SECURITIES PURCHASE AGREEMENT
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THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of May
___, 2005, by and between SMARTIRE SYSTEMS, INC., a corporation organized and
existing under the laws of the Yukon Territory, and Cornell Capital Partners, LP
(the "Buyer").
WITNESSETH:
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WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon an exemption from securities registration afforded by
the provisions of:
(i) Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities
Act of 1933, as amended (the "1933 Act"); and
(ii) Multilateral Instrument 45-103 adopted by the British Columbia
Securities Commission (the "BCSC");
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Buyer, as
provided herein, and the Buyer shall purchase One Million Five Hundred Thousand
Dollars ($1,500,000) of convertible debenture (the "Convertible Debenture"),
which shall be convertible into shares of the Company's common stock, no par
value (the "Common Stock") (as converted, the "Conversion Shares"), all of which
One Million Five Hundred Thousand Dollars ($1,500,000) shall be funded on the
fifth (5th) business day following the date hereof (the "Closing") for a total
purchase price of up to One Million Five Hundred Thousand Dollars ($1,500,000)
(the "Purchase Price") in the respective amounts set forth opposite the Buyer's
name on Schedule I (the "Subscription Amount");
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement substantially in the form attached hereto as Exhibit A (the "Investor
Registration Rights Agreement") pursuant to which the Company has agreed to
provide certain registration rights under the Securities Act and the rules and
regulations promulgated there under, and applicable state securities laws; and
WHEREAS, the aggregate proceeds of the sale of the Convertible Debenture
contemplated hereby shall be held in escrow pursuant to the terms of an escrow
agreement substantially in the form of the Escrow Agreement attached hereto as
Exhibit B; and
WHEREAS, contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering Irrevocable Transfer
Agent Instructions substantially in the form attached hereto as Exhibit E (the
"Irrevocable Transfer Agent Instructions")
NOW, THEREFORE, in consideration of the mutual covenants and other
agreements contained in this Agreement the Company and the Buyer(s) hereby agree
as follows:
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1. PURCHASE AND SALE OF CONVERTIBLE DEBENTURE.
(a) Purchase of Convertible Debenture. Subject to the satisfaction
(or waiver) of the terms and conditions of this Agreement, the Buyer agrees to
purchase at Closing (as defined herein below), and the Company agrees to sell
and issue to the Buyer at Closing, a Convertible Debenture in amount
corresponding with the Subscription Amount set forth opposite the Buyer's name
on Schedule I hereto. Upon execution hereof by the Buyer, the Buyer shall wire
transfer the Subscription Amount set forth opposite his name on Schedule I in
same-day funds or a check payable to "David Gonzalez, Esq., as Escrow Agent for
SmarTire Systems, Inc./Cornell Capital Partners, LP", which Subscription Amount
shall be held in escrow pursuant to the terms of the Escrow Agreement (as
hereinafter defined) and disbursed in accordance therewith.
(b) Closing Date. The Closing of the purchase and sale of the
Convertible Debenture shall take place at 10:00 a.m. Eastern Standard Time on
the fifth (5th) business day following the date hereof, subject to notification
of satisfaction of the conditions to the Closing set forth herein and in
Sections 6 and 7 below (or such later date as is mutually agreed to by the
Company and the Buyer(s)) (the "Closing Date"). The Closing shall occur on the
respective Closing Dates at the offices of Yorkville Advisors, LLC, 3700 Hudson
Street, Suite 3700, Jersey City, New Jersey 07302 (or such other place as is
mutually agreed to by the Company and the Buyer(s)).
(c) Escrow Arrangements; Form of Payment. Upon execution hereof by
the Buyer and pending the Closing, the aggregate proceeds of the sale of the
Convertible Debenture to the Buyer pursuant hereto shall be deposited in a
non-interest bearing escrow account with David Gonzalez, Esq., as escrow agent
(the "Escrow Agent"), pursuant to the terms of an escrow agreement between the
Company, the Buyer and the Escrow Agent in the form attached hereto as Exhibit B
(the "Escrow Agreement"). Subject to the satisfaction of the terms and
conditions of this Agreement, and in accordance with the Escrow Agreement, on
the Closing Date, (i) the Escrow Agent shall deliver to the Company in
accordance with the terms of the Escrow Agreement such aggregate proceeds for
the Convertible Debenture to be issued and sold to the Buyer, minus the unpaid
structuring fees and expenses of Yorkville Advisors Management, LLC of Ten
Thousand Dollars ($10,000) which shall be paid directly from the gross proceeds
held in escrow of the Closing, and (ii) the Company shall deliver to the Buyer,
a Convertible Debenture which the Buyer is purchasing in the amount indicated
opposite the Buyer's name on Schedule I, duly executed on behalf of the Company.
2. DOCUMENTS REQUIRED FROM BUYER.
The Buyer must complete, sign and return to the Company:
(a) an executed copy of this Agreement;
(b) a Prospective Investor Suitability Questionnaire in the form
attached as Exhibit C (the US Questionnaire");
(c) if the Buyer is purchasing pursuant to Part 5 of Multilateral
Instrument 45-103 adopted by the BCSC, or is purchasing as a foreign portfolio
manager pursuant to British Columbia Instrument 45-504 adopted by the BCSC, a
British Columbia Accredited Investor Questionnaire in the form attached as
Exhibit D (together with the US Questionnaire, the "Questionnaires");
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The Buyer shall complete, sign and return to the Company as soon as
possible, on request by the Company, any documents, questionnaires, notices and
undertakings as may be required by any regulatory authorities and applicable
law.
3. BUYER'S REPRESENTATIONS AND WARRANTIES.
The Buyer represents and warrants, severally and not jointly, that:
(a) Investment Purpose. The Buyer is acquiring the Convertible
Debenture and, upon conversion of Convertible Debenture, the Buyer will acquire
the Conversion Shares then issuable, for its own account for investment only and
not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
such Buyer reserves the right to dispose of the Conversion Shares at any time in
accordance with or pursuant to an effective registration statement covering such
Conversion Shares or an available exemption under the Securities Act.
(b) Accredited Investor Status. The Buyer is an "Accredited
Investor" as that term is defined in Rule 501(a)(3) of Regulation D and, in
Multilateral Instrument 45-103 adopted by the BCSC..
(c) Reliance on Exemptions. The Buyer understands that the
Convertible Debenture is being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and such Buyer's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
such Buyer to acquire such securities.
(d) Information. The Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information he deemed
material to making an informed investment decision regarding his purchase of the
Convertible Debenture and the Conversion Shares, which have been requested by
such Buyer. The Buyer 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 Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Section 3 below. The Buyer understands that its investment in the Convertible
Debenture and the Conversion Shares involves a high degree of risk. The Buyer is
in a position regarding the Company, which, based upon employment, family
relationship or economic bargaining power, enabled and enables such Buyer to
obtain information from the Company in order to evaluate the merits and risks of
this investment. The Buyer has sought such accounting, legal and tax advice, as
it has considered necessary to make an informed investment decision with respect
to its acquisition of the Convertible Debenture and the Conversion Shares.
(e) No Governmental Review. The Buyer understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Convertible
Debenture or the Conversion Shares, or the fairness or suitability of the
investment in the Convertible Debenture or the Conversion Shares, nor have such
authorities passed upon or endorsed the merits of the offering of the
Convertible Debenture or the Conversion Shares.
(f) Transfer or Resale. The Buyer understands that except as
provided in the Investor Registration Rights Agreement: (i) the Convertible
Debenture has not been and are not being registered under the Securities Act or
any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, or (B) such Buyer
shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration requirements; (ii) any sale of such securities made in
reliance on Rule 144 under the Securities Act (or a successor rule thereto)
("Rule 144") may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the Securities
Act) may require compliance with some other exemption under the Securities Act
or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register such securities
under the Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder. The Company reserves the right
to place stop transfer instructions against the shares and certificates for the
Conversion Shares.
(g) Legends. The Buyer understands that the certificates or other
instruments representing the Convertible Debenture and or the Conversion Shares
shall bear a restrictive legend in substantially the following form (and a stop
transfer order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED
SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAWS.
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The legend set forth above shall be removed and the Company within three (3)
business days shall issue a certificate without such legend to the holder of the
Conversion Shares upon which it is stamped, if, unless otherwise required by
state securities laws, (i) in connection with a sale transaction, provided the
Conversion Shares are registered under the Securities Act or (ii) in connection
with a sale transaction, after such holder provides the Company with an opinion
of counsel, which opinion shall be in form, substance and scope customary for
opinions of counsel in comparable transactions, to the effect that a public
sale, assignment or transfer of the Conversion Shares may be made without
registration under the Securities Act.
(h) Authorization, Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable in accordance with its
terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors' rights and remedies.
(i) Receipt of Documents. The Buyer and his or its counsel has
received and read in their entirety: (i) this Agreement and each representation,
warranty and covenant set forth herein, the Investor Registration Rights
Agreement, the Escrow Agreement, and the Irrevocable Transfer Agent Agreement;
(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 fiscal year ended July 31, 2004 and Form 10-QSB
for the fiscal quarters ended October 31, 2004 and January 31, 2005; and (v)
answers to all questions the Buyer submitted to the Company regarding an
investment in the Company; and the Buyer has relied on the information contained
therein and has not been furnished any other documents, literature, memorandum
or prospectus.
(j) Due Formation. The Buyer has been formed and validly exists and
has not been organized for the specific purpose of purchasing the Convertible
Debenture and is not prohibited from doing so.
(k) No Legal Advice From the Company. The Buyer 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 Buyer 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.
(l) B.C. Exemption - Accredited Investor as Principal. If the Buyer
is purchasing the Convertible Debenture pursuant to Part 5 of Multilateral
Instrument 45-103 adopted by the BCSC, then the Buyer additionally represents,
warrants and covenants to the Company (which representations, warrants and
covenants shall survive closing) that the Buyer is purchasing as principal for
its own account, and not for the benefit of any other person, or company.
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(m) B.C. Exemption - Minimum Purchase as Principal. If the Buyer is
purchasing the Convertible Debenture pursuant to Section 74(2)(4) of the B.C.
Act, then the Buyer additionally represents, warrants and covenants to the
Company (which representations, warrants and covenants shall survive closing)
that:
(i) the Buyer is purchasing as principal for its own account,
and not for the benefit of any other person, or company, a Convertible Debenture
with an aggregate acquisition cost to the Buyer of not less than CDN$97,000;
(ii) if the Buyer is not an individual or a corporation, each
member of the partnership, syndicate or other unincorporated organization which
is the purchaser, or each beneficiary of the trust which is the purchaser, as
the case may be, is an individual who has an aggregate acquisition cost for the
Convertible Debenture of not less than CDN $97,000;
(iii) neither the Buyer nor any party on whose behalf the
Buyer is acting has been created, established formed or incorporated solely, or
is used primarily to acquire securities or to permit the purchase of the
Convertible Debenture without a prospectus in reliance on an exemption from the
prospectus requirements of applicable securities legislation; and
(iv) if the Buyer is not purchasing for its own account;
A. the Buyer is a trust company or an insurer
which has received a business authorization under the Financial Institutions
Act (British Columbia;
or
B. a portfolio manager who manages the investment
portfoliosof clients through discretionary authority granted by one or more
clients and the Buyer is registered under the B.C. Act, or the Buyer is exempt
from such registration, and the Buyer is purchasing the Convertible Debenture
as an agentfor accounts that are fully managed by the Buyer;
(n) B.C. Exemption - Trust Companies, Insurers and Portfolio
Managers Outside British Columbia. If the Buyer is purchasing the Convertible
Debenture pursuant to the exemption from prospectus requirements available under
British Columbia Instrument 45-504 and is not purchasing for its own account,
then the Buyer additionally represents, warrants and covenants to the Company
(which representations, warrants and covenants shall survive closing) that;
(i) the Buyer is purchasing a Convertible Debenture at an
aggregate acquisition cost to the Buyer of not less than CDN$97,000;
(ii) the Buyer is:
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A. a trust company or an insurer authorized under the laws of
anotherprovince in Canada to carry on such business in such province or
territory, and the Buyer is purchasing the Convertible Debenture as an agent or
trustee for accounts that are fully managed by the Buyer; or
B. a portfolio manager who manages the investment portfolios of
clients through discretionary authority granted by one or more clients and the
Buyer is registered as a portfolio manager under the laws of a province in
Canada other than British Columbia, or the Buyer is exempt from such
registration and the Buyer is purchasing the Convertible Debenture as an agent
for accounts that are fully managed by the Buyer; or
C. a person that carries on business as a portfolio manager in a
jurisdiction outside Canada, and the Buyer is purchasing the Convertible
Debenture as an agent for accounts that are fully managed by the Buyer.
4. BRITISH COLUMBIA RESALE RESTRICTIONS.
(a) The Buyer acknowledges that the Convertible Debenture and/or
Conversion Shares are 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 thereunder.
(b) Pursuant to Multilateral Instrument 45-102, as adopted by the
BCSC, a subsequent trade in the Convertible Debenture will be a distribution
subject to 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 Convertible Debenture were issued
to the Buyer;
(ii) during the currency of the Canadian Hold Period, any
certificate representing the Convertible Debenture 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);
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(iv) no unusual effort is made to prepare the market or to
create a demand for the Convertible Debenture 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
(c) By executing and delivering this Agreement, the Buyer will have
directed the Company not to include the Canadian Legend on any certificates
representing the Conversion Shares to be issued to the Buyer,
(d) As a consequence, the Buyer will not be able to rely on the
resale provisions of Multilateral Instrument 45-102, and any subsequent trade in
the Convertible Debenture during or after the Canadian Hold Period will be
distribution subject to the prospectus and registration requirements of Canadian
securities legislation, to the extent that the trade at that time is subject to
any such Canadian securities legislation.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Buyer that, except as set forth
in the SEC Documents (as defined herein):
(a) Organization and Qualification. The Company and its subsidiaries
are corporations duly organized and validly existing in good standing under the
laws of the jurisdiction in which it is incorporated, and have the requisite
corporate power to own their properties and to carry on their 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.
(b) Authorization, Enforcement, Compliance with Other Instruments.
(i) The Company has the requisite corporate power and authority to enter into
and perform this Agreement, the Investor Registration Rights Agreement, the
Irrevocable Transfer Agent Agreement, the Escrow Agreement, and any related
agreements (collectively, the "Transaction Documents") and to issue the
Convertible Debenture and the Conversion Shares in accordance with the terms
hereof and thereof, (ii) the execution and delivery of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated
hereby and thereby, including, without limitation, the issuance of the
Convertible Debenture the Conversion Shares and the reservation for issuance and
the issuance of the Conversion Shares issuable upon conversion or exercise
thereof, 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) the Transaction Documents have been duly
executed and delivered by the Company, (iv) the Transaction Documents 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. The
authorized officer of the Company executing the Transaction Documents knows of
no reason why the Company cannot file the registration statement as required
under the Investor Registration Rights Agreement or perform any of the Company's
other obligations under such documents.
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(c) Capitalization. As of May 11, 2005, the authorized capital stock
of the Company consists of an unlimited number of shares of common stock, no par
value per share and one hundred thousand (100,000) shares of Preferred Stock,
par value CDN1,000. As of May 11, 2005, the Company had two hundred
seventy-three million four hundred twenty-five thousand eight hundred thirty-six
(273,425,836) shares of common stock and twenty-five thousand (25,000) shares of
Preferred Stock 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 (as defined in Section 3(f)), 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 of this Agreement, (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 and (iii) 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) and (iv) there are no outstanding registration statements and
there are no outstanding comment letters from the SEC or any other regulatory
agency. There are no securities or instruments containing anti-dilution or
similar provisions that will be triggered by the issuance of the Convertible
Debenture as described in this Agreement. The Company has furnished to the Buyer
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 other than stock
options issued to employees and consultants.
(d) Issuance of Securities. The Convertible Debenture is duly
authorized and, upon issuance in accordance with the terms hereof, shall be duly
issued, fully paid and nonassessable, are free from all taxes, liens and charges
with respect to the issue thereof. The Conversion Shares issuable upon
conversion of the Convertible Debenture have been duly authorized and reserved
for issuance. Upon conversion or exercise in accordance with the Convertible
Debenture the Conversion Shares will be duly issued, fully paid and
nonassessable.
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(e) No Conflicts. Except as disclosed in the SEC Documents, the
execution, delivery and performance of the Transaction Documents 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
the 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 National Association of
Securities Dealers Inc.'s OTC Bulletin Board on which the Common Stock is
quoted) applicable to the Company or any of its subsidiaries or by which any
property or asset of the Company or any of its subsidiaries is bound or
affected. Except as disclosed in the SEC Documents, neither the Company nor its
subsidiaries is in 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, and shall not be conducted
in violation of any material law, ordinance, or regulation of any governmental
entity. Except as 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. Except as disclosed in the SEC Documents, 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 unaware of any
facts or circumstance, which might give rise to any of the foregoing.
(f) SEC Documents: Financial Statements. Since January 1, 2003, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC under of the Securities Exchange Act of
1934, as amended (the "Exchange Act") (all of the foregoing filed prior to the
date hereof or amended after the date hereof and all exhibits included therein
and financial statements and schedules thereto and documents incorporated by
reference therein, being hereinafter referred to as the "SEC Documents"). The
Company has delivered to the Buyers or their representatives, or made available
through the SEC's website at http://www.sec.gov., true and complete copies of
the SEC Documents. As of their respective dates, the financial statements of the
Company disclosed in the SEC Documents (the "Financial Statements") complied as
to form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such Financial Statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and, fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Buyer which is not included in the SEC Documents, including, without
limitation, information referred to in this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(g) Rule 10(b)-5. The SEC Documents do not include any untrue
statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light of
the circumstances under which they were made, not misleading.
(h) Absence of Litigation. Except as disclosed in the SEC Documents,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending against or affecting the Company, the Common Stock or any of the
Company's subsidiaries, wherein an unfavorable decision, ruling or finding would
(i) have a material adverse effect on the transactions contemplated hereby (ii)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of the
documents contemplated herein, or (iii) except as expressly disclosed in the SEC
Documents, have a material adverse effect on the business, operations,
properties, financial condition or results of operations of the Company and its
subsidiaries taken as a whole.
(i) Acknowledgment Regarding Buyer's Purchase of the Convertible
Debenture. The Company acknowledges and agrees that the Buyer(s) is acting
solely in the capacity of an arm's length purchaser with respect to this
Agreement and the transactions contemplated hereby. The Company further
acknowledges that the Buyer(s) is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to this Agreement and
the transactions contemplated hereby and any advice given by the Buyer(s) or any
of their respective representatives or agents in connection with this Agreement
and the transactions contemplated hereby is merely incidental to such Buyer's
purchase of the Convertible Debenture or the Conversion Shares. The Company
further represents to the Buyer that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation by the Company and
its representatives.
(j) 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 Convertible Debenture or the Conversion Shares.
(k) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of the
Convertible Debenture or the Conversion Shares under the Securities Act or cause
this offering of the Convertible Debenture or the Conversion Shares to be
integrated with prior offerings by the Company for purposes of the Securities
Act.
9
(l) Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.
(m) Intellectual Property Rights. The Company and its subsidiaries
own or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted. The Company and its subsidiaries do not have any
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secret or other
similar rights of others, and, to the knowledge of the Company there is no
claim, action or proceeding being made or brought against, or to the Company's
knowledge, being threatened against, the Company or its subsidiaries regarding
trademark, trade name, patents, patent rights, invention, copyright, license,
service names, service marks, service mark registrations, trade secret or other
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
(n) Environmental Laws. The Company and its subsidiaries are (i) in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval.
(o) Title. Any real property and facilities held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
(p) Insurance. The Company and each of its subsidiaries are insured
by insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its subsidiaries are
engaged. Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
(q) Regulatory Permits. The Company and its subsidiaries possess all
material certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
10
(r) Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, and (iii) the recorded amounts for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(s) No Material Adverse Breaches, etc. Except as set forth in the
SEC Documents, neither the Company nor any of its subsidiaries is subject to any
charter, corporate or other legal restriction, or any judgment, decree, order,
rule or regulation which in the judgment of the Company's officers has or is
expected in the future to have a material adverse effect on the business,
properties, operations, financial condition, or results of operations of the
Company or its subsidiaries. Except as set forth in the SEC Documents, neither
the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the judgment of the Company's officers, has or is
expected to have a material adverse effect on the business, properties,
operations, financial condition, or results of operations of the Company or its
subsidiaries.
(t) Tax Status. Except as set forth in the SEC Documents, the
Company and each of its subsidiaries has made and filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
(u) Certain Transactions. Except as set forth in the SEC Documents,
and except for arm's length transactions pursuant to which the Company makes
payments in the ordinary course of business upon terms no less favorable than
the Company could obtain from third parties and other than the grant of stock
options disclosed in the SEC Documents, none of the officers, directors, or
employees of the Company is presently a party to any transaction with the
Company (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
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(v) Fees and Rights of First Refusal. The Company is not obligated
to offer the securities offered hereunder on a right of first refusal basis or
otherwise to any third parties including, but not limited to, current or former
shareholders of the Company, underwriters, brokers, agents or other third
parties.
6. COVENANTS.
(a) Reasonable Best Efforts. Each party shall use its reasonable
best efforts timely to satisfy each of the conditions to be satisfied by it as
provided in Sections 6 and 7 of this Agreement.
(b) Form D. The Company agrees to file a Form D with respect to the
Conversion Shares as required under Regulation D and to provide a copy thereof
to the Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Conversion Shares, or obtain an exemption for the
Conversion Shares for sale to the Buyer at the Closing pursuant to this
Agreement under applicable securities or "Blue Sky" laws of the states of the
United States or Canada, and shall provide evidence of any such action so taken
to the Buyers on or prior to the Closing Date.
(c) Reporting Status. Until the earlier of (i) the date as of which
the Buyer(s) may sell all of the Conversion Shares without restriction pursuant
to Rule 144(k) promulgated under the Securities Act (or successor thereto), or
(ii) the date on which (A) the Buyer(s) shall have sold all the Conversion
Shares and (B) none of the Convertible Debenture are outstanding (the
"Registration Period"), the Company shall file in a timely manner all reports
required to be filed with the SEC pursuant to the Exchange Act and the
regulations of the SEC thereunder, and the Company shall not terminate its
status as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would otherwise permit such
termination.
(d) Use of Proceeds. The Company will use the proceeds from the sale
of the Convertible Debenture for retirement of debt, general corporate and
working capital purposes.
(e) Reservation of Shares. The Company shall take all action
reasonably necessary to at all times have authorized, and reserved for the
purpose of issuance, such number of shares of Common Stock as shall be necessary
to effect the issuance of the Conversion Shares. If at any time the Company does
not have available such shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Conversion Shares of the
Company shall call and hold a special meeting of the shareholders within thirty
(30) days of such occurrence, for the sole purpose of increasing the number of
shares authorized. The Company's management shall recommend to the shareholders
to vote in favor of increasing the number of shares of Common Stock authorized.
Management shall also vote all of its shares in favor of increasing the number
of authorized shares of Common Stock.
(f) Listings or Quotation. The Company shall promptly secure the
listing or quotation of the Conversion Shares upon each national securities
exchange, automated quotation system or The National Association of Securities
Dealers Inc.'s Over-The-Counter Bulletin Board ("OTCBB") or other market, if
any, upon which shares of Common Stock are then listed or quoted (subject to
official notice of issuance) and shall use its best efforts to maintain, so long
as any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable under the terms of this Agreement.
The Company shall maintain the Common Stock's authorization for quotation on the
OTCBB.
12
(g) Fees and Expenses. Each of the Company and the Buyer shall pay
all costs and expenses incurred by such party in connection with the
negotiation, investigation, preparation, execution and delivery of the
Transaction Documents. The Company shall pay Yorkville Advisors Management LLC a
fee equal to ten percent (10%) of the Purchase Price at closing.
(h) The Company shall pay a structuring fee to Yorkville Advisors
Management, LLC of Ten Thousand Dollars ($10,000), shall be paid directly from
the proceeds of the Closing.
t 12 (i) Corporate Existence. So long as any of the Convertible Debenture
remains outstanding, the Company shall not directly or indirectly consummate any
merger, reorganization, restructuring, reverse stock split consolidation, sale
of all or substantially all of the Company's assets or any similar transaction
or related transactions (each such transaction, an "Organizational Change")
unless, prior to the consummation an Organizational Change, the Company obtains
the written consent of the Buyer . In any such case, the Company will make
appropriate provision with respect to such holders' rights and interests to
insure that the provisions of this Section 4(h) will thereafter be applicable to
the Convertible Debenture. (j) Transactions With Affiliates. So long as any
Convertible Debenture is outstanding, the Company shall not, and shall cause
each of its subsidiaries not to, enter into, amend, modify or supplement, or
permit any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary's
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent (5%)
or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a "Related Party"), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
investment in an Affiliate of the Company, (c) any agreement, transaction,
commitment, or arrangement on an arms-length basis on terms no less favorable
than terms which would have been obtainable from a person other than such
Related Party, (d) any agreement transaction, commitment, or arrangement which
is approved by a majority of the disinterested directors of the Company, for
purposes hereof, any director who is also an officer of the Company or any
subsidiary of the Company shall not be a disinterested director with respect to
any such agreement, transaction, commitment, or arrangement and (e) any
agreement, transaction, commitment, or arrangement that is amended, modified, or
supplemented in the ordinary course of business consistent with past practice.
"Affiliate" for purposes hereof means, with respect to any person or entity,
another person or entity that, directly or indirectly, (i) has a ten percent
(10%) or more equity interest in that person or entity, (ii) has ten percent
(10%) or more common ownership with that person or entity, (iii) controls that
person or entity, or (iv) shares common control with that person or entity.
"Control" or "controls" for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity.
13
(k) Transfer Agent. The Company covenants and agrees that, in the
event that the Company's agency relationship with the transfer agent should be
terminated for any reason prior to a date which is two (2) years after the
Closing Date, the Company shall immediately appoint a new transfer agent and
shall require that the new transfer agent execute and agree to be bound by the
terms of the Irrevocable Transfer Agent Instructions (as defined herein).
(l) Restriction on Issuance of the Capital Stock. The Company
covenants and agrees that, with the exception of Common Stock to be issued
pursuant to the Standby Equity Distribution Agreement of even date herewith
between the Company and the Buyer or pursuant to a commitment disclosed in the
SEC Documents as defined in the Securities Purchase Agreement dated prior to the
date hereof which shall be subject to the provisions contained in Sections
3(c)(i), (ii), (iii), (iv), (v) and (vi) of the Convertible Debenture, so long
as any of the principal amount or interest on this Debenture remains unpaid and
unconverted, the Company shall not, without the prior consent of the Buyer, (i)
issue or sell any common stock or preferred stock with or without consideration,
(ii) issue or sell any preferred stock, warrant, option, right, contract, call,
or other security or instrument granting the holder thereof the right to acquire
common stock with or without consideration, (iii) enter into any security
instrument granting the holder a security interest in any of the assets of the
Company, or (iv) file any registration statements on Form S-8. Provided the
Company gives the Buyer ten (10) days prior written notice, the foregoing
restriction shall exclude options, warrants or other securities convertible or
exchangeable into shares of common stock of the Company that were outstanding
prior to the date hereof, subject to the provisions contained in Sections
3(c)(i), (ii), (iii), (iv), (v), and (vi) of the Convertible Debenture.
7. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue the Irrevocable Transfer Agent Instructions to its
transfer agent irrevocably appointing David Gonzalez, Esq. as its agent for
purpose of having certificates issued, registered in the name of the Buyer(s) or
its respective nominee(s), for the Conversion Shares representing such amounts
of Convertible Debenture as specified from time to time by the Buyer(s) to the
Company upon conversion of the Convertible Debenture, for interest owed pursuant
to the Convertible Debenture, and for any and all Liquidated Damages (as this
term is defined in the Investor Registration Rights Agreement). David Gonzalez,
Esq. shall be paid a cash fee of Fifty Dollars ($50) for every occasion they act
pursuant to the Irrevocable Transfer Agent Instructions. The Company shall not
change its transfer agent without the express written consent of the Buyer(s),
which may be withheld by the Buyer(s) in its sole discretion. Prior to
registration of the Conversion Shares under the Securities Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of this
Agreement. The Company warrants that no instruction other than the Irrevocable
Transfer Agent Instructions referred to in this Section 5, and stop transfer
instructions to give effect to Section 2(g) hereof (in the case of the
Conversion Shares prior to registration of such shares under the Securities Act)
will be given by the Company to its transfer agent and that the Conversion
Shares shall otherwise be freely transferable on the books and records of the
Company as and to the extent provided in this Agreement and the Investor
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of Conversion Shares. If the Buyer(s) provides the Company with
an opinion of counsel, in form, scope and substance customary for opinions of
counsel in comparable transactions to the effect that registration of a resale
by the Buyer(s) of any of the Conversion Shares is not required under the
Securities Act, the Company shall within two (2) business days instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by the Buyer. The Company acknowledges that a breach
by it of its obligations hereunder will cause irreparable harm to the Buyer by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5 will be inadequate and agrees, in the event of
a breach or threatened breach by the Company of the provisions of this Section
5, that the Buyer(s) shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach and requiring immediate
issuance and transfer, without the necessity of showing economic loss and
without any bond or other security being required.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the Convertible
Debenture to the Buyer at the Closing is subject to the satisfaction, at or
before the Closing Dates, of each of the following conditions, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion:
(a) The Buyer shall have executed the Transaction Documents and
delivered them to the Company.
(b) The Buyer shall have delivered to the Escrow Agent the Purchase
Price for Convertible Debenture in respective amounts as set forth next to the
Buyer as outlined on Schedule I attached hereto and the Escrow Agent shall have
delivered the net proceeds to the Company by wire transfer of immediately
available U.S. funds pursuant to the wire instructions provided by the Company.
(c) The representations and warranties of the Buyer shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer(s) at or prior to the Closing Date.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
(a) The obligation of the Buyer(s) hereunder to purchase the
Convertible Debenture at the Closing is subject to the satisfaction, at or
before the First Closing Date, of each of the following conditions:
(i) The Company shall have executed the Transaction Documents
and delivered them to the Buyer.
15
(ii) The Common Stock shall be authorized for quotation on the
OTCBB, trading in the Common Stock shall not have been suspended for any reason.
(iii) The representations and warranties of the Company shall
be true and correct in all material respects (except to the extent that any of
such representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall be
true and correct without further qualification) as of the date when made and as
of the Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. If requested by
the Buyer, the Buyer shall have received a certificate, executed by the
President of the Company, dated as of the Closing Date, to the foregoing effect
and as to such other matters as may be reasonably requested by the Buyer
including, without limitation an update as of the Closing Date regarding the
representation contained in Section 3(c) above.
(iv) The Company shall have executed and delivered to the
Buyer(s) the Convertible Debenture in the respective amounts set forth opposite
the Buyer's name on Schedule I attached hereto.
(v) The Buyer shall have received an opinion of counsel from
Greenberg Traurig, LLP in a form set forth in Schedule 9(a)(v).
(vi) The Company shall have provided to the Buyer a
certificate of good standing from the secretary of state from the state in which
the Company is incorporated.
(vii) The Company shall have provided to the Buyer an
acknowledgement, to the satisfaction of the Buyer, from the Company's certified
public accountant as to its ability to provide all consents required in order to
file a registration statement in connection with this transaction.
(viii) The Company shall have reserved out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversion of
the Convertible Debenture, shares of Common Stock to effect the conversion of
all of the Conversion Shares then outstanding.
(ix) The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to the Buyer, shall have been delivered to and
acknowledged in writing by the Company's transfer agent.
10. INDEMNIFICATION.
(a) In consideration of the Buyer's execution and delivery of this
Agreement and acquiring the Convertible Debenture and the Conversion Shares
hereunder, and in addition to all of the Company's other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Buyer(s) and each other holder of the Convertible Debenture and the Conversion
Shares, and all of their officers, directors, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "Buyer Indemnitees") from and
against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Buyer Indemnitee is a party to the action for
which indemnification hereunder is sought), and including reasonable attorneys'
fees and disbursements (the "Indemnified Liabilities"), incurred by the Buyer
Indemnitees or any of them as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement, the Convertible Debenture or the Investor
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, or the Investor
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim
brought or made against such Indemnitee and arising out of or resulting from the
execution, delivery, performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the
Indemnities, any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Convertible
Debenture or the status of the Buyer or holder of the Convertible Debenture the
Conversion Shares, as a Buyer of Convertible Debenture in the Company. To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities, which is permissible under
applicable law.
16
(b) In consideration of the Company's execution and delivery of this
Agreement, and in addition to all of the Buyer's other obligations under this
Agreement, the Buyer shall defend, protect, indemnify and hold harmless the
Company and all of its officers, directors, employees and agents (including,
without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the "Company Indemnitees") from
and against any and all Indemnified Liabilities incurred by the Indemnitees or
any of them as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Buyer(s) in this Agreement, instrument or document contemplated hereby or
thereby executed by the Buyer, (b) any breach of any covenant, agreement or
obligation of the Buyer(s) contained in this Agreement, the Investor
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby executed by the Buyer, or (c) any cause of
action, suit or claim brought or made against such Company Indemnitee based on
material misrepresentations or due to a material breach and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement, the Investor Registration Rights Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Company
Indemnities. To the extent that the foregoing undertaking by The Buyer may be
unenforceable for any reason, The Buyer shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.
17
11. GOVERNING LAW: MISCELLANEOUS.
(a) Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New Jersey without
regard to the principles of conflict of laws. The parties further agree that any
action between them shall be heard in Hudson County, New Jersey, and expressly
consent to the jurisdiction and venue of the Superior Court of New Jersey,
sitting in Hudson County and the United States District Court for the District
of New Jersey sitting in Newark, New Jersey for the adjudication of any civil
action asserted pursuant to this Paragraph.
(b) Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
(c) Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
(d) Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
(e) Entire Agreement, Amendments. This Agreement supersedes all
other prior oral or written agreements between the Buyer(s), the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be waived or amended other than by an instrument in writing signed
by the party to be charged with enforcement.
(f) Notices. Any notices, consents, waivers, or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon confirmation of receipt, when sent by facsimile;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:
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If to the Company, to: SmarTire Systems Inc.
Richmond Corporate Centre
Suite 150-13151 Vanier Place
Richmond, British Columbia
Canada V6V 2J1
Attention: Robert Rudman - President
Telephone:(604) 276-9884
Facsimile:(604) 276-2353
With a copy to: Greenberg Traurig, LLP
200 Park Avenue
New York, NY 10166
Attention: Spencer G. Feldman, Esq.
Telephone:(212) 801-9200
Facsimile:(212) 801-6400
If to the Buyer, to its address and facsimile number on Schedule I, with
copies to the Buyer's counsel as set forth on Schedule I. Each party shall
provide five (5) days' prior written notice to the other party of any change in
address or facsimile number.
(g) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
Neither the Company nor any Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other party
hereto.
(h) No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
(i) Survival. Unless this Agreement is terminated under Section11,
5, the representations and warranties of the Company and the Buyer contained in
Sections 3, 4 and 5, the agreements and covenants set forth in Sections 6 and 7,
and the indemnification provisions set forth in Section 10, shall survive the
Closing for a period of two (2) years following the date on which the
Convertible Debenture are converted in full. The Buyer(s) shall be responsible
only for its own representations, warranties, agreements and covenants
hereunder.
(j) Publicity. The Company and the Buyer shall have the right to
approve, before issuance any press release or any other public statement with
respect to the transactions contemplated hereby made by any party; provided,
however, that the Company shall be entitled, without the prior approval of the
Buyer, to issue any press release or other public disclosure with respect to
such transactions required under applicable securities or other laws or
regulations (the Company shall use its best efforts to consult the Buyer in
connection with any such press release or other public disclosure prior to its
release and Buyer shall be provided with a copy thereof upon release thereof).
(k) Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
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(l) Termination. In the event that the Closing shall not have
occurred with respect to the Buyer on or before five (5) business days from the
date hereof due to the Company's or the Buyer's failure to satisfy the
conditions set forth in Section 9 above (and the non-breaching party's failure
to waive such unsatisfied condition(s)), the non-breaching party shall have the
option to terminate this Agreement with respect to such breaching party at the
close of business on such date without liability of any party to any other
party; provided, however, that if this Agreement is terminated by the Company
pursuant to this Section 11(l), the Company shall remain obligated to reimburse
the Buyer for the fees and expenses of Yorkville Advisors Management, LLC
described in Section 6(g) above.
(m) No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
20
IN WITNESS WHEREOF, the Buyer and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
COMPANY:
SMARTIRE SYSTEMS, INC.
By: /s/ Jeff Finklestein
--------------------
Name: Jeff Finklestein
Title: Chief Financial Officer
BUYER:
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
By: /s/ Mark Angelo
------------------------
Name: Mark A. Angelo
Its: President and Portfolio Manager
21
EXHIBIT A
FORM OF INVESTOR REGISTRATION RIGHTS AGREEMENT
----------------------------------------------
22
EXHIBIT B
FORM OF ESCROW AGREEMENT
------------------------
23
EXHIBIT C
IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
---------------------------------------
24
EXHIBIT D
US Questionnaire
----------------
ACCREDITED INVESTOR QUESTIONNAIRE
All capitalized terms herein, unless otherwise defined, have the meanings
ascribed thereto in the Securities Purchase Agreement.
This Questionnaire is for completion by the Investor, who is a US person
(as that term is defined Regulation S of the United States Securities Act of
1933 (the "1933 Act")). The purpose of this Questionnaire is to assure the
Company that the Investor will meet the standards imposed by the 1933 Act and
the appropriate exemptions of applicable state securities laws in connection
with the transactions contemplated by the Securities Purchase Agreement. The
Company will rely on the information contained in this Questionnaire for the
purposes of such determination. This Questionnaire is not an offer of any
securities of the Company in any state other than those specifically authorized
by the Company.
All information contained in this Questionnaire will be treated as
confidential. However, by signing and returning this Questionnaire, each
Investor agrees that, if necessary, this Questionnaire may be presented to such
parties as the Company deems appropriate to establish the availability, under
the 1933 Act or applicable state securities law, of exemption from registration
in connection with the transactions contemplated by the Securities Purchase
Agreement.
12. The Investor covenants, represents and warrants to the Company
that it satisfies one or more of the categories of "Accredited Investors", as
defined by Regulation D promulgated under the 1933 Act, as indicated below:
(Please initial in the space provide those categories, if any, of an "Accredited
Investor" which the Investor satisfies)
Category 1 An organization described in
Section 501(c)(3) of the United
States Internal Revenue Code, a
corporation, a Massachusetts or
similar business trust or
partnership, not formed for the
specific purpose of acquiring the
securities, with total assets in
excess of US $5,000,000;
Category 2 A natural person whose individual
net worth, or joint net worth with
that person's spouse, on the date of
purchase exceeds US $1,000,000;
Category 3 A natural person who had an
individual income in excess of US
$200,000 in each of the two most
recent years or joint income with
that person's spouse in excess of US
$300,000 in each of those years and
has a reasonable expectation of
reaching the same income level in
the current year;
25
Category 4 A "bank" as defined under Section
(3)(a)(2) of the 1933 Act or savings
and loan association or other
institution as defined in Section
3(a)(5)(A) of the 1933 Act acting in
its individual or fiduciary
capacity; a broker dealer registered
pursuant to Section 15 of the
Securities Exchange Act of 1934
(United States); an insurance
company as defined in Section 2(13)
of the 1933 Act; an investment
company registered under the
Investment Company Act of 1940
(United States) or a business
development company as defined in
Section 2(a)(48) of such Act; a
Small Business Investment Company
licensed by the U.S. Small Business
Administration under Section 301(c)
or (d) of the Small Business
Investment Act of 1958 (United
States); a plan with total assets in
excess of $5,000,000 established and
maintained by a state, a political
subdivision thereof, or an agency or
instrumentality of a state or a
political subdivision thereof, for
the benefit of its employees; an
employee benefit plan within the
meaning of the Employee Retirement
Income Security Act of 1974 (United
States) whose investment decisions
are made by a plan fiduciary, as
defined in Section 3(21) of such
Act, which is either a bank, savings
and loan association, insurance
company or registered investment
adviser, or if the employee benefit
plan has total assets in excess of
$5,000,000, or, if a self-directed
plan, whose investment decisions are
made solely by persons that are
accredited investors;
Category 5 A private business development
company as defined in Section
202(a)(22) of the Investment
Advisers Act of 1940 (United
States);
Category 6 A director or executive officer of
the Company;
Category 7 A trust with total assets in
excess of $5,000,000, not formed for
the specific purpose of acquiring
the securities, whose purchase is
directed by a sophisticated person
as described in Rule 506(b)(2)(ii)
under the 1933 Act;
Category 8 An entity in which all of the
equity owners satisfy the
requirements of one or more of the
foregoing categories;
Note that prospective Investors claiming to satisfy one
of the above categories of Accredited Investor may be required
to supply the Company with a balance sheet, prior years'
federal income tax returns or other appropriate documentation
to verify and substantiate the Investor's status as an
Accredited Investor.
26
13. If the Investor is an entity which initialed Category 8 in reliance
upon the Accredited Investor categories above, state the name, address, total
personal income from all sources for the previous calendar year, and the net
worth (exclusive of home, home furnishings and personal automobiles) for each
equity owner of the said entity:
14. _______________________________________________________________
15. _______________________________________________________________
The Investor hereby certifies that the information contained in this
Questionnaire is complete and accurate and the Investor will notify the Company
promptly of any change in any such information. If this Questionnaire is being
completed on behalf of a corporation, partnership, trust or estate, the person
executing on behalf of the Investor represents that it has the authority to
execute and deliver this Questionnaire on behalf of such entity.
IN WITNESS WHEREOF, the undersigned has executed this Questionnaire as of
the ______ day of __________________, 2005.
If a Corporation, Partnership or If an Individual:
Other Entity:
Print or Type Name of Entity Signature
Signature of Authorized Signatory Print or Type Name
Type of Entity Social Security/Tax I.D. No.
27
EXHIBIT E
---------
ACCREDITED INVESTOR QUESTIONNAIRE
---------------------------------
The purpose of this Questionnaire is to assure SmarTire Systems Inc. (the
"Company") that the undersigned (the "Subscriber") will meet certain
requirements for the registration and prospectus exemptions provided for under
Multilateral Instrument 45-103 ("MI 45-103"), as adopted by the British Columbia
Securities Commission and the Alberta Securities Commission (each, a "local
jurisdiction"), in respect of a proposed private placement of securities by the
Company (the "Transaction"). The Company will rely on the information contained
in this Questionnaire for the purposes of such determination.
The undersigned Subscriber covenants, represents and warrants to the
Company that:
1. the Subscriber has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks
of the Transaction and the Subscriber is able to bear the economic
risk of loss arising from such Transaction;
2. the Subscriber satisfies one or more of the categories of
"accredited investor" (as that term is defined in MI 45-103)
indicated below (please check the appropriate box):
(a) |_| a Canadian financial institution as defined in National
Instrument 14-101, or an authorized foreign bank listed in
Schedule III of the Bank Act (Canada);
(b) |_| the Business Development Bank of Canada incorporated under
the Business Development Bank of Canada Act (Canada);
(c) |_| an association under the Cooperative Credit Associations
Act (Canada) located in Canada;
(d) |_| a subsidiary of any person or company referred to in
paragraphs 2(a) to 2(c), where the person or company owns all
of the voting securities of the subsidiary, except the voting
securities required by law to be owned by directors of that
subsidiary;
(e) |_| a person or company registered under the Securities Act
(British Columbia), or under securities legislation of another
jurisdiction of Canada, as an adviser or dealer, other than a
limited market dealer registered under the Securities Act
(Ontario);
(f) |_| an individual registered or formerly registered under the
Securities Act (British Columbia), or under securities
legislation in another jurisdiction of Canada, as a
representative of a person or company registered under the
Securities Act (British Columbia), or under securities
legislation in another jurisdiction of Canada, as an adviser
or dealer, other than a limited market dealer registered under
the Securities Act (Ontario);
28
(g) |_| the government of Canada or a province, or any crown
corporation or agency of the government of Canada or a
province;
(h) |_| a municipality, public board or commission in Canada;
(i) |_| a national, federal, state, provincial, territorial or
municipal government of or in any foreign jurisdiction, or any
agency of that government;
(j) |_| a pension fund that is regulated by either the Office of
the Superintendent of Financial Institutions (Canada) or a
provincial pension commission or similar regulatory authority;
(k) |_| a registered charity under the Income Tax Act (Canada);
(l) |_| an individual who beneficially owns, or who together with
a spouse beneficially owns, directly or indirectly, financial
assets (defined in MI 45-103 to mean cash and securities)
having an aggregate realizable value that, before taxes but
net of any related liabilities, exceeds CDN.$1,000,000;
(m) |_| an individual whose net income before taxes exceeded
CDN.$200,000 in each of the two most recent years or whose net
income before taxes combined with that of a spouse exceeded
CDN.$300,000 in each of those years and who, in either case,
has a reasonable expectation of exceeding that net income
level in the current year;
(n) |_| a corporation, limited partnership, limited liability
partnership, trust or estate, other than a mutual fund or
non-redeemable investment fund, that had net assets of at
least CDN.$5,000,000 as reflected on its most recently
prepared financial statements;
(o) |_| a mutual fund or non-redeemable investment fund that, in
the local jurisdiction, distributes it securities only to
persons or companies that are accredited investors;
(p) |_| a mutual fund or non-redeemable investment fund that, in
the local jurisdiction, distributes its securities under a
prospectus for which a receipt has been issued by the
regulator;
29
(q) |_| an entity organized in a foreign jurisdiction that is
analogous to any of the entities referred to in paragraphs
2(a) through 2(e) and paragraph 2(j) in form and function; or
(r) |_| a person or company in respect of which all of the owners
of interests, direct or indirect, legal or beneficial, are
persons or companies that are accredited investors. The
Subscriber acknowledges and agrees that the Subscriber may be
required by the Company to provide such additional
documentation as may be reasonably required by the Company and
its legal counsel in determining the Subscriber's eligibility
to acquire the Shares under relevant Legislation.
IN WITNESS WHEREOF, the undersigned has executed this Questionnaire as of
the__________ day of_______ ,___________.
If a Corporation, Partnership or Other Entity: If an Individual:
- ----------------------------------------- -------------------------
Print or Type Name of Entity Signature
- ----------------------------------------- -------------------------
Signature of Authorized Signatory Print or Type Name
- -----------------------------------------
Type of Entity
30
EXHIBIT F
Form 45-903F1
31
SCHEDULE I
SCHEDULE OF BUYERS
Address/Facsimile Amount of
Name Signature Number of Buyer Subscription
---- --------- --------------- ------------
Cornell Capital Partners, LP By: Yorkville Advisors, LLC 101 Hudson Street - Suite 3700 $1,500,000
Its: General Partner Jersey City, NJ 07303
Facsimile: (201) 985-8266
By: /s/ Mark Angel
--------------------
Name: Mark Angelo
Its: Portfolio Manager and
President
With a copy to: David Gonzalez, Esq. 101 Hudson Street - Suite 3700
Jersey City, NJ 07302
Facsimile: (201) 985-8266