-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HKvw3CBZvYb5Mo3EEwLT8j/oTPNaqY/wEXX560aRsw2Fym3AcGBk3p4cauERoeCR /YSge13MUFSOfv17nzPCwg== /in/edgar/work/20000817/0000897069-00-000431/0000897069-00-000431.txt : 20000922 0000897069-00-000431.hdr.sgml : 20000922 ACCESSION NUMBER: 0000897069-00-000431 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20000817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAPWORLD COM CENTRAL INDEX KEY: 0001024628 STANDARD INDUSTRIAL CLASSIFICATION: [3600 ] IRS NUMBER: 943210624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-44014 FILM NUMBER: 705017 BUSINESS ADDRESS: STREET 1: 117 MORRIS ST CITY: SEBASTOBOL STATE: CA ZIP: 95472 BUSINESS PHONE: 7078244150 MAIL ADDRESS: STREET 1: 117 MORRIS ST CITY: STBASTOPOL STATE: CA ZIP: 95472 FORMER COMPANY: FORMER CONFORMED NAME: ZAP POWER SYSTEMS INC DATE OF NAME CHANGE: 19970319 S-3 1 0001.txt S-3 REGISTRATION STATEMENT - ZAPWORLD.COM Registration No. xx-xxxxx ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM S-3 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ----------------------------- ZAPWORLD.COM (Exact name of registrant as specified in its charter) California 94-3210624 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 117 Morris Street Sebastopol, California 95472 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------------------------------------------- John Dabels President Zapworld.com 117 Morris Street Sebastopol, California 95472 (707) 824-4150 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------------------------------------------- with a copy to: William D. Evers Foley & Lardner 1 Maritime Plaza, Sixth Floor San Francisco, California 94111 (415) 434-4484 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) of the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE ===================== ============ =========== ============ ============== Proposed Proposed Maximum Maximum Title of Each Amount Offering Aggregate Amount of Class of Securities to be Price Offering Registration to be Registered Registered Per Unit) Price * Fee - --------------------- ------------ ----------- ------------ -------------- Common Stock, no par 1,546,392 4.78 7,391,753 1,951 value (1)(2)(3) ===================== ============ =========== ============ ============== Common Stock, no par 1,030,928 4.78 4,927,835 1,301 value (1)(2)(4) ===================== ============ =========== ============ ============== Common Stock, no par 231,959 4.78 1,108,764 293 value(1)(2)(5) ===================== ============ =========== ============ ============== Common Stock, no par value(6) 816,666 5.43 4,434,496 1,171 ===================== ============ =========== ============ ============== Common Stock, no par value (7) 363,636 4.85 $ 1,763,635 466 ===================== ============ =========== ============ ============== Total 3,989,581 $19,626,483 $5,182 ===================== ============ =========== ============ ============== (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) on the basis of the average high and low prices of the common stock reported on the Nasdaq SmallCap Market on August 10, 2000. (2) In addition to the estimated number of shares set forth in the table, the amount to be registered includes a presently indeterminate number of shares issuable upon the conversion of the series A-1 and A-2 convertible preferred stock and the exercise of the warrants as such number may be adjusted as a result of stock split, stock dividend and anti-dilution provisions in accordance with Rule 416. (3) Consists of shares issuable upon the conversion of series A-1 preferred stock. Pursuant to the terms of a registration rights agreement with the selling shareholders, we are required to register 200% of the number of shares issuable upon conversion of the series A-1 preferred stock. The number of shares being registered is equal to 200% of the number of shares of common stock which would be issuable if all shares of the series A-1 preferred stock were converted into common stock as of August 15, 2000. (4) Consists of shares issuable upon the conversion of series A-2 preferred stock. Pursuant to the terms of a registration rights agreement with the selling shareholders, we are required to register 200% of the number of shares issuable upon conversion of the series A-2 preferred stock. The number of shares being registered is equal to 200% of the number of shares of common stock which would be issuable if the selling shareholders purchased all of the shares of series A-2 preferred stock they are eligible to purchase and then immediately converted all of their shares into common stock on August 15, 2000. (5) Consists of shares issuable upon the payment of dividends to the holders of the series A-1 and series A-2 preferred stock. Pursuant to the terms of the registration rights agreement, we are required to register 200% of the number of shares issuable upon the payment of the dividend. The number of shares being registered is equal to 200% of the number of shares that would be issued upon payment of the dividend, assuming that the entire amount of the dividend is paid in the form of common stock. (6) Consists of shares purchasable upon the exercise of warrants issued to the selling shareholders. (7) Consists of shares purchasable upon the exercise of warrants which the selling shareholders have the right to purchase under the terms of a securities purchase agreement, assuming that the selling shareholders purchase the maximum number of warrants under that agreement. ------------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ The information in this prospectus is not complete and may be changed. These shares may not be sold until the registration statement filed with the Securities and Exchange commission is effective. The prospectus is not an offer to sell these securities and is not a solicitation of offers to buy these securities in any state where the offer or sale is not permitted. Subject to Completion Preliminary Prospectus Dated August 16, 2000 ____________________ Shares ZAPWORLD.COM Common Stock We are registering ________ shares of common stock upon conversion of series A-1 and A-2 convertible preferred stock, shares issuable as a dividend paid to the holders of the series A-1 and A-2 preferred stock and shares issued upon the exercise of certain warrants. We will only receive proceeds from the sale of common stock as a result of the exercise of the warrants. We will use the proceeds, if any, for working capital. If and when the owners of series A-1 or A-2 preferred stock or warrants convert or exercise any of these securities for shares of common stock, that stock may be resold to the public using this prospectus. The selling shareholders and any intermediaries through whom they sell common stock may be considered underwriters within the meaning of the Securities Act of 1933 as to the common stock they sell. Any profits realized or commissions received by them may be considered underwriting compensation. Our shares are currently traded on the Nasdaq SmallCap Market under the trading symbol ZAPP. On August 15, 2000, the last reported sale price of our common stock was $5.00 per share. Investing in our common stock involves risks. See the "Risk Factors" Section beginning on page 3. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus. Any representation to the contrary is a criminal offense. This prospectus is dated __________________, 2000. TABLE OF CONTENTS Page TABLE OF CONTENTS..............................................................1 ABOUT ZAPWORLD.COM.............................................................2 THE OFFERING...................................................................3 FORWARD-LOOKING STATEMENTS.....................................................3 RISK FACTORS...................................................................3 We have never operated profitably since we began operations and we can provide you with no assurance that we will achieve profitability...........................................................3 We may not be able to obtain additional capital to fund our operations when needed..................................................4 We face intense competition which could cause us to lose market share...................................................................4 Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity..........................4 We may be unable to keep up with changes in electric vehicle technology and suffer a decline in our competitive position as a result.............................................................5 We will need to increase our research and development spending, which could substantially increase our costs and adversely affect our operation's cash flow........................................5 The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business................................................................5 Product liability or other claims could have a material adverse effect on our business..................................................5 Failure to manage our growth effectively could adversely affect our business............................................................6 The loss of certain key personnel could significantly harm our business................................................................6 Changes in the law may have a negative impact upon our business...........6 Our success is heavily dependent on protecting our intellectual property rights, which we may not be able to protect....................7 USE OF PROCEEDS................................................................8 selling shareholders...........................................................8 plan of distribution..........................................................12 description of securities.....................................................13 Series A-1 and A-2 Preferred Stock.......................................13 Warrants.................................................................14 Registration Rights......................................................14 legal matters.................................................................15 EXPERTS ......................................................................15 INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................15 signatures....................................................................20 ABOUT ZAPWORLD.COM Our company, Zapworld.com was incorporated in California in 1994 under the name "Zap Power Systems, Inc." We produce and sell electric vehicles, including an electric scooter called the "ZAPPY(R)", electric motorbikes and other products. We also manufacture and sell non-motorized scooters. Our principal offices are located at 117 Morris Street, Sebastopol, California 95472 and our telephone number is (707) 824-4150. Our corporate website is www.zapworld.com. The information on our website is not incorporated by reference in this prospectus. 2 THE OFFERING Type of security.............................Common stock Common stock registered by company...........We are registering shares of common stock which are issuable upon: (1) the conversion of series A-1 preferred stock and series A-2 preferred stock; (2) upon the payment of dividends on those shares; and (3) which are issuable upon the exercise of certain presently outstanding warrants as well as under warrants which we have agreed to sell to the selling shareholders. Use of proceeds..............................We will only receive cash proceeds upon exercise of the warrants. Those proceeds, if any will be used for working capital. All proceeds from sales of common stock conducted by selling shareholders will go to the selling shareholders and not to us. FORWARD-LOOKING STATEMENTS This prospectus and the documents we incorporate by reference into this prospectus include forward-looking statements. Those statements are sometimes indicated by words such as "anticipate," "estimate," "believe," "consider," "expect," "project," "intend" and similar expressions. Forward-looking statements are based on assumptions of future events, some of which will not occur. Actual results will vary from those set forth or implied in the forward-looking statements and the variances may be material. RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors before you decide to buy our common stock. We have never operated profitably since we began operations and we can provide you with no assurance that we will achieve profitability. We have never generated a profit from operations during any fiscal year of our existence since we began operation in 1994. We have concentrated primarily on increasing our revenues and expanding our market share through acquisitions rather than on maximizing profits to date. As a result, although we experienced revenue growth from fiscal year 1998 to fiscal year 1999, we incurred net losses of $1,109,400 and $1,692,600 for the years ended December 31, 1998 and 1999, respectively. There is no assurance that we will be able to successfully operate profitably in the future. Because we will ultimately need to operate 3 profitably or sell our operations, our failure to generate profits from operations could harm our ability to continue operations in the long term. We may not be able to obtain additional capital to fund our operations when needed. From our inception, we have financed our operations primarily through private and public offerings of our equity securities. Our planned expenditures are based primarily on our internal estimates of future sales and ability to raise additional financing. If revenues or additional financing do not meet our expectations in any given period of time, the adverse impact on our finances will be magnified by our inability to adjust spending quickly enough to compensate for revenue or financing shortfalls. Failure to achieve anticipated revenues may require us to seek additional financing when none is available or on extremely unfavorable terms. There can be no assurance that we will be able to achieve profitability. We face intense competition which could cause us to lose market share. Some of our competitors are large manufacturers including Honda, Suzuki, Sanyo and Yamaha, have significant financial resources, established market positions, longstanding relationships with other customers, and significantly greater name recognition, technical, marketing, sales, manufacturing, distribution and other resources than we do. These factors may make it difficult for us to compete with these businesses in the production and sale of our products. There are many smaller manufacturers which are experienced in selling electric bicycles to the U.S., European and Asian markets, all of which are key segments of our market. We also compete against the makers of electric scooters as well as non-motorized scooters and bicycles. Although we believe we have a competitive advantage from our name recognition in the electric vehicle industry and ownership of fundamental technology, the market for the sale of these products is subject to rapid change and ease of entry by new competitors. We cannot be certain that we will be able to meet the changes in the marketplace that will allow us to remain competitive. Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity. The electric vehicle industry is in its infancy and has experienced substantial growth and change in the last few years. Demand for and interest in electric vehicles appears to be increasing. However, growth in the electric vehicle industry may depend on: continued development of product technology and recharge infrastructure, the environmental consciousness of customers, the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines, and future regulation and legislation requiring more use of nonpolluting vehicles. We can provide you with no assurance that growth in the electric vehicle industry will continue, and our business may suffer should such growth cease. There has also been a substantial increase in the number of electric vehicles and non-motorized vehicles which are competitive with our products in the last several years. One of 4 our principal challenges will be to continue to develop and market products which keep pace with the rapid changes in the market. We can provide you with no assurance that we will be able to introduce new products and maintain the market share of our current products. If we are not able to do so, we will likely be unable to continue to increase revenue or begin to operate profitably. We may be unable to keep up with changes in electric vehicle technology and suffer a decline in our competitive position as a result. Our existing products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology. However, we cannot be certain that our products will not become obsolete or that our research and development efforts will be able to adapt to changes in or create the necessary technology. Therefore, changes in technology in the electric vehicle industry may harm our competitive position. We will need to increase our research and development spending, which could substantially increase our costs and adversely affect our operation's cash flow. To keep pace with technological changes and developments in the market for electronic vehicles, we have substantially increased spending on research and development. Our research and development costs in 1999 were $364,600, as compared to $202,600 in 1998, an 80% increase. Because we plan to develop new electric vehicle products and tooling that will broaden our product line in 2000 and 2001, we expect to continue incurring increased research and development costs in 2000 and 2001.. There is no assurance that we will be able to raise sufficient funds to meet our research and development costs. Failure to provide sufficient funds to support our research and development efforts could have a material adverse effect on our business, results of operations or financial condition. The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business. We rely on a small group of suppliers to provide us with some components for our products. If these suppliers are unwilling or unable to provide these parts, there are only a limited number of alternative suppliers who could provide them. Some of these suppliers are located outside of the United States, changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate will occur could affect our ability to receive components from suppliers. A failure of these suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from filling customer orders in a timely fashion. Product liability or other claims could have a material adverse effect on our business. As producers of electric vehicles, we face the risk of product liability claims and unfavorable publicity in the event that the use of our products causes injury or has other adverse effects. Although we have product liability insurance for risks of up to $10,000,000, 5 such insurance may be inadequate to cover all potential product claims. In addition, we may not be able to maintain such insurance indefinitely or be able to avoid product liability exposure. Failure to manage our growth effectively could adversely affect our business. We plan to increase sales and expand our operations substantially during the next several years through internally generated growth and the acquisition of businesses and products which we view strategically advantageous. To manage our growth, we believe we must continue to implement and improve our operational, manufacturing and research and development departments. We may not have adequately evaluated the costs and risks associated with this expansion, and our systems, procedures and controls may not be adequate to support our operations. In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a profitable basis. The success of our future operating activities will also depend on our ability to expand our support system to meet with the growth of our business. Any failure by our management to effectively anticipate, implement and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will be able to successfully operate the acquired businesses and become profitable in the future and we may not be able to effectively manage such change. Our inability to successfully integrate or operate the recently acquired businesses would have a material adverse effect on our business, financial condition and results of operations. The loss of certain key personnel could significantly harm our business. Our performance is heavily dependent on the performance of our executive officers and key employees all of whom have worked together for a relatively short period of time. In particular, John Dabels was recently appointed as our President on June 1, 2000 which allows our prior President and Chief Executive Officer, Gary Starr, to devote his time to serving as the CEO. At the present time, we do not have any life insurance policy taken on the life of any of our employees. The loss of the services of any of our executive officers or other key employees could adversely affect our business. Additionally, to successfully implement our projected and anticipated growth, we will be dependent on our ability to retain existing personnel to hire additional qualified personnel. There can be no assurance that we will be able to retain or hire other necessary personnel. Our success is dependent, in part, on our key management and technical personnel. The loss of one or more of these personnel could adversely affect our business. Changes in the law may have a negative impact upon our business. Our products are subject to substantial regulation under federal, state and local laws. We believe that our products are materially in compliance with all laws governing their manufacture, sale and use. However, to the extent such laws change or that we may introduce new products in the future, there can be no assurance that any of our other products will 6 continue to comply with applicable state or federal or foreign laws. Further, certain foreign country, federal and state laws and industrial standards currently regulate electrical and electronics equipment. Standards for electric vehicles are not yet generally available or accepted as industry standards. There can be no assurance that our products may not become subject to such federal and/or state regulation in the future. Compliance with any future federal or state regulations may be burdensome, time consuming and expensive. We cannot predict the effect of possible future legislation and regulation on our business. Our success is heavily dependent on protecting our intellectual property rights, which we may not be able to protect. We rely on a combination of patent, trademark and trade secret protections to protect our proprietary technology. Our success will, in part, depend on our ability to obtain trademarks and patents and to operate without infringing on the proprietary rights of others. We may not be able to do this successfully, however. For example, at the present time one of our U.S. patents (Pat. No. 5,491,390) covering various aspects of our electric bicycle is being reexamined by the United States Patent and Trademark Office to determine if one or more of its claims are invalid. If that proceeding results in an adverse ruling against us, the patent will be declared invalid. If this occurs, this could severely and adversely affect our ability to prevent competitors from copying and using key elements of our technology in developing and marketing their own products. Additionally, we have recently learned that at least one company is attempting to sell an electric scooter in the United States which we believe infringes one or more of our patents and trademarks. In this regard we may have to incur substantial legal fees and costs in preventing these infringing activities. We have registered several trademarks with the United States Patent and Trademark Office and have obtained several overseas trademark registrations as well. There can be no assurance that the trademarks and patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted under those registrations will provide competitive advantages to us. We also rely on trade secrets and new technologies to maintain our competitive position. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. In addition, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Although we have conducted searches to discover any patents and trademarks which our products or their use might infringe and are not aware of any such patents and trademarks, we cannot be certain that no such infringement has or will occur. We could incur substantial costs in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party. 7 USE OF PROCEEDS We will not receive any proceeds from the conversion of shares of series A-1 and A-2 preferred stock or the sale of any shares of the common stock by the selling shareholders. If all of the warrants which we have issued or which we have agreed to sell to the selling shareholders are exercised in full, , we would receive total proceeds of approximately $4,435,523. We will use these proceeds, assuming we receive any, for working capital. The amounts we actually expend for such working capital may vary significantly and we cannot predict the proceeds we may receive from the exercise of the warrants. If we do receive funds from the exercise of the warrants, the manner in which we use the proceeds will depend on a number of factors including, but not limited to, the actual net proceeds received, the amount of our future revenues and other factors described in this prospectus. Accordingly, our management will retain broad discretion in the allocation of net proceeds of this offering. SELLING SHAREHOLDERS The following tables set forth certain information concerning each of the selling shareholders. The shares are being registered to permit the selling shareholders and their transferees or other successors in interest to offer the shares from time to time. None of the selling shareholders has held any position or office or had a material relationship with Zapworld.com or any of our affiliates within the past three years other than as a result of the ownership of our common stock. Selling shareholders are under no obligation to sell all or any portion of their shares. Particular selling shareholders may not have a present intention of selling their shares and may sell less than the number of shares indicated. The following table assumes that the selling shareholders will sell all of their shares.
- -------------------------------- ------------------ ----------- ----------- ------------ ------------ Selling Shareholders Number of Number of Shares Number of Percentage Percentage Owned and to be Number of Shares of Shares of Shares Owned Prior to Shares Owned Owned Owned Offering(1) Being After Prior to After (2)(3)(4)(5) Offered Offering Offering Offering - -------------------------------- ------------------ ----------- ----------- ------------ ------------ The Endeavour Capital Fund, 1,159,481 1,159,481 0 21.71% * S.A. P.O.B. 57116 Jerusalem 91570 Israel - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Celeste Trust Reg. 386,494 386,494 0 7.24% * c/o Trevisa-Treuhand-Anstalt Landstrasse 8 Furstentums 9496 Balzers, Liechtenstein - -------------------------------- ------------------ ----------- ----------- ------------ ------------ 8 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Esquire Trade & Finance 386,494 386,494 0 7.24% * Trident Chambers P.O. Box 146 Road Town, Tortola British Virgin Islands - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Nesher Limited 139,138 139,138 0 2.61% * c/o KCM LLC 135 W. 50th Street Suite 1700 New York, NY 10020 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Keshet L.P. 104,353 104,353 0 1.95% * c/o KCM LLC 135 W. 50th Street New York, NY 10020 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ The Keshet Fund L.P. 65,704 65,704 0 1.23% * c/o KCM LLC 135 W. 50th Street New York, NY 10020 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ West Capital & Associates, Inc. 77,299 77,299 0 1.45% * 14 Rue du Conseil General CH-1205 Geneva, Switzerland - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Samuel Krieger 10,000 10,000 0 * * c/o Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Ronald Nussbaum 10,000 10,000 0 * * c/o Krieger & Prager LLP, Esqs. 39 Broadway Suite 1440 New York, NY 10006 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ 9 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Union Atlantic Capital L.C. 104,000 104,000 0 1.95% * 1401 Brickell Avenue Suite 660 Miami, Florida 33131 - -------------------------------- ------------------ ----------- ----------- ------------ ------------ Union Atlantic LC 26,000 26,000 0 * * 3300 PGA Boulevard Suite 810 Palm Beach Gardens, FL 33410 - -------------------------------- ------------------ ----------- ----------- ------------ ------------
(1) Based upon the information we have received, we assume that the selling shareholders have sole voting and investment power with respect to all shares owned. (2) The above chart sets forth the number of shares that the selling shareholders presently own or have a right to acquire within 60 days of the date of this prospectus. The number of shares consists of: o The total number of shares of common stock presently issuable upon conversion of the series A-1 preferred stock, o The total number of shares which would be presently issuable upon conversion of the series A-2 preferred stock which the holders have a present right to acquire. o The number of shares issuable upon exercise of warrants granted to the selling shareholders; and o The number of shares issuable upon exercise of warrants which the selling shareholders have a present right to purchase from us. The number of shares which the selling shareholders may receive could vary significantly from that estimate. No holder of the series A-1 preferred stock, series A-2 preferred stock or any of the warrants may convert shares into common stock or exercise warrants to purchase common stock if the number of shares of common stock that shareholder will own after conversion or exercise will exceed 9.99% of our outstanding shares of common stock. (3) Share ownership is calculated in accordance with Rule 13d-3 of the Securities Exchange Act of 1934. All shares of common stock which that shareholder has a right to receive or acquire within 60 days of the date of this prospectus upon the conversion of the series A-1 or series A-2 preferred stock or warrants are deemed to be outstanding for the purpose the percentage of the outstanding shares that shareholder may acquire. However, 10 those shares are not deemed outstanding for the purpose of calculating the percentage of the outstanding shares any other selling shareholder owns. (4) Each holder of series A-1 and series A-2 convertible preferred stock may convert that holder's shares into common stock at any time. The number of shares of common stock that each holder of series A-1 or series A-2 preferred stock is entitled to receive is determined by dividing the stated value of the series A-1 and A-2 convertible preferred stock, which is presently $1,000 by the conversion price for those shares. The conversion price for the series A-1 convertible preferred stock is the lesser of $4.50 per share or the variable conversion price for those shares. The conversion price for the series A-2 preferred stock is the lesser of $5.50 per share or the variable conversion price for those shares. The variable conversion price means an amount equal to the following: o if shares of series A-1 preferred stock or series A-2 preferred stock are converted within one year of the sale of those shares, 85% of the average of the three lowest closing bid prices over the 22 trading days prior to the day the shares are converted; o if shares of series A-1 preferred stock or series A-2 preferred stock are converted between one and two years after those shares were sold, 80% of the average of the three lowest closing bid prices over the 22 trading days prior to the day the shares are converted; and o if series A-1 or series A-2 preferred shares are converted between two and three years after they were initially issued, 70% of the average of the three lowest closing bid prices over the 45 days prior to the day the shares are converted. If any shares of series A-1 or series A-2 preferred stock have not been converted prior to the third year anniversary of the sale of those shares, then those shares shall be automatically converted into common stock on that date. Assuming that all presently outstanding shares of series A-1 preferred stock were converted into common stock as of August 15, 2000, the total number of shares issuable upon conversion of those shares would be 773,196. This calculation is based upon the application of a conversion price of $3.88, which would be the conversion price if the series A-1 preferred stock were converted as of that date. If the selling shareholders purchased all of the shares of series A-2 preferred stock they are entitled to purchase under the terms of a securities purchase agreement with us, and then converted those shares immediately into common stock, the total number of shares they would receive would be 515,464. This calculation is based upon the application of a conversion price of $3.88. (5) The number of shares includes the common stock purchasable upon warrants issued to the selling shareholders. The selling shareholders currently hold warrants to purchase 816,666 shares of common stock and have a right to acquire warrants to purchase an additional 363,636 shares of common stock. All warrants are immediately exercisable upon issuance. 11 PLAN OF DISTRIBUTION The shares being offered through this prospectus will be offered and sold by the selling shareholders, transferees or successors in interest. We have agreed to bear the expenses of the registration of the shares, including legal and accounting fees, and to pay up to $4,000 for the legal fees of the selling shareholders for separate legal counsel they obtain to review the registration statement and $2,000 for the review of post-effective amendments to that registration statement. We will not be responsible for paying any discounts or commissions with respect to sales of the shares. None of the selling shareholders has informed us of any arrangements into which he, she or it has entered with respect to the sale of the shares. The selling shareholders may sell their shares at such prices as they choose in their discretion. The selling shareholders are not obligated to sell any specific number of their shares. The selling shareholders may effect the sale or distribution of their shares directly to purchasers from time to time on the Nasdaq SmallCap Market at prices and at terms prevailing at the time of sale. The shares may be sold by one or more of the following methods: o a block trade in which the broker or dealer so engaged will attempt to sell the shares of common stock as an agent, but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker or dealer as principal and re-sales by that broker or dealer for its own account pursuant to this prospectus; o a Nasdaq SmallCap distribution in accordance with the rules of the Nasdaq SmallCap Market; o in ordinary brokerage transactions or transactions in which the broker solicits purchasers; o in transactions otherwise than on any stock exchange or in the Nasdaq SmallCap market; or o pursuant to Rule 144 of the SEC. The selling shareholders may effect any of these transactions at market prices prevailing at the time of sale, at prices related to the prevailing market prices, at varying prices determined at the time of sale or at negotiated or fixed prices, in each case as the selling shareholder determines, or by agreement between the selling shareholder and underwriters, brokers, dealers or agents, or purchasers. In effecting sales, brokers or dealers engaged by the selling shareholders may arrange for other brokers or dealers to participate. Brokers or dealers may receive commissions or discounts from the selling shareholders in amounts to be negotiated prior to the sale. The selling shareholders, and any brokers, dealers or agents that participate in the distribution of the shares may be deemed to be underwriters, and any profit on the sale of the common stock by them and any discounts, concessions or commissions any 12 underwriters, brokers, dealers or agents receive may be deemed to be underwriting discounts and commissions under the Securities Act. Under the securities laws of certain states, the shares may be sold in those states only through registered or licensed brokers or dealers. In addition, in certain states the shares may not be sold unless they have been registered or qualified for sale in that state or an exemption from registration or qualification is available and is met. DESCRIPTION OF SECURITIES The only shares were are registering under this prospectus are those which the selling shareholders own or have a right to acquire. These shares consist of common stock purchasable upon the conversion of series A-1 and series A-2 preferred stock, shares of common stock issuable as dividends on the series A-1 and series A-2 preferred stock and common stock purchasable upon the exercise of warrants. SERIES A-1 AND A-2 PREFERRED STOCK Our articles of incorporation authorize us to issue up to 10,000,000 shares of preferred stock in one or more series. The board of directors has the authority to designate different series of preferred stock and to prescribe the rights preferences and restrictions for those series of shares. Depending upon the rights given to the preferred stock, the issuance of preferred stock may have the effect of delaying or preventing a change in control. The issuance of preferred stock could also decrease the earnings available for distribution to the holders of the common stock. As of the date of this prospectus, we have authorized and designated 3,300 shares of series A-1 convertible preferred stock and 2,200 shares of series A-2 convertible preferred stock. No other series of preferred stock has been designated. As of August 10, 2000, there were 3,000 shares of series A-1 convertible preferred stock outstanding and no shares of series A-2 convertible preferred stock outstanding. Pursuant to the terms of a securities purchase agreement between us and the selling shareholders, the selling shareholders may purchase up to 2,200 shares of series A-2 preferred stock at a price of $1,000 per share. The series A-1 and series A-2 convertible preferred shares have a par value of $1,000 per share and a stated value of $1,000 per share Holders of the series A-1 and A-2 convertible preferred stock are entitled to receive a dividend, payable in cash at a rate of 6% per annum of the stated value of the preferred stock. Dividends are payable upon June 30 of each year and accrue if not paid. Failure to pay dividends will result in an increase in the number of shares of common stock into which the series A-1 and A-2 preferred stock is convertible. The liquidation preference on the series A-1 and Series A-2 preferred stock is equal to the stated value per share. This payment shall be prior to any payment we make to the holders of our common stock or other shares of stock which are junior to the series A-1 and A-2 preferred stock. 13 WARRANTS We have issued warrants to purchase an aggregate of 816,666 shares of common stock to the selling shareholders. The warrants allow the holders to purchase at a price equal to $5.43125 per share. The holders of the warrants may pay for the shares in cash or through the use of a net exercise procedure without the payment of cash by surrendering shares otherwise purchasable upon exercise of the warrant with a fair market value equal to the exercise price for the shares they are purchasing. The exercise price is subject to adjustments if we declare a stock split or dividend of our common stock and will be adjusted lower on a weighted average basis if we issue shares of our common stock at below the exercise price then in effect for the warrant. The warrants are presently exercisable and have a term of five years. Under the terms of the securities purchase agreement, the selling shareholders may acquire from us additional warrants to purchase 363,636 shares of common stock at a price equal to the average of the closing bid prices for our common stock for the five day period prior to the issuance of the warrants. The exercise price for those warrants will equal the average of the closing bid prices for the common stock for the five days prior to the issuance of the warrants. The warrants will have a term of five years from the date of issuance. The other terms and conditions of the additional warrants are the same as those in the warrants which we have already issued to the selling shareholders. REGISTRATION RIGHTS We have entered into a registration rights agreement with the selling shareholders which requires that we file a registration statement with the SEC to register under the Securities Act all shares of common stock issued to them or issuable upon the conversion of the series A preferred stock and exercise of the common stock purchase warrants. The registration rights agreement provides that we must pay all expenses incurred in the registration and certain expenses of the selling shareholders, including legal fees of counsel to the selling shareholders equal to $4,500 for the review of each registration statement and $2,000 for each post-effective amendment to a registration statement. We are obligated to keep the registration statement effective with respect to those shares until the earliest of: (i) three (3) years after the last day of the calendar month following the month in which the relevant registration statement is declared effective by the SEC; (ii) the date when the selling shareholders may sell the registrable securities under Rule 144 without volume or other restrictions; or (iii) the date the selling shareholders no longer own any of the registrable securities. Under the terms of the registration rights agreement we are required to register: (i) 200% of the number of common shares into which the preferred stock and all dividends through the third anniversary of their issuance would be convertible; plus (ii) 100% of the maximum number of shares of common stock issuable upon the exercise of the warrants. The registration rights agreement provides that we must pay the selling shareholders liquidated damages equal to: 1% of the purchase price of all preferred shares for the first 30 14 days after the certain events occur; plus 2% of the purchase price of all preferred shares for each subsequent 30 day period. Principal among these events are: o If the registration statement is not filed by the SEC by August 17, 2000; and o If the SEC does not declare the registration statement for the registration of the selling shareholders' shares effective by November 14, 2000. For example, if the registration statement is timely filed but is not declared effective until 70 days after November 14, 2000, we would have to pay liquidated damages of 5% of the purchase price of the preferred shares (1% for days 1-30, plus 2% for days 31-60, plus 2% for days 61-70). LEGAL MATTERS Certain legal matters relating to the validity of the common stock covered by this prospectus will be passed upon by Foley & Lardner, One Maritime Plaza, Sixth Floor, San Francisco, California 94111-3404. William D. Evers is a member of our Board of Directors. Mr. Evers' previous firm, Evers & Hendrickson LLP, provided legal services for our company during 1999 and until July 31, 2000. Evers & Hendrickson LLP received $430,408 in compensation for these services. Additionally, Mr. Evers was granted stock options to acquire 75,000 shares ranging in price from $3.02 to $6.50 per share. In August, 2000, Mr. Evers became a partner with Foley & Lardner which continues to provide legal services for our company. EXPERTS The audited financial statements incorporated by reference in this prospectus and elsewhere in the registration statement have been so incorporated in reliance on the report of Grant Thornton LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE We are a reporting company and file annual, quarterly and current reports, and other information with the Securities and Exchange Commission, or the SEC. You may read and copy these reports, and other information at the SEC's public reference rooms at 450 Fifth Street, N.W. Washington, D.C. You can request copies of these documents by writing to the SEC and paying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 for more information about the operation of the public reference rooms. Our SEC filings are also available at the SEC's web site at http://www.sec.gov. In addition, you can read and copy our SEC filings at the office of the National Association of Securities Dealers, Inc. at 1735 K Street, Washington, D.C. 20006. We have filed with the SEC a registration statement on Form S-3 under the Securities Act of 1933 with respect to the common stock offered in connection with this prospectus. 15 This prospectus does not contain all of the information set forth in the registration statement. We have omitted certain parts of the registration statement in accordance with the rules and regulations of the SEC. For further information with respect to us and the common stock, you should refer to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, you should refer to the copy of such contract or document filed as an exhibit to or incorporated by reference in the registration statement. Each statement as to contents of such contract or document is qualified in all respects by such reference. You may obtain copies of the registration statement from the SEC's principal office in Washington, D.C. upon payment of the fees prescribed by the SEC, or you may examine the registration statement without charge at the offices of the SEC described above. The SEC allows us to incorporate by reference information that we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934: o Annual Reports on Form 10-KSB and 10-KSB/A for the fiscal year ended December 31, 1999; o Quarterly Report on Form 10-QSB for the period ended June 30, 2000 and the period ended June 30 1999; o Definitive Proxy Statement dated June 1, 2000; and o Current Report on Form 8-K dated June 7, 2000. You may request a copy of these filings at no cost by writing or telephoning us at the following address: Zapworld.com Attention: Investor Relations 117 Morris Street Sebastopol, CA 95472 (707) 824-4150 You should rely only on the information or representations provided in this prospectus. We have authorized no one to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document. 16 Part II Information Not Required in Prospectus Item 14. Other Expenses of Issuance and Distribution The following table sets forth all expenses payable by the registrant in connection with the sale of the common stock being registered. All the amounts shown are estimates except for the registration fee. Registration fee.....................................$ 5,182 Printing and engraving expenses......................$ 5,000 Legal fees and expenses..............................$17,000 Accounting Fees and Expenses.........................$10,000 Miscellaneous........................................$ 5,000 Total................................................$42,182 Item 15. Indemnification of Directors and Officers. Article VII of our Bylaws provides that we may indemnify any director, officer, agent or employee against all expenses and liabilities, including counsel fees, reasonably incurred by or imposed upon such persons in connection with any proceeding to which any such persons may become involved by reason of such persons being or having been a director, officer, employee or agent of our company. Moreover, our Bylaws provide that we shall have the right to purchase and maintain insurance on behalf of any such persons whether or not we would have the power to indemnify such person against the liability insured against. Our Articles of Incorporation provide that we may indemnify our directors and officers to the fullest extent permissible under California law. In accordance with these Articles of Incorporation, the liability of our directors for monetary damages is eliminated to the fullest extent permissible under California law. As to indemnification for liabilities arising under the ecurities Act, we have been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Item 16. Exhibits Exhibit Number Description of Document - ------- ----------------------- 4.1 Certificate of Determination of Rights and Preferences of the Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Zapworld.com 4.2 Form of Securities Purchase Agreement between Zapworld.com and the Selling Shareholders 4.3 Form of Registration Rights Agreement between Zapworld.com and the Selling Shareholders 17 4.4 Form of Warrant 4.5 Specimen stock certificate representing shares ofSeries A-1 Preferred Stock 4.6 Specimen stock certificate representing shares of Series A-2 Preferred Stock 5.1 Opinion of Foley & Lardner* 23.1 Consent of Foley & Lardner (included in Exhibit 5.1) 23.2 Consent of Grant Thornton, LLP * To be filed by amendment 18 Item 17. Undertakings (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and (b) The undersigned registrant hereby further undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 19 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe the registrant meets all of the requirements of filing on Form S-3 and duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in San Francisco, California, on August 16, 2000. Zapworld.com By: /s/ John Dabels ----------------------------------- John Dabels, President In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ John Dabels President August 16, 2000 - --------------------------- John Dabels /s/ Gary Starr Chief Executive Officer August 16, 2000 - --------------------------- and Chief Financial Gary Starr Officer /s/ Robert E. Swanson Chairman of the Board August 16, 2000 - --------------------------- Robert E. Swanson /s/ William D. Evers Director August 16, 2000 - --------------------------- William D. Evers 20 Exhibit Number Description of Document - ------- ----------------------- 4.1 Certificate of Determination of Rights and Preferences of the Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of Zapworld.com 4.2 Form of Securities Purchase Agreement between Zapworld.com and the Selling Shareholders 4.3 Form of Registration Rights Agreement between Zapworld.com and the Selling Shareholders 4.4 Form of Warrant 4.5 Specimen stock certificate representing shares ofSeries A-1 Preferred Stock 4.6 Specimen stock certificate representing shares of Series A-2 Preferred Stock 5.1 Opinion of Foley & Lardner* 23.1 Consent of Foley & Lardner (included in Exhibit 5.1) 23.2 Consent of Grant Thornton, LLP * To be filed by amendment 21 EX-4.1 2 0002.txt CERTIFICATE OF DETERMINATION CERTIFICATE OF DETERMINATION OF RIGHTS AND PREFERENCES OF THE SERIES A-1 CONVERTIBLE PREFERRED STOCK AND SERIES A-2 CONVERTIBLE PREFERRED STOCK OF ZAPWORLD.COM The undersigned, JOHN DABELS and OONAGH DUGGAN, hereby certify that: 1. They are the duly elected and acting President and Secretary, respectively of Zapworld.com, a California corporation (the "Company"). 2. The Company is authorized to issue ten million (10,000,000) shares of Preferred Stock. 3. Under authority given by the Company's Articles of Incorporation, the Board of Directors has duly adopted the following recitals and resolutions. 4. The authorized number of shares of Series A-1 Convertible Preferred Stock (the "Series A-1 Preferred Stock") is 3,330, none of which is presently outstanding, and the authorized number of shares of Series A-2 Convertible Preferred Stock (the "Series A-2 Preferred Stock") is 2,220, none of which is presently outstanding: WHEREAS, the Articles of Incorporation of the Company, as amended, authorized the Company to issue up to ten million (10,000,000) shares of Preferred Stock in one or more series, and authorize the Board of Directors of the Company to fix the number of shares constituting any such series, to determine the designation thereof, and to determine the rights, preferences, privileges and restrictions granted to or imposed on such series; and WHEREAS, the Company has not issued any shares of Preferred Stock and the Board of Directors desires to designate a series of Preferred Stock, to fix the number of shares constituting the series, and to determine the rights, preferences, privileges and restrictions relating to this series; RESOLVED, that the Board of Directors hereby designates three thousand three hundred thirty (3,330) shares of Preferred Stock as Series A-1 Convertible Preferred Stock, $1,000 Par Value and two thousand two hundred twenty (2,220) shares of Preferred Stock as Series A-2 Convertible Preferred Stock, $1,000 Par Value (collectively the "Preferred Stock"), with the rights, preferences, privileges and restrictions set forth below. I. CERTAIN DEFINITIONS For purposes of this Certificate of Determination, the following terms shall have the following meanings: A. "Series A-2 Closing Date" means the date of the closing of the purchase and sale of the Series A-2 Preferred Stock. B. "Buy-In Adjustment Amount" means the amount equal to the excess, if any, of (i) the Converting Holder's total purchase price (including brokerage commissions, if any) for the Covering Shares (as defined below) over (ii) the net proceeds (after brokerage commissions, if any) received by the Converting Holder (as defined below) from the sale of the Sold Shares. By way of illustration and not in limitation of the foregoing, if the Converting Holder purchases shares of Common Stock having a total purchase price (including brokerage commissions) of $11,000 to cover a Buy-In (as defined below) with respect to shares of Common Stock it sold for net proceeds of $10,000, the Buy-In Adjustment Amount which the Company will be required to pay to the Converting Holder will be $1,000 C. "Cap Amount" means, if the Cap Regulations (as defined below) limit the number of shares of Common Stock which the Company may issue to Holders of Preferred Stock on conversion of Preferred Stock, the maximum number of shares of Common Stock, determined as of the date of the Series A-1 Closing Date, which the Company may so issue to the Holders under the Cap Regulations. D. "Closing Bid Price" means the closing bid price of the Common Stock (in U.S. Dollars) on the Principal Trading Market as reported by Bloomberg LP or if that service is not then reporting the relevant information regarding the Common Stock, a comparable reporting service of national reputation selected by the Holders of the Preferred Stock and reasonably acceptable to the Company. If the Closing Bid Price cannot be calculated for such security on the relevant date on the foregoing basis, the Closing Bid Price of such security on such date shall be the fair market value as reasonably determined by an investment banking firm selected by Holders of a majority of the then outstanding shares of Preferred Stock and reasonably acceptable to the Company, with the costs of such appraisal to be borne by the Company. The manner of determining the Closing Bid Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to closing bid price must be made hereunder. E. "Closing Date" means the Series A-1 Closing Date or the Series A-2 Closing Date, as the case may be. F. "Common Stock" means the Company's common stock, no par value per share. G. "Conversion Price" means, with respect to any relevant date, the lesser of (i) the Fixed Conversion Price or (ii) the Variable Conversion Price, which is in effect as of such date. H. "Effective Date" shall mean the date the relevant Registration Statement for the shares of Common Stock issuable on conversion of the Preferred Stock is declared effective by the Securities and Exchange Commission. I. "Fixed Conversion Price" means (i) with respect to the Series A-1 Preferred Stock, $4.50 per share, and (ii) with respect to the Series A-2 Preferred Stock, 110% of the Closing Bid Price of the Common Stock on the trading day immediately preceding the Series A-1 Closing Date, each of which amounts shall be subject to the adjustment as provided herein. J. "Holder" means a person or entity holding shares of the Preferred Stock. K. "Series A-1 Closing Date" means the date of the closing of the purchase and sale of the Series A-1 Preferred Stock. L. "Junior Securities" means (i) any class or series of capital stock of the Company authorized prior to the filing of this Certificate of Determination that, by its terms, ranks junior to the Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary and (ii) all classes or series of capital stock of the Company authorized after the filing of this Certificate of Determination, unless consented to as provided herein in each instance, each of which shall rank junior to the Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. M. "Liquidation Preference" means, with respect to a share of Preferred Stock, an amount equal to the Stated Value thereof, plus the accrued and unpaid dividends thereon through the date of final distribution. N. "Maturity Date" means, with respect to (i) the Series A-1 Preferred Stock, the date which is thirty-six (36) months after the Series A-1 Closing Date, and (ii) the Series A-2 Preferred Stock, the date which is thirty-six (36) months after the Series A-2 Closing Date. O. "Meeting Date" means the date which is the earlier of (x) seventy-five (75) days after the date on which the Company has issued to Holders of Preferred Stock, after the date of this Certificate of Determination, shares of Common Stock which, in the aggregate equal or exceed ten percent (10%) of the outstanding shares of Common Stock on the date hereof or (y) the date on which the Company holds its next regular or special stockholders meeting. P. "Pari Passu Securities" means any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, on parity with the Preferred Stock as to distribution of assets upon liquidation, 2 dissolution or winding up of the Company, whether voluntary or involuntary. Q. "Principal Trading Market" means The Nasdaq/SmallCap Market, or if the Common Stock is no longer listed on that market, the principal securities exchange or trading market on which the Common Stock is listed or traded. R. "Senior Securities" means each class or series of capital stock of the Company authorized prior to the original filing of this Certificate of Determination that, by its terms, is senior to the Preferred Stock as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. S. "Stated Value" for the Preferred Stock shall be $1,000.00 per share. T. "Variable Conversion Price" means, with respect to a Conversion Date (as defined below) which occurs (i) after the relevant Closing Date and on or before the first year anniversary of such Closing Date, the amount equal to eighty-five percent (85%) of the average of the three (3) lowest Closing Bid Prices over the twenty-two (22) trading days prior to the Conversion Date, (ii) thereafter and on or before the second year anniversary of the relevant Closing Date, the amount equal to eighty percent (80%) of the average of the three (3) lowest Closing Bid Prices over the twenty-two (22) trading days prior to the Conversion Date, and (iii) thereafter and on or before the day prior to the Maturity Date, the amount equal to seventy percent (70%) of the average of the three (3) lowest Closing Bid Prices over the forty-five (45) days prior to the Conversion Date. II. DIVIDENDS A. Generally. The Holders of the Preferred Stock shall be entitled to receive a dividend which shall accumulate at a rate of 6% of the stated value per annum. Except as described below, the dividend shall be payable upon June 30 of each year or on a Conversion Date (each, a "Dividend Payment Date"). The dividend shall accrue on a daily basis and shall be payable in cash or in Common Stock at the Company's option. Such dividends shall be payable in preference to dividends on any Common Stock or stock of any class ranking, as to dividend rights, junior to the Preferred Stock, and shall be junior as to payment of dividends to the Senior Securities. Dividends shall be fully cumulative and shall accrue (whether or not declared and whether or not there shall be funds legally available for the payment of dividends) daily (based on a 365-day year), without interest, and shall be payable on the Dividend Payment Date unless such payment would be in violation of the California Corporations Code. B. Dividend on Conversion Date. Upon conversion of shares of the Preferred Stock, the Holder of those shares shall receive a payment equal to the prorated amount of the unpaid dividend which accrued through the Conversion Date. C. Dividends Paid In Common Stock. If paid in Common Stock, the number of shares of Common Stock to be received shall be determined by dividing the dollar amount of the dividend by the Conversion Price on the Dividend Payment Date. If the dividend is to be paid in Common Stock, said Common Stock shall be delivered to the Holder, or per Holder's instructions, (i) if being issued in connection with a conversion, at the same time as the Conversion Certificates pursuant to Paragraph B(1) of Article III of this Certificate of Determination, and (ii) with respect to all other instances, within three (3) business days after the Dividend Payment Date (such third business date, a "Delivery Date"). The certificates representing the dividends so paid are referred to as "Conversion Certificates." D. Dividends Paid In Cash. If the dividend is to be paid in cash, the Company shall make such payment on the Dividend Payment Date. If the dividend is not paid on the Dividend Payment Date, the dividend must be paid in Common Stock in accordance with the provisions of this Certificate of Determination, unless the Holder consents otherwise in each specific instance. III. CONVERSION A. Conversion at the Option of the Holder. Subject to the limitations on conversions contained in Paragraph C of this Article III, each Holder of shares of Preferred Stock may, at any time and from time to time convert (an "Optional Conversion") each of its shares of Preferred Stock into a number of fully paid and non-assessable shares of Common Stock determined in accordance with the following formula: 3 Stated Value of Shares to Be Converted ------------------------------------------- Conversion Price B. Mechanics of Conversion. Conversion shall be effectuated by faxing a Notice of Conversion in the form attached hereto as Exhibit A ("Notice of Conversion") to the Company as provided in this Paragraph. The Notice of Conversion shall be executed by the Holder of one or more shares of Preferred Stock and shall evidence such Holder's intention to convert all or a portion of such shares. The date of conversion (the "Conversion Date") shall be deemed to be the date on which the Holder faxes or otherwise delivers a conversion notice to the Company so that it is received by the Company on or before such specified date, provided that, the Holder shall deliver to the Company the certificate or certificates representing the shares being converted (the "Converted Shares") no later than five (5) business days thereafter. 1. Delivery of Common Stock Upon Conversion. Certificates representing the Common Stock issuable on conversion of the Preferred Stock (the "Conversion Certificates") will be delivered to the Converting Holder at the address specified in the Notice of Conversion (which may be the Converting Holder's address for notices or a different address), via express courier, by electronic transfer or otherwise, within three (3) business days (such third business day, a "Delivery Date") after the later of (i) the date on which the Notice of Conversion is delivered to the Company as contemplated in this Paragraph or the Maturity Date, or (ii) the date on which the Converted Shares are delivered to the Company. 2. Taxes. The Company shall pay any and all taxes which may be imposed upon the Company with respect to the issuance and delivery of the shares of Common Stock upon the conversion of the Preferred Stock other than transfer taxes due upon conversion, if such Holder has transferred to another party the Preferred Stock or the right to receive Common Stock upon the Holder's conversion thereof or any or income taxes due on the part of the Holder. The Company shall have the right to withhold any taxes as required by the United States federal or state tax laws. 3. No Fractional Shares. If any conversion of Preferred Stock would result in the issuance of a fractional share of Common Stock, such fractional share shall be disregarded and the number of shares of Common Stock issuable upon conversion of the Preferred Stock shall be rounded up or down to the nearest whole share, it being understood that .5 of one share shall be rounded up to the next highest share. 4. Conversion Disputes. In the case of any dispute with respect to a conversion, the Company shall promptly issue such number of shares of Common Stock as are not disputed in accordance with Paragraph A of Article III above. If such dispute involves the calculation of the Conversion Price, the Company shall first discuss such discrepancy with the Converting Holder. If the Company and the Converting Holder are unable to agree upon the Conversion Price calculation, the Company shall promptly submit the disputed calculations to independent auditors, which shall be one of the top six nationally recognized accounting firms selected by the Holder (unless the Holders and the Company mutually agree to a different firm). The auditors, at the expense of the party or parties in error (as determined by the auditors), shall audit the calculations and notify the Company and the Holder of the results within five (5) business days following the date it receives the disputed calculations. The auditor's calculation shall be deemed conclusive, absent manifest error. The Company shall then issue the appropriate number of shares of Common Stock in accordance with Paragraph A of Article III above. 5. Delay in Delivering Conversion Certificates. The Company understands that a delay in the delivery of the Conversion Certificates beyond the Delivery Date could result in economic loss to a Holder. As compensation to a Holder for such loss, the Company agrees if there is a delay in the delivery of the Conversion Certificates (as adjusted in accordance with this provision) so that such Conversion Certificates are not received within two (2) business days after the Delivery Date, to pay late payments to such Holder for late delivery of Conversion Certificates in accordance with the following schedule (where "No. Business Days Late" is defined as the number of business days beyond two (2) business days after the Delivery Date): 4 No. Business Days Late Late Payment For Each $10,000 of Liquidation Preference or Dividend Amount Being Converted - -------------------------- --------------------------------------------- 1 $100 2 $200 3 $300 4 $400 5 $500 6 $600 7 $700 8 $800 9 $900 10 $1,000 >10 $1,000 +$200 for each Business Day Late beyond 10 days The Company shall pay any payments incurred under this Paragraph in immediately available funds upon demand. For purposes of this Paragraph B(5) of Article III, in connection with a Automatic Conversion (as defined below), the term "Delivery Date" shall refer to the earlier of (i) the Delivery Date determined in relation to a Notice of Conversion actually submitted by the Holder to the Company or (ii) the third business date after written notice from the Holder that the delivery of shares to the Holder in connection with a Automatic Conversion has not been accomplished. Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver the Conversion Certificates to the Holder within a reasonable time. Furthermore, in addition to any other remedies which may be available to a Holder, in the event that the Company fails for any reason to effect delivery of such Conversion Certificates within two (2) business days after the Delivery Date, the Converting Holder will be entitled to revoke the relevant Notice of Conversion by delivering a notice to such effect to the Company whereupon the Company and the Converting Holder shall each be restored to their respective positions immediately prior to delivery of such Notice of Conversion; provided, however, that any payments contemplated by this Paragraph B(5) of this Article III which have accrued through the date of such revocation notice shall remain due and owing to the Converting Holder notwithstanding such revocation. 6. Buy-In. If, by the relevant Delivery Date, the Company fails for any reason to deliver the Conversion Certificates and after such Delivery Date, the Holder of the Preferred Stock being converted (a "Converting Holder") purchases, in an arm's-length open market transaction or otherwise, shares of Common Stock (the "Covering Shares") in order to make delivery in satisfaction of a sale of Common Stock by the Converting Holder (the "Sold Shares"), which delivery such Converting Holder anticipated to make using the shares to be issued upon such conversion (a "Buy-In"), the Converting Holder shall have the right, to require the Company to pay to the Converting Holder, in addition to and not in lieu of the amounts due under Paragraph B(5) of this Article III, the Buy-In Adjustment Amount. The Company shall pay the Buy-In Adjustment Amount to the Converting Holder in immediately available funds immediately upon demand by the Converting Holder. 7. DWAC Certificate Delivery. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of a Converting Holder and his/her compliance with the provisions contained in this paragraph, so long as the certificates therefor do not bear a legend and the Converting Holder thereof is not obligated to return such certificate for the placement of a legend thereon, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable 5 upon conversion to the Converting Holder by crediting the account of Converting Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission system. 8. Conversion Obligations and Default. a. Until such time as a court of competent jurisdiction shall have issued a binding injunction prohibiting the Company from issuing shares of Common Stock to the Holder on the Holder's conversion of shares of the Preferred Stock, the Company will timely honor all such conversions effected by the Holder in accordance with the terms of this Certificate of Determination, subject only to the limitations as to manner of exercise provided herein and to the provisions of Paragraphs E(1) and (2) of this Article III. In furtherance of the foregoing, and not in limitation thereof, if at any time, a Holder shall elect to convert a share of the Preferred Stock, the Company may not refuse to effect such conversion, unless a binding injunction from a court of competent jurisdiction, issued on notice to the Holder of the hearing with respect to the issuance of such injunction, restraining or enjoining conversion of all of the shares of Preferred Stock shall have been sought and obtained and the Company shall have posted a bond in favor of the Holder in the amount of one hundred thirty-five percent (135%) of the Stated Value of the shares of Preferred Stock held by the Holder which are subject to such injunction. The bond referred to in the immediately preceding sentence shall remain in effect at least until thirty (30) days after the completion of the proceedings relating to the dispute between the Holder and the Company with respect to such conversion or right to effectuate conversions. The proceeds of such bond shall be payable to the Holder to offset any amounts owed to the Holder as reflected in any judgment obtained by the Holder in its favor in connection with such dispute. b. If, at any time: (I) the Company challenges, disputes or denies the right of a Holder of Preferred Stock to effect a conversion of the Preferred Stock into Common Stock or otherwise dishonors or rejects any Notice of Conversion delivered in accordance with the terms of this Certificate of Determination (subject to the provisions of Paragraph B(4) of this Article III with respect to certain disputes relating to calculations of the number of shares to be issued and subject to the provisions of Paragraph E of this Article V with respect to Limitations on Conversions), or (II) any third party who is not and has never been an affiliate of such Holder commences any lawsuit or proceeding or otherwise asserts any claim before any court or public or governmental authority, which lawsuit, proceeding or claim seeks to challenge, deny, enjoin, limit, modify, delay or dispute the right of such Holder to effect the conversion of the Preferred Stock into Common Stock, and the Company refuses to honor any such Notice of Conversion, then such Holder shall have the right, by written notice to the Company, to require the Company to redeem each share of Preferred Stock for which a Notice of Conversion has been refused pursuant to clauses (I) or (II) of this Paragraphs B(8) for cash, at an amount per share equal to the Redemption Amount (as defined below), pursuant to the provisions of Article V hereof. Such Redemption Amount shall be payable to such Holder in cash within five (5) business days after the such Holder gives the Company written notice that it is exercising its rights under this paragraph. 9. Conversion in Bankruptcy. The Holder of any Preferred Stock Preferred Stock shall be entitled to exercise its conversion privilege with respect to the Preferred Stock notwithstanding the commencement of any case 6 under 11 U.S.C.ss.101 et seq. (the "Bankruptcy Code"). In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C.ss.362 in respect of such Holder's conversion privilege. The Company hereby waives, to the fullest extent permitted, any rights to relief it may have under 11 U.S.C.ss.362 in respect of the conversion of the Preferred Stock. The Company agrees, without cost or expense to such Holder, to take or to consent to any and all action necessary to effectuate relief under 11 U.S.C.ss.362. C. Automatic Conversion Upon Maturity. Any shares of Preferred Stock not previously converted or redeemed as of the Maturity Date shall be deemed to be automatically converted (an "Automatic Conversion") up to an amount contemplated by Paragraphs E(1) or (2), as may be applicable, of this Article III (or from time to time thereafter as such additional conversions may be made consistent with said provisions), without further action of any kind (including, but not necessarily limited to, the giving of a Notice of Conversion) by the Holder, as of the Maturity Date at the Conversion Price applicable on the Maturity Date. D. Intentionally Omitted. E. Limitations on Conversions. The conversion of shares of Preferred Stock shall be subject to the following limitations (each of which limitations shall be applied independently): 1. Cap Regulations. If the Company is limited in the number of shares of Common Stock it may issue by virtue of (i) the number of authorized shares or (ii) the applicable rules and regulations of its Principal Trading Market, including, but not necessarily limited to, Nasdaq Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable (collectively, the "Cap Regulations") the Company will take all steps reasonably necessary to be in a position to issue shares of Common Stock on conversion of the Preferred Stock without violating the Cap Regulations. If at any time after the date of this Certificate of Determination, the Company has issued shares of Common Stock to Holders of Preferred Stock which, in the aggregate, equal or exceed ten percent (10%) of the outstanding shares of Common Stock on the date of this Certificate of Determination, the Company shall immediately notify the Holders of Preferred Stock of such occurrence and shall take immediate action (including, if necessary, seeking the approval of its shareholders to authorize the listing or issuance of the full number of shares of Common Stock which would be issuable upon the conversion of the then outstanding shares of Preferred Stock but for the Cap Amount) to eliminate any prohibitions under applicable law or the rules or regulations of any stock exchange, inter-dealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities on the Company's ability to list or issue shares of Common Stock in excess of the Cap Amount. If on the Meeting Date such prohibitions have not been eliminated or if prior to such date there occurs a Conversion Date as to which the Company can not honor in full the conversion submitted on that date as result of the Cap Regulations, then, after all such Preferred Stock which can be converted under the Cap Amount have been converted, each Holder of then outstanding shares of Preferred Stock (each such share, an "Unconverted Share") shall have the option, exercisable in such Holder's sole and absolute discretion, to elect either of the following remedies: a. If permitted by the Cap Regulations, require the Company to issue shares of Common Stock in accordance with such holder's notice of conversion at a conversion purchase price equal to the average of the closing price per share of Common Stock for any three (3) trading days (which need not be consecutive, but subject to certain equitable adjustments for certain events occurring during such period) during the sixty (60) trading days immediately preceding the date of notice of conversion; or b. Require the Company to redeem each Unconverted Share for cash, at an amount per share equal to the Redemption Amount, pursuant to the provisions of Article V hereof, such Redemption Amount shall be paid in cash by the Company to the Holder within five (5) business days after the date the Holder notifies the Company in writing of the Holder's election to pursue this remedy. 7 A Holder of more than one Unconverted Share may elect one of the above remedies with respect to some of such Unconverted Shares and the other remedy with respect to other Unconverted Shares. The Redemption Amount payable under the provisions of this Paragraph E(1) of this Article III shall be payable within ten (10) days after the Redemption Date or the Meeting Date, as the case may be. If prior to such date, the Cap Regulations no longer apply to limit the Company's issuance of shares of Common Stock in connection with the Preferred Stock, the remedies contained clauses (a) and (b) of this Paragraph E(1) of this Article III shall not be exercisable by a Holder. 2. No Ten Percent Holders. Notwithstanding any other provision hereof, in no event (except (i) as specifically provided in this Certificate of Determination as an exception to this provision, (ii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock, or (iii) on at least seventy-five (75) days' advance written notice from the Holder to the Company of the Holder's election to cancel this Section E(2) of Article III) shall the Holder be entitled to convert any share of the Holder's Preferred Stock, or shall the Company have the obligation to convert such share (and the Company shall not have the right to pay dividends on shares of Preferred Stock in shares of Common Stock or require an Automatic Conversion), to the extent that, after such conversion or issuance of stock in payment of dividends, the sum of (a) the number of shares of Common Stock beneficially owned by the Holder and its affiliates, and (b) the number of shares of Common Stock issuable upon the conversion of the shares of Preferred Stock with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 9.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to the Holder upon such conversion). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended. If the Holder transfers or assigns any shares of the Preferred Stock to a party who or which would not be considered such an affiliate, such assignment shall be made subject to the transferee's or assignee's specific agreement to be bound by the provisions of this Paragraph D(2) of Article III as if such transferee or assignee were the original Holder hereof. Nothing herein shall preclude the Holder from disposing of a sufficient number of other shares of Common Stock beneficially owned by the Holder so as to thereafter permit the continued conversion of the shares of Preferred Stock. IV. RESERVATION OF SHARES OF COMMON STOCK A. Reserved Amount. Upon the initial issuance of the shares of Preferred Stock, the Company shall reserve out of the authorized but unissued shares of Common Stock for issuance upon conversion of the Preferred Stock such number of shares equal to 200% of the number of shares which would be issuable if all of the authorized shares of Preferred Stock were converted in their entirety on the Series A-1 Closing Date based on the Conversion Price in effect on that date and thereafter the number of authorized but unissued shares of Common Stock so reserved (the "Reserved Amount") shall not be decreased, but may be increased pursuant to Paragraph B of this Article IV, and shall at all times be sufficient to provide for the conversion of the Preferred Stock outstanding at the then current Conversion Price thereof. The Reserved Amount shall be allocated to the holders of Preferred Stock as provided in Paragraph D of Article IX hereof. B. Increases to Reserved Amount. If the Reserved Amount for any ten (10) consecutive trading days (the last of such ten (10) trading days being the "Authorization Trigger Date") shall be less than 150% of the number of shares of Common Stock issuable upon conversion of the then outstanding shares of Preferred Stock, the Company shall immediately notify the holders of Preferred Stock of such occurrence and shall take immediate action (including, if necessary, seeking shareholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to 200% of the number of shares of Common Stock then issuable upon conversion of the outstanding Preferred Stock. In the event the Company fails to so increase the Reserved Amount within 90 days after an Authorization Trigger Date, each Holder of Preferred Stock shall thereafter have the option, exercisable in whole or in part at any time and from time to time by delivery of a Redemption Notice (as defined below) to the Company, to require the Company to purchase for cash, at an amount per share equal to the Redemption Amount, a portion of the holder's Preferred Stock such that, after giving effect to such purchase, the holder's allocated portion of 8 the Reserved Amount equals or exceeds 200% of the total number of shares of Common Stock issuable to such Holder upon conversion of its Preferred Stock. If the Company fails to redeem any of such shares within five (5) business days after its receipt of such Redemption Notice, then such Holder shall be entitled to the remedies provided in Paragraph A(2) of Article V hereof. C. Limitations on Redemption Right. Notwithstanding the provisions of Paragraph B of this Article IV, the holders of Preferred Stock shall have no right to require the Company to effect a redemption of their outstanding shares of Preferred Stock as provided in Paragraph B of this Article IV so long as (i) the Company has not, at any time, decreased the Reserved Amount below that number of shares of Common Stock computed as set forth in Paragraphs A and B of this Article IV; (ii) the Company shall have taken immediate action following the applicable Authorization Trigger Date (including, if necessary, seeking stockholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to 200% of the number of shares of Common Stock then issuable upon conversion of the outstanding Preferred Stock; and (iii) the Company continues to use its commercially reasonable good faith best efforts (including the resolicitation of stockholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to 200% of the number of shares of Common Stock then issuable upon conversion of the outstanding Preferred Stock. The Company will be deemed to be using "its commercially reasonable good faith best efforts" to increase the Reserved Amount so long as it solicits stockholder approval to authorize the issuance of additional shares of Common Stock not less than two (2) times during each twelve month period following the applicable Authorization Trigger Date during which any shares of Preferred Stock remain outstanding; provided that no such limitation on the redemption rights set out in Paragraph B of this Article IV, shall be effective if the Company fails to obtain stockholder approval after two (2) attempts. V. REDEMPTION A. Redemption by Holder. In the event that any of the following occur (individually, a "Redemption Event"): 1. Cap Regulations. The Company's inability to issue sufficient shares of Common Stock upon conversion of Unconverted Shares in accordance with Paragraph E(1) of Article III hereof. 2. Conversion Default. The Company's inability to deliver Conversion Certificates under Paragraph B of Article III hereof. then, upon the occurrence of any such Redemption Event, each Holder of shares of Preferred Stock shall thereafter have the option, exercisable in whole or in part at any time and from time to time by delivery of a notice requesting the redemption of all or part of such Holder's shares of Preferred Stock (a "Redemption Notice") to the Company while such Redemption Event continues, to require the Company to purchase for cash any or all of the then outstanding shares of Preferred Stock held by such Holder for an amount per share equal to the Redemption Amount in effect at the time of the redemption hereunder. B. Definition of Redemption Amount. The "Redemption Amount" with respect to a share of Preferred Stock being redeemed (a "Redeemed Share") means an amount payable in cash, equal to: V ---- x M CP where: "V" means the outstanding stated value plus accrued dividends through the date of payment of the Redemption Amount for the Redeemed Share (the "Redemption Payment Date"); "CP" means the Conversion Price in effect on the Redemption Date (as defined below) 9 "Redemption Date" means the date contemplated by a specific provision of this Certificate of Determination or, if no such date is specified, the date of redemption specified in the notice from the Holder electing redemption of a Redeemed Share; and "M" means the average of the closing prices for any five (5) trading days (which need not be consecutive) selected by the Holder of the Unconverted Share being redeemed. during the period beginning on the Redemption Date and ending on the Redemption Payment Date. C. Redemption Defaults. If the Company fails to pay any Holder the Redemption Amount with respect to any share of Preferred Stock within twenty-five (25) business days after its receipt of Redemption Notice, then the Holder of Preferred Stock delivering such Redemption Notice shall be entitled to interest on the Redemption Amount at a per annum rate equal to the lower of 15% and the highest interest rate permitted by applicable law from the date on which the Company receives the Redemption Notice until the date of payment of the Redemption Amount hereunder. In the event the Company is not able to redeem all of the shares of Preferred Stock subject to Redemption Notices delivered prior to the date upon which such redemption is to be effected, the Company shall redeem shares of Preferred Stock from each Holder pro rata, based on the total number of shares of Preferred Stock outstanding at the time of redemption included by such Holder in all Redemption Notices delivered prior to the date upon which such redemption is to be effected relative to the total number of shares of Preferred Stock outstanding at the time of redemption included in all of the Redemption Notices delivered prior to the date upon which such redemption is to be effected. VI. LIQUIDATION PREFERENCE A. Liquidation Event. If the Company shall commence a voluntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Company shall be entered by a court having jurisdiction in the premises in an involuntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 60 consecutive days and, on account of any such event, the Company shall liquidate, dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or wind up, including, but not limited to, the sale or transfer of all or substantially all of the Company's assets in one transaction or in a series of related transactions (a "Liquidation Event"), no distribution shall be made to the holders of any shares of capital stock of the Company (other than Senior Securities and Pari Passu Securities) upon liquidation, dissolution or winding up unless prior thereto the holders of shares of Preferred Stock shall have received the Liquidation Preference with respect to each share. If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the holders of the Preferred Stock and holders of Pari Passu Securities shall be insufficient to permit the payment to such holders of the preferential amounts payable thereon, then the entire assets and funds of the Company legally available for distribution to the Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares. B. Exclusions. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Neither the consolidation or merger of the Company with or into any other entity nor the sale or transfer by the Company of less than substantially all of its assets shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. 10 VII. ADJUSTMENTS TO THE CONVERSION PRICE A. Sale. The Conversion Price shall be subject to adjustment from time to time as follows: If, for as long as any shares of Preferred Stock remain outstanding, the Company enters into a merger (other than where the Company is the surviving entity) or consolidation with another corporation or other entity or a sale or transfer of all or substantially all of the assets of the Company to another person (collectively, a "Sale"), the Company will require, in the agreements reflecting such transaction, that the surviving entity expressly assume the obligations of the Company hereunder. Notwithstanding the foregoing, if the Company enters into a Sale and the holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such Sale, the Company and any such successor, purchaser or transferee will agree that the Preferred Stock may thereafter be converted on the terms and subject to the conditions set forth above into the kind and amount of stock, securities or property receivable upon such merger, consolidation, sale or transfer by a Holder of the number of shares of Common Stock into which then outstanding shares of Preferred Stock might have been converted immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable. In the event of any such proposed Sale, the Holder hereof shall have the right to convert by delivering a Notice of Conversion to the Company within 15 days of receipt of notice of such Sale from the Company. B. Spin Off. The Company agrees that for as long as shares of Preferred Stock remain outstanding, the Company will not, without the consent of the Holders of a majority of the Preferred Stock, spin off or otherwise divest itself of a part of its business or operations or dispose all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive just compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company. If, for any reason, prior to the Conversion Date or the date of payment of the Redemption Amount hereunder, the Company consummates a Spin Off, then the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the holder's shares of Preferred Stock outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Preferred Stock") been converted as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the conversion of all or any of the Outstanding Preferred Stock, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (a) the numerator is the principal amount of the Outstanding Preferred Stock then being converted, and (b) the denominator is the principal amount of the Outstanding Preferred Stock. C. Stock Splits, etc. If, at any time while any shares of Preferred Stock remain outstanding, the Company effectuates a stock split or reverse stock split of its Common Stock or issues a dividend on its Common Stock consisting of shares of Common Stock, the Conversion Price and any other amounts calculated as contemplated by this Certificate of Determination shall be equitably adjusted to reflect such action. By way of illustration, and not in limitation, of the foregoing (i) if the Company effectuates a 2:1 split of its Common Stock, thereafter, with respect to any conversion for which the Company issues the shares after the record date of such split, any market price from a date prior to such split which was used in any of the calculation of the Conversion Price shall be deemed to be one-half of what it had been calculated to be immediately prior to such split; (ii) if the Company effectuates a 1:10 reverse split of its Common Stock, thereafter, with respect to any conversion for which the Company issues the shares after the record date of such reverse split, any market price from a date prior to such split which was used in any of the calculation of the Conversion Price shall be deemed to be ten times what it had been calculated to be immediately prior to such split; and (iii) if the Company declares a stock dividend of one share of Common Stock for every 10 shares outstanding, thereafter, with respect to any conversion for which the Company issues the shares after the record date of such dividend, any market price from a date prior to such record date which was used in any of the calculation of the Conversion Price shall be deemed to be such amount multiplied by a fraction, of which the numerator is the number of shares (10 in the example) for which a dividend share will be issued and the denominator is such number 11 of shares plus the dividend share(s) issuable or issued thereon (11 in the example). D. Certain Defaults. Except to the extent specifically provided in Paragraph E of this Article VII, the Company has committed to each Holder of Preferred Stock that, during the period from the date of this Certificate of Determination until hundred eighty (180) days after the most recent Effective Date, without the prior written consent of such Holder, the Company will not enter into (x) any subsequent or further offer or sale of Common Stock or securities convertible into Common Stock (collectively, "New Common Stock"), or (y) any subsequent offer or contract for an equity line or similar arrangement which contemplates the issuance of New Common Stock with any third party. In the event the Company breaches the provisions of this Paragraph D of this Article VII, the Conversion Price shall be amended to be equal to (i) 90% of (ii) the amount determined in accordance with the provisions of this Certificate of Determination without regard to this provision. E. Right of First Refusal. (i) Subject to the provisions of this Paragraph E, the Company may during the period commencing on the Effective Date and continuing through and including the date which is one hundred eighty (180) days after the Effective Date offer to enter into any transaction (a "New Transaction") for the sale of New Common Stock to a New Investor, but only if (x) the average Closing Bid Price for the twenty (20) trading days ending on the trading immediately before the New Transaction Notice (as defined below) is at least $5.50 per share (adjusted for capital transactions occurring after the Series A-1 Closing Date) and (y) the sale price per share of Common Stock or, if a convertible security or other right to acquire shares, the conversion or exercise price per share of Common Stock is at least $5.50 per share (adjusted for capital transactions occurring after the Series A-1 Closing Date). Before consummating the New Transaction with a New Investor, the Company shall give written notice (a "New Transaction Notice") to the Holders summarizing all of the terms of such offer (a "New Transaction Offer"). The Holders shall have the right (the "Right of First Refusal"), exercisable by written notice given to the Company by the close of business on the fifth business day after the Holders' receipt of the New Transaction Offer (the "Right of First Refusal Expiration Date"), to participate in all or any part of the New Transaction Offer on the terms so specified. (ii) If, and only if, the Holders do not exercise the Right of First Refusal in full, the Company may consummate the remaining portion of the New Transaction with any New Investor on the terms specified in the New Transaction Offer within thirty (30) days of the Right of First Refusal Expiration Date. (iii) If the terms of the New Transaction to be consummated with such other party differ from the terms specified in the New Transaction Offer so that the terms are more beneficial in any respect to the New Investor, the Company shall give the Holders a New Transaction Offer relating to the terms of the New Transaction, as so changed, and the Holders' Right of First Refusal and the preceding terms of this Paragraph E shall apply with respect to such changed terms. (iv) In the event the New Transaction is consummated with such New Investor at any time prior to the expiration of one hundred eighty (180) days after the Effective Date on terms providing for a sale price equal to or computed based on, or a determination of a conversion price (howsoever defined or computed) based on, a lower percentage of the then current market price (howsoever defined or computed) than provided in this Certificate of Determination for determining the Conversion Price, the terms of any unissued or unconverted share of Preferred Stock shall be modified to reduce the relevant Conversion Price to be equal to that provided in the New Transaction as so consummated. 12 F. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Initial Conversion Price pursuant to this Article VII, the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each Holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any Holder of Preferred Stock, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Initial Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Preferred Stock. VIII. VOTING RIGHTS A. Generally. The holders of the Preferred Stock have no right to vote in any matter whatsoever except as otherwise required by the California Corporations Code. B. Class Voting. To the extent that under the California Corporations Code the vote of the holders of the Preferred Stock, voting separately as a class or series, as applicable, is required to authorize a given action of the Company, the affirmative vote or consent of the holders of at least a majority of the then outstanding shares of the Preferred Stock represented at a duly held meeting at which a quorum is present or by written consent of the holders of at least a majority of the then outstanding shares of Preferred Stock (except as otherwise may be required under the California Corporations Code, a "Required Interest") shall constitute the approval of such action by the class. To the extent that under the California Corporations Code Holders of the Preferred Stock are entitled to vote on a matter with holders of Common Stock, voting together as one class, each share of Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible (subject to the limitations contained in Article III Paragraph E) using the record date for the taking of such vote of shareholders as the date as of which the Conversion Price is calculated. IX. MISCELLANEOUS A. Rank. The Preferred Stock shall rank (i) prior to the Company's Common Stock; (ii) prior to any Junior Securities; (iii) junior to any Senior Securities; and (iv) pari passu with any Pari Passu Securities; provided, however, that no additional Senior or Pari Passu Securities shall be created without the written consent of a Required Interest. B. Cancellation or Redemption of Preferred Stock. If any shares of Preferred Stock are converted pursuant to Article III, or redeemed pursuant to Article V. the shares so converted or redeemed shall be canceled, shall return to the status of authorized, but unissued preferred stock of no series, and shall not be issuable by the Company as Preferred Stock. C. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence of the loss, theft, destruction or mutilation of any Preferred Stock certificate(s) and (ii) (y) in the case of loss, theft or destruction, of indemnity (without any bond or other security) reasonably satisfactory to the Company, or (z) in the case of mutilation, upon surrender and cancellation of the Preferred Stock certificate(s), the Company shall execute and deliver new Preferred Stock certificate(s) of like tenor and date. However, the Company shall not be obligated to reissue such lost or stolen Preferred Stock certificate(s) if the Holder contemporaneously requests the Company to convert such Preferred Stock. D. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and Reserved Amount shall be allocated pro rata among the holders of Preferred Stock based on the number of shares of Preferred Stock issued to each Holder. Each increase to the Cap Amount and the Reserved Amount shall be allocated pro rata among the holders of Preferred Stock based on the number of shares of Preferred Stock held by each Holder at the time of the increase in the Cap Amount or Reserved Amount. In the event a Holder shall sell or otherwise transfer any of such holder's shares of Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor's Cap Amount and Reserved Amount. Any portion of the Cap Amount or Reserved Amount which remains allocated to any person or entity which does not hold any Preferred Stock shall be allocated to the remaining holders of shares of 13 Preferred Stock, pro rata based on the number of shares of Preferred Stock then held by such holders. E. Payment of Cash; Defaults. Whenever the Company is required to make any cash payment to a Holder under this Certificate of Determination (upon redemption or otherwise), such cash payment shall be made to the Holder on the date specified herein or, if not so specified, within 5 business days after delivery by such Holder of a notice specifying that the Holder elects to receive such payment in cash and the method (e.g., by check, wire transfer) in which such payment should be made. If such payment is not delivered within the relevant time period, such Holder shall thereafter be entitled to interest on the unpaid amount at a per annum rate equal to the lower of 15% and the highest interest rate permitted by applicable law until such amount is paid in full to the Holder. F. Status as Stockholder. Upon submission of a Notice of Conversion by a Holder of Preferred Stock, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their listing or issuance would exceed such holder's allocated portion of the Reserved Amount or Cap Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a Holder of such converted shares of Preferred Stock shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such Holder because of a failure by the Company to comply with the terms of this Certificate of Determination. G. Amendments. This Certificate of Determination may only be amended with the written consent of the holders of eighty-five (85%) percent of the outstanding Preferred Stock and the vote or action of any other party or class entitled to vote or act thereon. 14 The undersigned declare under penalty of perjury under the laws of the State of California that the matters set out in the foregoing Certificate are true of his or her knowledge. Executed at San Francisco, California on June 27, 2000. /s/ John Dabels /s/ Oonagh Duggan - ------------------------------- -------------------------------- John Dabels Oonagh Duggan President Secretary 15 EX-4.2 3 0003.txt SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT, dated as of the date of acceptance set forth below (this "Agreement"), is entered into by and between ZAPWORLD.COM a California corporation, with headquarters located at 117 Morris Street, Sebastopol, CA 95472 (the "Company"), and each entity named on a signature page hereto (each, a "Buyer") (each agreement with a Buyer being deemed a separate and independent agreement between the Company and such Buyer, except that each Buyer acknowledges and consents to the rights granted to each other Buyer under such agreement and the Transaction Agreements, as defined below, referred to therein). W I T N E S S E T H: WHEREAS, the Company and the Buyer are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded, inter alia, by Rule 506 under 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/or Section 4(2) of the 1933 Act; and WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the conditions of this Agreement, shares of the Series A-1 and Series A-2 Convertible Preferred Stock, par value $1,000 per share and having a stated value of $1,000 per share, of the Company (the "Convertible Preferred Stock") which will be convertible into shares of Common Stock, no par value per share of the Company (the "Common Stock"), upon the terms and subject to the conditions of such Convertible Preferred Stock, together with the Warrants (as defined below) exercisable for the purchase of shares of Common Stock, and subject to acceptance of this Agreement by the Company; NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. AGREEMENT TO PURCHASE; PURCHASE PRICE. a. Purchase; Certain Definitions. (i) The undersigned hereby agrees to purchase from the Company Convertible Preferred Stock having a stated value in the amount set forth on the Buyer's signature page of this Agreement (the "Preferred Stock," which term includes the Initial Preferred Stock and the Additional Preferred Stock, as defined below), out of a total offering of such Convertible Preferred Stock having a stated value of $5,000,000, and having the terms and conditions set forth in the Certificate of 1 Determination of Rights and Preferences of the Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock of the Company attached hereto as Annex I (the "Certificate of Determination"). (ii) Subject to the terms and conditions of this Agreement and the other Transaction Agreements, the Buyer will purchase (x) Series A-1 Convertible Preferred Stock having a stated value of $3,000,000 multiplied by the Buyer's Allocable Share (the "Initial Preferred Stock") on the Initial Closing Date (as those terms are defined below) and (y) Series A-2 Convertible Preferred Stock having a stated value of $2,000,000 (the "Additional Preferred Stock") on the Additional Closing Date (as defined below). (iii) The Purchase Price (as defined below) to be paid by the Buyer shall be equal to the amount set forth on the Buyer's signature page of this Agreement, and shall be payable in United States Dollars. b. Certain Definitions. As used herein, each of the following terms has the meaning set forth below, unless the context otherwise requires: (i) "Securities" means the Preferred Stock, the Warrants and the Common Stock issuable upon conversion of the Preferred Stock or the exercise of the Warrants. (ii) "Purchase Price" means the purchase price for the Initial Preferred Stock or the Additional Preferred Stock, as the case may be. (iii) "Initial Closing Date" means the date of the closing of the purchase and sale of the Initial Preferred Stock, as provided herein. (iv) "Additional Closing Date" means the date of the closing of the purchase and sale of the Additional Preferred Stock, as provided herein. (v) "Closing Date" means the Initial Closing Date or the Additional Closing Date, as the case may be. (vi) "Buyer's Allocable Share" means the fraction of which the numerator is the stated value of the Buyer's Preferred Stock specified on the Buyer's signature page of this Agreement and the denominator is $5,000,000. (vii) "Effective Date" means the effective date of the Registration Statement covering the Registrable Securities (as those terms are defined in the Registration Rights Agreement defined below). 2 (viii) "Conversion Shares" means the shares of Common Stock issuable upon conversion of the Preferred Stock. (ix) "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. (x) "Shares" means the shares of Common Stock representing any or all of the Conversion Shares and the Warrant Shares. (xi) "Latest Audited Date" means December 31, 1999. (xii) "Closing Bid Price" means the closing bid price of the Common Stock (in U.S. Dollars) on the Principal Trading Market, as reported by Bloomberg LP (or if that service is not then reporting the relevant information regarding the Common Stock, a comparable reporting service of national reputation selected by the Buyer and reasonably acceptable to the Company). (xiii) "Principal Trading Market" means The Nasdaq/SmallCap Market or, if the Common Stock is no longer listed on that market, the principal securities exchange or trading market on which the Common Stock is listed or traded. (xiv) "Volume Standard" means an average daily trading volume of 100,000 shares of the Common Stock on the Principal Trading Market for the relevant period. (xv) "Certificates" means (x) the stock certificates, duly executed by the Company and issued in the name of the Buyer, representing the Preferred Stock being issued to the Buyer on the relevant Closing Date and (y) the Warrants, each duly executed on behalf of the Company and issued in the name of the Buyer, being issued to the Buyer on the relevant Closing Date. c. Form of Payment; Delivery of Certificates. (i) The Buyer shall pay the Purchase Price for the relevant Preferred Stock by delivering immediately available good funds in United States Dollars to the escrow agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached hereto as Annex II (the "Joint Escrow Instructions") on the date prior to the relevant Closing Date. (ii) No later than the relevant Closing Date, but in any event as promptly as practicable following payment by the Buyer to the Escrow Agent of the relevant Purchase Price, the Company shall deliver the Certificates to the Escrow Agent. 3 (iii) By signing this Agreement, each of the Buyer and the Company, subject to acceptance by the Escrow Agent, agrees to all of the terms and conditions of, and becomes a party to, the Joint Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. d. Method of Payment. Payment into escrow of the Purchase Price shall be made by wire transfer of funds to: Bank of New York 350 Fifth Avenue New York, New York 10001 ABA# 021000018 For credit to the account of Krieger & Prager LLP, Esqs. Account No.: [To be provided to the Buyer by Krieger & Prager LLP] Re: Zapworld.com Not later than 5:00 p.m., New York time, on the date which is three (3) Nasdaq/SmallCap Market trading days after the Company shall have accepted this Agreement and returned a signed counterpart of this Agreement to the Escrow Agent by facsimile, the Buyer shall deposit with the Escrow Agent the Purchase Price for the Initial Preferred Stock in immediately available funds. Time is of the essence with respect to such payment, and failure by the Buyer to make such payment, shall allow the Company to cancel this Agreement. e. Escrow Property. The Purchase Price, if any, for the Initial Preferred Stock or the Additional Preferred Stock, as the case may be, which is delivered to the Escrow Agent as contemplated by Section 1(d) hereof is referred to as the "Escrow Funds." The Escrow Funds and the Certificates delivered to the Escrow Agent as contemplated by Section 1(c) hereof are referred to as the "Escrow Property." 2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION; INDEPENDENT INVESTIGATION. The Buyer represents and warrants to, and covenants and agrees with, the Company as follows: a. Without limiting Buyer's right to sell the Common Stock pursuant to the Registration Statement, the Buyer is purchasing the Preferred Stock and the Warrants and will be acquiring the Shares for its own account for investment only and not with a view towards the public sale or distribution thereof and not with a view to or for sale in connection with any distribution thereof. 4 b. The Buyer is (i) an "accredited investor" as that term is defined in Rule 501 of the General Rules and Regulations under the 1933 Act by reason of Rule 501(a)(3), (ii) experienced in making investments of the kind described in this Agreement and the related documents, (iii) able, by reason of the business and financial experience of its officers (if an entity) and professional advisors (who are not affiliated with or compensated in any way by the Company or any of its affiliates or selling agents), to protect its own interests in connection with the transactions described in this Agreement, and the related documents, and (iv) able to afford the entire loss of its investment in the Securities. c. All subsequent offers and sales of the Preferred Stock and the Shares by the Buyer shall be made pursuant to registration of the Shares under the 1933 Act or pursuant to an exemption from registration. d. The Buyer understands that the Securities are 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 upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities. e. The Buyer and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Preferred Stock and the offer of the Shares which have been requested by the Buyer, including those set forth on Annex V hereto. The Buyer and its advisors, if any, have been afforded the opportunity to ask questions of the Company and have received complete and satisfactory answers to any such inquiries. Without limiting the generality of the foregoing, the Buyer has also had the opportunity to obtain and to review the Company's (1) Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1999, (2) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000; (3) Current Report on Form 8-K filed on April 17, 2000; and (4) Definitive Proxy Statement filed on June 1, 2000 (collectively, the "Company's SEC Documents"). f. The Buyer understands that its investment in the Securities involves a high degree of risk. g. 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 Securities. 5 h. This Agreement and the other Transaction Agreements to which the Buyer is a party have been duly and validly authorized, executed and delivered on behalf of the Buyer and are valid and binding agreements of the Buyer enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. 3. COMPANY REPRESENTATIONS, ETC. The Company represents and warrants to the Buyer as of the date hereof and as of each Closing Date that, except as otherwise provided in the Company Disclosure Materials attached hereto as Annex V hereto: a. Concerning the Preferred Stock and the Shares. The Preferred Stock has been duly authorized, and when issued and paid for in accordance with the terms of this Agreement, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability solely by reason of acquiring the Preferred Stock hereunder. There are no preemptive rights of any stockholder of the Company, as such, to acquire the Preferred Stock, the Warrants or the Shares. b. Reporting Company Status. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a material adverse effect on the business, operations or financial condition or results of operation of the Company and its subsidiaries taken as a whole. The Company has registered its stock and is obligated to file reports pursuant to Section 12 of the 1934 Act. The Common Stock is listed and traded on The Nasdaq/ SmallCap Market. The Company has received no notice, either oral or written, with respect to the continued eligibility of the Common Stock for such listing, and the Company has maintained all requirements for the continuation of such listing. c. Authorized Shares. The authorized capital stock of the Company consists of (i) 20,000,000 shares of Common Stock, no par value per share, of which approximately 5,500,000 shares have been issued as of the date hereof and (ii)10,000,000 shares of Indeterminate Preferred Stock, par value $1,000 per share, of which none have been issued as of the date hereof. All issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Company has sufficient authorized and unissued shares of Common Stock as may be necessary to effect the issuance of the Shares. The Shares have been duly authorized and, when issued upon conversion of, or as dividends on, the Preferred Stock or upon exercise of the Warrants, each in accordance with its respective terms, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. 6 d. Securities Purchase Agreement; Registration Rights Agreement and Stock. This Agreement and the Registration Rights Agreement, the form of which is attached hereto as Annex IV (the "Registration Rights Agreement"), and the transactions contemplated thereby, have been duly and validly authorized by the Company. This Agreement has been duly executed and delivered by the Company and this Agreement is, and each of the other Transaction Agreements, when executed and delivered by the Company, will be, a valid and binding agreement of the Company enforceable in accordance with their respective terms, subject as to enforceability to general principles of equity and to bankruptcy, insolvency, moratorium, and other similar laws affecting the enforcement of creditors' rights generally. e. Non-contravention. The execution and delivery of this Agreement and the Registration Rights Agreement by the Company, the issuance of the Securities, and the consummation by the Company of the other transactions contemplated by this Agreement, the Registration Rights Agreement, and the Preferred Stock do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the Articles of Incorporation or the By-Laws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any listing agreement for the Common Stock except as herein set forth, (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, or (iv) the Company's listing agreement for its Common Stock, except such conflict, breach or default which would not have a material adverse effect on the business, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries, taken as a whole, or on the transactions contemplated herein. f. Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or stock exchange or market or the stockholders of the Company is required to be obtained by the Company for the issuance and sale of the Securities to the Buyer as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained. g. SEC Filings. None of the Company's SEC Documents contained, at the time they were filed, any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made, not misleading. The Company has since April 1, 1999 timely filed all requisite forms, reports and exhibits thereto with the SEC. h. Absence of Certain Changes. Since the Latest Audited Date, there has been no material adverse change and no material adverse development in the business, properties, 7 operations, condition (financial or otherwise), or results of operations of the Company, except as disclosed in the Company's SEC Documents. Since the Latest Audited Date, except as provided in the Company's SEC Documents, the Company has not (i) incurred or become subject to any material liabilities (absolute or contingent) except liabilities incurred in the ordinary course of business consistent with past practices; (ii) discharged or satisfied any material lien or encumbrance or paid any material obligation or liability (absolute or contingent), other than current liabilities paid in the ordinary course of business consistent with past practices; (iii) declared or made any payment or distribution of cash or other property to stockholders with respect to its capital stock, or purchased or redeemed, or made any agreements to purchase or redeem, any shares of its capital stock; (iv) sold, assigned or transferred any other tangible assets, or canceled any debts or claims, except in the ordinary course of business consistent with past practices; (v) suffered any substantial losses or waived any rights of material value, whether or not in the ordinary course of business, or suffered the loss of any material amount of existing business; (vi) made any changes in employee compensation, except in the ordinary course of business consistent with past practices; or (vii) experienced any material problems with labor or management in connection with the terms and conditions of their employment. i. Full Disclosure. There is no fact known to the Company (other than general economic conditions known to the public generally or as disclosed in the Company's SEC Documents) that has not been disclosed in writing to the Buyer that (i) would reasonably be expected to have a material adverse effect on the business, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries, taken as a whole , (ii) would reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement or any of the agreements contemplated hereby (collectively, including this Agreement, the "Transaction Agreements"), or (iii) would reasonably be expected to materially and adversely affect the value of the rights granted to the Buyer in the Transaction Agreements. j. Absence of Litigation. Except as set forth in the Company's SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a material adverse effect on the properties, business, operations, condition (financial or otherwise), or results of operation of the Company and its subsidiaries taken as a whole or the transactions contemplated by any of the Transaction Agreements or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, any of the Transaction Agreements. k. Absence of Events of Default. Except as set forth in the Company's SEC Documents, no Event of Default (or its equivalent term), as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (or its equivalent term) (as so defined in such 8 agreement), has occurred and is continuing, which would have a material adverse effect on the business, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries, taken as a whole. l. Prior Issues. Except as set forth in the Company's SEC Documents, during the twelve (12) months preceding the date hereof, the Company has not issued any convertible securities. As of the date hereof, the outstanding unconverted principal amount of each convertible security issued by the Company is as set forth in Annex V hereto. m. No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Company's SEC Documents or those incurred in the ordinary course of the Company's business since the Latest Audited Date, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries, taken as a whole. No event or circumstances has occurred or exists with respect to the Company or its properties, business, operations, condition (financial or otherwise), or results of operations, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. There are no proposals currently under consideration or currently anticipated to be under consideration by the Board of Directors or the executive officers of the Company (other than the transactions contemplated by the Transaction Agreements) which proposal would (x) change the Articles of Incorporation or any other charter document or the By-Laws of the Company, each as currently in effect, with or without shareholder approval, which change would reduce or otherwise adversely affect the rights and powers of the shareholders of the Common Stock or (y) materially or substantially change the business, assets or capital of the Company, including its interests in subsidiaries. n. No Default. Except as provided in the Company's SEC Documents, the Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it or its property is bound. o. No Integrated Offering. Neither the Company nor any of its affiliates nor any person acting on its or their behalf has, directly or indirectly, at any time since November 1, 1999, made any offer or sales of any security or solicited any offers to buy any security under circumstances that would eliminate the availability of the exemption from registration under Rule 506 of Regulation D in connection with the offer and sale of the Securities as contemplated hereby. p. Dilution. The number of Shares issuable upon conversion of the Preferred Stock and the exercise of the Warrants may increase substantially in certain circumstances, including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines prior to the conversion of the Preferred Stock. The Company's executive officers and 9 directors have studied and fully understand the nature of the Securities being sold hereby and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Shares upon conversion of the Preferred Stock and upon exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company, the Company will honor every Notice of Conversion (as defined in the Certificate of Determination) relating to the conversion of the Preferred Stock and every Notice of Exercise Form (as contemplated by the Warrants) relating to the exercise of the Warrants unless the Company is subject to an injunction (which injunction was not sought by the Company) prohibiting the Company from doing so. q. Brokers, Finders. Except for payment of fees to Harry Kraatz, an independent finder (the "Finder") , and fees payable to Union Atlantic LC or Union Atlantic Capital, LC (the "Placement Agent"), the payment of which fees is the sole responsibility of the Company, the Company has taken no action which would give rise to any claim by any person for brokerage commission, finder's fees or similar payments by Buyer relating to this Agreement or the transactions contemplated hereby. Buyer shall have no obligation with respect to such fees or with respect to any claims made by or on behalf of other persons for fees of a type contemplated in this Section 3(q) that may be due in connection with the transactions contemplated hereby. The Company shall indemnify and hold harmless each of Buyer, its employees, officers, directors, agents, and partners, and their respective affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees, as and when incurred. 10 4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS. a. Transfer Restrictions. The Buyer acknowledges that (1) the Preferred Stock have not been and are not being registered under the provisions of the 1933 Act and, except as provided in the Registration Rights Agreement, the Shares have not been and are not being registered under the 1933 Act, and may not be transferred unless (A) subsequently registered thereunder or (B) the Buyer shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; (2) any sale of the Securities made in reliance on Rule 144 promulgated under the 1933 Act ("Rule 144") may be made only in accordance with the terms of said Rule and further, if said Rule 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 used in the 1933 Act, may require compliance with some other exemption under the 1933 Act or the rules and regulations of the SEC thereunder; and (3) neither the Company nor any other person is under any obligation to register the Securities (other than pursuant to the Registration Rights Agreement) under the 1933 Act or to comply with the terms and conditions of any exemption thereunder. b. Restrictive Legend. The Buyer acknowledges and agrees that the Preferred Stock and the Warrants, and, until such time as the Common Stock has been registered under the 1933 Act as contemplated by the Registration Rights Agreement and sold in accordance with an effective Registration Statement, certificates and other instruments representing any of the Securities shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of any such Securities): THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. c. Registration Rights Agreement. The parties hereto agree to enter into the Registration Rights Agreement on or before the Initial Closing Date. d. Filings. (i) The Company undertakes and agrees to make all necessary filings in connection with the sale of the Securities to the Buyer under any United States laws and regulations applicable to the Company, or by any domestic securities exchange or trading market, and to provide a copy thereof to the Buyer promptly after such filing. 11 (ii) Subject to the conditions of the immediately following sentence, the Company undertakes and agrees to take all steps necessary to have a meeting and vote of the stockholders of the Company no later than the Meeting Date (as defined below) regarding either or both (A) the authorization of the Company's issuance to the holders of the Preferred Stock of shares of Common Stock in excess of twenty percent (20%) of the outstanding shares of Common Stock on the date of this Agreement in accordance with NASDAQ Rule 4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable and/or (B) the increase of the authorized shares of Common Stock of the Company, if and as may be necessary, to enable the Company to meet its obligations regarding the reservation of shares and the conversion of the Preferred Stock as contemplated by the Certificate of Determination and the other Transaction Agreements. The term "Meeting Date" means the date which is the earlier of (x) seventy-five (75) days after the date on which the Company has issued, after the date of this Agreement, shares of Common Stock which, in the aggregate equal or exceed ten percent (10%) of the outstanding shares of Common Stock on the date hereof or (y) the date on which the Company holds its next regular or special stockholders meeting or (v) the date on which the Company holds its next regular or special stockholders meeting after the meeting originally scheduled to be held on or about June 24, 2000. The Company will recommend to the stockholders that such authorization be granted and will seek proxies from stockholders not attending the meeting naming a director or officer of the Company as such stockholder's proxy and directing the proxy to vote, or giving the proxy the authority to vote, in favor of such authorization. Upon determination that the stockholders have voted in favor of such authorization, the Company shall cause its counsel to issue to the Buyer an unqualified opinion (the "Authorization Opinion") that such authorization has been duly adopted by all necessary corporate action of the Company and that the Company will be able to issue, without restriction as to the number of such shares, all shares of Common Stock as may be issuable upon conversion of the Preferred Stock and without any limits imposed by the Cap Regulations (as defined in the Certificate of Determination) adopted on or before and in effect on the date of the Authorization Opinion. The Authorization Opinion shall state that the Buyer may rely thereon in connection with the transactions contemplated by this Agreement and the other Transaction Agreements regarding its holdings of the Preferred Stock. If, for any reason, (x) the Authorization Opinion is not issued within five (5) business days after such meeting, (y) the meeting is not held by the Meeting Date or (z) the requisite stockholder approval is not obtained at the meeting, then in lieu of issuing any shares in violation of NASDAQ Rule 4310(c)(25)(H) or Rule 4460(i)(1), as may be applicable, or any of the other Cap Regulations, the Company shall redeem the outstanding Preferred Stock as set forth in Section VI of the Certificate of Determination within ten (10) days after the Meeting Date. (iii) In furtherance of the provisions of the immediately preceding subparagraph (ii) hereof, the Company (a) commits to using its best efforts to obtain any stockholder authorization contemplated by said subparagraph (ii), and (b) represents to the Buyer that the Company has obtained the binding irrevocable commitment or proxy (each, a "Principal Voter Proxy") of each Principal Voter (as defined below) that such Principal Voter will vote in favor of any stockholder authorization contemplated by said subparagraph (ii). A "Principal Voter" is a person who meets any one or more of the following criteria: (A) a person who is a director or principal officer of the Company (each, a "Company Principal") and who, directly or indirectly, holds any shares of 12 Common Stock of the Company; (B) a spouse of a Company Principal who resides in the household of the Company Principal (a "Principal's Spouse") and who, directly or indirectly, holds any shares of Common Stock of the Company, (C) a parent, sibling or child of a Company Principal who resides in the household of a Company Principal or of a Principal's Spouse (each, a "Principal's Relative") and who, directly or indirectly, holds any shares of Common Stock or (D) any other person or entity, including, without limitation, for profit or non-profit corporations, partnerships and trusts, whose voting rights regarding Common Stock of the Company is subject to the direction, control or other influence of any Company Principal, Principal's Spouse or Principal's Relative. The Company will deliver such Principal Voter Proxies to the Buyer or the Buyer's designee on the Initial Closing Date. e. Reporting Status. So long as the Buyer beneficially owns any of the Securities, the Company shall file all reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the 1934 Act, and the Company shall not terminate its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would permit such termination. The Company will take all reasonable action under its control to obtain and to continue the listing and trading of its Common Stock (including, without limitation, all Registrable Securities) on The Nasdaq/Small Cap market and will comply in all material respects with the Company's reporting, filing and other obligations under the by-laws or rules of the National Association of Securities Dealers, Inc. ("NASD") or The Nasdaq/Small Cap Market. f. Use of Proceeds. The Company may use the proceeds from the sale of the Preferred Stock (excluding amounts paid by the Company for legal fees, finder's fees and escrow fees in connection with the sale of the Preferred Stock) for internal working capital purposes and other corporate business activities. g. Certain Agreements. Except to the extent specifically provided in Section 4(j) hereof, but in each such event subject to compliance with all of the other provisions of this Agreement, the Company covenants and agrees that it will not, without the prior written consent of the Buyer, enter into (x) any subsequent or further offer or sale of Common Stock or securities convertible into Common Stock (collectively, "New Common Stock") except as contemplated by Section 4(j) hereof,, or (y) any subsequent offer or contract for an equity line or similar arrangement which contemplates the issuance of New Common Stock with any third party (a "New Investor") on any date which is earlier than one hundred eighty (180) days after the Effective Date. 13 h. Available Shares. The Company shall have at all times authorized and reserved for issuance, free from preemptive rights, shares of Common Stock sufficient to yield (the "Reserved Standard") at least the aggregate of (i) two hundred percent (200%) of the number of shares of Common Stock issuable at conversion as may be required to satisfy the conversion rights of the Buyer pursuant to the terms and conditions of the Certificate of Determination or to represent payment of dividends on the Preferred Stock and (ii) the number of shares issuable upon exercise as may be required to satisfy the exercise rights of the Buyer pursuant to the terms and conditions of the Warrants. If, at any time, the number of shares so authorized and reserved for issuance to all Buyers is less than the number of shares contemplated by Paragraph B of Article VI of the Certificate of Determination, the Company shall promptly take all steps necessary or appropriate, which may include the calling of a special or regular shareholders' meeting, to authorize an increase in the number of authorized shares at least sufficient to enable the Company to comply with the Reserved Standard. i. Warrants. The Company agrees to issue to the Buyer on each Closing Date transferable warrants (the "Warrants") for the purchase of a number of shares of Common Stock equal to (x) the stated value of the Preferred Stock issued to the Buyer on such Closing Date, divided by (y) the Fixed Conversion Price ( as defined in the Certificate of Determination). The Warrants shall bear an exercise price per share equal to 110% of (i) for the Warrants issued on the Initial Closing Date, the average Closing Bid Price for the five (5) trading days ending on the trading day immediately before (x) June 23, 2000 or (y) the Initial Closing Date, whichever is lower, and (ii) for the Warrants issued on the Additional Closing Date, the average Closing Bid Price for the five (5) trading days ending on the trading day immediately before the Additional Closing Date (subject in each instance to adjustment as provided in the Warrant). The Warrants will expire on the last day of the calendar month in which the fifth anniversary of the relevant Closing Date occurs. The Warrants shall be in the form annexed hereto as Annex VI, together with (x) registration rights as provided in the Registration Rights Agreement and (y) piggy-back registration rights after the effectiveness of the Registration Statement expires, as contemplated by the Registration Rights Agreement. j. Right of First Refusal. (i) Subject to the provisions of this paragraph (j), the Company may during the period commencing on the Effective Date and continuing through and including the date which is one hundred eighty (180) days after the Effective Date offer to enter into any transaction (a "New Transaction") for the sale of New Common Stock to a New Investor, but only if (x) the average Closing Bid Price for the twenty (20) trading days ending on the trading immediately before the New Transaction Notice (as defined below) is at least $5.50 per share (adjusted for capital transactions occurring after the Initial Closing Date) and (y) the sale price per share of Common Stock or, if a convertible security or other right to acquire shares, the conversion or exercise price per share of Common Stock is at least $5.50 per share (adjusted for capital transactions occurring after the Initial Closing Date). Before consummating the New Transaction with a New Investor, the Company shall give written notice (a "New Transaction Notice") to the Buyer summarizing all of the terms of such offer (a "New Transaction Offer"). The Buyer shall have the right (the "Right of First Refusal"), exercisable by written notice given to the Company by the close of business on the fifth business day after the Buyer's receipt of the New Transaction Offer 14 (the "Right of First Refusal Expiration Date"), to participate in all or any part of the New Transaction Offer on the terms so specified. (ii) If, and only if, the Buyer does not exercise the Right of First Refusal in full, the Company may consummate the remaining portion of the New Transaction with any New Investor on the terms specified in the New Transaction Offer within thirty (30) days of the Right of First Refusal Expiration Date. (iii) If the terms of the New Transaction to be consummated with such other party differ from the terms specified in the New Transaction Offer so that the terms are more beneficial in any respect to the New Investor, the Company shall give the Buyer a New Transaction Offer relating to the terms of the New Transaction, as so changed, and the Buyer's Right of First Refusal and the preceding terms of this paragraph (j) shall apply with respect to such changed terms. (iv) If there is more than one Buyer signatory to this Agreement, the preceding provisions of this paragraph (j) shall apply pro rata among them (based on their relative Buyer's Allocable Shares), except that, to the extent any such Buyer does not exercise its Right of First Refusal in full (a "Declining Buyer"), the remaining Buyer or Buyers who or which have exercised their own Right of First Refusal in full, shall have the right (pro rata among them based on their relative Buyer's Allocable Shares, if more than one) to exercise all or a portion of such Declining Buyer's unexercised Right of Refusal. (v) In the event the New Transaction is consummated with such New Investor at any time prior to the expiration of one hundred eighty (180) days after the Effective Date on terms providing for (x) either a sale price equal to or computed based on, or a determination of a conversion price (howsoever defined or computed) based on, a lower percentage of the then current market price (howsoever defined or computed) than provided in the Certificate of Determination for determining the Conversion Price, the terms of any unissued or unconverted share of Preferred Stock shall be modified to reduce the relevant Conversion Price to be equal to that provided in the New Transaction as so consummated; and/or (y) the issuance of warrants at an exercise price lower than that provided in the Warrants, the terms of any unissued or unexercised Warrants shall be modified to reduce the relevant Warrant exercise price to be equal to that provided in the New Transaction as so consummated. k. Reimbursement. If (i) the Buyer, other than by reason of its gross negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by the Transaction Documents, or if the Buyer is impleaded in any such action, proceeding or investigation by any person, or (ii) the Buyer, other than by reason of its gross negligence or willful misconduct or by reason of its trading of the Common Stock in a manner that is illegal under the federal or state securities laws, becomes involved in any capacity in any action, proceeding or investigation brought by the SEC against or involving the Company or in connection with or as a result of the consummation of the transactions 15 contemplated by the Transaction Documents, or if the Buyer is impleaded in any such action, proceeding or investigation by any person, then in any such case, the Company will reimburse the Buyer for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. In addition, other than with respect to any matter in which Buyer is a named party, the Company will pay to the Buyer reasonable out-of-pocket costs with respect to assisting in preparation for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearing, trials, and other proceedings relating to the subject matter of this Agreement. The reimbursement obligations of the Company under this Section 4(k) shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of the Buyer that are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Buyer and any such affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Buyer and any such affiliate and any such person. 5. TRANSFER AGENT INSTRUCTIONS. a. The Company warrants that, with respect to the Securities, other than the stop transfer instructions to give effect to Section 4(a) hereof, it will give its transfer agent no instructions inconsistent with instructions to issue Common Stock from time to time upon conversion of the Preferred Stock in such amounts as specified from time to time by the Company to the transfer agent, bearing the restrictive legend specified in Section 4(b) of this Agreement prior to registration of the Shares under the 1933 Act, registered in the name of the Buyer or its nominee and in such denominations to be specified by the Buyer in connection with each conversion of the Preferred Stock. Except as so provided, the Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement, the Registration Rights Agreement, and applicable law. Nothing in this Section shall affect in any way the Buyer's obligations and agreement to comply with all applicable securities laws upon resale of the Securities. If the Buyer provides the Company with an opinion of counsel reasonably satisfactory to the Company that registration of a resale by the Buyer of any of the Securities in accordance with clause (1)(B) of Section 4(a) of this Agreement is not required under the 1933 Act, the Company shall (except as provided in clause (2) of Section 4(a) of this Agreement) permit the transfer of the Securities and, in the case of the Converted Shares or the Warrant Shares, as the case may be, promptly instruct the Company's transfer agent to issue one or more certificates for Common Stock without legend in such name and in such denominations as specified by the Buyer. The Company agrees that if a sale by a holder of Securities complies with the provisions of Rule 144, it will instruct the Company's transfer agent to transfer shares to each purchaser in such a transaction and, if necessary, arrange for an opinion of counsel to be delivered to the transfer agent with respect to such transfer. 16 b. Subject to the provisions of this Agreement, the Company will permit the Buyer to exercise its right to convert the Preferred Stock in the manner contemplated by the Certificate of Determination. The Company acknowledges that the submission (by facsimile transmission or delivery by mail, messenger or courier) of a Notice of Conversion substantially in the form annexed hereto as Annex VII shall constitute adequate notice of the exercise of the conversion right by the holder of the Preferred Stock. c The Company will authorize its transfer agent to give information relating to the Company directly to the Buyer or the Buyer's representatives upon the request of the Buyer or any such representative , to the extent such information relates to (i) the status of shares of Common Stock issued or claimed to be issued to the Buyer in connection with a Notice of Conversion, or (ii) the number of outstanding shares of Common Stock of all stockholders as of a current or other specified date. The Company will provide the Buyer with a copy of the authorization so given to the transfer agent. 6. CLOSING DATES. a. The Initial Closing Date shall occur on the date which is the first NYSE trading day after each of the conditions contemplated by Sections 7 and 8 hereof shall have either been satisfied or been waived by the party in whose favor such conditions run. b. (i) The Additional Closing Date shall be the date which is seven (7) business days after the date of the Company Additional Closing Date Notice or the Buyer Additional Closing Date Notice (as those terms are defined below; each, an "Additional Closing Date Notice") . (ii) On a date which is no earlier than the fifteenth business day after the Effective Date and ending on the thirtieth business day after the Effective Date, the Company may give notice (the "Company Additional Closing Date Notice") by fax transmission or hand delivery to the Buyer, with a copy to the Escrow Agent, specifying its demand that the Buyer purchase the Additional Preferred Stock, as contemplated by Section 1(a)(ii)(y) hereof. The closing of the purchase and sale of the Additional Preferred Stock shall be subject to the provisions of this Section 6(b) and the other terms of this Agreement. (iii) It shall be a condition to the Company's right to issue a Company Closing Date Notice that, as of the Additional Closing Notice Date: (A) The Registration Statement shall have been declared effective and shall continue to be effective; (B) Each of the Transaction Agreements shall continue to be in full force and effect and be applicable, to the extent relevant, to the 17 Additional Preferred Stock and the Warrants to be issued on the Additional Closing Date (and the Company's issuance of the Company Additional Closing Date Notice shall constitute the Company's making each such representation and warranty as of such date); (C) The Closing Bid Price on the trading day immediately prior to the date of the Company Additional Closing Date Notice was not less than $2.00 per share (adjusted to reflect any capital adjustments made by the Company after the Initial Closing Date); (D) (a)(i) If the average Closing Bid Price for the Common Stock for the thirty (30) trading days ending on the trading day immediately before the date the Company Additional Date Notice was given, was not less than $2.50 per share (adjusted to reflect any capital adjustments made by the Company after the Initial Closing Date), and (ii) the average daily trading volume for the thirty (30) trading days ending the trading day immediately prior to the date of the Company Additional Closing Date Notice was not less than the Volume Standard; provided, however, that if the average daily trading volume during that period is less than the Volume Standard, but at least seventy-five percent (75%) of the Volume Standard, the amount of the Additional Preferred Stock to be purchased by the Buyer shall be two-thirds of the amount contemplated by Section 1(a)(ii)(y); (b)(i) If the average Closing Bid Price for the Common Stock for the thirty (30) trading days ending on the trading day immediately before the date the Company Additional Date Notice was given, was not less than $4.00 per share (adjusted to reflect any capital adjustments made by the Company after the Initial Closing Date), and (ii) the average daily trading volume for the thirty (30) trading days ending the trading day immediately prior to the date of the Company Additional Closing Date Notice was not less than seventy-five percent (75%) of the Volume Standard; provided, however, that if the average daily trading volume during that period is less than such amount but at least fifty percent (50%) of the Volume Standard, the amount of the Additional Preferred Stock to be purchased by the Buyer shall be two- thirds of the amount contemplated by Section 1(a)(ii)(y); (E) the Authorization Opinion shall have been issued to the Buyer; and 18 (F) The representations and warranties of the Company contained in Section 3 hereof shall be true and correct in all material respects and there shall have been no material adverse effect on the business, operations or financial condition or results of operations of the Company and its subsidiaries taken as a whole, from the Initial Closing Date through and including the date the Company gives the Company Additional Closing Date Notice to the Buyer (and the Company's issuance of the Additional Closing Date Notice shall constitute the Company's making each such representation and warranty as of such date). (iv) The Buyer by written notice to the Company can waive all or any part of the conditions referred to in Section 6(b)(iii) with respect to all or any specified portion of the Additional Preferred Stock; and (v) If the Company has not given the Company Additional Closing Date Notice, then, during the period commencing on the thirty-first business day after the Effective Date and ending on the forty-fifth business day after the Effective Date, the Buyer shall have the right to give notice (the "Buyer Additional Closing Date Notice") by fax transmission or hand delivery to the Company, with a copy to the Escrow Agent, specifying its demand that the Company issue all or part of the Additional Preferred Stock, as contemplated by Section 1(a)(ii)(y) hereof. (vi) The closing for the Additional Preferred Stock shall be conducted upon the same terms and conditions as those applicable to the Initial Preferred Stock. c. Each closing of the purchase and issuance of Preferred Stock shall occur on the relevant Closing Date at the offices of the Escrow Agent and shall take place no later than 3:00 P.M., New York time, on such day or such other time as is mutually agreed upon by the Company and the Buyer. d. Notwithstanding anything to the contrary contained herein, the Escrow Agent will be authorized to release the Escrow Funds to the Company and to others and to release the other Escrow Property on the relevant Closing Date upon satisfaction of the conditions set forth in Sections 7 and 8 hereof and as provided in the Joint Escrow Instructions. 7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Buyer understands that the Company's obligation to sell the relevant Preferred Stock to the Buyer pursuant to this Agreement on the relevant Closing Date is conditioned upon: 18 DRAFT -2 6/21/00 a. The Buyer's execution and delivery of this Agreement and the other Transaction Agreements contemplated to be signed by the Buyer; b. Delivery by the Buyer to the Escrow Agent of good funds as payment in full of an amount equal to the Purchase Price for the relevant Preferred Stock in accordance with this Agreement; c. The accuracy on such Closing Date of the representations and warranties of the Buyer contained in this Agreement, each as if made on such date, and the performance by the Buyer on or before such date of all covenants and agreements of the Buyer required to be performed on or before such date; d. Except to the extent contemplated by specific provisions of the Transaction Agreements, there shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby to an extent materially greater than contemplated herein, or requiring any consent or approval which shall not have been obtained; and e. From and after the date hereof to and including such Closing Date, the trading of the Common Stock shall not have been suspended by the SEC or the NASD and trading in securities generally on the NYSE or The Nasdaq/SmallCap Market shall not have been suspended or limited, nor shall minimum prices been established for securities traded on The Nasdaq/SmallCap Market, nor shall there be any outbreak or escalation of hostilities involving the United States or any material adverse change in any financial market that in either case in the reasonable judgment of the Company makes it impracticable or inadvisable to sell the Preferred Stock. 8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE. The Company understands that the Buyer's obligation to purchase the Preferred Stock on the relevant Closing Date is conditioned upon: a. The adoption of the Certificate of Determination by all necessary corporate action of the Company and the filing of all filings necessary to effectuate the Certificate of Determination as a part of the charter documents of the Company; b. The execution and delivery of this Agreement and the Registration Rights Agreement by the Company; c. Delivery by the Company to the Escrow Agent of the relevant Certificates in accordance with this Agreement; d. The accuracy in all material respects on such Closing Date of the representations and warranties of the Company contained in this Agreement, each as if made on such 20 date, and the performance by the Company on or before such date of all covenants and agreements of the Company required to be performed on or before such date; e. On such Closing Date, the Registration Rights Agreement shall be in full force and effect and the Company shall not be in default thereunder; f. On such Closing Date, the Buyer shall have received an opinion of counsel for the Company, dated such Closing Date, in form, scope and substance reasonably satisfactory to the Buyer, substantially to the effect set forth in Annex III attached hereto; g. Except to the extent contemplated by specific provisions of the Transaction Agreements, there shall not be in effect any law, rule or regulation prohibiting or restricting the transactions contemplated hereby to an extent materially greater than contemplated herein, or requiring any consent or approval which shall not have been obtained; h. From and after the date hereof to and including such Closing Date, the trading of the Common Stock shall not have been suspended by the SEC or the NASD and trading in securities generally on the The Nasdaq/SmallCap Market shall not have been suspended or limited, nor shall minimum prices been established for securities traded on The Nasdaq/SmallCap Market, nor shall there be any outbreak or escalation of hostilities involving the United States or any material adverse change in any financial market that in either case in the reasonable judgment of the Buyer makes it impracticable or inadvisable to purchase the Preferred Stock; and i. With respect to the Additional Closing Date, (i) a Company Additional Closing Date Notice shall have been duly given in accordance with the provisions of Section 6(b); (ii) all the other conditions of Section 6(b) shall have been satisfied; (iii) the Registration Statement shall have been declared effective and continue to be effective; (iv) each of the Transaction Agreements shall continue to be in full force and effect and be applicable, to the extent relevant, to the Additional Preferred Stock and Warrants (and the Company's issuance of the Additional Preferred Stock shall constitute the Company's making a representation and warranty to such effect as of such date); (v) the representations and warranties of the Company contained in Section 3 hereof shall be true and correct in all material respects (and the Company's issuance of the Additional Preferred Stock shall constitute the Company's making each such representation and warranty as of such date) and there shall have been no material adverse change to the business, operations or 21 financial condition or results of operation of the Company and its subsidiaries taken as a whole from the Initial Closing Date through and including the Additional Closing Date (and the Company's issuance of the Additional Preferred Stock shall constitute the Company's making such representation and warranty as of such date); (vi) the Company shall have timely issued all shares issuable upon conversion of the Preferred Stock or upon exercise of the Warrants prior to the date of such Additional Closing Date; and (vii) the Company shall have available and shall reserve for issuance to Buyer at least two hundred (200%) of the number of Shares which would be issued on (x) conversion of all unconverted Initial Preferred Stock and all Additional Preferred Stock and (y) exercise of all unexercised Warrants. 9. GOVERNING LAW: MISCELLANEOUS. a. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Buyer for any reasonable legal fees and disbursements incurred by the Buyer in enforcement of or protection of any of its rights under any of the Transaction Agreements. b. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. c. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. d. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. e. A facsimile transmission of this signed Agreement shall be legal and binding on all parties hereto. 22 f. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original. g. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement. h. 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 or the validity or enforceability of this Agreement in any other jurisdiction. i. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. j. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. 10. NOTICES. Any notice required or permitted hereunder shall be given in writing (unless otherwise specified herein) and shall be deemed effectively given on the earliest of (a) the date delivered, if delivered by personal delivery as against written receipt therefor or by confirmed facsimile transmission, (b) the seventh business day after deposit, postage prepaid, in the United States Postal Service by registered or certified mail, or (c) the third business day after mailing by domestic or international express courier, with delivery costs and fees prepaid, in each case, addressed to each of the other parties thereunto entitled at the following addresses (or at such other addresses as such party may designate by ten (10) days' advance written notice similarly given to each of the other parties hereto): COMPANY: Zapworld.com 117 Morris Street Sebastopol, CA 95472 Attn: Gary Starr Telephone No.: (707) 824-4150 Telecopier No.: (707) 824-4159 with a copy to: 23 Evers & Hendrickson LLP 155 Montgomery Street 12th Floor San Francisco, California 94104 Attn: William D. Evers, Esq. Telephone No.: (415) 772-8102 Telecopier No.: (415) 772-8101 BUYER: At the address set forth on the signature page of this Agreement. with a copy to: Krieger & Prager LLP 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel Krieger, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 ESCROW AGENT: Krieger & Prager LLP 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel Krieger, Esq. New York, New York 10016 Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The Company's and the Buyer's representations and warranties herein shall survive the execution and delivery of this Agreement and the delivery of the Certificates and the Warrants and the payment of the Purchase Price and shall inure to the benefit of the Buyer and the Company and their respective successors and assigns. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK.] 24 IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer by one of its officers thereunto duly authorized as of the date set forth below. STATED VALUE OF PREFERRED STOCK: $ --------------------------- PURCHASE PRICE OF PREFERRED STOCK: $ --------------------------- SIGNATURES FOR ENTITIES IN WITNESS WHEREOF, the undersigned represents that the foregoing statements are true and correct and that it has caused this Securities Purchase Agreement to be duly executed on its behalf this day , 2000. - -------------------------------- ------------------------------------ Address Printed Name of Subscriber - -------------------------------- By: -------------------------------- Telecopier No. (Signature of Authorized Person) ----------------- ------------------------------------ - -------------------------------- Printed Name and Title Jurisdiction of Incorporation or Organization As of the date set forth below, the undersigned hereby accepts this Agreement and represents that the foregoing statements are true and correct and that it has caused this Securities Purchase Agreement to be duly executed on its behalf. ZAPWORLD.COM By: ------------------------------------- Gary Starr Title: Chief Executive Officer ------------------------------------- Date: ,2000 ---------------------------------- 25 ANNEX I CERTIFICATE OF DETERMINATION ANNEX II JOINT ESCROW INSTRUCTIONS ANNEX III OPINION OF COUNSEL ANNEX IV REGISTRATION RIGHTS AGREEMENT ANNEX V COMPANY DISCLOSURE MATERIALS ANNEX VI FORM OF WARRANT ANNEX VII NOTICE OF CONVERSION FORM 26 COMPANY DISCLOSURE MATERIALS ---------------------------- NONE ZAPWORLD.COM Notice of Conversion (To be Executed by the Registered Holder in order to Convert the Series A Preferred Stock) TO: APWORLD.COM VIA TELECOPIER TO: 17 Morris Street ( ) ebastopol, CA 95472 Attn: FROM: ("Holder") ----------------------------------------------------------------- DATE: (the "Conversion Date") ---------------------------------------------------- RE: Conversion of shares (the "Converted Shares") of the ------------------- [ ] Series A-1 Convertible Preferred Stock [ ] Series A-2 Convertible Preferred Stock (the "Preferred Stock") of ZAPWORLD.COM (the "Company") into ______ shares (the "Conversion Shares") of Common Stock (defined below) CONVERSION DATE: --------------------------------------------------- The captioned Holder hereby gives notice to the Company, pursuant to the Certificate of Determination of Convertible Preferred Stock of ZAPWORLD.COM (the "Certificate of Determination"), that the Holder elects to convert the Converted Shares into fully paid and non- assessable shares of Common Stock, no par value (the "Common Stock"), of the Company as of the Conversion Date specified above. Said conversion shall be based on the following Conversion Price (the lower of the two alternatives is checked): [ ] $ , representing the Fixed Conversion Price (as --------------- defined in the Certificate of Determination) [ ] $ , representing the Variable Conversion Price --------------- (as defined in the Certificate of Determination) A schedule of the Closing Bid Prices of the Common Stock for the [ ] twenty-two [ ] forty-five trading days prior to the relevant Conversion Date, as reported on the Principal Trading Market by the Reporting Service (as those terms are defined in the Certificate of Determination), is attached for your reference in determining the Variable Conversion Price, if that box is checked above. Based on this Conversion Price, the number of Conversion Shares indicated above should be issued in the following name(s): Name and Record Address Conversion Shares ----------------------------- ----------------- ----------------------------- ----------------- ----------------------------- ----------------- As contemplated by the Certificate of Determination and the Securities Purchase Agreement, dated June ____, 2000 (the "Securities Purchase Agreement"), to which the Company and the Holder are parties, this Notice of Conversion is being sent by facsimile to the telecopier number and officer indicated above, with a copy to the Company's counsel. The Holder has previously surrendered or will surrender (or cause to be surrendered) the certificate(s) for the Converted Shares, duly endorsed, to the Company at the address indicated above by express courier within 5 business days after delivery or facsimile transmission of this Notice of Conversion. The certificates representing the Conversion Shares (together with certificate(s) representing the shares of Preferred Stock not converted hereby) should be transmitted by the Company to the Holder via express courier or by electronic transfer within the time contemplated by the Certificate of Determination after receipt of this Notice of Conversion (by facsimile transmission or otherwise) and the certificate(s) representing the Converted Shares to: ----------------------------- ----------------------------- ----------------------------- As contemplated by Article III of the Certificate of Determination, the Company should also pay all unpaid dividends on the Converted Shares by check payable to the Holder (unless such dividends are being paid in Common Stock as contemplated by said section, in which event such shares should be issued in the name of the Holder) delivered in the same manner as, and together with, the Conversion Shares. ---------------------------------------- (Print name of Holder) By: ------------------------------------ (Signature of Authorized Person) ---------------------------------------- (Printed Name and Title) EX-4.3 4 0004.txt REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 23, 2000 (this "Agreement"), is made by and between ZAPWORLD.COM, a California corporation, with headquarters located at 117 Morris Street, Sebastopol, CA 95472 (the "Company"), and each entity named on a signature page hereto (each, an "Initial Investor") (each agreement with an Initial Investor being deemed a separate and independent agreement between the Company and such Initial Investor, except that each Initial Investor acknowledges and consents to the rights granted to each other Initial Investor under such agreement). W I T N E S S E T H: WHEREAS, upon the terms and subject to the conditions of the Securities Purchase Agreement, dated as of June 23, 2000, between the Initial Investor and the Company (the "Securities Purchase Agreement"; terms not otherwise defined herein shall have the meanings ascribed to them in the Securities Purchase Agreement), the Company has agreed to issue and sell to the Initial Investor shares of Series A-1 and Series A-2 Convertible Preferred Stock of the Company having an aggregate stated value of $5,000,000 (collectively, the "Preferred Stock"); and WHEREAS, the Company has agreed to issue the Warrants to the Initial Investor in connection with the issuance of the Preferred Stock; and WHEREAS, the Preferred Stock (which term, for purposes of this Agreement, shall include Periodic Amount Shares, as defined below) is convertible into shares of Common Stock (the "Conversion Shares"; which term, for purposes of this Agreement, shall include shares of Common Stock of the Company issuable in lieu of accrued dividends through the respective maturity dates of the Preferred Stock as contemplated by the Preferred Stock) upon the terms and subject to the conditions contained in the Certificate of Determination and the Warrants may be exercised for the purchase of shares of Common Stock (the "Warrant Shares") upon the terms and conditions of the Warrants; and WHEREAS, to induce the Initial Investor to execute and deliver the Securities Purchase Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), with respect to the Conversion Shares and the Warrant Shares; 1 NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Initial Investor hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the following meanings: (a) "Investor" means the Initial Investor and any permitted transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof and who holds Preferred Stock, Warrants or Registrable Securities. (b) "Potential Material Event" means any of the following: (i) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company; or (ii) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. (c) "Register," "Registered," and "Registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act and pursuant to Rule 415 under the Securities Act or any successor rule providing for offering securities on a continuous basis ("Rule 415"), and the declaration or ordering of effectiveness of such Registration Statement by the United States Securities and Exchange Commission (the "SEC"). (d) "Registrable Securities" means the Conversion Shares and the Warrant Shares. (e) "Registration Statement" means a registration statement of the Company under the Securities Act covering Registrable Securities on Form S-3, if the Company is then eligible to file using such form, and if not eligible, on Form SB-2 or other appropriate form. (f) "Required Effective Date" means the relevant Initial Required Effective Date or Increased Required Effective Date (as those terms are defined below). (g) "Effective Date" means the date the SEC declares a Registration Statement covering Registrable Securities and otherwise meeting the conditions contemplated hereby to be effective. 2 2. Registration. (a) Mandatory Registration. (i) The Company shall prepare and file with the SEC, as soon as possible after the Initial Closing Date but no later than thirty (30) days after the Initial Closing Date (the "Required Filing Date"), either a Registration Statement or an amendment to an existing Registration Statement, in either event registering for resale by the Investor a sufficient number of shares of Common Stock for the Initial Investors to sell the Registrable Securities, but in no event less than the number of shares equal to the sum of (A) two hundred percent (200%) of the number of shares into which the Preferred Stock and all dividends thereon through the third annual anniversary of their issuance would be convertible at the time of filing of such Registration Statement (assuming for such purposes that all shares of Initial Preferred Stock and the maximum number of Additional Preferred Stock had been issued, had been eligible to be converted, and had been converted, into Conversion Shares in accordance with their terms, whether or not such issuance, accrual of dividends, eligibility or conversion had in fact occurred as of such date) and (B) the number of shares which would be issued upon exercise of all of the Warrants issued and to be issued as contemplated by the Securities Purchase Agreement at the time of filing of the Registration Statement (assuming for such purposes that the maximum number of Additional Preferred Stock had been issued and all Warrants had been issued, were eligible to be exercised and had been exercised in accordance with their terms, whether or not such issuance, eligibility or exercise had in fact occurred as of such date) (or such lesser number as may be required by the SEC). The Registration Statement (W) shall include only the Registrable Securities and the shares specifically listed on Exhibit 1 annexed hereto, and (X) shall also state that, in accordance with Rule 416 and 457 under the Securities Act, it also covers such indeterminate number of additional shares of Common Stock as may become issuable upon conversion of the Preferred Stock and the exercise of the Warrants to prevent dilution resulting from stock splits, or stock dividends. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (the "Initial Required Effective Date") which is no later than the earlier of (Y) five (5) days after oral or written notice by the SEC that it may be declared effective or (Z) one hundred twenty (120) days after the Initial Closing Date. (ii) If at any time (an "Increased Registered Shares Date"), the number of shares of Common Stock represented by the Registrable Shares, issued or to be issued as contemplated by the Transaction Agreements, exceeds eighty percent (80%) of the aggregate number of shares of Common Stock then registered, the Company shall either (X) amend the relevant Registration Statement filed by the Company pursuant to the preceding provisions of this Section 2, if such Registration Statement has not been declared effective by the SEC at that time, to register, in the aggregate, at least the number of shares (the "Increased Shares Amount") equal to (A) (I) the number of shares theretofore issued on conversion of the Preferred Stock (including any dividends paid on conversion by the issuance of Conversion Shares) plus (II) two hundred percent (200%) of the 3 number of shares into which the unconverted Preferred Stock and all dividends thereon through the thirty six (36) month anniversary of the Closing Date would be convertible at the date of such filing (assuming for such purposes that all such shares of Preferred Stock had been issued, had been eligible to be converted, and had been converted, into Conversion Shares in accordance with their terms, whether or not such issuance, accrual of dividends, eligibility or conversion had in fact occurred as of such date) and (B) the number of shares which would be issued upon exercise of all of the Warrants (assuming for such purposes that all Warrants had been issued, had been eligible to be exercised and had been exercised in accordance with their terms, whether or not such issuance, eligibility or exercise had in fact occurred as of such date), or (Y) if such Registration Statement has been declared effective by the SEC at that time, file with the SEC an additional Registration Statement (an "Additional Registration Statement") to register the number of shares equal to the excess of the Increased Shares Amount over the aggregate number of shares of Common Stock already registered. The Company will use its reasonable best efforts to cause such Registration Statement to be declared effective on a date (each, an "Increased Required Effective Date") which is no later than (Q) with respect to a Registration Statement under clause (X) of this subparagraph (ii), the Initial Required Effective Date and (R) with respect to an Additional Registration Statement, the earlier of (I) five (5) days after notice by the SEC that it may be declared effective or (II) forty- five (45) days after the Increased Registered Shares Date. (iii) To the extent that any of the Registrable Securities are not included in any effective Registration Statement prior to the Additional Closing Date, the Company shall prepare and file either a Registration Statement or an amendment to an existing Registration Statement, registering such Registrable Securities. The provisions of this Agreement, including, but not limited to, the provisions of Section 2(a)(i) hereof, apply separately with respect to such Registration Statement, except that (i) references to the Initial Closing Date shall be deemed to refer to the Additional Closing Date, and (ii) clause (Z) of Section 2(a)(i) shall read "ninety (90) days after the Additional Closing Date." (iv) The aggregate number of shares registered for the Investors in each Registration Statement or amendment thereto shall be allocated among the Investors on a pro rata basis among them according to their relative Registrable Shares included in such Registration Statement). (b) Payments by the Company. (i) If the Registration Statement covering the Registrable Securities is not filed in proper form with the SEC by the Required Filing Date, the Company will make payment to the Initial Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). 4 (ii) If the Registration Statement covering the Registrable Securities is not effective by the relevant Required Effective Date or if the Investor is restricted from making sales of Registrable Securities covered by any previously effective Registration Statement at any time (the date such restriction commences, a "Restricted Sale Date") after the relevant Effective Date other than during a Permitted Suspension Period (as defined below), then the Company will make payments to the Initial Investor in such amounts and at such times as shall be determined pursuant to this Section 2(b). (iii) The amount (the "Periodic Amount") to be paid by the Company to the Initial Investor shall be determined as of each Computation Date (as defined below) and such amount shall be equal to the Periodic Amount Percentage (as defined below) of the Purchase Price for all Preferred Stock for the period from the date following the relevant Required Filing Date or the Required Effective Date or Restricted Sale Date, as the case may be, to the first relevant Computation Date, and thereafter to each subsequent Computation Date. The "Periodic Amount Percentage" means (A) one percent (1.0%) of the Purchase Price of all Preferred Stock for the first 30 days after the relevant date; (B) two percent (2%) of the Purchase Price of all Preferred Stock to each Computation Date thereafter. Anything in the preceding provisions of this paragraph (iii) to the contrary notwithstanding, after the relevant Effective Date the Purchase Price shall be deemed to refer to the sum of (X) the principal amount of all Preferred Stock not yet converted and (Y) the Held Shares Value (as defined below). The "Held Shares Value" means, for shares acquired by the Investor upon a conversion within the thirty (30) days preceding the Restricted Sale Date, but not yet sold by the Investor, the principal amount of the Preferred Stock converted into such Conversion Shares; provided, however, that if the Investor effected more than one conversion during such thirty (30) day period and sold less than all of such shares, the sold shares shall be deemed to be derived first from the conversions in the sequence of such conversions (that is, for example, until the number of shares from the first of such conversions have been sold, all shares shall be deemed to be from the first conversion; thereafter, from the second conversion until all such shares are sold). By way of illustration and not in limitation of the foregoing, if the Registration Statement is timely filed but is not declared effective until one hundred ninety (190) days after the Initial Closing Date, the Periodic Amount will aggregate five percent (5%) of the Purchase Price of the Preferred Stock theretofore issued (1% for days 121-150, plus 2% for days 151-180, plus 2% for days 181-195). (iv) Each Periodic Amount will be payable by the Company, except as provided in the other provisions of this subparagraph (iv), in cash or other immediately available funds to the Investor (1) on the day after the Required Filing Date or the Required Effective Date, as the case may be, and (2) on the earlier of (A) each thirtieth day thereafter, (B) the third business day after the date the Registration Statement is filed or is declared effective, or (C) the third business day after the Registration Statement has its restrictions removed after the relevant Effective Date, as the case may be, in each case without requiring demand therefor by the Investor. Notwithstanding the provisions of the first sentence of this subparagraph (iv), at the option of the Investor, exercisable in its sole and absolute discretion by written notice to the Company at any time before 5 the Periodic Amount is paid, all or a portion of the Periodic Amount shall be paid by the issuance of additional shares of Series A-1 or Series A-2 Preferred Stock to the Investor ("Periodic Amount Shares") having a stated value equal to the Periodic Amount being paid thereby. The Periodic Amount Shares shall be of the same series as the shares for which the Periodic Amount is computed. (v) The parties acknowledge that the damages which may be incurred by the Investor if the Registration Statement is not filed by the Required Filing Date or the Registration Statement has not been declared effective by a Required Effective Date, including if the right to sell Registrable Securities under a previously effective Registration Statement is suspended, may be difficult to ascertain. The parties agree that the Periodic Amounts represent a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of such damages. (vi) Notwithstanding the foregoing, the amounts payable by the Company pursuant to this provision shall not be payable (i) to the extent any delay in the effectiveness of the Registration Statement occurs because of an act of, or a failure to act or to act timely by the Initial Investor or its counsel, (ii) in the event all of the Registrable Securities may be sold pursuant to Rule 144 or another available exemption under the Act without volume or other restrictions or limits or (iii) with respect to a Permitted Suspension Period. (vii) "Computation Date" means (A) the date which is the earlier of (1) thirty (30) days after the Required Filing Date, any relevant Required Effective Date or a Restricted Sale Date, as the case may be, or (2) the date after the Required Filing Date, such Required Effective Date or Restricted Sale Date on which the Registration Statement is filed (with respect to payments due as contemplated by Section 2(b)(i) hereof) or is declared effective or has its restrictions removed (with respect to payments due as contemplated by Section 2(b)(ii) hereof), as the case may be, and (B) each date which is the earlier of (1) thirty (30) days after the previous Computation Date or (2) the date after the previous Computation Date on which the Registration Statement is filed (with respect to payments due as contemplated by Section 2(b)(i) hereof) or is declared effective or has its restrictions removed (with respect to payments due as contemplated by Section 2(b)(ii) hereof), as the case may be. 3. Obligations of the Company. In connection with the registration of the Registrable Securities, the Company shall do each of the following: (a) Prepare promptly, and file with the SEC by the Required Filing Date a Registration Statement with respect to not less than the number of Registrable Securities provided in Section 2(a) above, and thereafter use its reasonable best efforts to cause such Registration Statement relating to Registrable Securities to become effective by the Required Effective Date and keep the Registration Statement effective at all times during the period (the "Registration Period") continuing until the earliest of (i) the date that is three (3) years after the last day of the calendar month following the month in which the relevant Effective Date occurs, (ii) the date when the Investors may sell all Registrable Securities under Rule 144 without volume or other restrictions or 6 limits or (iii) the date the Investors no longer own any of the Registrable Securities, which Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; (b) Prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times during the Registration Period, and, during the Registration Period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Company covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) Permit a single firm of counsel designated by the Initial Investors to review the Registration Statement and all amendments and supplements thereto a reasonable period of time (but not less than three (3) business days) prior to their filing with the SEC, and not file any document in a form to which such counsel reasonably objects; (d) Notify each Investor and such Investor's legal counsel identified to the Company and which has requested by written notice to the Company that it receive such notification (which, until further notice, shall be deemed to be Krieger & Prager LLP, Attn: Samuel Krieger, Esq., which firm has requested to receive such notification; each, an "Investor's Counsel"), and any managing underwriters immediately (and, in the case of (i)(A) below, not less than three (3) business days prior to such filing) and (if requested by any such person) confirm such notice in writing no later than one (1) business day following the day (i)(A) when a Prospectus or any Prospectus supplement or post- effective amendment to the Registration Statement is proposed to be filed; (B) whenever the SEC notifies the Company whether there will be a "review" of such Registration Statement; (C) whenever the Company receives (or a representative of the Company receives on its behalf) any oral or written comments from the SEC in respect of a Registration Statement (copies or, in the case of oral comments, summaries of such comments shall be promptly furnished by the Company to the Investors); and (D) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any proceedings for that purpose; (iv) if at any time any of the representations or warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from 7 qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose; and (vi) of the occurrence of any event that to the best knowledge of the Company makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. In addition, the Company shall furnish the Investor's Counsel with copies of all intended written responses to the comments contemplated in clause (C) of this Section 3(d) not later than one (1) business day in advance of the filing of such responses with the SEC so that the Investors shall have the opportunity to comment thereon; (e) Furnish to each Investor and such Investor's Counsel (i) promptly after the same is prepared and publicly distributed, filed with the SEC, or received by the Company, one (1) copy of the Registration Statement, each preliminary prospectus and prospectus, and each amendment or supplement thereto, and (ii) such number of copies of a prospectus, and all amendments and supplements thereto and such other documents, as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (f) As promptly as practicable after becoming aware thereof, notify each Investor of the happening of any event of which the Company has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement or other appropriate filing with the SEC to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (g) As promptly as practicable after becoming aware thereof, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of a Notice of Effectiveness or any notice of effectiveness or any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time; (h) Notwithstanding the foregoing, if at any time or from time to time after the date of effectiveness of the Registration Statement, the Company notifies the Investors in writing of the existence of a Potential Material Event, the Investors shall not offer or sell any Registrable Securities, or engage in any other transaction involving or relating to the Registrable Securities, from the time of the giving of notice with respect to a Potential Material Event until such Investor receives 8 written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Registrable Securities during the periods the Registration Statement is required to be in effect other than during a Permitted Suspension Period (and the applicable provisions of Section 2(b) shall apply with respect to any such suspension other than during a Permitted Suspension Period) . The term "Permitted Suspension Period" means up to two such suspension periods during any consecutive 12-month period, each of which suspension period shall not either (i) be for more than ten (10) days or (ii) begin less than ten (10) business days after the last day of the preceding suspension (whether or not such last day was during or after a Permitted Suspension Period); provided further that the Company shall, if lawful to do so, provide the Investor with at least two (2) business days' notice of the existence (but not the substance of) a Potential Material Event; (i) Use its reasonable efforts to secure and maintain the designation of all the Registrable Securities covered by the Registration Statement on the "Nasdaq/SmallCap Market" of the National Association of Securities Dealers Automated Quotations System ("NASDAQ") within the meaning of Rule 11Aa2-1 of the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the quotation of the Registrable Securities on The Nasdaq/SmallCap Market; and, without limiting the generality of the foregoing, to arrange for at least two market makers to register with the National Association of Securities Dealers, Inc. as such with respect to such Registrable Securities; (j) Provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the initial Effective Date. (k) Cooperate with the Investors who hold Registrable Securities being offered to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts as the case may be, as the Investors may reasonably request, and, within five (5) business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel selected by the Company to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) an appropriate instruction and opinion of such counsel; and (l) Take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of the Registrable Securities pursuant to the Registration Statement. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: 9 (a) It shall be a condition precedent to the obligations of the Company to complete the registration pursuant to this Agreement with respect to the Registrable Securities of a particular Investor that such Investor shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of the Registrable Securities held by it, as shall be reasonably required to effect the registration of such Registrable Securities and shall execute such documents in connection with such registration as the Company may reasonably request. At least ten (10) days prior to the first anticipated filing date of the Registration Statement, the Company shall notify each Investor of the information the Company requires from each such Investor (the "Requested Information") if such Investor has any Registrable Securities included in the Registration Statement. If at least two (2) business days prior to the filing date the Company has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Company may file the Registration Statement without including Registrable Securities of such Non-Responsive Investor; (b) Each Investor, by such Investor's acceptance of the Registrable Securities, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of the Registration Statement hereunder, unless such Investor has notified the Company in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; and (c) Each Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or 3(g), above, such Investor will immediately discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Company, such Investor shall deliver to the Company (at the expense of the Company) or destroy (and deliver to the Company a certificate of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. 5. Expenses of Registration. All reasonable expenses (other than underwriting discounts and commissions of the Investor) incurred in connection with registrations, filings or qualifications pursuant to Section 3, but including, without limitation, all registration, listing, and qualifications fees, printers and accounting fees, the fees and disbursements of counsel for the Company shall be borne by the Company. In addition, a fee for a single counsel for the Investors (as a group and not individually) equal to $4,500 for the review of each Registration Statement and $2,000 for each post-effective amendment to a Registration Statement, shall be borne by the Company. 6. Indemnification. In the event any Registrable Securities are included in a Registration Statement under this Agreement: 10 (a) To the extent permitted by law, the Company will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person" or "Indemnified Party"), against any losses, claims, damages, liabilities or expenses (joint or several) incurred (collectively, "Claims") to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in the final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation under the Securities Act, the Exchange Act or any state securities law (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject to clause (b) of this Section 6, the Company shall reimburse the Investors, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) shall not (I) apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, after such prospectus was made available by the Company pursuant to Section 3(c) hereof; (II) be available to the extent such Claim is based on a failure of the Investor to deliver or cause to be delivered the prospectus made available by the Company or the amendment or supplement thereto made available by the Company; (III) be available to the extent such Claim is based on the delivery of a prospectus by the Investor after receiving notice from the Company under Section 3(f), (g) or (h) hereof (other than a notice regarding the effectiveness of the Registration Statement or any amendment or supplement thereto), or (IV) apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld or delayed. Each Investor will indemnify the Company and its officers, directors and agents (each, an "Indemnified Person" or "Indemnified Party") against any claims arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company, by or on behalf of such Investor, expressly for use in connection with the preparation of the Registration Statement or the amendment or supplement thereto, subject to such limitations 11 and conditions as are applicable to the Indemnification provided by the Company to this Section 6. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. (b) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be. In case any such action is brought against any Indemnified Person or Indemnified Party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such Indemnified Person or Indemnified Party of its election so to assume the defense thereof, the indemnifying party will not be liable to such Indemnified Person or Indemnified Party under this Section 6 for any legal or other reasonable out-of-pocket expenses subsequently incurred by such Indemnified Person or Indemnified Party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The Indemnified Person or Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and reasonable out-of-pocket expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the Indemnified Person or Indemnified Party provided such counsel is of the opinion that all defenses available to the Indemnified Party can be maintained without prejudicing the rights of the indemnifying party. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. Contribution. To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault 12 standards set forth in Section 6; (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation; and (c) except where the seller has committed fraud (other than a fraud by reason of the information included or omitted from the Registration Statement as to which the Company has not given notice as contemplated under Section 3 hereof) or intentional misconduct, contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. Reports under Securities Act and Exchange Act. With a view to making available to Investor the benefits of Rule 144 promulgated under the Securities Act or any other similar rule or regulation of the SEC that may at any time permit Investor to sell securities of the Company to the public without Registration ("Rule 144"), the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to Investor so long as Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company and (iii) such other information as may be reasonably requested to permit Investor to sell such securities pursuant to Rule 144 without Registration. (d) The Company will, at the request of any Holder of Registrable Securities, upon receipt from such Holder of a certificate certifying (i) that such Holder has held such Registrable Securities for a period of not less than one (1) year, (ii) that such Holder has not been an affiliate (as defined in Rule 144) of the company for more than the ninety (90) preceding days, and (iii) as to such other matters as may be appropriate in accordance with such Rule, remove from the stock certificate representing such Registrable Securities that portion of any restrictive legend which relates to the registration provisions of the Securities Act, provided, however, counsel to Investor may provide such instructions and opinion to the transfer agent regarding the removal of the restrictive legend. 9. Assignment of the Registration Rights. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to any transferee of the Registrable Securities (or all or any portion of any unconverted 13 Preferred Stock or unexercised Warrant) only if: (a) the Investor agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (b) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (c) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, (d) at or before the time the Company received the written notice contemplated by clause (b) of this sentence the transferee or assignee agrees in writing with the Company to be bound by all of the provisions contained herein, and (e) such transfer of Registrable Securities is completed and disclosed to the Company prior to the initial Effective Date or involves the transfer of Registrable Securities resulting from the conversion of Preferred Stock having a stated value of at least $200,000. In the event of any delay in filing or effectiveness of the Registration Statement as a result of such assignment, the Company shall not be liable for any damages arising from such delay, or the payments set forth in Section 2(b) hereof arising from such delay. 10. Amendment of Registration Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and Investors who hold a eighty (80%) percent interest of the Registrable Securities (as calculated by the stated value of the Preferred Stock without any reference to the Warrant Shares). Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Company. 11. Miscellaneous. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be given in the manner contemplated by the Securities Purchase Agreement, (i) if to the Company or to the Initial Investor, to their respective address contemplated by the Securities Purchase Agreement, and (ii) if to any other Investor, at such address as such Investor shall have provided in writing to the Company, or at such other address as each such party furnishes by notice given in accordance with this Section 11(b). 14 (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non coveniens, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, either party hereto shall reimburse the other party for any reasonable legal fees and disbursements incurred by such party in enforcement of or protection of any of its rights under this Agreement. (e) 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 or the validity or enforceability of this Agreement in any other jurisdiction. (f) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. (h) The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (i) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. (j) The Company acknowledges that any failure by the Company to perform its obligations under Section 3(a) hereof, or any delay in such performance could result in loss to the Investors, and the Company agrees that, in addition to any other liability the Company may have by reason of such failure or delay, the Company shall be liable for all direct damages caused by any such failure or delay, unless the same is the result of force majeure. Neither party shall be liable for consequential damages. 15 (k) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. This Agreement may be amended only by an instrument in writing signed by the party to be charged with enforcement thereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 16 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. COMPANY: ZAPWORLD.COM By: ------------------------------------------- Name: Gary Starr ---------------------------------------- Title: Chief Executive Officer --------------------------------------- INITIAL INVESTOR: ---------------------------------------------- [Print Name of Initial Investor] By: ------------------------------------------- Name: ---------------------------------------- Title: --------------------------------------- 17 EXHIBIT 1 Shares Permitted to Be Included in Registration Statement Shares of Shareholder Name Common Stock Owned/Description of Right to Acquire - ---------------- ------------ ------------------------------------- Union Atlantic I,C 130,000 Warrants, to be issued on the Initial or its designees Closing Date, with piggy back registration rights Krieger & Prager LLP 20,000 Warrants, to be issued on the Initial or its designees Closing Date, with piggy back registration rights EX-4.4 5 0005.txt FORM OF WARRANT FORM OF WARRANT THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. ZAPWORLD.COM COMMON STOCK PURCHASE WARRANT 1. Issuance; Certain Definitions. In consideration of good and valuable consideration, the receipt of which is hereby acknowledged by ZAPWORLD.COM, a California corporation (the "Company"), _________________ or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on _______________, 200__(1) (the "Expiration Date"), ______________ Thousand (__________)(2) fully paid and nonassessable - -------------------- (1) Insert date which is last day of month in which fifth anniversary of the relevant Closing Date occurs. (2) Insert (x) the aggregate stated value of the Preferred Stock issued to the Holder on the relevant Closing Date divided by (y) the Fixed Conversion Price (as defined in Certificate of Determination). shares of the Company's Common Stock, no par value per share (the "Common Stock") at an initial exercise price per share (the "Exercise Price") of $________(3) per share, subject to further adjustment as set forth herein. This Warrant is being issued pursuant to the terms of that certain Securities Purchase Agreement, dated as of June ____, 2000 (the "Securities Purchase Agreement"), to which the Company and Holder (or Holder's predecessor in interest) are parties. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Securities Purchase Agreement. 2. Exercise of Warrants. 2.1 General. This Warrant is exercisable in whole or in part at any time and from time to time. Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof) a completed and duly executed Notice of Exercise (substantially in the form attached to this Warrant Certificate) as provided in this paragraph. The date such Notice of Exercise is faxed to the Company shall be the "Exercise Date," provided that the Holder of this Warrant tenders this Warrant Certificate to the Company within five (5) business days thereafter. The Notice of Exercise shall be executed by the Holder of this Warrant and shall indicate the number of shares then being purchased pursuant to such exercise. Upon surrender of this Warrant Certificate, together with appropriate payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. If the Notice of Exercise form elects a "cash" exercise, the Exercise Price per share of Common Stock for the shares then being exercised shall be payable in cash or by certified or official bank check. If the Notice of Exercise form elects a "cashless" exercise, the Holder shall thereby be entitled to receive a number of shares of Common Stock equal to (x) the excess of the Current Market Value (as defined below) over the total cash exercise price of the portion of the Warrant then being exercised, divided by (y) the Market Price of the Common Stock as of the trading day immediately prior to the Exercise Date. For the purposes of this Warrant, the terms (Q) "Current Market Value" shall be an amount equal to the Market Price of the Common Stock as of the trading day immediately prior to the Exercise Date, multiplied by the number of shares of Common Stock specified in such Notice of Exercise Form, and (R) "Market Price of the Common Stock" shall be the closing price of the Common Stock as reported by Bloomberg, LP or, if not so reported, as reported by the securities exchange or automated quotation system on which the Common Stock is listed or on the over-the-counter market - -------------------- (3) Insert 110% of (i) for the Warrants issued on the Initial Closing Date, the average Closing Bid Price for the five (5) trading days ending on the trading day immediately before (x) June 23, 2000 or (y) the Initial Closing Date, whichever is lower, and (ii) for the Warrants issued on the Additional Closing Date, the average Closing Bid Price for the five (5) trading days ending on the trading day immediately before the Additional Closing Date. 2 for the relevant date. The Holder shall be deemed to be the holder of the shares issuable to it in accordance with the provisions of this Section 2.1 on the Exercise Date. 2.2 Limitation on Exercise. Notwithstanding the provisions of this Warrant, the Securities Purchase Agreement or of the other Transaction Agreements, in no event (except (i) as specifically provided in this Warrant as an exception to this provision, (ii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock, or (iii) on at least seventy-five (75) days' advance written notice from the Holder of its election to cancel this Section 2.2) shall the Holder be entitled to exercise this Warrant, or shall the Company have the obligation to issue shares upon such exercise of all or any portion of this Warrant, to the extent that, after such exercise the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Preferred Stock or unexercised portion of the Warrants), and (2) the number of shares of Common Stock issuable upon the exercise of the Warrants with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its affiliates of more than 9.99% of the outstanding shares of Common Stock (after taking into account the shares to be issued to the Holder upon such exercise). For purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, except as otherwise provided in clause (1) of such sentence. The Holder, by its acceptance of this Warrant, further agrees that if the Holder transfers or assigns any of the Warrants to a party who or which would not be considered such an affiliate, such assignment shall be made subject to the transferee's or assignee's specific agreement to be bound by the provisions of this Section 2.2 as if such transferee or assignee were the original Holder hereof. 3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares"). 4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification and affidavit, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void. 5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. 3 6. Protection Against Dilution. 6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to this Section 6, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted Exercise Price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock which the Holder is entitled to purchase before adjustment, multiplied by the total Exercise Price before adjustment. 6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original Exercise Price had been fairly allocated to the stock resulting from such capital adjustment; and in other respects the provisions of this Section shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights. 6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes of all or a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then (a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and (b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the Average Market Price 4 of the Common Stock (as defined below) for the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the Average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date. As used herein, the term "Average Market Price of the Common Stock" means the average closing bid price of a share of Common Stock, as reported by Bloomberg, LP or, if not so reported, as reported on the over-the-counter market for the relevant period. 7. Transfer to Comply with the Securities Act; Registration Rights. 7.1 Transfer. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. Neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section. 7.2 Registration Rights. (a) Reference is made to the Registration Rights Agreement. The Company's obligations under the Registration Rights Agreement and the other terms and conditions thereof with respect to the Warrant Shares, including, but not necessarily limited to, the Company's commitment to file a registration statement including the Warrant Shares, to have the registration of the Warrant Shares completed and effective, and to maintain such registration, are incorporated herein by reference. (b) In addition to the registration rights referred to in the preceding provisions of Section 7.2(a), effective after the expiration of the effectiveness of the Registration Statement as contemplated by the Registration Rights Agreement, the Holder shall have piggy-back registration rights with respect to the Warrant Shares then held by the Holder or then subject to issuance upon exercise of this Warrant (collectively, the "Remaining Warrant Shares"), subject to the conditions set forth below. If, at any time after the Registration Statement has ceased to be effective, the Company participates (whether voluntarily or by reason of an obligation to a third party) in the registration of any shares of the Company's stock (other than a registration on Form S-8), the Company shall give written notice thereof to the Holder and the Holder shall have the right, exercisable within ten (10) business days after receipt of such notice, to demand inclusion of all or a portion of the Holder's Remaining Warrant Shares in such registration statement. If the Holder exercises such election, the Remaining Warrant Shares so designated shall be included in the 5 registration statement at no cost or expense to the Holder (other than any costs or commissions which would be borne by the Holder under the terms of the Registration Rights Agreement). The Holder's rights under this Section 7 shall expire at such time as the Holder can sell all of the Remaining Warrant Shares under Rule 144 without volume or other restrictions or limit. 8. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows: (i) if to the Company, to: Zapworld.com 117 Morris Street Sebastopol, CA 95472 Attn: Gary Starr Telephone No.: (707) 824-4150 Telecopier No.: (707) 824-4159 with a copy to: Evers & Hendrickson LLP 155 Montgomery Street 12th Floor San Francisco, California 94101 Attn:. William D. Evers, Esq. Telephone No.: (415) 772-8102 Telecopier No.: (415) 772-8101 (ii) if to the Holder, to: ATTN: Telephone No.: ( ) - Telecopier No.: ( ) - with a copy to: 6 Krieger & Prager LLP 39 Broadway Suite 1440 New York, NY 10006 Attn: Samuel Krieger, Esq. Telephone No.: (212) 363-2900 Telecopier No. (212) 363-2999 Any party may be notice given in accordance with this Section to the other parties designate another address or person for receipt of notices hereunder. 9. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein. 10. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Company shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Holder in enforcement of or protection of any of its rights under any of the Transaction Agreements. 11. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. 12. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the th day of , 2000. ----------------- ZAPWORLD.COM By: --------------------------------------------------- Name: Gary Starr --------------------------------------------- Its: Chief Executive Officer ---------------------------------------------- Attest: - --------------------------------------------- Name: --------------------------------------- Title: -------------------------------------- 7 NOTICE OF EXERCISE OF WARRANT The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant Certificate dated as of ______________, ________, to purchase ________ shares of the Common Stock, no par value per share, of ZAPWORLD.COM and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant. Please deliver the stock certificate to: Dated: ------------------------------------------- - -------------------------------------------------- [Name of Holder] By: ----------------------------------------------- [ ] CASH: $ ------------------------------------ [ ] CASHLESS EXERCISE 8 EX-4.5 6 0006.txt SPECIMEN STOCK CERTIFICATE Number ______ INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA SEP 23 1994 Shares _____ ZAPWORLD.COM _______ SHARES PAR VALUE $1,000.00 EACH SERIES A-1 PREFERRED STOCK See reverse for Certain Conditions This is to Certify that __[SPECIMEN]___ is the owner of ______________________ FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES A-1 PREFERRED STOCK OF ZAPWORLD.COM transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. Witness, the seal of the Corporation and the signatures of its duly authorized officers. Dated --------------------------- - ------------------------------------- ------------------------------------ [Signed by:] Secretary President The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT - _______________ (Cust) Custodian _____________ (Minor) under Uniform Gifts to Minors Act ___________ (State) Additional abbreviations may also be used though not in the above list For value received ______________ hereby sell, assign and transfer unto ____________ PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE) ___________________ Shares represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________ Attorney to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated: ----------------------------------------- In presence of -------------------------------- - ------------------------------------- ------------------------------------ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-23.2 7 0007.txt CONSENT FROM GRANT THORNTON LLP We have issued our report dated March 1, 2000 accompanying the consolidated financial statements of ZAPWORLD.COM and subsidiaries appearing in the 1999 Annual Report of the Company to its shareholders and accompanying the schedules included in the Annual Report on Form 10-KSB/A for the year ended December 31, 1999 which are incorporated by reference in this Registration Statement. We consent to the incorporation by reference in the Registration Statement of the aforementioned reports and to the use of our name as it appears under the caption "Experts." /s/ GRANT THORNTON LLP San Francisco, California August 16, 2000 -----END PRIVACY-ENHANCED MESSAGE-----