request of the Holder
delivered before the 90th day after such Fundamental
Transaction, the Company (or any such successor or surviving
entity) will purchase the Debenture from the Holder for a
purchase price, payable in cash within five Trading Days after
such request (or, if later, on the effective date of the
Fundamental Transaction), equal to the 105% of the remaining
unconverted principal amount of this Debenture on the date of
such request, plus all accrued and unpaid interest thereon,
plus all other accrued and unpaid amounts due hereunder.
(d) The Company covenants that it will at all times reserve
and keep available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of the
Debentures and payment of interest on the Debenture, each as herein
provided, free from preemptive rights or any other actual contingent
purchase rights of persons other than the Holders, not less than such
number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares
set forth in the Purchase Agreement) be issuable (taking into account
the adjustments and restrictions of Section 4(b)) upon the conversion
of the outstanding principal amount of the Debentures and payment of
interest hereunder. The Company covenants that all shares of Common
Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Underlying
Shares Registration Statement is then effective under the Securities
Act, registered for public sale in accordance with such Underlying
Shares Registration Statement.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares
of the Common Stock, but may if otherwise permitted, make a cash
payment in respect of any final fraction of a share based on the VWAP
at such time. If the Company elects not, or is unable, to make such a
cash payment, the Holder shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.
(f) The issuance of certificates for shares of the Common
Stock on conversion of the Debentures shall be made without charge to
the Holders thereof for any documentary stamp or similar taxes that may
be payable in respect of the issue or delivery of such certificate,
provided that the Company shall not be required to pay any tax that may
be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than
that of the Holder of such Debentures so converted and the Company
shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
Debenture - page 14
(g) Any and all notices or other communications or deliveries
to be provided by the Holders hereunder, including, without limitation,
any Notice of Conversion, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Company, at the address set forth above,
facsimile number (303) 293-2417, ATTN: MARC E. BRUNER or such other
address or facsimile number as the Company may specify for such
purposes by notice to the Holders delivered in accordance with this
Section. Any and all notices or other communications or deliveries to
be provided by the Company hereunder shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight
courier service addressed to each Holder at the facsimile telephone
number or address of such Holder appearing on the books of the Company,
or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other
communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section prior to 5:30 p.m. (New York
City time), (ii) the date after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 5:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required
to be given.
SECTION 5. DEFINITIONS. For the purposes hereof, in addition to the
terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise
defined herein have the meanings given to such terms in the Purchase Agreement,
and (b) the following terms shall have the following meanings:
"BUSINESS DAY" means any day except Saturday, Sunday and any
day which shall be a federal legal holiday in the United States or a
day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"CHANGE OF CONTROL TRANSACTION" means the occurrence after the
date hereof of any of (i) an acquisition after the date hereof by an
individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of effective control (whether
through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 50% of the voting securities
of the Company, or (ii) the sale by the Company of all or substantially
all of its assets in one or a series of related transactions.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock, $.001 par value per
share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
Debenture - page 15
"CONVERSION DATE" shall have the meaning set forth in Section
4(a)(i) hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"MATURITY DATE" shall mean 30 months from the Original Issue
Date, unless payment of amounts due under this Debenture shall violate
the terms of any provisions of the debt instruments and agreements with
the holders of the Company's Senior Debt, thereby automatically
extending such date to the earliest date on which no Senior Debt is
outstanding.
"ORIGINAL ISSUE DATE" shall mean the date of the first
issuance of the Debentures regardless of the number of transfers of any
Debenture and regardless of the number of instruments which may be
issued to evidence such Debenture.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political
subdivision thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Securities Purchase Agreement,
dated as of April 25, 2006, to which the Company and the original
Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SET PRICE" shall have the meaning set forth in Section
4(c)(i).
"SENIOR DEBT" shall be all of the indebtedness identified in
Schedule 3.1(x) to the Purchase Agreement.
"TRADING DAY" means (a) a day on which the shares of Common
Stock are traded on a Principal Market on which the shares of Common
Stock are then listed or quoted, or (b) if the shares of Common Stock
are not quoted on a Principal Market, a day on which the shares of
Common Stock are quoted in the over-the-counter market as reported by
the National Quotation Bureau Incorporated (or any similar organization
or agency succeeding its functions of reporting prices); PROVIDED, that
in the event that the shares of Common Stock are not listed or quoted
as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a
Business Day.
"TRANSACTION DOCUMENTS" shall have the meaning set forth in
the Purchase Agreement.
"UNDERLYING SHARES" means the shares of Common Stock issuable
upon conversion of Debentures or as payment of interest in accordance
with the terms hereof.
Debenture - page 16
"UNDERLYING SHARES REGISTRATION STATEMENT" means a
registration statement meeting the requirements set forth in the
Purchase Agreement, covering among other things the resale of the
Underlying Shares and naming the Holder as a "selling stockholder"
thereunder.
"VWAP" means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date)
on the Trading Market on which the Common Stock is then listed or
quoted as reported by Bloomberg Financial L.P. (based on a trading day
from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the
Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board,
the volume weighted average price of the Common Stock for such date (or
the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and
if prices for the Common Stock are then reported in the "Pink Sheets"
published by the National Quotation Bureau Incorporated (or a similar
organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so
reported; or (d) in all other cases, the fair market value of a share
of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers and reasonably acceptable to the Company.
SECTION 6. This Debenture is a direct debt obligation of the Company. This
Debenture ranks PARI PASSU with all other Debentures now or hereafter issued
under the terms set forth herein.
SECTION 7. If this Debenture shall be mutilated, lost, stolen or
destroyed, the Company shall execute and deliver, in exchange and substitution
for and upon cancellation of a mutilated Debenture, or in lieu of or in
substitution for a lost, stolen or destroyed Debenture, a new Debenture for the
principal amount of this Debenture so mutilated, lost, stolen or destroyed but
only upon receipt of evidence of such loss, theft or destruction of such
Debenture, and of the ownership hereof, and indemnity, if requested, all
reasonably satisfactory to the Company.
SECTION 8. [INTENTIONALLY OMITTED]
SECTION 9. All questions concerning the construction, validity,
enforcement and interpretation of this Debenture shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Colorado, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this
Debenture - page 17
Debenture or the transactions contemplated hereby. If either party shall
commence an action or proceeding to enforce any provisions of this Debenture,
then the prevailing party in such action or proceeding shall be reimbursed
by the other party for its attorneys fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.
SECTION 10. Any waiver by the Company or the Holder of a breach of any
provision of this Debenture shall not operate as or be construed to be a waiver
of any other breach of such provision or of any breach of any other provision of
this Debenture. The failure of the Company or the Holder to insist upon strict
adherence to any term of this Debenture on one or more occasions shall not be
considered a waiver or deprive that party of the right thereafter to insist upon
strict adherence to that term or any other term of this Debenture. Any waiver
must be in writing.
SECTION 11. If any provision of this Debenture is invalid, illegal or
unenforceable, the balance of this Debenture shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances. If it shall be found
that any interest or other amount deemed interest due hereunder violates any
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Company covenants (to the extent that it may lawfully do so) that it shall
not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impeded the execution of any power herein granted to the Holder, but
will suffer and permit the execution of every such as though no such law has
been enacted.
SECTION 12. Whenever any payment or other obligation hereunder shall be
due on a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
*********************
Debenture - page 18
IN WITNESS WHEREOF, the Company has caused this Convertible Debenture
to be duly executed by a duly authorized officer as of the date first above
indicated.
GALAXY ENERGY CORPORATION
By:
-----------------------------------------
Name:
Title:
ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal under the 15% Subordinated
Convertible Debenture of Galaxy Energy Corporation (the "Company"), due on
October 25, 2008, into shares of common stock, $.001 par value per share (the
"COMMON STOCK"), of the Company according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the holder for any conversion, except for such transfer taxes, if
any.
By the delivery of this Notice of Conversion the undersigned represents and
warrants to the Company that its ownership of the Company's Common Stock does
not exceed the amounts determined in accordance with Section 13(d) of the
Exchange Act, specified under Section 4 of this Debenture.
The undersigned agrees to comply with the prospectus delivery requirements under
the applicable securities laws in connection with any transfer of the aforesaid
shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount of Debentures to be Converted:
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account
of Conversion at Issue.
Number of shares of Common Stock to be issued:
Signature:
Name:
Delivery address for physical delivery:
DTC DWAC Account for electronic delivery:
Contact information in case of questions:
SCHEDULE 1
CONVERSION SCHEDULE
15% Subordinated Convertible Debentures due on October 25, 2008, in the
aggregate principal amount of $____________ issued by Galaxy Energy Corporation
This Conversion Schedule reflects conversions made under Section 4 of the above
referenced Debenture.
Dated:
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Aggregate Principal
Amount Remaining
Date of Conversion Subsequent to
(or for first entry, Original Amount of Conversion Conversion
Issue Date) Principal Amount) (or original Company Attest
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