EXHIBIT 1.1 STANDBY EQUITY DISTRIBUTION AGREEMENT

 

<PAGE>

 

                                                                     EXHIBIT 1.1

 

                      STANDBY EQUITY DISTRIBUTION AGREEMENT

 

      AGREEMENT dated as of the 11th day of February 2004 (the "Agreement")

between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the

"Investor"), and CANARGO ENERGY CORPORATION, a corporation organized and

existing under the laws of the State of Delaware (the "Company").

 

      WHEREAS, the parties desire that, upon the terms and subject to the

conditions contained herein, the Company shall issue and sell to the Investor,

from time to time as provided herein, and the Investor shall purchase from the

Company up to Twenty Million Dollars ($20,000,000) of the Company's common

stock, par value $0.10 per share (the "Common Stock"); and

 

      WHEREAS, such investments will be made in reliance upon the provisions of

Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the

rules and regulations promulgated thereunder (the "Securities Act"), and or upon

such other exemption from the registration requirements of the Securities Act as

may be available with respect to any or all of the investments to be made

hereunder.

 

      WHEREAS, the Company has engaged Newbridge Securities Corporation, to act

as the Company's exclusive placement agent in connection with the sale of the

Company's Common Stock to the Investor hereunder pursuant to the Placement Agent

Agreement dated the date hereof by and among the Company, the Placement Agent

and the Investor substantially in the form attached hereto as Exhibit A(the

"Placement Agent Agreement").

 

      NOW, THEREFORE, the parties hereto agree as follows:

 

                                   ARTICLE I.

 

                               CERTAIN DEFINITIONS

 

      Section 1.1. "Advance" shall mean the portion of the Commitment Amount

requested by the Company in the Advance Notice.

 

      Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP Escrow

Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as

the Investor's Counsel, is in possession of Common Stock, which has been

registered for resale under the Securities Act pursuant to the Registration

Statement filed pursuant to the Registration Rights Agreement dated the date

hereof, from the Company and therefore an Advance by the Investor to the Company

can be made and Butler Gonzalez LLP can release such shares to the Investor. No

Advance Date shall be less than six (6) Trading Days after an Advance Notice

Date.

 

      Section 1.3. "Advance Notice" shall mean a written notice to the Investor

setting forth the Advance amount that the Company requests from the Investor and

the Advance Date.

 

      Section 1.4. "Advance Notice Date" shall mean each date the Company

delivers to the Investor an Advance Notice requiring the Investor to advance

funds to the Company, subject to

 

<PAGE>

 

the terms of this Agreement. No Advance Notice Date shall be less than seven (7)

Trading Days after the prior Advance Notice Date.

 

      Section 1.5. "Affiliate" shall mean (i) when referring to an Affiliate of

the Investor, a director, officer, member, partner or employee of the Investor,

or any Person that directly, or indirectly through one or more intermediaries,

controls, is controlling or is under common control with the Investor, or any

Person who has "investment discretion" (as defined in Section 3(a)(35) of the

Exchange Act) over any account maintained by the Investor, or any Person over

whose account the Investor has any investment discretion and (ii) when referring

to an Affiliate of any Person, any Person that directly, or indirectly through

one or more intermediaries, controls, is controlling or is under common control

with such other Person.

 

      Section 1.6. "Bid Price" shall mean, on any date, the closing bid price

(as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or

if the Common Stock is not traded on a Principal Market, the highest reported

bid price for the Common Stock, as furnished by the National Association of

Securities Dealers, Inc.

 

      Section 1.7. "Business Day" shall mean any day that is not a Saturday, a

Sunday or other day on which banks are required or authorized by law to be

closed in New York.

 

      Section 1.8. "Closing" shall mean one of the closings of a purchase and

sale of Common Stock pursuant to Section 2.3.

 

      Section 1.9. "Commitment Amount" shall mean the aggregate amount of up to

Twenty Million Dollars ($20,000,000) which the Investor has irrevocably agreed

to provide to the Company in order to purchase the Company's Common Stock

pursuant to the terms and conditions of this Agreement.

 

      Section 1.10. "Commitment Period" shall mean the period commencing on the

earlier to occur of (i) the Effective Date, or (ii) such earlier date as the

Company and the Investor may mutually agree in writing, and expiring on the

earliest to occur of (x) the date on which the Investor shall have made payment

of Advances pursuant to this Agreement in the aggregate amount of Twenty Million

Dollars ($20,000,000), (y) the date this Agreement is terminated pursuant to

Section 2.4, or 10.2 or (z) the date occurring twenty-four (24) months after the

Effective Date.

 

      Section 1.11. "Common Stock" shall mean the Company's common stock, par

value $0.10 per share.

 

      Section 1.12. "Condition Satisfaction Date" shall have the meaning set

forth in Section 7.2.

 

      Section 1.13. "Damages" shall mean any loss, claim, damage, liability,

costs and expenses (including, without limitation, reasonable attorney's fees

and disbursements and costs and expenses of expert witnesses and investigation).

 

                                       2

<PAGE>

 

      Section 1.14. "Effective Date" shall mean the date on which the SEC first

declares effective a Registration Statement registering the resale of the

Registrable Securities as set forth in Section 7.2(a).

 

      Section 1.15. "Escrow Agreement" shall mean the escrow agreement among the

Company, the Investor, and Butler Gonzalez LLP dated the date hereof in

substantially the form of Exhibit B attached hereto.

 

      Section 1.16. "Exchange Act" shall mean the Securities Exchange Act of

1934, as amended, and the rules and regulations promulgated thereunder.

 

      Section 1.17. "Material Adverse Effect" shall mean any condition,

circumstance, or situation that would prohibit or otherwise materially interfere

with the ability of either party hereto to enter into and perform any of its

obligations under this Agreement or the Registration Rights Agreement in any

material respect.

 

      Section 1.18. "Market Price" shall mean the lowest daily closing VWAP of

the Common Stock during the Pricing Period on the Principal Market.

 

      Section 1.19. "Maximum Advance Amount" shall be Six Hundred Thousand

Dollars ($600,000) per Advance Notice.

 

      Section 1.20. "NASD" shall mean the National Association of Securities

Dealers, Inc.

 

      Section 1.21 "NOK" shall mean Norwegian Kroner.

 

      Section 1.22. "OSE" Shall mean the Oslo Stock Exchange.

 

      Section 1.23. "Person" shall mean an individual, a corporation, a

partnership, an association, a trust or other entity or organization, including

a government or political subdivision or an agency or instrumentality thereof.

 

      Section 1.24. "Placement Agent" shall mean Newbridge Securities

Corporation a registered broker-dealer.

 

      Section 1.25. "Pricing Period" shall mean the initial five (5) consecutive

Trading Days immediately after the Advance Notice Date.

 

         Section 1.26. "Principal Market" shall mean the OSE and in the event

the Common Stock is not traded on the OSE, the Nasdaq National Market, the

Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board, or

the New York Stock Exchange, whichever is at the time the principal trading

exchange or market for the Common Stock, or such other trading exchange or

market the parties may agree as the principal trading exchange or market of the

Company, from time to time.

 

      Section 1.27. "Purchase Price" shall be set at ninety seven percent (97%)

of the Market Price during the Pricing Period.

 

                                       3

<PAGE>

 

      Section 1.28. "Registrable Securities" shall mean the shares of Common

Stock to be issued hereunder (i) in respect of which the Registration Statement

has not been declared effective by the SEC, (ii) which have not been sold under

circumstances meeting all of the applicable conditions of Rule 144 (or any

similar rule then in force) under the Securities Act ("Rule 144") or (iii) which

have not been otherwise transferred to a holder who may trade such shares

without restriction under the Securities Act, and the Company has delivered a

new certificate or other evidence of ownership for such securities bearing a

restrictive legend.

 

      Section 1.29. "Registration Rights Agreement" shall mean the Registration

Rights Agreement dated the date hereof, regarding the filing of the Registration

Statement for the resale of the Registrable Securities, entered into between the

Company and the Investor in substantially the form attached hereto as Exhibit

"C".

 

      Section 1.30. "Registration Statement" shall mean a registration statement

on Form S-1 or SB-2 (if use of such form is then available to the Company

pursuant to the rules of the SEC and, if not, on such other form promulgated by

the SEC for which the Company then qualifies and which counsel for the Company

shall deem appropriate, and which form shall be available for the resale of the

Registrable Securities to be registered thereunder in accordance with the

provisions of this Agreement and the Registration Rights Agreement, and in

accordance with the intended method of distribution of such securities), for the

registration of the resale by the Investor of the Registrable Securities under

the Securities Act.

 

      Section 1.31. "Regulation D" shall have the meaning set forth in the

recitals of this Agreement.

 

      Section 1.32. "SEC" shall mean the Securities and Exchange Commission.

 

      Section 1.33. "Securities Act" shall have the meaning set forth in the

recitals of this Agreement.

 

      Section 1.34. "SEC Documents" shall mean Annual Reports on Form 10-K,

Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements

of the Company as supplemented to the date hereof, filed by the Company for a

period of at least twelve (12) months immediately preceding the date hereof or

the Advance Date, as the case may be, until such time as the Company no longer

has an obligation to maintain the effectiveness of a Registration Statement as

set forth in the Registration Rights Agreement.

 

      Section 1.35. "Securities Laws" shall (i) have the meaning set forth in

Section 3(a)(47) under the Exchange Act and all rules and regulations

promulgated thereunder; (ii) including all applicable United States state

securities or "blue sky" laws and all rules and regulations promulgated

thereunder, and, (iii) including all laws, rule and regulations promulgated by

any "foreign securities authority" or "foreign financial regulatory authority"

as respectively defined in Sections 3(a)(50) and (52) under the Exchange Act, in

each case as applicable.

 

      Section 1.36. "Subsidiary" shall mean with respect to any Person, any

other corporation, limited liability company, general or limited partnership,

unincorporated association, trust or other business entity of which (i) if a

corporation, a majority of the total

 

                                       4

<PAGE>

 

voting power of shares of stock entitled (without regard to the occurrence of

any contingency) to vote in the election of directors thereof is at the time

owned or controlled, directly or indirectly, by that Person or one or more of

the Subsidiaries of that Person or a combination thereof, or (ii) if a limited

liability company, partnership, association, trust or other business entity, a

majority of the partnership or other similar ownership interest thereof is at

the time owned or controlled, directly or indirectly, by any Person or one or

more Subsidiaries of that Person or a combination thereof.

 

      Section 1.37. "Trading Day" shall mean any day during which the Principal

Market shall be open for business.

 

      Section 1.38. "US$ or $ or Dollar" shall mean the currency of the United

States.

 

      Section 1.39. "VWAP" shall mean the volume weighted average price of the

Company's Common Stock as quoted by Bloomberg, L.P on the Principal Market. The

VWAP will be converted from NOK to US$ at the mid-market NOK/US$ price quoted by

Bloomberg, L.P., at the time when the Principal Market (equities only) closes,

at the end of the Pricing Period.

 

      Section 1.40 "Other Interpretive Provisions" With reference to this

Agreement, unless otherwise specified herein, the following interpretive

provisions shall apply:

 

            i.     the meanings of defined terms are equally applicable to the

singular and plural forms of such defined terms;

 

            ii.    where a representation, covenant, or warranty given by a party

hereto is qualified by "to the knowledge of" or "to the best knowledge of" or

words of similar effect than the knowledge of the party giving such

representation, warranty, or covenant shall be the knowledge of its executive

officers;

 

            iii.   the words "herein", "hereto", "hereof", and "hereunder" and

words of similar import shall refer to this Agreement as a whole and not to any

particular provision hereof;

 

            iv.    Article, Section and Exhibit references are to this Agreement

and any Exhibits thereto;

 

            v.     the term "including" is by way of example and not limitation

and "or" has the inclusive meaning of the phrase "and/or";

 

            vi.    the term "documents" includes any and all instruments,

documents, agreements, certificates, notices, reports, financial statements and

other writings, however evidenced, whether in physical or electronic form;

 

            vii.   in the computation of periods of time from a specified date to

a later specified date, (i) the word "from" shall mean "from and including;" and

the words "to" and "until" each mean "to but excluding;" and (iii) the word

"through" shall mean "to and including";

 

                                       5

<PAGE>

 

            viii. Article and Section headings herein are included for

convenience of reference only and shall not affect the interpretation of this

Agreement; and words importing masculine gender shall include feminine and

neuter genders and vice versa and words importing individuals shall include

Persons and vice versa;

 

            ix.    whenever anything is required to be done or any action is

required to be taken hereunder on or by a day which is not a Business Day or

Trading Day, then such thing may be validly done and such action may be validly

taken on or by the next succeeding Business Day or Trading Day that is a

Business Day or Trading Day, respectively;

 

            x.     any reference to any law, statute, rule or regulation shall

mean such law, statute, rule, or regulation as in effect and amended from time

to time; and

 

            xi.    the parties have participated jointly in the negotiation and

drafting of this Agreement. In the event that an ambiguity or question of intent

or interpretation arises, this Agreement shall be construed as if drafted

jointly by the parties and no presumption or burden of proof shall arise

favoring or disfavoring any party by virtue of authorship of any of the

provisions of this Agreement.

 

                                   ARTICLE II.

 

                                    ADVANCES

 

      Section 2.1. Investments.

 

            (a)    Advances. Upon the terms and conditions set forth herein

(including, without limitation, the provisions of Article VII hereof), on any

Advance Notice Date the Company may request an Advance by the Investor by the

delivery of an Advance Notice. Subject to adjustment as herein provided, the

number of shares of Common Stock that the Investor shall receive for each

Advance shall be determined by dividing the amount of the Advance by the

Purchase Price. No fractional shares shall be issued. Fractional shares shall be

rounded to the next higher whole number of shares. The aggregate maximum amount

of all Advances that the Investor shall be obligated to make under this

Agreement shall not exceed the Commitment Amount.

 

      Section 2.2. Mechanics.

 

            (a)    Advance Notice. At any time during the Commitment Period, the

Company may deliver an Advance Notice to the Investor, subject to the conditions

set forth in Section 7.2; provided, however, the amount for each Advance as

designated by the Company in the applicable Advance Notice, shall not be more

than the Maximum Advance Amount. The aggregate amount of the Advances pursuant

to this Agreement shall not exceed the Commitment Amount. The Company

acknowledges that the Investor may sell shares of the Company's Common Stock

corresponding with a particular Advance Notice on the day the Advance Notice is

received by the Investor; provided however, the Investor agrees that it shall

and it shall cause its Affiliates to comply with all applicable Securities Laws

in connection with each such sale, including Rules 3b-3, 10a-1, and 10a-2 under

the Exchange Act. There will be a minimum of seven (7) Trading Days between each

Advance Notice Date.

 

                                       6

<PAGE>

 

            (b)    Date of Delivery of Advance Notice. An Advance Notice shall be

deemed delivered on (i) the Trading Day it is received by facsimile or otherwise

by the Investor if such notice is received prior to 12:00 noon United States

Eastern Time (5:00 pm London, England Time), or (ii) the immediately succeeding

Trading Day if it is received by facsimile or otherwise after 12:00 noon United

States Eastern Time (5:00 pm London, England Time), on a Trading Day or at any

time on a day which is not a Trading Day. No Advance Notice may be deemed

delivered, on a day that is not a Trading Day.

 

            (d)    Closing of an Advance Notice. In order to effectuate a closing

of an Advance Notice pursuant to the Escrow Agreement, upon the calculation of

the number of shares of the Company's Common Stock required pursuant to an

Advance Notice the Company shall deliver, such shares of the Company's Common

Stock to the Investor's Counsel equal to the Advance Notice, either in physical

stock certificate form or via credit shares of the Company's Common Stock to the

Investor's Counsel's balance account with The Depository Trust Company through

its Deposit Withdrawal At Custodian system, and the Investor shall deposit with

the Investor's Counsel the amount of such Advance Notice.

 

            (e)    Loss. In the event the Investor sells the Company's Common

Stock pursuant to an Advance Notice and the Company fails to perform its

obligations as mandated in Section 2.5 and 2.2 (d) and the Escrow Agreement, and

specifically fails to provide the Investor with the shares of Common Stock for

the applicable Advance, the Company acknowledges that the Investor shall suffer

financial hardship and therefore shall be liable for any and all losses,

commissions, fees, or financial hardship caused to the Investor.

 

      Section 2.3. Closings. On each Advance Date, which shall be six (6)

Trading Days after an Advance Notice Date, (i) the Company shall deliver to the

Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the

Company's Common Stock, representing the amount of the Advance by the Investor

pursuant to Section 2.1 herein, registered in the name of the Investor which

shall be delivered to the Investor, or otherwise in accordance with the Escrow

Agreement and (ii) the Investor shall deliver to (x) Butler Gonzalez LLP (the

"Escrow Agent") the amount of the Advance specified in the Advance Notice by

wire transfer of immediately available funds which shall be delivered to the

Company, or otherwise in accordance with the Escrow Agreement and (y) to the

Company a written report specifying (1) the aggregate number of shares of Common

Stock beneficially owned by the Investor and its Affiliates on the Advance

Notice Date; (2) each sale (including short sales, puts or other derivative

transactions equivalent to a sale) of shares of Common Stock by the Investor and

its Affiliates during the six (6) Trading Days preceding the Advance Date

specifying the number of shares sold, the sale price per share and the trading

market in which the sales were effected; and (3) the aggregate number of shares

of Common Stock beneficially owned by the Investor and its Affiliates on the

Advance Date (not including the shares acquired in connection with the Advance).

In addition, on or prior to the Advance Date, each of the Company and the

Investor shall deliver to the other through the Investor's Counsel all

documents, instruments and writings required to be delivered by either of them

pursuant to this Agreement or the Registration Rights Agreement in order to

implement and effect the transactions contemplated herein. Payment of funds to

the Company and delivery of the Company's Common Stock to the Investor shall

occur in accordance with the conditions set forth above and those contained in

the Escrow Agreement; provided, however, that to the extent the Company has not

paid the fees, expenses, and disbursements of the Investor and the

 

                                       7

<PAGE>

 

Investor's counsel in accordance with Section 12.4, (provided that the Company

has been furnished with a written invoice specifying such fees, expenses, and

disbursements in reasonable detail at least three (3) Trading Days prior to the

Advance Date) the amount of such fees, expenses, and disbursements may be

deducted by the Investor (and shall be paid to the relevant party) from the

amount of the Advance with no reduction in the amount of shares of the Company's

Common Stock to be delivered on such Advance Date.

 

      Section 2.4. Termination of Investment. The obligation of the Investor to

make an Advance to the Company and the obligation of the Company to issue shares

of the Company's Common Stock to the Investor pursuant to this Agreement shall

terminate permanently (including with respect to an Advance Date that has not

yet occurred) in the event that (i) there shall occur any stop order or

suspension of the effectiveness of the Registration Statement for an aggregate

of fifty (50) Trading Days, other than due to the acts of the Investor, during

the Commitment Period, or (ii) the Company shall at any time fail materially to

comply with the requirements of Article VI and such failure is not cured within

thirty (30) days after receipt of written notice from the Investor or (iii) this

Agreement is terminated in accordance with the provisions of Section 10.2

hereof, provided, however, that this termination provision shall not apply to

any period commencing upon the filing of a post-effective amendment to such

Registration Statement and ending upon the date on which such post effective

amendment is declared effective by the SEC.

 

      Section 2.5. Agreement to Advance Funds.

 

            (a)    The Investor irrevocably agrees to advance the amount

specified in the Advance Notice to the Company after the completion of each of

the following conditions and the other conditions set forth in this Agreement:

 

                  (i)    the execution and delivery by the Company, and the

Investor, of this Agreement, and the Exhibits hereto;

 

                  (ii)   Investor's Counsel shall have received the shares of

Common Stock applicable to the Advance in accordance with Section 2.2(d) hereof;

 

                  (iii) the Company's Registration Statement with respect to the

resale of the Registrable Securities in accordance with the terms of the

Registration Rights Agreement shall have been declared effective by the SEC;

 

                  (iv)   the Company shall have obtained all material permits and

qualifications required by any applicable state identified by the Investor for

the offer and sale of the Registrable Securities, or shall have the availability

of exemptions therefrom. The sale and issuance of the Registrable Securities

shall be legally permitted by all laws and regulations to which the Company is

subject;

 

                  (v)    the Company shall have filed with the Commission in a

timely manner all reports, notices and other documents required of a "reporting

company" under the Exchange Act and applicable Commission regulations;

 

                                       8

<PAGE>

 

                  (vi)   the fees as set forth in Section 12.4 below shall have

been paid or can be withheld as provided in Section 2.3; and

 

                  (vii) the conditions set forth in Section 7.2 shall have been

satisfied.

 

      Section 2.6. Lock Up Period.

 

                  (i)    During the Commitment Period, the Company shall not

without thirty (30) calendar days prior written notice to the Investor, of which

the sending party has a confirmation of good transmission, issue or sell (i) any

Common Stock or Preferred Stock without consideration or for a consideration per

share less than the Bid Price on the date of issuance or (ii) issue or sell any

warrant, option, right, contract, call, or other security or instrument granting

the holder thereof the right to acquire Common Stock without consideration or

for a consideration per share less than the Bid Price on the date of issuance.

 

                  (ii)   Prior to the Effective Date, as this term is defined in

the Registration Rights Agreement, the Company shall obtain from each executive

officer and director a lock-up agreement, as defined below, in the form annexed

hereto as Exhibit D agreeing to only sell in compliance with the volume

limitation of Rule 144 during the Commitment Period.

 

                                  ARTICLE III.

 

                   REPRESENTATIONS AND WARRANTIES OF INVESTOR

 

      Investor hereby represents and warrants to, and agrees with, the Company

that the following are true and correct as of the date hereof and as of each

Advance Date:

 

      Section 3.1. Organization and Authorization. The Investor is duly

organized and validly existing in the jurisdiction of organization and has all

requisite power and authority to purchase and hold the securities issuable

hereunder. The decision to invest in the securities issuable hereunder and

thereunder, and the execution and delivery of this Agreement and the Exhibits

attached hereto by such Investor, the performance by such Investor of its

obligations hereunder and the consummation by such Investor of the transactions

contemplated hereby and thereunder have been duly authorized and require no

other proceedings on the part of the Investor. The undersigned has the right,

power, authority and legal capacity to execute and deliver this Agreement and

all other Exhibits and other instruments (including, without limitations, the

Registration Rights Agreement), on behalf of the Investor. This Agreement and

Exhibits hereto have been duly executed and delivered by the Investor and,

assuming the execution and delivery hereof and thereof and acceptance thereof by

the Company, will constitute the legal, valid and binding obligations of the

Investor, enforceable against the Investor in accordance with their respective

terms.

 

      Section 3.2. Evaluation of Risks. The Investor has such knowledge and

experience in financial tax and business matters as to be capable of evaluating

the merits and risks of, and bearing the economic risks entailed by, an

investment in the Company and of protecting its interests in connection with

this transaction. It recognizes that its investment in the Company involves a

high degree of risk.

 

                                       9

<PAGE>

 

      Section 3.3. No Legal Advice From the Company. The Investor acknowledges

that it had the opportunity to review this Agreement and the Exhibits hereto and

the transactions contemplated by this Agreement with his or its own legal

counsel and investment and tax advisors. The Investor is relying solely on such

counsel and advisors and not on any statements or representations of the Company

or any of its representatives or agents for legal, tax or investment advice with

respect to this investment, the transactions contemplated by this Agreement or

the Exhibits hereto or the Securities Laws.

 

      Section 3.4. Investment Purpose. The securities are being purchased by the

Investor for its own account, for investment and without any view to the

distribution, assignment or resale to others or fractionalization in whole or in

part. The Investor agrees not to assign or in any way transfer the Investor's

rights hereunder or to the securities or any interest therein and acknowledges

that the Company will not recognize any purported assignment or transfer except

in accordance with applicable Securities Laws. No other person has or will have

a direct or indirect beneficial interest in the securities. The Investor agrees

not to sell, hypothecate or otherwise transfer the Investor's securities or

interests therein unless the securities are registered under Federal and

applicable state securities laws or unless, in the opinion of counsel

satisfactory to the Company, an exemption from such laws is available.

 

      Section 3.5. Accredited Investor. The Investor is an "Accredited Investor"

as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act.

 

      Section 3.6. Information. The Investor and its advisors (and its counsel),

if any, have been furnished with all materials relating to the business,

finances and operations of the Company and information it deemed material to

making an informed investment decision. The Investor and its advisors, if any,

have been afforded the opportunity to ask questions of the Company and its

management. Neither such inquiries nor any other due diligence investigations

conducted by such Investor or its advisors, if any, or its representatives shall

modify, amend or affect the Investor's right to rely on the Company's

representations and warranties contained in this Agreement. The Investor

understands that its investment involves a high degree of risk. The Investor is

in a position regarding the Company, which, based upon employment, family

relationship or economic bargaining power, enabled and enables such Investor to

obtain information from the Company in order to evaluate the merits and risks of

this investment. The Investor has sought such accounting, legal and tax advice,

as it has considered necessary to make an informed investment decision with

respect to this transaction.

 

      Section 3.7. Receipt of Documents. The Investor and its counsel has

received and read in their entirety: (i) this Agreement and the Exhibits annexed

hereto; (ii) all due diligence and other information necessary to verify the

accuracy and completeness of such representations, warranties and covenants;

(iii) the Company's Form 10-K for the year ended year ended December 31, 2002

and Form 10-K for the periods ended March 31, 2003, June 30, 2003 and September

30, 2003; and (iv) answers to all questions the Investor submitted to the

Company regarding an investment in the Company; and the Investor has relied on

the information contained therein and has not been furnished any other

documents, literature, memorandum or prospectus.

 

                                       10

<PAGE>

 

      Section 3.8. Registration Rights Agreement and Escrow Agreement. The

parties have entered into the Registration Rights Agreement and the Escrow

Agreement, each dated the date hereof.

 

      Section 3.9. No General Solicitation. Neither the Company, nor the

Investor, nor any of their respective Affiliates, nor any person acting on its

or their behalf, has engaged in any form of general solicitation or general

advertising (within the meaning of Regulation D under the Securities Act) in

connection with the offer or sale of the shares of Common Stock offered hereby.

 

      Section 3.10. Not an Affiliate. The Investor is not an officer, director

or a Person or an "Affiliate" of the Company . Neither the Investor nor its

Affiliates has an open short position in the Common Stock of the Company, and

the Investor agrees that it will not, and that it will cause its Affiliates not

to, engage in any short sales of or hedging transactions with respect to the

Common Stock, provided that the Company acknowledges and agrees that upon

receipt of an Advance Notice the Investor will sell the Shares to be issued to

the Investor pursuant to the Advance Notice, even if the Shares have not been

delivered to the Investor, provided that all such sales of shares of Common

Stock shall be made in compliance with all Securities Laws..

 

      Section 3.11. No Conflict. To the best of the Investor's knowledge the

execution, delivery and performance of this Agreement and the Exhibits hereto by

the Investor and the consummation by the Investor of the transactions

contemplated hereby will not (i) result in a material violation of the

organizational documents of the Investor or (ii) conflict with or constitute a

material default (or an event which with notice of lapse of time or both would

become a default) under, or give to others any rights of termination, amendment,

acceleration or cancellation of, any material agreement, indenture or instrument

to which the investor is a party, or (iii) result in a material violation of any

law, rule regulation, order, judgment or decree (including any Securities Laws,

including the rules and regulations of the NASD) applicable to the Investor or

by which any material property or asset of the Investor is bound or affected and

which would reasonably be likely to cause a Material Adverse Effect. To the Best

of the Investor's knowledge, neither the Investor nor any Affiliate is in

material violation of or has breached or is in material default under any term

of (i) its organizational documents, or (ii) any material contract, agreement,

mortgage, indebtedness, indenture or other instrument, or (iii) any material

judgment, decree or order or (iv) any statute, rule or regulation applicable to

the Investor or such Affiliate. To the best of the Investor's knowledge the

business of the Investor is not being conducted in violation of any material

law, ordinance, regulation of any governmental entity, including any Securities

Laws. Except as specifically contemplated by this Agreement and as required

under the Securities Act and any applicable United States state securities laws,

and to the best of the Investor's knowledge the Investor is not required to

obtain any consent, authorization or order of, or make any filing or

registration with, any court or governmental agency in order to execute, deliver

or perform any of its obligations under or contemplated by this Agreement or the

Registration Rights Agreement in accordance with the terms hereof or thereof. To

the best of the Investor's knowledge all consents, authorizations, orders,

filings and registrations which the Investor is required to obtain pursuant to

the preceding sentence have been obtained or effected on or prior to the date

hereof. To the best of the Investor's knowledge the Investor and its Affiliates

are unaware of any fact or circumstance which might give rise to any of the

foregoing.

 

                                       11

<PAGE>

 

      Section 3.12 Opinion of Counsel. The Company shall receive an opinion

letter from Butler Gonzalez, LLP, counsel to the Investor on the date hereof,

confirming the Investor's power and authority to enter into this Agreement and

the Exhibits attached hereto.

 

                                   ARTICLE IV.

 

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

      Except as stated below, on the disclosure schedules attached hereto or in

the SEC Documents (as defined herein), the Company hereby represents and

warrants to, and covenants with, the Investor that the following are true and

correct as of the date hereof:

 

      Section 4.1. Organization and Qualification. The Company is duly

incorporated and validly existing in the State of Delaware and has all requisite

corporate power and authority to own its properties and to carry on its business

as now being conducted. Each of the Company and its Subsidiaries is duly

qualified as a foreign corporation to do business and is in good standing in

every jurisdiction in which the nature of the business conducted by it makes

such qualification necessary, except to the extent that the failure to be so

qualified or be in good standing would not have a Material Adverse Effect on the

Company and its Subsidiaries taken as a whole.

 

      Section 4.2. Authorization, Enforcement, Compliance with Other

Instruments. (i) The Company has the requisite corporate power and authority to

enter into and perform this Agreement and the Exhibits attached hereto to which

it is a party and any related agreements, in accordance with the terms hereof

and thereof, (ii) the execution and delivery of this Agreement and the Exhibits

attached hereto to which it is a party and any related agreements by the Company

and the consummation by it of the transactions contemplated hereby and thereby,

have been duly authorized by the Company's Board of Directors and no further

consent or authorization is required by the Company, its Board of Directors or

its stockholders, except to the extent that the approval of the stockholders

will be required in the future, to increase the number of authorized but

unissued shares of the Company's Common Stock, (iii) this Agreement and the

Exhibits attached hereto to which it is a party, and any related agreements have

been duly executed and delivered by the Company, assuming the execution and

delivery thereof and acceptance by the Investor and constitute the valid and

binding obligations of the Company enforceable against the Company in accordance

with their terms, except as such enforceability may be limited by general

principles of equity or applicable bankruptcy, insolvency, reorganization,

moratorium, liquidation or similar laws relating to, or affecting generally, the

enforcement of creditors' rights and remedies.

 

      Section 4.3. Capitalization. As of the date hereof, the authorized capital

stock of the Company consists of 150,000,000 shares of Common Stock, par value

$0.10 per share and 5,000,000 shares of Preferred Stock of which 105,617,958

shares of Common Stock and no shares of Preferred Stock were issued and

outstanding. All of such outstanding shares have been validly issued and are

fully paid and nonassessable. Except as disclosed in the SEC Documents, no

shares of Common Stock are subject to preemptive rights or any other similar

rights or any liens or encumbrances suffered or permitted by the Company. Except

as disclosed in the SEC

 

                                        12

<PAGE>

 

Documents, as of the date hereof, (i) there are no outstanding options,

warrants, scrip, rights to subscribe to, calls or commitments of any character

whatsoever relating to, or securities or rights convertible into, any shares of

capital stock of the Company or any of its subsidiaries, or contracts,

commitments, understandings or arrangements by which the Company or any of its

subsidiaries is or may become bound to issue additional shares of capital stock

of the Company or any of its subsidiaries or options, warrants, scrip, rights to

subscribe to, calls or commitments of any character whatsoever relating to, or

securities or rights convertible into, any shares of capital stock of the

Company or any of its subsidiaries, (ii) there are no outstanding debt

securities (iii) there are no outstanding registration statements other than on

Form S-8 and (iv) there are no agreements or arrangements under which the

Company or any of its subsidiaries is obligated to register the sale of any of

their securities under the Securities Act (except pursuant to the Registration

Rights Agreement). There are no securities or instruments containing

anti-dilution or similar provisions that will be triggered by this Agreement or

any related agreement or the consummation of the transactions described herein

or therein. The Company has furnished to the Investor true and correct copies of

the Company's Certificate of Incorporation, as amended and as in effect on the

date hereof (the "Certificate of Incorporation"), and the Company's By-laws, as

in effect on the date hereof (the "By-laws"), and the terms of all securities

convertible into or exercisable for Common Stock and the material rights of the

holders thereof in respect thereto.

 

      Section 4.4. No Conflict. To the best of the Company's knowledge, the

execution, delivery and performance of this Agreement by the Company and the

consummation by the Company of the transactions contemplated hereby will not (i)

result in a material violation of the Certificate of Incorporation, any

certificate of designations of any outstanding series of preferred stock of the

Company or By-laws or (ii) conflict with or constitute a material default (or an

event which with notice or lapse of time or both would become a material

default) under, or give to others any rights of termination, amendment,

acceleration or cancellation of, any material agreement, indenture or instrument

to which the Company or any of its Subsidiaries is a party, or result in a

material violation of any law, rule, regulation, order, judgment or decree

(including federal and state securities laws and regulations and the rules and

regulations of the Principal Market on which the Common Stock is quoted)

applicable to the Company or any of its Subsidiaries in any material respect or

by which any material property or asset of the Company or any of its

subsidiaries is bound or affected and which would reasonably would be likely to

cause a Material Adverse Effect. Except as disclosed in the SEC Documents, to

the best of the Company's knowledge, neither the Company nor its Subsidiaries is

in material violation of any term of or in material def