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. "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.
(J)
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).
(K)
NO SHORT SALES OR HEDGING TRANSACTIONS. NEITHER THE BUYER(S) NOR
ANY OF ITS AFFILIATES HAVE AN OPEN SHORT POSITION IN THE COMMON STOCK OF THE
COMPANY, AND THE BUYER(S) AGREES THAT IT SHALL 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 AS LONG AS ANY CONVERTIBLE DEBENTURES SHALL REMAIN
OUTSTANDING.
(L)
SHAREHOLDER APPROVAL. THE COMPANY SHALL OBTAIN SHAREHOLDER
APPROVAL NO LATER THAN OCTOBER 31, 2006 (WITHOUT THE VOTE OF ANY SHARES ACQUIRED
IN THIS TRANSACTION AND RELATED TRANSACTIONS) FOR THE ISSUANCE OF A MAXIMUM
57,924,215 SHARES AS CONVERSION SHARES (BEING 64,000,000 MAXIMUM SHARES TO BE
ISSUED LESS 6,075,785 CONVERSION SHARES, WHICH WILL REGISTERED IN THE INITIAL
REGISTRATION STATEMENT, AS DEFINED IN THE INVESTOR'S REGISTRATION RIGHTS
AGREEMENT, WITHIN THE 19.99% REQUIREMENT), (II) SHARES ISSUABLE IN PAYMENT OF
INTEREST ON THE DEBENTURES; (III) SHARES ISSUABLE AS LIQUIDATED DAMAGES PURSUANT
TO THE INVESTOR REGISTRATION RIGHTS AGREEMENT; AND (IV) THE WARRANT SHARES (THE
"TOTAL TRANSACTION SHARES").
FOR THE PURPOSES OF THE SHAREHOLDER APPROVAL
REQUIREMENT, THE TERM "TOTAL TRANSACTION SHARES" DOES NOT INCLUDE 6,075,785
CONVERSION SHARES, THE BUYERS SHARES, AND THE SHARES OF THE COMPANY'S COMMON
STOCK ISSUABLE UPON EXERCISE OF THE 2,000,000 WARRANTS WITH AN EXERCISE PRICE OF
$1.25.
15
(M)
INCREASE OF AUTHORIZED SHARES.
THE COMPANY SHALL INCREASE ITS AUTHORIZED
SHARES OF COMMON STOCK TO AT LEAST ONE HUNDRED SEVENTY FIVE MILLION
(175,000,000) SHARES OF COMMON STOCK BY A VOTE OF ITS SHAREHOLDERS NO LATER THAN
OCTOBER 31, 2006 AND THE FILING OF PRELIMINARY AND DEFINITIVE SCHEDULE 14A TO BE
FOLLOWED BY THE APPROPRIATE FILINGS WITH THE CALIFORNIA SECRETARY OF STATE
AND
WHICH SHALL BE