STANDBY EQUITY DISTRIBUTION AGREEMENT

 

                                                                    Exhibit 10.1

 

                      STANDBY EQUITY DISTRIBUTION AGREEMENT

                      -------------------------------------

 

      THIS AGREEMENT   dated as of the 23rd day of June,   2005 (the   "Agreement")

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

"Investor"),   and SMARTIRE   SYSTEMS INC., a   corporation   organized and existing

under the laws of the Yukon Territory (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 One Hundred   Sixty   Million   U.S.   Dollars   ($160,000,000)   of the

Company's common stock, no par value (the "Common Stock");

 

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

 

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

            amended, and the 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; and

 

      (ii)   Multilateral   Instrument   45-103   adopted   by the   British   Columbia

            Securities Commission (the "BCSC"); and

 

      WHEREAS,   the   Company   has   engaged   Newbridge    Securities,    Inc.   (the

"Placement   Agent"),   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 (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   the   David   Gonzalez

Attorney   Trust   Account is in receipt of the funds from the   Investor and David

Gonzalez,   Esq., is in   possession   of free trading   shares from the Company and

therefore   an   Advance   by the   Investor   to the   Company   can be made and David

Gonzalez,   Esq. can release the free trading shares to the Investor. The Advance

Date shall be the first (1st)   Trading Day after   expiration   of the   applicable

Pricing Period for each Advance.

 

      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.

 

<PAGE>

 

      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 the terms of this Agreement. No Advance Notice

Date shall be less than five (5)   Trading   Days after the prior   Advance   Notice

Date.

 

      Section 1.5.   "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   1.6.   "Closing"   shall mean one of the closings of a purchase and

sale of Common Stock pursuant to Section 2.3.

 

      Section 1.7.   "Commitment Amount" shall mean the aggregate amount of up to

One Hundred Sixty   Million U.S.   Dollars   ($160,000,000)   which the Investor has

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 1.8.   "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 One Hundred

Sixty   Million   U.S.   Dollars   ($160,000,000),   (y) the date this   Agreement   is

terminated   pursuant to Section 2.4, or (z) the date occurring   twenty four (24)

months after the Effective   Date or sixty (60) months after the   Effective   Date

provided   the   Company    files   either   an   amendment   to   the   then    effective

registration   statement or a new   registration   statement is declared   effective

after the twenty   fourth   (24th) and forty   eighty   (48th)   month after the date

hereof.

 

      Section 1.9.   "Common Stock" shall mean the Company's common stock, no par

value.

 

      Section   1.10.   "Condition   Satisfaction   Date" shall have the meaning set

forth in Section 7.2.

 

      Section 1.11.   "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).

 

      Section 1.12.   "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 1.13. "Escrow Agreement" shall mean the escrow agreement among the

Company, the Investor, and David Gonzalez, Esq., dated the date hereof.

 

      Section 1.14.   "Exchange   Act" shall mean the   Securities   Exchange Act of

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

 

                                        2

<PAGE>

 

      Section   1.15.    "Material   Adverse   Effect"   shall   mean   any   condition,

circumstance, or situation that would prohibit or otherwise materially interfere

with the ability of the Company to enter into and perform any of its obligations

under this   Agreement   or the   Registration   Rights   Agreement   in any   material

respect.

 

      Section 1.16.   "Market   Price" shall mean the lowest   closing Bid Price of

the Common Stock during the Pricing Period.

 

      Section 1.17. "Maximum Advance Amount" shall be Three Million U.S. Dollars

(US$3,000,000) per Advance Notice.

 

      Section   1.18.   "NASD" shall mean the National   Association   of Securities

Dealers, Inc.

 

      Section   1.19.   "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 1.20.   "Placement   Agent" shall mean Newbridge   Securities Inc., a

registered broker-dealer.

 

      Section 1.21. "Pricing Period" shall mean the five (5) consecutive Trading

Days after the Advance Notice Date.

 

      Section 1.22.   "Principal   Market" shall mean 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.

 

      Section 1.23.   "Purchase Price" shall be set at ninety eight percent (98%)

of the Market Price during the Pricing Period.

 

      Section   1.24.   "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   provision 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 not bearing a

restrictive legend.

 

      Section 1.25.   "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.

 

      Section 1.26. "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.

 

                                       3

<PAGE>

 

      Section   1.27.   "Regulation   D" shall   have the   meaning   set forth in the

recitals of this Agreement.

 

      Section 1.28. "SEC" shall mean the Securities and Exchange Commission

 

      Section   1.29.   "Securities   Act" shall have the   meaning set forth in the

recitals of this Agreement.

 

      Section 1.30.   "SEC   Documents"   shall mean Annual Reports on Form 10-KSB,

Quarterly   Reports   on   Form   10-QSB,   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   1.31.   "Trading Day" shall mean any day during which the New York

Stock Exchange shall be open for business.

 

 

                                   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.   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.   No fractional shares

shall be issued;   fractional   shares   shall be rounded to the next higher   whole

number of shares. 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.   There shall be a minimum of

five (5) Trading Days between each Advance Notice Date.

 

                                       4

<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 Eastern Time, or

(ii) the   immediately   succeeding   Trading Day if it is received by facsimile or

otherwise after 12:00 noon Eastern 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.

 

      Section   2.3.   Closings.   On each Advance   Date,   which shall be the first

(1st) Trading Day after   expiration of the   applicable   Pricing   Period for each

Advance,   (i) the Company   shall   deliver to David   Gonzalez,   Esq. (the "Escrow

Agent")   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

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.   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 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 in accordance with

Section   12.4,   the   amount of such fees,   expenses,   and   disbursements   may be

deducted by the Investor 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   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,   and (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,   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.   The Investor   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:

 

            (a) the execution and delivery by the Company, and the Investor,   of

this Agreement and the Exhibits hereto;

 

                                        5

<PAGE>

 

            (b) the Escrow Agent shall have   received the shares of Common Stock

applicable to the Advance in   accordance   with Section 2.3. Such shares shall be

free of restrictive legends.

 

            (c) 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;

 

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

qualifications   required by any applicable   U.S. state or Canadian   province 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;

 

            (e) 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;

 

            (f) 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

 

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

satisfied.

 

      Section 2.6. Lock Up Period.

 

                  (i) On the date   hereof,   the Company   shall   obtain from each

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

form annexed hereto as Schedule 2.6 agreeing to only sell in compliance with the

volume limitation of Rule 144.

 

      Section   2.7.   Hardship.   In the event the   Investor   sells   shares of the

Company's   Common Stock after receipt of an Advance Notice and the Company fails

to perform its   obligations   as mandated in Section   2.3, and   specifically   the

Company   fails to deliver to the Escrow   Agent on the Advance Date the shares of

Common Stock corresponding to 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.

 

 

                                  ARTICLE III.

                   Representations and Warranties of Investor

 

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

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

Date:

 

      Section   3.1.   Organization   and   Authorization.    The   Investor   is   duly

incorporated   or   organized   and   validly   existing in the   jurisdiction   of its

incorporation   or   organization   and has all   requisite   power and   authority to

purchase and hold the securities issuable hereunder.   The decision to invest and

the execution and delivery of this Agreement by such Investor,   the   performance

by such   Investor of its   obligations   hereunder   and the   consummation   by such

 

                                       6

<PAGE>

 

Investor of the transactions   contemplated   hereby have been duly authorized and

requires no other   proceedings on the part of the Investor.   The undersigned has

the right,   power and   authority to execute and deliver this   Agreement   and all

other   instruments   (including,   without   limitations,   the Registration   Rights

Agreement), on behalf of the Investor. This Agreement has been duly executed and

delivered by the Investor and,   assuming the   execution and delivery   hereof and

acceptance thereof by the Company,   will constitute the legal, valid and binding

obligations of the Investor, enforceable against the Investor in accordance with

its 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.   The   Investor   acknowledges   that it shall pay any and all

withholding   taxes assessed in connection with the transactions   contemplated by

this Agreement.

 

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

that it had the   opportunity   to   review   this   Agreement   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

securities laws of any jurisdiction.

 

      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 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   Federal and state   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   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

and, in Multilateral Instrument 45 103 adopted by the BCSC.

 

      Section 3.6.   Reliance on Exemptions.   The Investor   understands   that the

Common   Stock is being   offered   and sold to it pursuant   to this   Agreement   in

reliance on specific exemptions from registration   requirements of United States

and   federal,   state,   and   provincial   securities   laws and that the Company is

relying in part upon the truth and   accuracy of, and the   Investor's   compliance

with, the   representations,   warranties,   acknowledgements and understandings of

the Investor set forth   herein and in the   questionnaires   in order to determine

 

                                         7

<PAGE>

 

the   availability   of such   exemptions   and the   eligibility   of the Investor to

acquire such   securities.   The Company has advised the Investor that the Company

is relying on an exemption from the   requirements to provide the Investor with a

prospectus   and that sales of the Common   Stock in Canada must be made through a

person registered to sell securities under the Securities Act (British Columbia)

(the "B.C. Act").

 

      Section 3.7. 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   3.8.   Receipt of   Documents.   The   Investor   and its counsel have

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-KSB for the year ended July 31, 2004 and Form 10-QSB

for the periods ended January 31, 205 and October 31, 2004;   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.

 

      Section 3.9.   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 3.10. No General Solicitation. Neither the Company, nor any of its

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 3.11. Not an Affiliate.   The Investor is not an officer,   director

or a person that   directly,   or indirectly   through one or more   intermediaries,

controls or is controlled by, or is under common control with the Company or any

"Affiliate"   of the   Company   (as   that   term   is   defined   in   Rule   405 of the

Securities Act).

 

      Section 3.12. Trading   Activities.   The Investor's trading activities with

respect to the Company's Common Stock shall be in compliance with all applicable

federal   and state   securities   laws,   rules and   regulations   and the rules and

regulations   of the   Principal   Market on which the   Company's   Common   Stock is

listed or traded.   Neither the   Investor   nor its   affiliates   has an open short

position in the Common Stock of the Company,   the Investor   agrees that it shall

 

 

                                        8

<PAGE>

 

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 is permitted   to sell the shares to be issued to the Investor   pursuant

to the Advance Notice during the applicable Pricing Period.

 

      Section      3.13.       British       Columbia      Resale       Restrictions.

 

             a. The   Investor   acknowledges   that the Common   Stock is subject to

resale   restrictions   in   British   Columbia   and may not be   traded   in   British

Columbia except as permitted by the B.C. Act and the rules made there under.

 

            b. Pursuant to   Multilateral   Instrument   45-102,   as adopted by the

BCSC a subsequent   trade in Common Stock will be a   distribution   subject to the

Prospectus   and   registration   requirements   of applicable   Canadian   Securities

legislation   (including   the   B.C.   Act)   unless   certain   conditions   are   met,

including the following:

 

                  i. at least four (4) months (the "Canadian Hold Period") shall

have elapsed from the date on which the Common Stock was issued to the Investor;

 

                  ii.   during the   currency of the   Canadian   Hold   Period,   any

certificate   representing   the   Common   Stock is   imprinted   with a legend   (the

"Canadian Legend") stating:

 

                    "Unless permitted under securities legislation,

 

                     the holder of the securities shall not trade the

 

                     securities before [insert the date that is four

 

                     months and a day after the distribution date]."

 

 

 

                  iii.   The trade is not a control   distribution   (as defined in

Multilateral Instrument 45-102);

 

                  iv. No   unusual   effort is made to   prepare   the   market or to

create a demand for the Common Stock that is the subject of the trade;

 

                  v. No   extraordinary   commission or consideration is paid to a

person or company in respect of the trade; and

 

                  vi. If the selling security holder is an insider or officer of

the Company,   the selling   security holder has no reasonable   grounds to believe

that the Company is in default of securities legislation; and

 

                                       9

<PAGE>

 

            c. By executing and   delivering   this   Agreement,   the Investor will

have directed the Company not to include the Canadian Legend on any certificates

representing the Common Stock to be issued to the Investor,

 

            d. As a   consequence,   the Investor   will not be able to rely on the

resale provisions of Multilateral Instrument 45-102, and any subsequent trade in

the   Conversion   Shares   during   or   after   the   Canadian   Hold   Period   will be

distribution   subject to the prospectus and registration of Canadian   securities

legislation,   to the   extent   that the   trade is   subject   to any such   Canadian

securities legislation.

 

 

 

                                    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   or   organized   and   validly   existing in the   jurisdiction   of its

incorporation   or   organization   and   has   all   requisite   power   and   authority

corporate   power 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,   the Registration   Rights Agreement,   the

Escrow Agreement,   the Placement Agent Agreement and any related agreements,   in

accordance with the terms hereof and thereof, (ii) the execution and delivery of

this Agreement,   the Registration   Rights Agreement,   the Escrow Agreement,   the

Placement   Agent   Agreement   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,   (iii) this Agreement,   the   Registration   Rights   Agreement,   the

Escrow Agreement,   the Placement Agent Agreement and any related agreements have

been duly   executed   and   delivered   by the Company,   (iv) this   Agreement,   the

Registration   Rights   Agreement,   the   Escrow   Agreement,   the   Placement   Agent

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

Investor and any related agreements 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.

 

                                       10

<PAGE>

 

      Section 4.3.   Capitalization.   As of June 23, 2005, the authorized capital

stock of the Company   consists of an unlimited number of shares of Common Stock,

no par value and one hundred   thousand   (100,000)   shares of Preferred   Stock of

which two hundred   seventy four million   five hundred   ninety five   thousand one

hundred   seventy   three   (274,595,173)   shares of Common   Stock and   twenty-five

thousand shares (25,000) 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   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 Articles of Incorporation, as amended and as in effect on the date

hereof (the   "Articles 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. 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   violation   of the   Articles   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

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

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

acceleration or cancellation of, any agreement, indenture or instrument to which

the Company or any of its   subsidiaries   is a party, or result in a 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   or by which any   material   property or asset of the

Company or any of its   subsidiaries is bound or affected and which would cause a

Material Adverse Effect.   Except as disclosed in the SEC Documents,   neither the

Company   nor its   subsidiaries   is in   material   violation   of any term of or in

default under its Articles of Incorporation   or By-laws or their   organizational

charter or by-laws, respectively, or any material contract, agreement, mortgage,

indebtedness,   indenture,   instrument, judgment, decree or order or any statute,

rule or regulation   applicable to the Company or its subsidiaries.   The business

of the Company and its subsidiaries is not being conducted in material violation

of any material law, ordinance, regulation of any governmental entity. Except as

 

                                       11

<PAGE>

 

specifically contemplated by this Agreement and as required under the Securities

Act and any   applicable   state   securities   laws, the Company 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 for it 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.    All   consents,    authorizations,    orders,    filings   and

registrations   which the Company is required to obtain pursuant to the preceding

sentence   have been   obtained or effected   on or prior to the date   hereof.   The

Company and its subsidiaries are unawa