-----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, LqAt+qzkCAEGrk0G+EluWNCyh/onxuXDsvj24mj944cWFPVXP2JPF4pdtV6SFg38 C/F3V3a+DbkrwVSFM4SPEw== 0000897069-01-000112.txt : 20010214 0000897069-01-000112.hdr.sgml : 20010214 ACCESSION NUMBER: 0000897069-01-000112 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAPWORLD COM CENTRAL INDEX KEY: 0001024628 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 943210624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-55478 FILM NUMBER: 1536831 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 SB-2 1 0001.txt FORM SB-2 REGISTRATION STATEMENT Registration No. 000-30300 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM SB-2 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 (I.R.S. Employer of incorporation or organization) Identification No.) 117 Morris Street Sebastopol, California 95472 (Address of registrant's principal executive offices) ------------------------------------------- Gary Starr Chief Executive Officer 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 94111-3404 (415) 434-4484 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. _________________________ 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, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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, check the following box. [_]
CALCULATION OF REGISTRATION FEE =========================== ================== ======================= ================== ===================== Proposed maximum Title of each Dollar amount Proposed maximum aggregate class of securities to be offering price offering Amount of to be registered registered per unit) price registration fee - --------------------------- ------------------ ----------------------- ------------------ --------------------- Common Stock, no par value $12,000,000 $5.00 $12,000,000 $3,000 =========================== ================== ======================= ================== =====================
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. ================================================================================ ABOUT THIS PROSPECTUS You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of Common Stock. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. See the section of this prospectus entitled "RISK FACTORS" for a discussion of certain factors that you should consider before investing in the Common Stock offered in this prospectus. Certain statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis," and "Description of Business" and elsewhere in this prospectus are forward-looking statements. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in the prospectus that are not historical facts. When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks" and "estimates" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under the "Risk Factors" section of this document. All trademarks and trade names appearing in this prospectus are the property of their respective holder. -i- [LOGO] ZAPWORLD.COM(R) 2,400,000 shares of Common Stock We are offering 2,400,000 shares of Zapworld.com(R) Common Stock at a price of $5.00 per share. This price may not reflect the market price of our shares after this offering. While we intend to directly place these shares without the use of an underwriter, we may, at our discretion, use a broker-dealer for the placement of some or all of these shares. There are no escrow arrangements pertaining to this offering and there is no minimum amount we are required to raise in this offering before we may have access to funds received from investors. ---------------------- ZAPWORLD.COM(R) OFFERING Per Share Total Public Offering Price $5.00 $12,000,000 Underwriting Discounts and Commissions(1) $0.00 $0 Proceeds Before Expenses $5.00 $12,000,000 (1) Does not include the cost of possible broker-dealer commissions of up to 10% of all investment funds raised and an additional 3% of unaccountable expenses. The proceeds before expenses are calculated before deducting estimated expenses of $100,000, including registration fees, legal and accounting fees, and other offering costs. Our shares are currently traded on the NASDAQ SmallCap Market under the trading symbol "ZAPP." On February 8, 2001, the last reported sale price of our Common Stock was $2.6875 per share. Investing in our Common Stock involves risks. You should invest in our Common Stock only if you can afford to lose your entire investment. Consider carefully the "Risk Factors" Section beginning on page 5 of this prospectus. 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 February 12, 2001. -ii- TABLE OF CONTENTS Page PROSPECTUS SUMMARY............................................................1 ZAPWORLD.COM(R).......................................................1 The Offering..........................................................2 SUMMARY FINANCIAL INFORMATION.................................................3 RISK FACTORS..................................................................5 Risks Related to Our Business.........................................5 We have a history of losses, and we might not achieve or maintain profitability.............................................5 We may not be able to obtain additional capital to fund our operations when needed.............................................5 We face intense competition which could cause us to lose market share.......................................................5 Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity.....................6 We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position...........................................6 We will need to increase our research and development spending, which could substantially increase our costs and adversely affect our cash flow...............................................7 The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business.............. ...................................7 Product liability or other claims could have a material adverse effect on our business. ...................................7 Failure to manage our growth effectively could adversely affect our business................................................8 The loss of certain key personnel could significantly harm our business..................................................8 Changes in the law may have a negative impact upon our business.......8 International expansion may cause problems for us.....................8 Internet address......................................................9 Our success is heavily dependent on protecting our intellectual property rights.......................................9 -iii- We may be exposed to liability for infringing intellectual property rights of other companies................................10 Risks Related to this Offering.......................................10 The market price for our stock may drop below the offering price, which could render us unable to sell shares in this offering.....................................................10 The Price of Our Common Stock is Likely to Be Volatile and Subject to Wide Fluctuations......................................10 Sales of a Substantial Amount of Our Common Stock After This Offering Could Cause Our Stock Price to Fall.................10 FORWARD-LOOKING STATEMENTS...................................................11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............14 PLAN OF DISTRIBUTION.........................................................16 LEGAL PROCEEDINGS............................................................16 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................17 DESCRIPTION OF SECURITIES....................................................19 General..............................................................19 Common Stock.........................................................19 Preferred Stock......................................................19 Series A-1 and Series A-2 Convertible Preferred Stock................19 Rights, Privileges, and Preferences..................................20 Transfer Agent and Registrar.........................................20 Warrants.............................................................20 Stock Options........................................................21 INTEREST OF NAMED EXPERTS AND COUNSEL........................................23 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES...........................................................23 DESCRIPTION OF BUSINESS......................................................24 Generally............................................................24 Principal products or services and their markets.....................24 -iv- New Product Development..............................................26 Distribution.........................................................28 Internet and Dealership Network......................................28 Environmental Initiatives and Legislation............................28 Research and Product Development.....................................29 Sources and Availability of Raw Materials............................30 Licenses, Patents and Trademarks.....................................30 Backlog..............................................................30 Competitive Conditions...............................................31 Employees............................................................31 Development of Business..............................................31 MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................32 Overview.............................................................32 Distribution.........................................................33 Mergers and Acquisitions.............................................33 Partnerships or Strategic Alliances..................................34 Results of Operations................................................35 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.................................................36 Nine Months Ended September 30, 2000 Compared to Nine Months Ending September 30, 1999.........................................37 Liquidity and Capital Resources......................................38 Seasonality and Quarterly Results....................................39 Inflation............................................................39 DESCRIPTION OF PROPERTY......................................................39 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................40 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................40 -v- DIVIDEND POLICY..............................................................41 EXECUTIVE COMPENSATION.......................................................41 Compensation of Directors............................................42 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..................................................42 LEGAL MATTERS................................................................43 EXPERTS......................................................................43 ADDITIONAL INFORMATION.......................................................43 FINANCIAL STATEMENTS.........................................................44 PART II INFORMATION NOT REQUIRED IN PROSPECTUS...............................45 Until 90 days after the effective date of this prospectus all dealers effecting transactions in the registered securities may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. -vi- PROSPECTUS SUMMARY The following summary highlights information contained elsewhere in this prospectus and should be read together with the more detailed information regarding our company, the Common Stock being sold in this offering, our financial statements, and the notes to those financial statements appearing elsewhere in this prospectus. ZAPWORLD.COM(R) Our company, ZAPWORLD.COM(R) ("Zapworld") was incorporated in California in 1994 under the name "ZAP Power Systems." We design, assemble, manufacture and distribute electric and non-electric scooters, electric bicycle power kits, electric bicycles, electric motorcycles and other personal electric transportation vehicles, including electric wheelchairs and electric aquatic propulsion devices. We develop proprietary technologies that are important elements of our own brand of personal electric vehicles. Each of these components is marketed under our own brand name. Along with our commitment to develop new electric vehicles, we are also focusing our development efforts on a new generation of microprocessor drive controllers. Our principal offices are located at 117 Morris Street, Sebastopol, California 95472, our telephone number is (707) 824-4150, and our internet address is http://www.zapworld.com. The information on our Web site does not constitute part of this prospectus. The Offering Type of security............................Common stock Common stock registered by company..........2,400,000 shares Common stock offered for sale by our company in this offering.........2,400,000 shares Common stock to be outstanding after this offering...........................8,339,033 shares Use of proceeds.............................The proceeds shall be used for the purposes of expanding our sales force, increasing our marketing and distribution capacities, expanding our domestic and international business operations, acquisitions, working capital and for general corporate purposes. See page 12 for a more detailed explanation. There is no minimum number of shares that must be sold. There can be no assurance that all of the shares offered will be sold. We intend to offer all of the shares directly to the public without the use of an underwriter. However, we retain the right, in our sole discretion, to use an underwriter or broker-dealer for selling these shares. Funds from this offering will not be placed in an escrow or trust account and will be available for use as the funds are received. This offering will begin as of the effective date of this prospectus and continue for 12 months or such earlier date as we may terminate this offering. -2- SUMMARY FINANCIAL INFORMATION The summary financial data for the years ended December 31, 1998 and 1999 have been derived from the Financial Statements and Notes to Financial Statements. The summary financial data for the nine months ended September 30, 1999 and 2000 is derived from our unaudited financial statements which, in the opinion of management, includes all adjustments, none of which were other than normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for those periods. The financial information for the nine months ended September 30, 1999 and 2000 is not necessarily indicative of the results of operations for subsequent periods or a full fiscal year. The selected financial data should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this prospectus.
Summary Financial Data (in thousands except per share amounts) Nine Months ended Year ended December 31, September 30, (unaudited) --------------- -------------- --------------- -------------- 1999 1998 2000 1999 --------------- -------------- --------------- -------------- Summary of Operating Data: - ----------------------------------- Revenue $6,437 $3,518 $8,128 $4,444 Cost of Goods Sold 4,446 2,391 5,190 2,978 ------- ------- -------- -------- Gross Profit 1,991 1,127 2,938 1,466 Operating Expenses 3,497 2,150 4,060 1,812 ------- ------- -------- -------- Operating Loss (1,506) (1,023) (1,122) (346) Other Income (expense) 81 14 (27) (86) Interest Income (expense) (267) (100) 135 41 ------- ------- -------- -------- Income before provision for taxes (1,692) (1,109) (1,014) (391) Provision for taxes on Income 1 1 - - ------- ------- -------- -------- Net Loss $(1,693) $(1,110) $(1,014) $(391) ============================================================ Net Loss attributable to shares Net Loss $(1,693) $(1,110) $(1,014) $(391) ------- ------- -------- -------- Preferred Dividend - - (3,100) - ------- ------- -------- -------- $(1,693) $(1,110) $(1,914) $(391) ======= ======= ======== ======== Net loss per Common share basic and diluted $(0.43) $(0.42) $(0.79) $(0.11) ============================================================ -3- December 31 September 30, -------------------------------------- 2000 (unaudited) Balance Sheet Data: 1999 1998 - ----------------------------------- ------------------ ------------------- ---------------------- Working Capital $4,450 $129 $6,447 Total Assets $7,727 $1,760 $11,061 Long-Term Debt, less current portion $ 24 $ 11 $ 390 Stockholders' Equity $6,554 $ 386 $9,282
-4- RISK FACTORS You should carefully consider the risks described below before making a decision to buy our Common Stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our Common Stock could decline, and you might lose all or part of your investment. You should refer to the other information set forth in this prospectus, including our financial statements and the related notes for more information. Risks Related to Our Business We have a history of losses, and we might not achieve or maintain profitability Since we began operation in 1994, we have not generated a profit from operations during any fiscal year. To date, we have concentrated primarily on increasing our revenues and expanding our market share through acquisitions rather than on maximizing profits. 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. Our nine month loss through September 30, 2000 was $1,014,000. There is no assurance that we will be able to operate profitably in the future. Because we will ultimately need to operate 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. Since 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 our 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 profitable operations may require us to seek additional financing when none is available or on extremely unfavorable terms. 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, who 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. -5- Many smaller manufacturers sell electric bicycles to key segments of our market in the United States, Europe and Asia. 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 changes in the marketplace and 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 many factors, including: o continued development of product technology; o the environmental consciousness of customers; o the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines; o widespread electricity shortages and the resultant increase in electricity prices, especially in our primary market, California, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline; and o future regulation and legislation requiring increased use of nonpolluting vehicles. We cannot assure you that growth in the electric vehicle industry will continue. Our business may suffer if growth in the electric vehicle industry ceases. In the last several years there has been a substantial increase in the number of electric vehicles and non-motorized vehicles which are competitive with our products. One of our principal challenges is to continue to develop and market products which keep pace with the rapid changes in the market. If we are unable to introduce new products and maintain our current market share, 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, as a result, may suffer a decline in our competitive position. Our current 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, our products may become obsolete or our research and development efforts may not be sufficient to adapt to -6- changes in or create necessary technology. As a result, our potential inability to adapt and develop the necessary technology 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 cash flow. To keep pace with technological changes and developments in the market for electric 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 2001, we expect to incurring increased research and development costs in 2001. Our research and development costs for the period ended September 30, 2000 were $464,000. Should we be unable to raise sufficient funds in the future to meet our research and development costs, we could suffer a materially adverse effect on our business, results of operations and 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 components for our products, some of whom are located outside of the United States. If these suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from our suppliers. A failure by our major 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. For example, our Zappy(R) and Kick(TM) products account for approximately 85% of our total sales. We acquire the major components of these products from only one or two suppliers. It could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products. This would affect our ability to timely fulfill customer orders, which, in turn, could greatly affect our market position. Product liability or other claims could have a material adverse effect on our business. As producers of electric vehicles sold to the general public, we face the risk of product liability claims and unfavorable publicity if 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, that insurance may be inadequate to cover all potential product claims. In addition, we may not be able to maintain this insurance indefinitely or be able to avoid product liability exposure. -7- 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. 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 upon our ability to expand our support system to meet the demands of our growing 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. We cannot assure you that we will be able to successfully operate acquired businesses, become profitable in the future or effectively manage any other change. An inability to successfully operate recently acquired businesses and manage existing business would harm our operations. The loss of certain key personnel could significantly harm our business. Our performance is substantially dependent on the services of our executive officers and other key employees, as well as on our ability to recruit, retain and motivate other officers and key employees. Competition for qualified personnel is intense and there are a limited number of people with knowledge of and experience in the electric vehicle industry. The loss of the services of any of our officers or key employees, or our inability to hire and retain a sufficient number of qualified employees, will harm our business. Changes in the law may have a negative impact upon our business. While 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 the laws change, or if we introduce new products in the future, some or all of our products may not comply with applicable federal, state or local laws. Further, certain federal, state and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state and local regulation in the future. Compliance with this regulation could be burdensome, time consuming, and expensive. International expansion may cause problems for us. We intend to expand our business globally. Assuming we conduct this expansion, we may encounter many of the risks associated with international business expansion. These risks include, but are not limited to language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing -8- agreements, and greater exposure of our intellectual property to markets where a high probability of unlawful appropriation may occur. A failure to successfully mitigate any of these potential risks could damage our business. Internet address We currently hold the internet address http://www.zapworld.com. We may not be able to prevent third parties from acquiring internet addresses that are similar to our address, which could adversely affect our business. Governmental agencies and their designees generally regulate the acquisition and maintenance of internet addresses. However, the regulation of internet addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business. Our success is heavily dependent on protecting our intellectual property rights. We rely on a combination of patent, copyright, 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. We hold several patents registered with the United States Patent and Trademark Office. These registrations include both design patents and utility patents. In addition, we have recently submitted provisional patents which may or may not be afforded the limited protection associated with provisional patents. We have also registered numerous trademarks with the United States Patent and Trademark Office, and have several pending at this time. We cannot assure you 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. For example, at the present time one of our patents, 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, 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 several companies are attempting to sell an electric scooter in the United States which we believe infringes one or more of our patents and trademarks. We have also discovered that at least one company has unlawfully sampled our copyrighted advertising copy. In this regard, we have already begun to incur legal fees in our attempt to prosecute this matter, and, in addition, we may have to incur substantial legal fees and costs in litigating these matters in the future. 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. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. -9- We may be exposed to liability for infringing intellectual property rights of other companies. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not 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. Risks Related to this Offering The market price for our stock may drop below the offering price, which could render us unable to sell shares in this offering We are offering to sell shares at the price on the cover page of this prospectus, whereas the market price for our stock may vary significantly. If the market price for the shares drops below the offering price, prospective investors will likely choose to purchase shares on the open market rather than directly from us. If this happens, the amount of financing we receive from this offering will be significantly reduced and we may be unable to raise any funds from this offering. The Price of Our Common Stock is Likely to Be Volatile and Subject to Wide Fluctuations The market price of our Common Stock has been, and will likely continue to be, subject to wide fluctuations. If our revenues do not grow or grow more slowly than we anticipate, or if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, or some other event adversely affects us, the market price of our Common Stock could decline. In addition, if the stock market in general experiences a loss in investor confidence or otherwise fails, the market price of our Common Stock could fall for reasons unrelated to our business, results of operations and financial condition. Investors might be unable to resell their shares of our Common Stock at or above the offering price. In the past, companies that have experienced volatility in the market price of their stock have been the subjects of securities class action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. Sales of a Substantial Amount of Our Common Stock After This Offering Could Cause Our Stock Price to Fall Sales of a substantial number of shares of our Common Stock in this offering and thereafter could cause our stock price to fall. In addition, the sale of shares by our stockholders could impair our ability to raise capital through the sale of additional stock. -10- FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or our future performance. You are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date of this prospectus. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect," "plan," or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating these statements, prospective investors should carefully review various risks and uncertainties identified in the Risk Factors section beginning on page 5 of this prospectus, as well as the matters set forth in our annual report on Form 10K-SB for the year ended December 31, 1999 and our other SEC filings. These risks and uncertainties could cause our actual results to differ materially from those indicated in the forward-looking statements. We are under no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments. -11- USE OF PROCEEDS If the entire offering is sold, the net proceeds from the sale of Common Stock, after deducting possible expenses, are estimated to be approximately $11,900,000 without the use of any broker-dealers, and approximately as low as $10,400,000 with the use of broker-dealers. We are estimating one-half of the offering will be sold using broker-dealers at a cost of 13% for their fees, or $780,000, plus $100,000 of other expenses. The net proceeds have been calculated using an aggregated maximum offering price of $12,000,000 and then deducting $100,000 in expenses. There is no guarantee that we will receive any proceeds from this offering. The following table presents how we intend to use the proceeds of 100% of the offering, minus expenses, without use of broker-dealers. We expect to use the net proceeds over a 12-month period in approximately the following amounts and percentages: - ------------------------------------------------------------------------------- Net Proceeds: $ 12,000,000 Percentage - ------------------------------------------------------------------------------- Taiwan Factory $ 1,000,000 8.33% Product Distribution $ 2,000,000 16.67% Product Engineering $ 1,000,000 8.33% Product Marketing $ 3,000,000 25.00% Acquisitions $ 2,900,000 24.16% Working Capital $ 2,000,000 16.67% Expenses(1): $ 100,000 0.84% Legal & Accounting Fees $ 90,000 0.76% Miscellaneous $ 10,000 0.08% - ------------------------------------------------------------------------------- Totals: $12,000,000 100% (1) As noted above, we may be obligated to provide 10% of all investment funds received or $780,000, plus 3% of unaccountable expenses, for using broker-dealers for one-half of the offering. Should we utilize broker-dealers, the net use of proceeds set forth above shall decrease ratably. The above listed use of proceeds represents our best estimate of the allocation of the net proceeds of this offering based upon the current status of our business operations, our current plans and current economic conditions. Future events, including the problems, delays, expenses and complications frequently encountered by emerging companies, as well as changes in regulatory, political and competitive conditions affecting our business and the success or lack thereof of our marketing efforts, may make shifts in the allocation of funds necessary or desirable. The following represent the: o Taiwan Factory: The Taiwanese government is currently providing a 30-60% rebate to purchasers of electric scooters. Last year, approximately 800,000 scooters were sold in Taiwan, and approximately 5,000 of these were electric. However, most of the participants in this industry are small businesses. We are currently contracting with factories in Taiwan for the manufacture of bicycle and scooter parts. We anticipate completing agreements to fully manufacture electric scooters and motorcycles in Taiwan to be able to tap into this market and supply -12- low-cost units for international distribution. We estimate required proceeds for the establishment of a factory in Taiwan to be $1,000,000. o Product Distribution: One of our primary goals is to expand upon and dominate the Electric Vehicle distribution network. Unfortunately, dealers are often hesitant to provide their own financing to contribute to this network. As a solution, we are contemplating a strategy that would allow us to provide financing for our dealers who would like to participate as regional distribution centers for Zapworld.com(R). We anticipate that we will need $2,000,000 to implement this strategy. o Product Engineering: Capital improvement, such as new molds, jigs, and assembly systems, will provide efficiency, improve uniformity, and lower costs. New products, such as an electric wheelchair retrofit, and new models of the Zappy(R) electric scooter, as well as other personal electric vehicles, including water scooters, are being developed. We estimate that the proceeds necessary for these capital improvements and new products to be $1,000,000. o Product Marketing: Our marketing strategy is based on a superior product, consistent quality and the delivery of a unique name and image. However, we also recognize that competition is imminent as the market for Electric Vehicles becomes more mature. Consequently, marketing support, through tradeshows, printed materials, and conventional media support packages, including radio, television, and billboard advertising, need to be implemented to ensure our success in retaining market leadership, promoting our dealer network, and attempting to guarantee that our ZAP(R)products are the preeminent Electric Vehicle brand name in the industry. Lobbying efforts are also required to continue our forward-progress in establishing governmental incentives for our Electric Vehicle product line. In addition, we plan to develop and air two infomercials highlighting our products. We estimate the necessary proceeds to implement this marketing campaign to be $3,000,000. o Acquisitions: We anticipate that we will be acquiring other companies that either complement our product line, increase the capability and scope of our distribution networks, or provide us product advantages over our competitors. We anticipate the requisite proceeds to be $2,900,000. o Working Capital: We will require $2,000,000 for working capital in order to grow our business through infrastructure and management resources called for by our program for expansion. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents information with respect to beneficial ownership of our Common Stock as of February 12, 2001 and as adjusted to reflect the sale of the shares offered by this prospectus by: -13- o Each person or entity who beneficially owns more than 5% of the Common Stock; o Each of our directors; o Each of our Named Executive Officers; and o All Executive Officers and directors as a group. Unless otherwise indicated, the address for each person or entity named below is c/o Zapworld.com, 117 Morris Street, Sebastopol, California 95472. The table includes all shares of Common Stock issuable within 60 days of February 12, 2001 upon the exercise of options and other rights beneficially owned by the indicated stockholders on that date. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and except for community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. The applicable percentage of ownership is based on 10,802,595 shares of Common Stock outstanding on a fully diluted basis as of February 12, 2001. The number of shares of Common Stock outstanding on a fully diluted basis includes 836,266 shares of Common Stock issuable upon the exercise of certain warrants, 2,201,414 shares of Common Stock issuable upon the exercise of certain options, and 1,825,882 shares of Common Stock issuable upon the conversion of shares of our outstanding Series A-1 and A-2 Preferred Stock into shares of Common Stock.(1) (1) The holders of Series A-1 and Series A-2 Preferred Stock may convert their shares at their option subject to a formulaic Conversion Price set forth in the Certificate of Determination of Rights and Preferences of Preferred stockholders. Such formula divides each Preferred Stockholder's Stated Value, which is $1,000 per share, by the formula conversion price, which is determined at different times according to the time at which the Preferred Stockholder converts. In addition, all Preferred Stockholders are subject to automatic conversion three years from the date of purchasing the Preferred Stock. The number of shares of Common Stock that Preferred Stockholders receive upon automatic conversion results from the division of the stated value of $1,000 by the formula conversion price. -14- Shares Beneficially Shares Beneficially Owned Prior to Offering Owned After Offering Name of Beneficial Owner Number Percent Number Percent The Endeavour Capital Fund, S.A.. 1,222,470 .8 1,222,470 9.3 P.O.B. 57116 Jerusalem 91570 Israel (1) Douglas R. Wilson (2) 1,250,357 11.6 1,250,357 9.5 Lee Sanella (3) 71,952 * 71,952 * William D. Evers (4) 76,723 * 76,723 * Robert E. Swanson (5) 1,250,357 11.6 1,250,357 9.5 Gary Starr(6) 520,117 4.8 520,117 3.9 Harry Kraatz (7) 108,571 * 108,571 * All Executive Officers and directors as a group (6 persons) 2,027,720 17.8 2,027,720 15.3 * Represents beneficial ownership of less than 1%. (1) Includes 1,176,470 shares of Common Stock issuable upon the conversion of 2,500 shares of Series A-1 and Series A-2 Preferred Stock. (2) These shares are held by Ridgewood Power, LLP and include 100,000 shares of Common Stock issuable upon the exercise of warrants exercisable within 60 days of February 12, 2001 by Ridgewood Power, LLP. Mr. Wilson is one of our directors and a principal of Ridgewood Power, LLP. Mr. Wilson does not personally own any of our shares. (3) Mr. Sanella is one of our directors. (4) Includes 75,000 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of February 12, 2001. Mr. Evers is one of our directors. (5) These shares are held by Ridgewood Power, LLP and include 100,000 shares of Common Stock issuable upon the exercise of warrants exercisable within 60 days of February 12, 2001 by Ridgewood Power, LLP. Mr. Swanson is the Chairman of our board and a principal of Ridgewood Power, LLP. Mr. Swanson does not personally own any of our shares. (6)Includes 135,000 shares of Common Stock issuable upon the exercise of incentive stock options exercisable within 60 days of February 12, 2001. Mr. Starr is our President, CEO and a director. (7) Includes 100,000 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of February 12, 2001. Mr. Kraatz is one of our directors. -15- PLAN OF DISTRIBUTION We are offering our shares directly to the public as a direct placement or distribution. There is no minimum number of shares that must be sold. There can be no assurance that all of the shares offered will be sold. Accordingly, investors will bear the risk that we will accept subscriptions for less than 2,400,000 shares and then be unable to successfully complete all of the anticipated uses of the proceeds of this offering. If fewer than 2,400,000 shares are sold, our business, financial condition, and results of operations could be adversely affected. Funds from this offering will not be placed in an escrow or trust account and will be available for use as the funds are received. The shares will initially be sold through our executive officers who will not receive commissions and who will be registered as sales representatives where required under state securities laws. We currently intend to solicit prospective investors directly through in-person communications only. We currently do not have a broker-dealer involved with the sale of our shares; however, we may obtain a broker-dealer to sell our shares on a best efforts basis. If we do determine to use a broker-dealer, we anticipate paying that broker-dealer a commission of a maximum of 10% of the investment funds that broker obtains, plus up to 3% for unaccountable expenses. Any selected broker-dealer that sells securities in this type of an offering would be deemed an underwriter as defined in Section 2(11) of the Securities Act. Prior to the involvement of any broker-dealer in the offering, that broker must obtain a no objection position from the NASD regarding the contemplated underwriting compensation and arrangements. Under the securities laws of certain states, the shares may be sold in such 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. LEGAL PROCEEDINGS We are currently involved in a lawsuit against Mastershine USA, Inc., and its related affiliates and subsidiaries ("Mastershine"), over alleged copyright, patent, and trademark infringement regarding Mastershine's importation and sale of electric scooters that are substantially similar to our Zappy(R) electric scooter. Upon our discovery of Mastershine's potentially infringing electric scooters, we attempted to negotiate a business solution to the problem. Prior to a business solution, however, Mastershine filed a lawsuit, in December 2000 in federal court, seeking declaratory relief. Since that time, we have filed a cross-complaint seeking unspecified damages and equitable relief. -16- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS MANAGEMENT Name Age Position Gary Starr 45 Director, Chief Executive Officer Robert Swanson 53 Director, Chairman of the Board Doug Wilson 40 Director William Evers 73 Director Lee S. Sannella, M.D. 84 Director Harry Kraatz 51 Director Andrew Hutchins 40 Vice President Operations Scott Cronk 35 Vice President Business Development Joni Arellanes 45 Corporate Secretary Gary Starr has been a director and executive officer since our inception in 1994, and our Chief Executive Officer since September 1999. Mr. Starr has been building, designing, and driving electric cars for more than 25 years. In addition to overseeing the marketing of more than 50,000 electric bicycles and other electric vehicles, Mr. Starr has invented several solar electric products and conservation devices. Mr. Starr has a Bachelor of Science Degree from the University of California, Davis in Environmental Consulting and Advocacy. Robert E. Swanson has served as Chairman of our board of directors since 1999. Mr. Swanson is also chairman of the board, sole director, and sole stockholder of Ridgewood Capital Corporation. Mr. Swanson organized Ridgewood Power, LLC, formerly known as Ridgewood Power Corporation ("Ridgewood Power"), for the purposes of, among other things, sponsoring six investment trusts that have primarily invested in the deregulated electric power industry and in related or similar infrastructure assets. Mr. Swanson is also chairman of the board of the Ridgewood Power Growth Fund, and president, registered principal and sole stockholder of Ridgewood Securities Corporation. Mr. Swanson was a tax partner at the former New York and Los Angeles law firm of Fulop & Hardee and an officer in the Investment Division of Morgan Guaranty Trust Company. He is a graduate of Amherst College and Fordham University Law School. Doug Wilson has been a director of our company since 1999. Mr. Wilson was a principal of Monhegan Partners, Inc., which provided acquisition and financial advisory services for Ridgewood Power and its investment funds from October 1996 until September 1998, at which time he joined Ridgewood Power as Vice President of Acquisitions. Mr. Wilson has over 14 years of capital markets experience, including specialization in complex lease and project financing in energy-related businesses. He has a Bachelor of Business Administration from the University of Texas and a Masters degree in Business Administration from the Wharton School of the University of Pennsylvania. William D. Evers has been a director of our company since 1999. Mr. Evers is a partner at the law firm of Foley & Lardner and is one of the leading securities law attorneys in California, specializing in private placements, Section 25102(n) offerings, Small Corporate Offering Registration, Regulation A Exemptions and Small Business Registrations. He has -17- handled numerous mergers and acquisitions. Mr. Evers has also has extensive experience in franchising and has been the CEO or President of various business ventures. He holds a Bachelor of Arts Degree from Yale University and a Juris Doctor Degree from the University of California, Berkeley. Lee Sannella, M.D. has been a director of our company since its inception in 1994. Dr. Sannella has been an active researcher in the fields of alternative transportation, energy, and medicine for more than 25 years and has been a founding shareholder in many start-up high technology companies. A graduate of Yale University, he maintained an active medical practice for many years in ophthalmology and psychiatry. Harry Kraatz became one of our directors on December 7, 2000. Since investing in our business in 1998, he has provided franchise consulting and certain financial services. Beginning in June 1986, Mr. Kraatz has been the sole officer and director of The Embarcadero Group II, and T.E.G. Inc., a franchise management and financial consulting company located in San Francisco, California. Working with those companies he has provided consulting services to numerous finance and franchising companies including Montgomery Medical Ventures, Commonwealth Associates, Westminster Capital and World Wide Wireless Communications, Inc. He received a degree from SMSU in 1971. Andrew Hutchins was appointed Vice President for Operations of our company in October 1999. He joined our company in December 1996 and since June 1997 has been our General Manager. Successful as an entrepreneur, Mr. Hutchins started, developed and managed a retail bicycle business for 11 years prior to selling it for several times his initial investment. In 1982, Mr. Hutchins received a Bachelor of Arts degree with a double major in Business Economics and Communication Studies from the University of California at Santa Barbara. Scott Cronk was appointed Vice President of Business Development of our company in December 1999. He was the founder of Electric MotorBike, Inc. and served as its President from 1995 to 1999. Previously, as Director of Business Development & International Programs, Mr. Cronk led strategic venturing activities for U.S. Electricar, Inc. Mr. Cronk has a Bachelor of Science degree in Electrical Engineering from GMI Engineering & Management Institute (now Kettering University) and a Masters of Business Administration degree from the City University of London, England. Joni Arellanes has been with us since 1998. Currently the Executive Administrator to the President, Vice President and CEO, Ms. Arellanes was appointed our Corporate Secretary in December 2000. Prior to joining our company, Ms. Arellanes was a program administrator for a certified autodesk training center program with over 200 locations in the United States and Canada. Ms. Arellanes holds a Bachelor of Arts degree in Environmental Studies and Planning from Sonoma State University. -18- DESCRIPTION OF SECURITIES General Our Amended Articles of Incorporation authorize the issuance of up to 20,000,000 shares of Common Stock, and up to 10,000,000 shares of Preferred Stock, the rights and preferences of which may be established from time to time by our board of directors. As of February 12, 2001, 5,939,033 shares of our Common Stock, 1,880 shares of our Series A-1 Preferred Stock and 2,000 shares of our Series A-2 Preferred Stock were outstanding. As of February 12, 2001 we have of record 1,918 holders of our Common Stock and 7 holders of Series A-1 and Series A-2 Preferred Stock. Common Stock Each holder of Common Stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of Preferred Stock may be entitled, holders of Common Stock will be entitled to receive ratably any dividends that may be declared from time to time by our Board of Directors out of funds legally available for that purpose. Please see the section of this document entitled "Dividend Policy" for further information regarding dividends. In the event of our liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of our Common Stock are, and the shares of Common Stock in this offering, when paid for, will be, fully paid and nonassessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock. Preferred Stock Our Board of Directors has the authority, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of 10,000,000 shares of Preferred Stock, in one or more series, each series to have rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as may be determined by our Board of Directors. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. Series A-1 and Series A-2 Convertible Preferred Stock As of the date of this prospectus, we have authorized and designated 3,330 shares of Series A-1 Convertible Preferred Stock and 2,220 shares of Series A-2 Convertible Preferred Stock. No other series of Preferred Stock has been designated. As of February 12, 2001, there were 1,880 shares of Series A-1 Convertible Preferred Stock outstanding and 2,000 shares of Series A-2 Convertible Preferred Stock outstanding. The Series A-1 and Series A-2 -19- Convertible Preferred Shares have a par value of $1,000 per share and a stated value of $1,000 per share Rights, Privileges, and Preferences 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. Transfer Agent and Registrar The transfer agent and registrar for our Common Stock is Computershare Trust Company. Warrants As of February 12, 2001 we have issued warrants to purchase 836,266 shares of our Common Stock. 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. The warrants are presently exercisable and have a term of five years. -20- Stock Options 1999 Stock Option Plan Our Board of Directors adopted, and our Shareholders approved, a 1999 Stock Incentive Plan reserving 1,500,000 shares of Common Stock for issuance. The Plan provides for the grant of incentive stock options, as defined in Section 422 of the Internal Revenue Code, to our officers and employees, and nonstatutory stock options to employees, directors and consultants. It may be administered by the Board of Directors or delegated to a committee. The exercise price of incentive stock options granted under the 1999 Stock Option Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value on the date of grant. Nonstatutory stock options granted to a person who at the time the option is granted does not hold more than 10% of the voting power of all classes of our stock will have an exercise price of no less than 85% of the fair market value of the stock on the date of grant. Options granted to our employees will become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered will become exercisable annually. No options will be exercisable prior to one year from the date it is granted unless the Board specifically determines otherwise. In no event will any option be exercisable after the expiration of 10 years from the date it is granted, and no Incentive Stock Option granted to a holder of more than 10% of the voting power of all classes of our stock will be exercisable after the expiration of 5 years from the date it is granted. If an optionee's status as an employee with us terminates for any reason, other than death or disability, then the optionee may exercise Incentive Stock Options in the three-month period following such cessation. The three-month period is extended to 12-months for termination due to death or disability. In the event of a merger or consolidation in which we are not the surviving entity, or a sale of all or substantially all of our assets or capital stock, if the surviving entity does not tender to the optionees stock options or capital stock of substantially the same economic benefit as optionees unexercised options, then the Board may grant to optionees the right to exercise any unexpired options for a period of thirty days. The 1999 Stock Option Plan will terminate in 2009, unless sooner terminated by the Board of Directors. 1996 Stock Option Plan Our Board of Directors adopted, and our Shareholders approved, a 1996 Stock Incentive Plan reserving 600,000 shares of Common Stock for issuance. The Plan provides for the grant of incentive stock options, as defined in Section 422 of the Internal Revenue Code, to our officers and employees, and nonstatutory stock options to employees, directors and consultants. It may be administered by the Board of Directors or delegated to a committee. -21- The exercise price of incentive stock options granted under the 1996 Stock Option Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value on the date of grant. Nonstatutory stock options granted to a person who at the time the option is granted does not hold more than 10% of the voting power of all classes of our stock will have an exercise price of no less than 85% of the fair market value of the stock on the date of grant. Options granted to our employees will become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered will become exercisable annually. No options will be exercisable prior to one year from the date it is granted unless the Board specifically determines otherwise. In no event will any option be exercisable after the expiration of 10 years from the date it is granted, and no Incentive Stock Option granted to a holder of more than 10% of the voting power of all classes of our stock will be exercisable after the expiration of 5 years from the date it is granted. If an optionee's status as an employee with us terminates for any reason, other than death or disability, then the optionee may exercise Incentive Stock Options in the three-month period following such cessation. The three-month period is extended to 12-months for termination due to death or disability. In the event of a merger or consolidation in which we are not the surviving entity, or a sale of all or substantially all of our assets or capital stock, if the surviving entity does not tender to the optionees stock options or capital stock of substantially the same economic benefit as optionees unexercised options, then the Board may grant to optionees the right to exercise any unexpired options for a period of thirty days. The 1996 Stock Option Plan will terminate in 2006, unless sooner terminated by the Board of Directors. 1995 Stock Option Plan Our Board of Directors adopted, and our Shareholders approved, a 1995 Stock Incentive Plan reserving 750,000 shares of Common Stock for issuance. The Plan provides for the grant of incentive stock options, as defined in Section 422 of the Internal Revenue Code, to our officers and employees. It may be administered by the Board of Directors or delegated to a committee. The exercise price of incentive stock options granted under the 1995 Stock Option Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value on the date of grant. Options granted to our employees will become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered will become exercisable annually. No options will be exercisable prior to one year from the date it is granted unless the Board specifically determines otherwise. In no event will any option be exercisable after the expiration of 10 years from the date it is granted, and no Incentive Stock Option granted to a -22- holder of more than 10% of the voting power of all classes of our stock will be exercisable after the expiration of 5 years from the date it is granted. If an optionee's status as an employee with us terminates for any reason, other than death or disability, then the optionee may exercise Incentive Stock Options in the three-month period following such cessation. The three-month period is extended to 12-months for termination due to death or disability. In the event of a merger or consolidation in which we are not the surviving entity, or a sale of all or substantially all of our assets or capital stock, if the surviving entity does not tender to the optionees stock options or capital stock of substantially the same economic benefit as optionees unexercised options, then the Board may grant to optionees the right to exercise any unexpired options for a period of thirty days. The 1995 Stock Option Plan will terminate in 2005, unless sooner terminated by the Board of Directors. INTEREST OF NAMED EXPERTS AND COUNSEL Since our inception in 1994, other than as described below, we have neither hired any experts or counsel on a contingent basis nor will any expert or counsel receive a direct or indirect interest in our business. Further, no expert or counsel, except as described below, was or is a promoter, underwriter, voting trustee, director, officer or employee of our company. As explained further in the section of this document entitled "Certain Relationships and Related Transactions," William D. Evers, Esq., who provides legal services to our company, via the firm of Foley & Lardner, of which he is a partner, has been one of our directors since 1999. In 1999 and 2000 Mr. Evers was granted options to purchase up to and including 75,000 shares of our Common Stock at an exercise price ranging from $3.02 to $6.50 per share. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our Amended Bylaws and Amended Articles of Incorporation provide that we shall indemnify our directors and officers, and may indemnify our other employees and agents, to the fullest extent permitted by California law. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be afforded to our directors, officers and controlling persons pursuant to our Amended Bylaws and Amended Articles of Incorporation, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. -23- DESCRIPTION OF BUSINESS Generally We incorporated under the laws of the State of California, on September 23, 1994, as "ZAP Power Systems." We subsequently changed our name to Zapworld.com on May 16, 1999 to reflect our growth and entry into larger markets. We have grown from offering a single product line to providing a full line of electric vehicle products. At our Sebastopol facilities, we design, assemble, manufacture and distribute electric bicycle power kits, electric bicycles and tricycles, electric scooters, electric motorcycles and other personal electric transportation vehicles. Principal products or services and their markets We look to develop and commercialize electric vehicles and electric vehicle power systems that have underlying practical and environmental advantages over available internal combustion modes of transportation. We further aim to develop electric vehicles and electric vehicle power systems that can be produced on an economically-competitive basis. In addition to broadening our electric vehicle product line, we are producing non-electric scooters and looking to expand into the area of microprocessor drive controllers. Our principal products are described below: o Electric Scooters The Zappy(R) is a stand-up, portable, lightweight scooter featuring a 12-volt battery with a built-in charger and a collapsible frame. Its patented design includes a unique folding mechanism and proprietary circuitry which increases the efficiency and range of the vehicle. Zappy Mobility(TM) is a low-cost electric scooter with a seat designed for the aging baby boomer market. The Zappy(R) accounts for over 70% of our sales. All Zappy(R) scooters are produced at our Sebastopol, California assembly plant. In an attempt to diversify the risk of the production of the Zappy(R), we are working with our foreign partners in Taiwan and China to expand production of the Zappy(R) and other new products. On August 30, 2000 our sourcing engineer moved to Taiwan to assist in establishing a production facility and implementing quality control measures. We presently rely on a single supplier to provide 80% of the materials for the Zappy(R). o Power Assist Retrofit Kits This product enables bicyclists to ride their existing bicycles more often by providing additional power to overcome hills or headwinds. We currently offer a number of different power -24- assist retrofit kits. These kits include dual or single motors, a sealed maintenance-free battery, a one or two-speed controller and an automatic battery charger. The ZPS-2 power system is designed for mountain, road and cruiser type bicycles. The ZPS-T is designed for tricycles. A motor kit may have up to 62 unique parts. The electric motor kit manufacturing, and installation of the motor systems to bicycles and scooters, is done at our Sebastopol, California location. Since 1994, the electric motors used for the electric motor kit, our Zappy(R) scooter and our electric bicycle products have been produced by an original equipment manufacturer ("OEM") in the automobile and air-conditioning industry. We have recently entered into an agreement with a manufacturer in China to manufacture motors that meet the specifications of our products. We own the proprietary rights to the mold for the motors that will be produced by this manufacturer. Motors produced by this Chinese manufacturer will come at a reduced price and have improved performance over the motors made by the OEM described above. The Chinese manufacturer will serve as a primary source of our motors and the OEM will continue to serve as a proven secondary source for our motors. We have a contractual relationship with a provider of law enforcement bicycles pursuant to which we agreed to purchase at least 200 bicycles in exchange for specific exclusive distribution and pricing rights. The enforcement bicycle producer has agreed to purchase at least 100 of our power kits in exchange for specific exclusive distribution and pricing rights. o The Kick(TM) The Kick(TM) in-line scooter is manufactured in Taiwan to our specifications. We have an exclusive distribution agreement with our manufacturer in Taiwan to exclusively distribute the Kick(TM) in the United States. This is a push type scooter on in-line skate-type wheels. -25- o Bicycles Our bicycles incorporate the our patented power system technology. The ElectriCruizer(R) is a cruiser style bicycle that has upright comfort style handle bars and six manual gears. The Zap Powerbike(R) is a mountain bike with 18 manual gears. The ZapTrike(TM) is a three-wheeled trike which contains a larger battery and a carry basket. The Zap PatrolBike(TM) is a suspension mountain bike with built-in lights and siren. o Neighborhood Electric Vehicle Recently, the U.S. Department of Transportation classified a new type of car. This vehicle is known as the Neighborhood Electric Vehicle or NEV. This vehicle must be electric and have a top speed of 25 miles per hour and meet minimum safety standards. We are currently a dealer for Global Electric Motorcars, LLC, and are exploring other manufacturing and distribution arrangements for the Neighborhood Electric Vehicles at this time. o Electric Motorcycle -- Lectra(TM) The Lectra(TM) is believed to be the only production ready electric motorcycle in the world. Zapworld completed the acquisition of the Electric Motorbike, Inc. (EMB) in October, 2000. Under the terms of the agreement, we acquired all assets, technology, engineering capabilities and customer contracts from EMB. o Sea Scooter(TM) The Sea Scooter(TM) is an electric water scooter which pulls a diver or swimmer through the water without gas emissions. It can also be used to as a water toy for swimming pools or for more efficient snorkeling. New Product Development o Zappy Jr.(TM) The Zappy Jr.(TM)is a smaller version of the Zappy(R)designed for children ages 6-10, and under 100 pounds. It will have a lower speed, and a lower cost. -26- o Lepton The Lepton is similar to a gas 50cc type scooter. With a top speed of approximately 30 miles per hour. We are the distributor for the Italian scooter company and expect sales primarily in resort and university localities. o E-Bike Chopper(TM) The E-Bike Chopper(TM) is a lower priced Lectra(TM) with a styling similar to the "chopper" style motor bikes. o PowerSki(R) The Powerski(R) is an electric motor device designed to pull an in-line skater, skateboard, or roller skater along the road or pathway. This device was developed by Electric Vehicles Systems, a company we purchased in the first quarter of 2000. o Swimmy(TM) We recently unveiled our new Swimmy(TM) Water Scooter. This water-borne electric propulsion device is designed to assist or pull swimmers and snorkelers, providing a fun boost up to 2.5 MPH on the surface or underneath water. We already manufacture a Sea Scooter(TM) for scuba divers, but believe there will be a strong demand for a swimming pool version that children and fitness swimmers can use. o Electri Pedi-Cab(TM) We distribute the Electric Pedi-Cab(TM), which can be pedaled like a regular ped-cab and has the ability to travel electrically at speeds up to 15 miles per hour. o Micro-processor drive controllers We are working to develop a series of low cost micro-processor drive controllers for all of our electric vehicles, which we believe will increase efficiency and lower costs. -27- Distribution Internet and Dealership Network Our Web site has become known world-wide as the ultimate portal for personal electric vehicles. It has been very effective in drawing new retail, wholesale and international customers. We distribute our products through a network of over 350 distributors, dealers, and specialty stores worldwide. We sell our electric vehicles to retail customers, international distributors, law enforcement agencies, electric utility companies, bicycle dealerships, motorsport dealers, and through franchisees and mail order catalogs. Our sales to mail order catalogs and selected customers are on various credit terms, with many sales to smaller dealerships being on a cash delivery basis only. We intend to franchise outlets in areas that do not have existing stores. To accomplish this, we have received qualification to franchise in California, Florida and Texas, and we plan to seek qualification to franchise in additional states. However, we are still evaluating franchising as a longer tier mode of distribution. We are the U.S. distributor of the imported Lepton scooter. Additionally, we are a dealer for an electric neighborhood vehicle, known as the GEM(TM). We have been granted exclusive market rights in selective electric vehicle markets from Evercel, Inc., in exchange for specifying that company's battery in a specific electric vehicle we make. We have no other contractual agreements with any of our other vendors. Environmental Initiatives and Legislation Federal legislation has been enacted to promote the use of alternative fuel vehicles, including electric vehicles. The U.S. Energy Policy Act of 1992 provides that federal, state and public utility fleets must begin to purchase alternative fuel vehicles with major acceleration of these purchases to begin in 2000. Neighborhood Electric Vehicles qualify for this tax credit which is in place through the year 2005. The Department of Energy Clean Cities Organization has pledged to purchase 1 million alternative fuel vehicles by the year 2010. There is also a 10% federal tax credit, to a maximum of $4,000, available to purchasers of qualified electric vehicles. Several states have also adopted legislation that sets mandates for the introduction of electric vehicles. In 2003, the State of California will require that 4% of the cars offered for sale be electric. However, there is strong interest group opposition to this mandate. To combat this interest group opposition, many states currently offer tax credits for electric vehicles. -28- The State of Arizona gives a state tax credit of up to $5,000 for electric vehicles that meet Federal Motor Vehicle Safety Standards. Neighborhood Electric Vehicles are one of the few Low Speed Vehicles that currently meet these standards. New York, Connecticut and other states in the northeastern United States have similar directives. In addition, a $3,000 state electric vehicle tax credit bill has been recently been passed in California. In support of these laws, utility companies have set up over 500 "free" public charging stations in the state of California. High-profile retailers such as WalMart, Denny's, Costco, and Raley's have agreed to participate in the program to promote the use of electric vehicles. Other incentives such as free charging and parking in the State of Hawaii are now in place. Honda and Toyota have begun to offer hybrid electric vehicles through specific auto dealers in select markets. Our Management believes that these expensive high-profile electric vehicles will assist the market for low-cost electric vehicles. Foreign governments have also taken measures to promote the use of electric vehicles. The Republic of China (Taiwan), where we presently manufacture the Zappy(R) and the Kick(TM), gives buyers of electric scooters a rebate equivalent to 30-60% of the cost. Taiwan is considering a Zero Emission Vehicle scooter mandate by the year 2001. Japan, Thailand, and Costa Rica have agreed to provide low duties on any electric vehicle sub-components. China has recently banned the licensing of new gas powered bicycles in the cities of Shanghai and Beijing. France has agreed to provide rebates of the additional cost of electric vehicles over conventional vehicles and is providing free parking to electric vehicles in Paris. Austria is providing a $150 rebate towards the purchase of electric bicycles. As we commercialize new transportation technology, we have been required to expend resources in educating legislators of the benefits of these vehicles. On January 1, 2000 a law we sponsored that creates guidelines for the legalized use of light electric scooters, such as our Zappy(R), went into effect in the State of California. Although many government agencies are concerned about rising global air pollution, we expect that we will need to continue to expend considerable resources in the governmental process, and there cannot be assurance that the current favorable governmental climate for these zero emission vehicles will remain in the future. Research and Product Development The nature of our business has required and will continue to require expenditures for research and product development. The development and introduction of new products are essential to establishing and maintaining a competitive advantage. Research and development expense charged to our operations in fiscal years 1999 and 1998 was $364,600 and $202,600 respectively, and $464,000 for the nine months ended September 30, 2000. -29- Sources and Availability of Raw Material Materials, parts, supplies and services used in our business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on our manufacturing operations. Licenses, Patents and Trademarks We have a number of patents and trademarks covering our electric vehicles. We were issued our first United States Patent on February 13, 1996 on our electric motor power system for bicycles, tricycles, and scooters (Pat. No. 5,491,390). On September 30,1997, we were issued our second United States Patent on our electric motor system (Pat. No. 5,671,821). On December 15, 1998, we were issued a utility patent for our ZAPPY(R)scooter (Pat. No. 5,848,660). On November 14, 2000, we were issued a design patent on our Zappy(R)scooter (Des. No. 433,718). We also hold several trademarks: the trademark Zap(R)was assigned to our company on September 23, 1994 (Reg No. 1,794,866); the trademark ElectriCruizer(R)was registered with the United States Patent and Trademark Office on April 2, 1999 (Reg. No. 2,248,753); the Zappy(R)mark was registered on March 21, 2000 (Reg. No. 2,330,894); the PowerBike(R)mark was registered on June 1, 1999 (Reg. No. 2,248,753); the trademark Zapworld.com(R)was registered on July 25, 2000 (Reg. No. 2,371,240); the trademark Zap Electric Vehicle Outlet(R)was registered on March 28, 2000 (Reg. No. 2,335,090); and the mark Zero Air Pollution(R)was registered on February 22, 2000 (Reg. No. 2,320,346). We also acquired various pending patent applications and trademark rights from emPower, Inc. when we acquired this company on December 30, 1999. We acquired all of the assets of Electric Vehicles Systems, Inc., including the trademark PowerSki(R)(Reg. No. 2,224,640) and two U.S. Patents, (Patent #5,735,361 and Patent #5,913,373). This transaction was finalized on February 29, 2000. Marketing strategies for PowerSki(R)will begin in the year 2001. In addition to the patents and trademarks listed above, we have several applications pending before the United States Patent and Trademark Office. We also have several copyright registrations for various advertisements that we use to promote our products. Lastly, we have an exclusive licensing agreement with Lucas Films Licensing Division for the use of the trade name STARWARS(TM) and STAP(TM) in the classification of electric scooters. Backlog As of February 12, 2001, we have a backlog in orders for electric vehicles which is worth approximately $682,000. We expect to fill our entire current backlog within 60 days. We also have a signed contract of $2,300,000 for items to be shipped throughout 2001. -30- Competitive Conditions Competition to develop and market electric vehicles has increased during the last year and is expected to continue to increase. The electric bicycle industry has four (4) major manufacturers and a large group of small manufacturers. The major manufacturers are Honda, Suzuki, Sanyo and Yamaha. They primarily sell products to Japan and Europe. The other group of manufacturers is much smaller in size and sales volume. These manufacturers have products they sell in the U.S., European, and Asian markets. There are also manufacturers of other personal electric vehicles. Our principal competitive advantages are our ownership of fundamental technology, our ability to be a low cost manufacturer through domestic and international connections, and our distribution network. We also currently benefit from our high name recognition in the electric vehicle industry coupled with a rapidly developing business on our internet site, http://www.zapworld.com. We offer one of the broadest lines of personal electric vehicles currently available. According to published reports, we believe that we currently hold the leading electric bicycle and scooter market position in the United States. Employees As of February 12, 2001, we had a total of 96 full-time employees. This is an increase of 44 employees from 1998. We consider our relationship with our employees to be good. None of our employees are represented by a collective bargaining unit, and we have never had a work stoppage. We believe that our future success will depend in part on our continuing ability to attract, integrate, retain and motive highly qualified personnel, and upon the continued service of our key technical personnel and senior management. Development of Business We have grown from a single product line to a full line of electric vehicle products, and currently develop, manufacture, and market low-speed electric vehicles in over 60 countries. We have established a system to develop low cost electric vehicles to provide alternative modes of transportation as a means of providing relief from the emissions associated with gas powered vehicles and to become a leader in the emerging light electric vehicle industry. Since our management founding believed that the primary barrier to widespread use of electric vehicles was their high cost, our activity and revenue was initially derived from development contracts with domestic government agencies, the California Energy Commission, EPA, EPRI and a foreign private entity. These contracts were set up to develop low cost, Zero Air Pollution(R) (or "ZAP(R)") electric vehicles. We continue to focus our research efforts on making electric vehicles cost effective, while developing an international distribution network for personal vehicle products. We are developing proprietary technologies that are important elements of the our brand of personal electric vehicles. Each of these components will be marketed under the Zapworld brand name. Our objective is to leverage our proprietary technology and name recognition to serve a number of potential markets in the electric bicycle, electric scooter and other light electric vehicle transportation industries. In addition to new electric vehicles, we -31- are currently focusing our development efforts on a new generation of microprocessor drive controllers. In following our plan to increase sales and expand operations substantially through internally generated growth and the acquisition of businesses and products which we view strategically advantageous, we have acquired or merged with a number of companies during the past three years. In 1999, we acquired Big Boy Bikes, a bicycle rental business in Key West, Florida, and American Scooter and Rental, a bicycle rental business in San Francisco, California. In 2000, we acquired ZAP of Santa Cruz, a bicycle rental business in Santa Cruz, California, and Electric Vehicle Systems, Inc. an electric vehicle development business in California. We acquired emPower in December 1999. Also, in 2000, we acquired Aquatic Propulsion Technology, Inc., a Bahaman corporation that operated in Florida. From this acquisition, we received technology that allows us to develop water-borne electric propulsion devices. MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included later in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the "Risk Factors" section or other parts of this prospectus. Overview We design, assemble, manufacture and distribute electric and non-electric scooters, electric bicycle power kits, electric bicycles, and other personal electric transportation vehicles. We also manufacture several types of electric motor kits and install motor systems to bicycles and scooters at our Sebastopol, California facilities. We plan to become a profitable light electric transportation company that utilizes our technology and products while improving the environment. Our initial objective is to establish ourselves as the dominant manufacturer and market leader of personal electric and other Zero Air Pollution(R) vehicles. To achieve this objective, we plan to: o expand our existing distribution system; o strengthen existing marketing efforts; o form partnerships with or acquire companies that offer services or products we consider crucial to our success in the electric vehicle industry; and o improve our existing products and develop new products by forming manufacturing alliances with offshore partners to assure low cost production. -32- The achievement of our objectives is highly dependent, on many factors, including: o our ability to improve our existing products; o our ability to produce attractive new products, either on our own or with companies that we form partnerships with or that we acquire; and o our ability to raise the necessary capital to develop and produce new products, as well as strengthen our existing distribution network. Distribution We sell our electric vehicles to retail customers, international distributors, law enforcement agencies, electric utility companies, bicycle dealerships, motorsport dealers, auto dealers, sporting goods stores, specialty dealers and foreign distributors. In addition, we sell our electric vehicles through mail order catalogs and to selected customers on various credit terms and on a cash-only delivery basis. We also sell our electric vehicles through the internet. Part of our growth strategy is to increase net sales by increasing distribution channels through our Web site, http://www.zapworld.com, retail organizations, and domestic and overseas wholesale distributors. In addition, we plan to set up Zapworld outlet and specialty stores to assist in the retail sales arena. In July 1999, we created two wholly-owned subsidiaries to oversee acquired and franchise stores, respectively. These subsidiaries are Zapworld Stores, Inc. (acquired stores) and Zapworld Outlets, Inc. (franchise stores). One alternative we are presently considering is the creation of a traditional distribution network, with small to medium retail outlets supplied by regional distributors. A second option is to distribute our products through the creation of a series of franchises strategically located in our primary markets. A third method is the expansion of current internet selling and marketing efforts. We are also evaluating the creation of a distribution system similar to that of an automobile dealership. Mergers and Acquisitions In order to satisfy the increasing demand for our products, we implemented a plan to increase production capacity via mergers and acquisitions. Other positive effects resulting from this expansion plan include increased sales support, as well as increased technological resources and manpower to aid in new product development. Our merger and acquisition activities are summarized below. On October 6, 2000, we completed our purchase of Electric Motorbike, Inc. We issued 140,000 shares of our Common Stock and $735,000 as the final purchase price. On June 24, 2000, our shareholders approved our acquisition by merger of Aquatic Propulsion Technology, Inc., a Bahaman corporation which sells electric water scooters. We acquired all of Aquatic Propulsion Technology, Inc.'s technology rights, including 5 patents on electric sea scooters, as well as all of Aquatic Propulsion Technology, Inc.'s assets and current operations in exchange for 120,000 shares of our Common Stock, $20,000 in cash and the assumption of Aquatic Propulsion Technology, Inc.'s liabilities of approximately -33- $400,000. The contractual acquisition was completed as of July 1, 2000, and the merger documents were filed with the California Secretary of State as of August 8, 2000. In order to access new markets, we also acquired two rental/retail operations in 1999: Big Boy Bikes, a bicycle rental business in Key West, Florida, and American Scooter and Rental, a bicycle rental business in San Francisco, California. We created a wholly-owned subsidiary, Zapworld Stores, Inc., to operate these operations. Zapworld Stores accounted for 5%, or $316,000, of our total revenues during 1999, with a gross profit margin of 34%. The lease for the Key West store expired in February 2000, and at that time all the assets for that store were sold. In October 2000 we ceased operating our store in San Francisco, California. EmPower, Inc., a design and manufacturing business of proprietary electric scooters, was acquired in December, 1999 to provide new technologies and broaden product lines. We acquired Electric Vehicle Systems, Inc., an electric vehicle development business, in February 2000. This acquisition brought us into a new product area, the patented Powerski(R). Finally, ZAP of Santa Cruz, a bicycle rental business in Santa Cruz, California, was acquired in March 2000. In 1999 and in the early part of 2000, we held discussions with Global Electric MotorCars, LLC, the largest manufacturer of Neighborhood Electric Vehicles, regarding a potential merger between our company and Global Electric MotorCars, LLC. While both companies have mutually agreed to terminate further merger discussions, we did enter into a distribution agreement with Global Electric MotorCars, LLC, to sell its GEM(TM) Neighborhood Electric Vehicle at select Zapworld locations. In addition, we continue to discuss strategic alliances with other potential manufacturers of Neighborhood Electric Vehicles. Our strategy is to transform Zapworld into a light electric transportation company with standards of measurement similar to the auto industry. We will continue to develop products with the goal of being the low cost leader in the industry. Product improvements, new product introductions, and the development of the Zap Electric Vehicle Outlet(R) franchise network continue to fortify our presence in the electric vehicle industry. Partnerships or Strategic Alliances Our growth plan for the future includes strengthening our distribution channels through forming partnerships or strategic alliances with businesses, factories or manufacturers in related industries. On August 9, 2000, we entered into an agreement with a manufacturer located in the People's Republic of China to work toward establishing production facilities that would allow full assembly of the Zappy(R) in China. Our initial plan is to sell these Zappy(R) products within China, but we may also transport these Zappy(R) products to the United States or other parts of the world for distribution. In order to have complete assembly of our products in Taiwan, we are working with our trading partner in Taiwan to establish factories there. We presently have an exclusive -34- distribution agreement with our Taiwanese trading partner for distribution of our Kick(TM) scooter exclusively in the United States. On September 1, 2000, we received an order for approximately 1,500 Zappy(R) scooters from Oxygen SpA of Italy. We are exploring opportunities for Oxygen SpA to serve as our distributor in Italy and other select European countries. We plan to grow our business by forming exclusive alliances with leading developers of electric vehicle technologies, structuring joint ventures with strong manufacturing partners around the world, creating alliances with governmental and private entities that support the electric vehicle industry, acquiring other electric vehicle companies, setting up various electric vehicle distribution networks through possible franchising and creating additional electric vehicle superstores, otherwise known as Zap Electric Vehicle Outlets(R). We are also considering a plan to establish ZAP Financial Services(TM), a finance company for our dealers and retail customers. At the present time, there are no bankruptcy, receivership or similar proceedings against our company. In addition, we are not presently participating in any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets that is not within the ordinary course of our business. Results of Operations The following table sets forth, as a percentage of net sales, certain items included in our Income Statements for the periods indicated. For further information please see the section of this document entitled "Financial Statements."
Years ended December 31, Nine months ended September 30, 1999 1998 2000 1999 ---- ---- ---- ---- Statements of Operations Data: Net sales.......................... 100.0% 100.0% 100.0% 100.0% Cost of Sales...................... 69.1 67.9 63.9 67.0 Gross profit....................... 30.9 32.1 36.1 33.0 Operating expenses................. 54.3 61.1 49.9 40.8 Loss from operations............... (23.4) (29.0) (13.8) (7.8) Other income (expenses) (2.9) (2.58) 1.3 (1.0) Loss before income taxes........... (26.3) (31.5) (12.5) (8.8) Provision for income taxes......... 0.0 0.0 0.0 0.0 Net Loss........................... (26.3) (31.5) (12.5) (8.8)
-35- Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net Sales Net sales for the year ended December 31, 1999 were $6,437,200 compared to $3,518,600 in the prior year, an increase of $2,918,600 or 83%. The increase in sales was due to greater acceptance of our products in the marketplace. Internet sales were $259,100 and $57,100 in 1999 and 1998, respectively. This represented a 354% increase for 1999. A total of $680,100 in products were sold to one customer during the year ended December 31, 1999, representing 11% of sales. In the year ended December 31, 1998, $617,000, or 18% of net sales, were sold to one customer. Gross Profit Gross profit decreased as a percentage of net sales to 31% from 32%. The gross profit percentage decrease of 1% is largely due to a one-time sale to a large distributor at a significant discount in the third quarter of 1999. Direct materials were 58% of net sales for the year ended December 31, 1998, as compared to 59% of net sales for the year ended December 31, 1999. Selling Expenses Selling expenses in 1999 were $1,186,700. This was an increase of $219,000, or 22% from 1998 to 1999. Due to greater market acceptance through our distribution channels, selling expenses as a percentage of sales, decreased from 28% of sales to 18% of sales. Costs increased as a result of additional personnel being added to our sales force. General and Administrative Expenses General and administrative expenses for 1999 were $1,945,000. This is an increase of $965,800 or 101% over 1998. As a percentage of sales, general and administrative expense increased from 28% to 30% of net sales. Expense increases during 1999 as compared to 1998 occurred due to added personnel in the administrative and accounting areas. Additionally, legal expenses of $300,000 were incurred in 1999 relating to acquisition activities and patent issues. Research & Development Research and development costs were $364,600 in 1999 as compared to $202,600 in 1998, an 80% increase. As a percentage of net sales, Research and Development costs remained 6% of revenues in 1998 and 1999. We invested in new product developments such as the Zappy Jr.(TM), and the PowerSki(R) and tooling that is expected to lower manufacturing costs and broaden our product line. -36- Other Income (Expense) Other income increased $67,000 in 1999 over 1998. This 579% increase can be attributed to interest earned on a commercial paper money market fund from the proceeds of private placement investments. Interest Expense Interest Expense increased $167,000, 166% in 1999 over 1998. This increase is due primarily to higher outstanding debt in 1999. Nine Months Ended September 30, 2000 Compared to Nine Months Ending September 30, 1999. Net sales for the nine months ended September 30, 2000 were $8,128,000 compared with $4,444,000 in the nine months ended September 30, 1999, an increase of $3,684,000 or 83%. The increase in sales, both domestically and oversees, is primarily attributable to increased production of our products. Additionally, we have added new product lines to diversify our core products. Gross profit dollars increased in the third quarter of 2000 to $2,938,000 from $1,466,000 in the third quarter of 1999 an increase of $1,472,000 or 100%. The increase is gross profit dollars can be attributed to the increase in net sales and greater cost controls. As a percentage of sales, gross profit increased to 36% in the third quarter of 2000 compared with 33% in the third quarter of 1999. The increase in gross margin percentage can be directly attributed to increased efficiencies with our production processes. Selling expenses for the nine months ended September 30, 2000 were $1,327,000 as compared to $729,000 for the nine months ended September 30, 1999. This was an increase Of $598,000 or 82% from 1999 to 2000. As a percentage of sales, selling expenses remained constant at 16% of sales. Added personnel costs incurred from our San Francisco location and increased promotional efforts worldwide led to increased costs in the nine months ended September 30, 2000. General and administrative expenses for the nine months ended September 30, 2000 were $2,269,000. This is an increase of $1,391,000 or 158% from 1999. As a percentage of sales, general and administrative expense increased to 28% from 20% of net sales. Expense increases during the first nine months of 2000 as compared to the first nine months of 1999 occurred due to overall salary increases in all administrative areas due to the pressures of low unemployment. Legal costs incurred from acquisitions and costs of options associated with operational consulting contributed to $156,000 in increased expenses. Additionally, the amortization of patents, trademarks and goodwill accounted for $110,000 in expenses during the first nine months of 2000 from acquisitions completed during the fourth quarter of 1999. Furthermore, the costs incurred to manage our San Francisco store accounted for $236,000 in expenses for the first nine months of 2000 that were not incurred in the first nine months of 1999. -37- Research and development expenses increased $259,000 or 126% from the first nine months of 1999 as compared to the first nine months of 2000. As a percentage of net sales, research and development increased to 6% of sales in the first nine months of 2000 as compared to 5% of sales in the first nine months of 1999. Increased personnel and facilities costs incurred to accommodate new product development and improve existing products led to higher costs in the first nine months of 2000. Interest income (expense) increased $94,000 in the first nine months of 2000 as compared to the first nine months of 1999. This increase is attributed primarily to interest income derived from proceeds from financing. Other expense decreased $59,000 from the first nine months of 1999 to the first nine months of 2000. This decrease can be primarily attributed to the completion of the amortization of the fair value of warrants issued for services. Liquidity and Capital Resources We used cash from operations of $2,565,000 and $733,000 during the nine months ended September 30, 2000 and 1999 respectively. Cash used in operations in the first nine months of 2000 was the result of the net loss incurred for the period of $1,014,000, offset by net non-cash expenses of $372,000, and the net change in operating assets and liabilities resulting in a further use of cash of $1,923,000. Cash used in operations for the first nine months of 1999 was the result of the net loss incurred for the first nine months of $391,000, offset by the net non-cash expenses of $884,000, and the net change in operating assets and liabilities resulting in a use of cash of $1,226,000. Investing activities used cash of $1,129,000 and $304,000 during the nine months ended September 30, 2000 and 1999 respectively. The uses of cash were for the purchase of fixed assets and patents and the acquisition of additional technology. Financing activities provided cash of $4,046,000 and $2,903,000 during the first nine months ended September 30, 2000 and 1999 respectively. In both years, the cash provided by financing activities resulted from the sales of Common and Preferred Stock, $3,561,000 and $3,750,000 for the first nine months ended September 30, 2000 and 1999 respectively, offset by principal payments on outstanding debt. At September 30, 2000, we had cash and cash equivalents of $3,536,000 as compared to $2,341,000 at September 30, 1999. At September 30, 2000, we had working capital of $6,447,000 as compared to working capital of $3,970,000 at September 30, 1999. The increases in both cash and working capital in the first nine months of 2000 from the first nine months of 1999 are mostly due to the equity financing raised during the year. At present, we do not have a credit facility in place with a bank or other financial institution. Additionally, by October 24, 2000, we had sold an additional $2.0 million in Preferred Stock financing to Union Atlantic Capital L.C. We believe that the cash on hand at September 30, 2000 will be sufficient to allow us to continue our expected level of operations for the remainder of the year. -38- We need capital to fund our growth strategy, which includes increasing our internet shopping mall presence, improving and increasing distribution channels, establishing franchised stores, introducing new products, improving existing product lines and developing a strong corporate infrastructure. Seasonality and Quarterly Results Our business is subject to seasonal influences. Sales volumes in the bicycle industry typically slow during the winter months, November to March, in the U.S. However, because we market worldwide, we are not fully subject to the dictates of U.S. seasonality influences. Inflation A majority of our raw materials are sourced from stable cost competitive industries. Because of this, we do not foresee any material inflationary trends for our raw material sources. DESCRIPTION OF PROPERTY A summary of our principal facilities are as follows:
- -------------------- --------------------------- --------- ------------------ ------------------- Location Use Square Lease Expiration Minimum Monthly Feet Date Rental - -------------------- --------------------------- --------- ------------------ ------------------- - -------------------- --------------------------- --------- ------------------ ------------------- 117 Morris St. Office & Motor Assembly 6,500 June 2002 $4,400 - -------------------- --------------------------- --------- ------------------ ------------------- 111 Morris St. Machine Shop 3,000 June 2001 $2,000 - -------------------- --------------------------- --------- ------------------ ------------------- 7190 Keating Production 10,000 June 2004 $5,000 - -------------------- --------------------------- --------- ------------------ ------------------- 6780 Depot Office, Production, R&D 5,000 June 2004 $2,500 - -------------------- --------------------------- --------- ------------------ ------------------- 6780-B Depot Engineering 4,200 May 2004 $2,188 - -------------------- --------------------------- --------- ------------------ ------------------- 2715 Hyde St. Retail/Rentals 8,000 April 2001 $12,000 - -------------------- --------------------------- --------- ------------------ ------------------- 6784 Sebastopol Warehouse 9,800 August 2005 $5,880 - -------------------- --------------------------- --------- ------------------ -------------------
All of the above buildings, except the store at 2715 Hyde Street in San Francisco, are located in Sebastopol, California. We lease all of our manufacturing, research, and office facilities. All of the leases are term leases, and none of these leases include options to purchase. Our property consists primarily of manufacturing equipment and office computer systems. It is management's opinion that our insurance policies cover all insurance requirements of the landlords. We own the basic tools, machinery and equipment necessary for the conduct of our production, research and development, and vehicle prototyping activities. Management believes that the above facilities are generally adequate for present operations. -39- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since our inception in 1994, we have not been a party to any transaction or series of similar transactions in which the amount involved exceeded or will exceed $60,000 and in which any director, executive officer or holder of more than 5% of our Common Stock had or will have an interest, other than as described under "Management," "Interest of Named Experts and Counsel" and the transactions described below. William D. Evers, is a member of our Board of Directors and our principal outside counsel. During 1999 and in 2000, until July 31, 2000, Mr. Evers' law firm received $430,408 in compensation for legal services provided to us. Additionally, Mr. Evers was granted stock options to acquire 75,000 shares with an exercise price ranging from $3.02 to $6.50 per share. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock was quoted on the National Association of Security Dealers (NASD) OTC Bulletin Board under the market symbol "ZAPP" from March 11, 1998 through May 22, 2000. On May 22, 2000, our Common Stock qualified for listing on the NASDAQ SmallCap stock exchange under the symbol "ZAPP." Before March 1998 there was no public market for our Common Stock. The following table presents, for the period indicated, the high and low prices per share as reported on the OTC Bulletin Board through the second quarter of 2000, and the high and low prices per share as reported on the NASDAQ SmallCap stock exchange through the third and fourth quarter of 2000.
2000 1999 1998 High Low High Low High Low ---- --- ---- --- ---- --- $ $ $ $ $ $ First Quarter 10.00 8.00 4.375 3.0625 6.00 4.50 Second Quarter 6.00 5.4375 8.75 4.25 6.50 4.50 Third Quarter 5.875 5.3125 6.875 5.00 5.0625 2.00 Fourth Quarter 3.25 2.50 18.25 5.00 4.3125 2.875
On February 8, 2001 the last reported quotation price of our Common Stock on the NASDAQ SmallCap stock exchange was $2.6875. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. As of February 12, 2001 there were 5,939,033 outstanding issued shares of our Common Stock, warrants to purchase 1,199,902 shares of our Common Stock, options to purchase 1,849,090 shares of our Common Stock, 1,880 shares of Series A-1 Preferred Stock -40- and 2,000 shares of Series A-2 Preferred Stock outstanding. As of February 12, 2001, we had approximately 1,918 holders of record of Common Stock and 7 holders of record of Preferred Stock. DIVIDEND POLICY We have not declared or paid any dividend on our Common Stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements and other factors our board of directors deems relevant. EXECUTIVE COMPENSATION The following tables set forth information concerning the compensation we paid for services rendered during our fiscal years ended December 31, 1999, 1998 and 1997, by the Named Executive Officers. The Named Executive Officers are our company's Chief Executive Officer, regardless of compensation level, and the other executive officers of our company who each received in excess of $100,000 in total annual salary and bonus for the fiscal years ended December 31, 1999, 1998 and 1997. Summary Compensation Table
Annual Compensation Long -Term Compensation Awards Payouts --------------------- -------- --------- Other Restricted Stock All Annual Stock Underlying Other Salary Bonus Compensation Award Options LTIP Compen- /SARs Payouts sation Name and Principal Year ($) ($) ($) ($) (#) ($) ($) Position - ------------------------- ----- -------- ------- ------------ ---------- ---------- -------- --------- Gary Starr 1997 35,000 Chief Executive officer 1998 35,700 And President 1999 39,500 200 135,000
-41- The following table shows all individual grants of stock options to the Named Executive Officers (as defined above) for the fiscal year ended December 31, 1999. Option/SAR Grants in Last Fiscal Year (Individual Grants)
Name Year Number of % of Total Exercise Expiration Options Securities Options/SARs or Base Date Granted Underlying Granted to Price Options/SARs Employees in Fiscal ($/Sh) Granted Year - ---------------------- ----------- ------------------ --------------------- ----------- ---------- Gary Starr 1999 35,000 $7.00 07/19/02 1999 100,000 $6.25 12/21/02 ------- ----- 135,000 19.8
The following table shows all individual grants of stock options exercised by the Named Executive Officers (as defined above) for the fiscal year ended December 31, 1999. Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Options/SAR Values
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Shares Option/SARs at Options/SARs at Acquired on Value FY-End(#) FY-End($) Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable ---- ----------- ----------- ------------------------- ------------------------- Gary Starr 32,319(1) 189,874 18,333/31,944 213,121/371,349 72,000(2) 354,960 15,181(3) 88,239 (1) Exercised on November 8, 1999 at a price of $1.00 per share. (2) Exercised on March 6, 1999 at a price of $0.40 per share. (3) Exercised on September 30, 1999 at price of $1.00 per share.
Compensation of Directors Our directors do not receive any cash compensation for their service on our Board of Directors, but they may be reimbursed for certain expenses in connection with their attendance at board meetings. During our fiscal year ended December 31, 1999 we granted options for 75,000 shares of our Common Stock to two of our directors. These options vest over a three year period and have an exercise price ranging from $3.25 to $6.25 per share. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During our two most recent fiscal years our principal independent accountant has neither resigned (or declined to stand for re-election) nor been dismissed. -42- LEGAL MATTERS Certain legal matters in connection with the Common Stock being offered in this prospectus will be passed upon by Foley & Lardner, One Maritime Plaza, Sixth Floor, San Francisco, California 94111-3404. EXPERTS Our financial statements as of and for the years ended December 31, 1999 and 1998 appearing in this prospectus have been audited by Grant Thornton LLP, independent certified accountants. The financial statements are included in reliance upon the authority of that firm as an expert in accounting and auditing. ADDITIONAL INFORMATION A registration statement on Form SB-2, including amendments, relating to the shares offered has been filed with the Securities and Exchange Commission, Office of Small Business Policy, Washington, D.C. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements made in this prospectus as to the contents of any contract or other document are not necessarily complete, and, in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each statement about those contracts and other documents is qualified in all respects by that reference. The registration statement and exhibits and schedules, as well as other reports and other information required to be filed with the Securities and Exchange Commission in accordance with the reporting requirements of the Securities Exchange Act of 1934, can be inspected without charge and copied, at proscribed rates, at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0300. In addition, the Securities and Exchange Commission maintains a Web site on the internet at http://www.sec.gov that contains reports, proxy and information statements and other documents filed electronically with the Securities and Exchange Commission, including the registration statement. We furnish our shareholders with annual reports containing financial statements audited by our independent accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. -43- FINANCIAL STATEMENTS Table of Contents Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .......................F-2 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS .........................................F-3 CONSOLIDATED STATEMENTS OF OPERATIONS ...............................F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS ...............................F-5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY .....................F-7 NOTES TO FINANCIAL STATEMENTS .......................................F-8 F-1 Report of Independent Certified Public Accountant To the Board of Directors and Stockholders ZAPWORLD.COM We have audited the accompanying consolidated balance sheets of ZAPWORLD.COM and subsidiaries as of December 31 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion o these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provided a reasonable basis for our opinion. In our opinion, the financial statements referred to above represent fairly, in all material respects, the consolidated financial position of ZAPWORLD.COM and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the years in the two year period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP San Francisco, California March 1, 2000 F-2 ZAPWORLD.COM and Subsidiaries Consolidated Balance Sheets (in thousands except per share amounts)
December 31, 1999 December 31, 1998 September 30, 2000 (unaudited) ASSETS CURRENT ASSETS Cash $3,184 $475 $3,536 Accounts Receivable 353 284 1,286 Inventories 1,725 634 1,708 Note Receivable 20 - 35 Prepaid Expenses and other assets 303 98 1,236 ------- -------- ------- Total Current Assets 5,585 1,491 7,801 ------- -------- ------- PROPERTY AND EQUIPMENT 350 177 507 OTHER ASSETS Patents & Trademarks, less accumulated amortization 1,176 80 1,440 Goodwill 112 - 1,197 Advance to retail stores and technology companies 479 - 63 Deposits 25 12 53 ------- -------- ------- Total Other Assets 1,792 92 2,753 ------- -------- ------- Total Assets $7,727 $1,760 $11,061 ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts Payable $742 $334 $612 Accrued Liabilities 368 151 697 Current maturities of long-term debt 16 867 41 Current maturities of obligations under capital leases 9 10 4 ------- -------- ------- Total Current Liabilities 1,135 1,362 1,354 ------- -------- ------- OTHER LIABILITIES Long-term debt, less current maturities 24 11 390 Obligations under capital leases, less current maturities 14 1 35 ------- -------- ------- Total Other Liabilities 38 12 425 STOCKHOLDERS' EQUITY Preferred stock, authorized 10,000,000 shares, 2,372 shares issued and outstanding - - 2,868 Common stock, authorized 20,000,000 shares of no par value; issued and outstanding 5,109,180 shares in 1999, 2,664,700 shares in 1998 and 5,557,100 shares in 2000 12,053 3,732 15,909 Accumulated deficit (5,118) (3,346) (9,232) Unearned Compensation (96) - (55) ------- -------- ------- 6,839 386 9,490 Less: notes receivable from shareholders (285) - (208) ------- -------- ------- Total stockholders' equity 6,554 386 9,282 ------- -------- ------- Total liabilities and stockholders' equity $7,727 $1,760 $11,061 ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements F-3
ZAPWORLD.COM CONSOLIDATED STATEMENTS OF OPERATIONS (Thousands, except share amounts) Year Ended December 31, Nine Months ended September 30, 1999 1998 2000 1999 - ----------------------------------------------------------------------------------------------------------- (unaudited) NET SALES $6,437 $3,518 $8,128 $4,444 COST OF GOODS SOLD 4,446 2,391 5,190 2,978 ------- -------- ------- ------ GROSS PROFIT 1,991 1,127 2,938 1,466 OPERATING EXPENSES Selling 1,187 968 1,327 729 General and administrative 1,945 979 2,269 878 Research and development 365 203 464 205 ------- -------- ------- ------ 3,497 2,150 4,060 1,812 ------- -------- ------- ------ LOSS FROM OPERATIONS (1,506) (1,023) (1,122) (346) ------- -------- ------- ------ OTHER INCOME (EXPENSE) Interest income (expense) (267) (100) 135 41 Other income (expense) 81 14 (27) (86) ------- -------- ------- ------ (186) (86) 108 (45) ------- -------- ------- ------ LOSS BEFORE INCOME TAXES (1,692) (1,109) (1,014) (391) PROVISION FOR INCOME TAXES 1 1 - - ------- -------- ------- ------ NET LOSS $(1,693) $(1,110) $(1,014) $ (391) ------- -------- ------- ------ NET LOSS ATTRIBUTABLE TO COMMON SHARES Net Loss $ (1,693) $(1,110) $ (3,100) $ (391) Preferred Dividend - - (900) - ------- -------- ------- ------ $(1,693) $(1,110) $(4,114) $ (391) ------- -------- ------- ------ NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.43) $ (0.42) $ (0.79) $ (0.11) ------- -------- ------- ------ WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 3,927,633 2,614,563 5,213,000 3,668,000 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-4 ZAPWORLD. COM and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Nine Months ended Year ended December 31, September 30 1999 1998 2000 1999 - --------------------------------------------------------- ------------- ------------ ------------------------ (unaudited) Cash flows from operating activities: Net loss $(1,693) $(1,110) $(1,014) $(391) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 124 86 250 79 Allowance for doubtful accounts - (30) 18 - Issuance of common stock for services rendered 141 150 63 805 Issuance of common stock for litigation settlement 50 - - - Issuance of stock options for services rendered 137 18 - - Noncash charges related to the settlement of debt 154 - - - Amortization of fair value of warrants, unearned compensation 31 31 41 - Changes in: Accounts receivable (69) (192) (966) (489) Inventories (876) (366) 17 (653) Prepaid expenses and other assets 24 (32) (933) (314) Deposits (13) 2 (29) (88) Other Assets - - (211) (59) Accounts payable 312 173 (130) 74 Accrued liabilities and customer deposits 217 (37) 329 303 ------- ------- ------- ------ Net cash used in operating activities (1,461) (1,307) (2,565) (733) Cash flows from investing activities: Purchases of property and equipment (188) (98) (285) (158) Purchase of American Scooter and Cycle Rental (70) - 132 (19) Purchase of Big Boy Bicycles (15) - - - Proceeds from emPower acquisition 1,032 - - - Investment In Technology Companies - - 167 (127) Purchase of Acquatic Propulsion Technologies - (981) - Purchase of Patents from EVS - - (162) - Payment advances for acquisitions (72) - Issuance of note receivable (20) - - - Purchase of intangibles (66) (64) ------- ------- ------- ------ Net cash provided by (used in) investing 601 (162) (1,129) (304) Cash flows from financing activities: Proceeds (repayment) from issuance of long-term debt (362) 1,281 398 27 Sale of common stock, net of stock offering costs 1,812 - 1,589 3,750 Issuance of common stock under employee purchase plan 6 - - - Repurchase of common stock (11) (16) - - Proceeds from exercise of stock options 2,423 (11) - - Sale of Preferred Stock, net of Preferred stock offering - - 1,972 - costs Increase in Capital Leases - - 26 22 Payments on obligations under capital leases (15) - (10) (7) F-5 Nine Months ended Year ended December 31, September 30 1999 1998 2000 1999 - --------------------------------------------------------- ------------- ------------ ------------------------ (unaudited) Principal Repayments on Note Payable - - (6) (889) (Advances) receipts on notes receivable to shareholders (284) 77 - ------- ------- ------- ------ Net cash provided by financing activities 3,569 1,254 4,046 2,903 NET INCREASE/(DECREASE) IN CASH 2,709 (215) 352 1,866 Cash, beginning of period 475 690 3,184 475 ------- ------- ------- ------ Cash, end of period $3,184 $475 $3,536 $2,341 ======= ======= ======= ====== Supplemental cash flow information: Cash paid during the year for: Interest $115 $69 $7 $77 Income taxes 1 1 1 1 Non-cash investing and financing activities: Conversion of debt into common stock $475 $475 Conversion of accounts payable into common stock 35 35 Equipment acquired through capital lease 27 27 obligations Notes payable used to exercise stock options 32 32 Issuance of common stock upon acquisition of American Scooter and Cycle Rental, Big Boy Bicycles, and emPower Corporation $2,312 $2,312 Assets and liabilities recognized upon acquisition of American Scooter and Cycle Rental, Big Boy Bicycles, and emPower Corporation Cash $1,032 $1,032 Inventories 213 213 Prepaid expenses and other 56 56 Property and equipment 70 70 Patent 1,155 1,155 Accounts payable 131 131
The accompanying notes are an integral part of the consolidated financial statements. F-6 ZAPWORLD.COM AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
Note Common Stock Preferred Stock Unearned Receivable ----------------------- ------------------------ Accumulated Compensation from Shares Amount Shares Amount Deficit and Services Stockholder Total ---------- ------------ ----------- ------------ ------------- -------------- ------------- ---------- Balance, January 1, 1998 2,543 $ 3,169 $ $ (2,315) $ - $ - $ 854 Issuance of common stock 79 383 383 Exercise of stock options 15 15 15 Conversion of notes payable and issuance of warrants in connection with debt 3 76 76 Common Stock issued for services 25 168 168 Net loss (1,110) (1,110) ------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 2,665 3,811 (3,425) 386 Issuance of common stock: Private placement, net of expenses of $614 746 1,721 1,721 Acquisitions 337 2,670 2,670 Conversion of Debt 165 665 665 Other 65 363 363 Exercise of stock options 1,131 2,423 2,423 Stock options and warrants issued for compensation and services 400 (96) 304 Notes receivable from shareholders (285) (285) Net loss (1,693) (1,693) ------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 5,109 12,053 (5,118) (96) (285) 6,554 Issuance of common stock Acquisitions 120 726 726 Services and others 74 83 83 Issuance of Preferred Stock, net of expenses of $400 and fair value of warrants 2,100 3 500 2,600 Beneficial Conversion Features on Preferred Stock 3,100 (3,100) Conversion of Preferred Stock to Common Stock 156 735 (1) (732) 3 Exercise of stock options 98 212 212 Amortization of Unearned compensation 41 41 Note receivable from shareholders 77 77 Net Loss (1,014) (1,014) ------------------------------------------------------------------------------------------------------- Balance, September 30, 2000 (unaudited) 5,557 $15,909 2 $2,868 $ (9,232) $ (55) $ (208) $ 9,282 =======================================================================================================
The accompanying notes are an integral part of the consolidated financial statements F-7 ZAPWORLD.COM and Subsidiaries Notes to the Consolidated Financial Statements December 31, 1999 and 1998 Information as of and for nine months ended September 30, 2000 is unaudited NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES o Nature Of Operations ZAPWORLD.COM (the "Company" or "ZAP") was incorporated in California in September, 1994 under its original name "Zap Power Systems". The name changed on May 16, 1999. ZAP designs, manufactures, and distributes electric bicycle power kits, electric bicycles and tricycles, and other personal electric transportation vehicles. Company products are sold directly to end-users and to distributors throughout the United States and the world. o Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, ZAPWORLD stores, Inc., and all wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated. o Revenue Recognition The Company recognizes revenues when earned; generally when products are shipped. o Inventories Inventories consist primarily of raw materials, work-in-process, and finished goods and are carried at the lower of cost (first-in, first-out method) or market. o Property and Equipment Property and equipment are stated at cost and depreciated using straight-line and accelerated methods over the assets' estimated useful lives. Costs of maintenance and repairs are charged to expenses as incurred. Significant renewals and betterments are capitalized. Estimated useful lives are as follows: Machinery and equipment 7 years Equipment under capital leases 5 years Demonstration bicycles 2 years Office furniture and equipment 7 years Vehicle 5 years Leasehold improvements 15 years or life of lease, whichever is shorter F-8 o Patents & Trademarks Patents & Trademarks consist of costs expended to perfect certain patents and trademarks acquired in the emPower acquisition. These costs will be amortized over an estimated useful life of ten years. o Goodwill Goodwill consists of the excess consideration paid over net assets acquired. Goodwill is amortized over a ten-year period. o Income Taxes The Company uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future bases on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change in deferred tax assets and liabilities during the period. o Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires Management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results. o Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. For certain of the Company's financial instruments, including cash, accounts receivable and accounts payable, the carrying amount approximates fair value because of the short maturities. The carrying amount of the bank note payable and current notes payable approximate fair value as current interest rates available to the Company for similar debt are approximately the same. The fair value of related party debt is impracticable to determine. F-9 o Net Loss Per Common Share Net loss per common share, basic and diluted, has been computed using weighted average common shares outstanding. Potentially dilutive securities have been excluded from the weighted average shares outstanding, as their inclusion would be anti-dilutive (see note F). o Segment Information In 1999, the company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The Company operates in one reportable segment, the design, assembly, manufacture and distribution of electric bicycle power kits, electric bicycles and tricycles, electric scooter, electric motorcycles and other personal electric transportation vehicles. o Unaudited Interim Financial Information The financial information as of September 30, 2000 and for the nine months ended September 30, 1999 and 2000 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for fair presentation of the financial position at such dates and the results of operations and cash flows for the periods then ended. Operating results for the nine months ended September 30, 2000 are not necessarily indicative of results that may be expected for the entire year. NOTE B - INVENTORIES
Year ended December 31, September 30, 1999 1998 2000 (unaudited) Inventories consisted of the following: Raw materials $661,700 $ 442,100 $1,054,900 Work-in-process 349,200 104,100 49,200 Finished goods 714,200 87,700 603,900 -------------- ---------------- ------------------- $1,725,100 $ 633,900 $1,708,000 -------------- ---------------- ------------------- -------------- ---------------- -------------------
F-10 NOTE C - PROPERTY AND EQUIPMENT
Year ended December 31, September 30, Property and equipment consist of the following: 1999 1998 2000 (unaudited) Machinery and equipment $ 187,000 $ 81,600 $ 325,000 Equipment and per capital lease - 45,900 - Computer Equipment 209,600 - 274,100 Demonstration bicycles 89,600 89,600 89,600 Office furniture and equipment 52,000 76,000 97,300 Leasehold improvements 78,400 25,400 91,900 Vehicles 97,600 56,200 118,100 ------------- -------------- ------------------- 714,200 374,700 996,000 Less accumulated depreciation and amortization 363,900 197,700 489,000 ------------- -------------- ------------------- $ 350,300 $ 177,000 $ 507,000 ------------- -------------- ------------------- ------------- -------------- -------------------
D - ADVANCE TO RETAIL STORES AND TECHNOLOGY COMPANIES During the year ended December 31, 1999 the Company issued shares of common stock and paid cash as advances toward the acquisition of retail stores and technology companies. The Company issued 57,803 shares of common stock in the amount of $406,300 and paid cash in the amount of $72,500. E - PROVISION FOR INCOME TAXES 1999 1998 Current tax expense Federal $ - $ - State 800 800 800 800 Significant components of the Company's net deferred tax assets as of December 31 are as follows: 1999 1998 Tax loss carry forward $1,819,600 $1,263,700 Inventory capitalization (99,100) (22,000) Other (70,800) (27,400) Total 1,649,700 1,214,300 Less valuation allowance (1,649,700) (1,214,300) Net deferred tax asset $ - $ - F-11 The Company has available carry forward of approximately $4,758,300 and $2,819,400 of federal and state net operating losses, respectively, expiring through 2019. The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose restrictions on the utilization of net operating losses in the event of an "ownership change" as defined by Section 382 of the Internal Revenue Code. There has been no determination whether an ownership change, as defined, has taken place. Therefore, the extent of any limitation has not been ascertained. A valuation allowance is required for those deferred tax assets that are not likely to be realized. Realization is dependent upon future earnings during the period that temporary differences and carry forwards are expected to be available. Because of the uncertain nature of their ultimate utilization, a full valuation allowance is recorded against these deferred tax assets. The valuation allowance increased $435,400 in 1999 and $386,700 in 1998. The difference between the income tax expense at the federal statutory rate and the Company's effective tax rate is as follows: 1999 1998 Statutory federal income tax rate 34% 34% State income tax rate 6 6 Valuation allowance (40) (40) -% -% NOTE F - STOCK OPTIONS AND WARRANTS Options to purchase common stock are granted by the Board of Directors under three Stock Option Plans, referred to as the 1999, 1996 and 1995 plans. Options granted may be incentive stock options (as defined under Section 422 of the Internal Revenue Code) or nonstatutory stock options. The number of shares available for grant under the 1999, 1996 and 1995 Plans are 1,500,000, 600,000 and 750,000, respectively. Options are granted at no less than fair market value on the date of grant, become exercisable as they vest (over a 2 or 3 year period) and expire ten years after the date of grant F-12 Option activity under the three plans is as follows:
1999 Plan 1996 Plan 1995 Plan Wtd Avg Wtd Avg Wtd Avg Number Exercise Number Exercise Number Exercise Of Shares Price of Shares Price of Shares Price ------------ ------------- ------------ -------------- ------------ -------------- Outstanding at 1/1/98 383,500 $ 1.38 446,300 $ 0.56 Granted 20,000 4.31 - Exercised (12,500) 1.00 - - Canceled (26,500) 1.48 (27,400) $ 0.40 -------- ---------- -------- Outstanding at 12/31/98 - $ - 364,500 1.55 418,900 $ 0.56 Granted 481,000 6.33 35,000 4.06 - - Exercised (586) 5.00 (259,500) 1.15 (299,000) $ 0.40 Forfeited ( (1,000) 5.00 (14,500) 3.50 (49,900) $ 1.00 -------- ---------- -------- Outstanding at 12/31/99 479,414 $ 6.34 125,500 $ 2.85 70,000 $ 1.00 -------- ---------- --------
The weighted average fair value of all options granted during the years ending December 31, 1999 and 1998 was $4.33 and $3.66 respectively. The following information applies to employee incentive stock options outstanding at December 31, 1999:
Plan: 1999 1996 1995 ----------- ----------------------------- ----------- Range of exercise prices $5.00-$7.00 $ 1.00-$1.00 $3.68-$5.25 $1.00-$1.00 Options outstanding 479,414 47,500 78,000 70,000 Weighted average exercise price $ 6.34 $ 1.00 $ 3.98 $ 1.00 Weighted average remaining life (years) 9.79 6.58 8.03 6.50 Options exercisable 46,833 47,500 62,806 70,000 Weighted average exercise price $ 6.31 $ 1.00 $ 3.97 $ 1.00
The Company recorded the non-employee options and warrants based on the grant date fair value in accordance with SFAS 123. The grant date fair value of each stock option was estimated using the Black-Scholes option-pricing model. The company recorded expense in the amount of $135,000 and $48,500 for the year ended December 31, 1999 and 1998, respectively. As of December 31, 1999 the Company has recorded prepaid expense in the amount of $166,700 for future services. F-13 Options and warrant activity for non-employees is as follows: Weighted Avg. Outstanding at 1/1/98 46,000 $4.33 Granted 82,800 4.86 Exercised (2,500) 1.00 --------------- Outstanding at 12-31-98 126,300 4.74 Granted 1,138,429 4.58 Exercised (571,429) 3.50 Forfeited (64,300) 4.75 Outstanding at 12-31-99 629,000 5.51 The Company accounts for stock options issued to employees under the policy of APB 25 "Accounting for Stock Issued to Employees". The Company has adopted the disclosure only provision of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation (SFAS 123)". Accordingly, no compensation expense has been recognized for stock options issued to employees during 1999 and 1998. Had compensation cost for the Company's options been based on the fair value of the awards at the grant date consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have approximated the following proforma amounts: 1999 1998 Net loss - as reported $(1,692,600) $(1,109,400) Net loss - pro forma (2,686,700) (1,254,600) Loss per share - as reported (.43) (.42) Loss per share - pro forma (.68) (.48) F-14 The fair value of each option and warrant is estimated on date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 1999 1998 Dividends None None Expected volatility 86.00% 100% Risk free interest rate 6.00% 6.00% Expected life 5 years 10 years In connection with the issuance of $800,000 of notes payable in 1998, the Company issued 20,000 warrants at $4.00 per share, to purchase the Company's common stock, to an entity that assisted the Company in arranging the financing. The warrants are immediately exercisable and expire September, 2001. The fair value of warrants at the time of issuance was $61,800 and is being amortized as additional interest expense over the term of the debt. Amortization expense of $30,900 was recorded for both 1998 and 1999. NOTE G - MAJOR CUSTOMERS and VENDORS During 1999, one customer accounted for $680,100 or 11% of the Company's net sales. During, 1998, one customer accounted for $617,000 or 17.5% of the Company's net sales, and during late 1998 the Company ceased selling to this customer. During 1999, one vendor accounted for $798,600 or 12% of the Company's supplies and materials. During 1998 one vendor accounted of $440,000 or 7%, of the Companies supplies and materials. NOTE H - COMMITMENTS The Company rents warehouses and office space under leases that expire in June 2001. An option exists to extend the lease for an additional five-year period. Rent expense under part of the applicable leases was $342,000 and $289,200 in 1999 and 1998, respectively. F-15 Future minimum lease payments on the lease are as follows: Year ending December 31, 2000 $ 320,600 2001 222,600 2002 138,300 2003 115,200 2004 and thereafter 54,300 Total $ 851,000 NOTE I - PREFERRED STOCK The Board of Directors authorized 10,000,000 shares of Preferred Stock in December 1999. The Preferred Stock which has been issued may be converted into Common Stock at a price which is specified in the Securities Purchase Agreement. The holders of the outstanding Preferred Stock are also entitled to receive a dividend based upon 6% of the stated value per annum. On July 19, 2000, ZAP received funding for the purchase of $3.0 million in a Preferred Stock offering from Union Atlantic L.C.. The Union Atlantic Capital L.C. investors purchased $3.0 million of Series A-1 Convertible Preferred Stock at a price of $1,000 per share. Additionally, by October 24, 2000, the Company received additional funding totaling $2.0 million from Union Atlantic Capital L.C. for Series A-2 Convertible Preferred Stock at a price of $1,000 per share. This $2.0 million preferred stock financing was received in two parts: $1,333,333 on October 6, 2000, and the remaining $666,666 on October 24, 2000. In connection with the Preferred Stock Offering we also issued warrants to purchase 816,666 shares of Common Stock at an exercise price of $5.43 pershare. During the 3rd Quarter, Union Atlantic Capital L.C. converted 628 shares of Preferred Stock for 155,989 shares of Common Stock at an average conversion price of $4.35 per share. During the third quarter of 2000, the company recorded a deemed divided on preferred stock of $3,100,000. This is the result of the conversion price of the convertible preferred stock issued during the quarter being less than the market price of the common stock on the date of the transaction. All deemed dividends related to the transaction have been recognized during the third quarter as a result of the preferred stock being immediately convertible at the discretion of the holder. NOTE J - ACQUISITIONS On December 30, 1999, the Company purchased all of the common stock of emPower, Inc., a designer and manufacturing business of proprietary electric scooters, for 265,676 shares of common stock. The Company issued warrants to emPower's shareholders to purchase an aggregate of 200,000 shares of the Company's common stock. The warrants expire three years after issuance. The acquisition has been accounted for as a purchase at $5.75 per share. The purchase was allocated to the assets acquired, including patents, and liabilities assumed based on their estimated fair values. The acquisition resulted in no goodwill. Results of operations for emPower have been included with those of the company for periods subsequent to the date of acquisition. F-16 The purchase price of emPower was allocated as follows: Cash $ 1,033,000 Inventories 96,300 Property and equipment 64,100 Patents 1,042,400 Liabilities assumed (54,200) ----------- $ 2,181,600 =========== Consideration paid: Common stock $ 2,181,600 In September 1999, the Company purchased all assets of Big Boy Bicycles and assumed certain liabilities. The company issued 1,000 shares of common stock and paid $15,165 in cash. The purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair value. Results of operations for American Scooter and Cycle Rental have been included with those of the Company for the periods subsequent to the date of acquisition. The purchase price of Big Boy was allocated as follows: Inventories $ 73,800 Property and equipment 4,400 Goodwill 1,300 Expenses 1,900 Liabilities assumed (59,800) -------- $ 21,600 ======== Consideration paid: Cash $15,200 Common stock 6,400 -------- $21,600 ======== In July 1999, the Company purchased certain assets and assumed certain liabilities of American Scooter and Cycle Rental. The Company issued 12,924 shares of common stock and paid $70,000 in cash. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. Results of operations for American Scooter and Cycle Rental have been included with those of the company for periods subsequent to the date of acquisition. The purchase price of certain assets and liabilities of American Scooter and Cycle Rental were allocated as follows: Inventories $ 43,300 Property and equipment 1,500 Goodwill 113,300 Expenses 4,600 Liabilities assumed ( 16,600) --------- $ 146,100 ========= Consideration paid: $ 70,000 Cash 76,100 --------- Common stock: $ 146,100 ========= F-17 The above operations represent 5% of total revenues for the year ended December 31,1999. NOTE K - SUBSEQUENT EVENTS On January 20, 2000, the Company purchased all of the common stock of Zap of Santa Cruz, Inc., a California corporation, for $25,000 in cash and 8,803 shares of the Company's common stock. The acquisition will be accounted for as a purchase. The purchase price is approximately $125,000 and will be allocated to net assets acquired based on their estimated fair values. The acquisition closed in the first quarter of calendar year 2000. On February 29, 2000, the Company purchased all of the common stock of Electric Vehicle Systems, Inc., a California corporation, for $20,000 in cash and 25,000 shares of the Company's common stock. The acquisition will be accounted for as a purchase. The purchase price is approximately $285,000 and will be allocated to the net assets acquired based on the estimated fair value. The acquisition closed in the first quarter of calendar year 2000. On June 24, 2000, the Company received approval from the shareholders to amend the Articles of Incorporation to authorize the issuance of Preferred Stock. Shareholder approval was also received to accept $3.0 million in new Preferred Stock financing from Union Atlantic Capital L.C. The Union Atlantic investors purchased $3.0 million of Series A Convertible preferred stock at a price of $1,000 per share with a conversion price of $4.50 per share of common stock. The Union Atlantic investors have the option to invest an additional $2.0 million, with a conversion price of 110% of the closing bid price of the Common Stock on the trading day of the closing of such investment. The funding was received on July 19, 2000. On July 1, 2000 ZAP completed its acquisition by merger of Aquatic Propulsion Technology, Inc. (APT), a Florida electric sea scooter company. The merger documents were filed with the California Secretary of State on August 8, 2000. ZAP acquired all technology, including five patents on electric sea scooters, assets, current operations from APT in exchange for 120,000 shares of ZAP common stock, $95,000 in cash and the assumption of APT's liabilities to the extent of $465,700. On July 19, 2000, ZAP sold $3.0 million of a Preferred Stock offering to Union Atlantic Capital L.C. The Union Atlantic Capital L.C. investors purchased $3.0 million of Series A-1 Convertible Preferred Stock at a price of $1,000 per share. Additionally, by October 24, 2000, the Company sold an additional $2.0 million Series A-2 Convertible Preferred Stock at a price of $1,000 per share to Union Atlantic Capital L.C. On August 14, 2000, ZAP announced that it had signed an agreement to form a joint venture with Ningbo Topp industrial Co. Ltd. of China. The purpose of the joint venture will be for manufacturing and distributing electric vehicles in China, starting with the ZAPPY scooter. Under the terms of the joint venture, the joint venture company will purchase key components from ZAP, assemble and distribute the ZAPPY in China, and pay ZAP a royalty on each electric scooter sold in China. Additionally, ZAP will receive a share of the profits from the joint venture. As of September 30, 2000 the joint venture has not been formed. F-18 On October 6, 2000, ZAP completed its purchase of Electric Motorbike Inc. The Company issued 140,000 shares of its common stock and $135,000 in cash as the final purchase price. F-19 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Our Amended Bylaws provide that we may indemnify any director, officer, agent or employee against all expenses and liabilities, including counsel fees, reasonably incurred by or imposed upon such persons in connection with any proceeding to which any such persons may become involved by reason of such persons being or having been a director, officer, employee or agent of our company. Moreover, our Amended Bylaws provide that we shall have the right to purchase and maintain insurance on behalf of any such persons whether or not we would have the power to indemnify such person against the liability insured against. Our Amended Articles of Incorporation provide that we may indemnify our directors and officers to the fullest extent permissible under California law. In accordance with these Articles of Incorporation, the liability of our directors for monetary damages is eliminated to the fullest extent permissible under California law. Item 25. Other Expenses of Issuance and Distribution The following table sets forth all expenses payable by the registrant in connection with the sale of the Common Stock being offered. All the amounts shown are estimates except for the registration fee. Registration fee...........................$ 3,000 Printing and engraving expenses............$ 5,000 Legal fees and expenses....................$ 65,000 Accounting Fees and Expenses...............$ 25,000 Miscellaneous..............................$ 2,000 Total......................................$ 100,000 Item 26. Recent Sales of Unregistered Securities Since our inception in 1994, we have issued or sold unregistered securities in the amounts, at the times, for the consideration and pursuant to the exemptions from registration provided by the Securities Act of 1933, as amended (the "Act"), as follows: In 1998, pursuant to an exemption under Rule 701 of Regulation D promulgated under the Act and in connection with our 1996 Stock Option Plan, we granted options to purchase 20,000 shares of our Common Stock to employees. In 1998, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1996 Stock Option Plan we granted options to purchase 82,800 shares of our Common Stock to non-employees. -45- In 1998, pursuant to an exemption under Section 4(2) of the Act and in connection with the issuance of $800,000 in notes payable, we issued a warrant to purchase 20,000 shares of our Common Stock. This warrant is exercisable at a price of $4.00 per share until September 2001. In 1998, pursuant to an exemption under Section 4(2) of the Act we issued 15,000 shares of our Common Stock to employees for an aggregate price of $15,000. In 1998, pursuant to an exemption under Section 4(2) of the Act and in connection with the conversion of $14,317 of debt to equity, we issued 2,727 shares of our Common Stock. In 1998, pursuant to an exemption under Section 4(2) of the Act, we issued 25,136 shares of our Common Stock for payment of current and future services. On December 30, 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the outstanding Common Stock of emPower, Inc., a Massachusetts corporation, we issued 265,676 shares of our Common Stock and a warrant to purchase 200,000 shares of our Common Stock, exercisable until December 30, 2002, to the shareholders of emPower, Inc. In September 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the assets of Big Boy Bicycles, a Florida corporation, we issued 1000 shares of our Common Stock to the shareholders of Big Boy Bicycles. In July 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the assets of American Scooter and Cycle Rental, a California corporation, we issued 12,924 shares of our Common Stock to the shareholders of American Scooter and Cycle Rental. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with the settlement of litigation, we issued 8,666 shares of our Common Stock to Transmag, Inc. In 1999, pursuant to an exemption under Rule 701 of Regulation D promulgated under the Act and in connection with our 1996 Stock Option Plan, we granted options to purchase 35,000 shares of our Common Stock to employees. In 1999, pursuant to an exemption under Rule 701 of Regulation D promulgated under the Act and in connection with our 1999 Stock Option Plan, we granted options to purchase 481,000 shares of our Common Stock to employees. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1999 and 1996 Stock Option Plans we granted options to purchase 1,138,429 shares of our Common Stock to non-employees. In 1999, pursuant to an exemption under Section 4(2) of the Act, we sold 29,833 shares of our Common Stock to purchasers for an aggregate price of $177,900. -46- In 1999, pursuant to an exemption under Section 4(2) of the Act, we sold 746,119 shares of our Common Stock to purchasers for an aggregate price of $1,720,600. In 1999, pursuant to an exemption under Section 4(2) of the Act, we issued 27,479 shares of our Common Stock for payment of current and future services. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1999 Employee Common Stock Purchase Plan, we sold 6,588 shares of our Common Stock to employees for an aggregate price of $5,600. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with the conversion of $664,700 of debt to equity, we issued 165,111 shares of our Common Stock. In 1999, pursuant to an exemption provided by Rule 701 of Regulation D promulgated under the Act and in connection with the exercise of employee stock options, we issued 559,086 shares of our Common Stock to employees for an aggregate price of $423,400. On January 20, 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the outstanding Common Stock of Zap of Santa Cruz, Inc., a California corporation, we issued 8,803 shares of our Common Stock to the shareholders of Zap of Santa Cruz, Inc. On February 29, 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the outstanding Common Stock of Electric Vehicle Systems, Inc., a California corporation, we issued 25,000 shares of our Common Stock to the shareholders of Electric Vehicle Systems, Inc. In October 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the assets of EMB, Inc., we issued 140,000 shares of our Common Stock. In July 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of Acquatic Propulsion Technology, Inc., a Bahaman corporation, we issued 120,000 shares of our Common Stock to the shareholders of Acquatic Propulsion Technology, Inc. In July 2000, pursuant to an exemption under Section 4(2) of the Act, we sold 3,000 shares of our Series A-1 Preferred Stock to investors for an aggregate purchase price of $3,000,000. In connection with this sale we issued warrants to purchase 816,666 shares of our Common Stock. In October 2000, pursuant to an exemption under Section 4(2) of the Act, we sold 2,000 shares of our Series A-2 Preferred Stock to investors for an aggregate purchase price of $2,000,000. In 2000, pursuant to an exemption under Section 4(2) of the Act, we issued warrants to purchase 19,600 shares of our Common Stock. -47- In 2000, pursuant to an exemption under Section 4(2) of the Act, we issued 23,300 shares of our Common Stock. In 2000, pursuant to an exemption under Section 4(2) of the Act and an exemption provided by Rule 701 of Regulation D promulgated under the Act and in connection with our 1999 Stock Option Plan, we issued 414,150 shares of our Common Stock to employees. In 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1999 Stock Option Plan we granted options to purchase 100,000 shares of our Common Stock to non-employees. Item 27. Exhibits Exhibit Number Document 3.1 Articles of Incorporation of ZAP Power Systems, endorsed and filed on September 23, 1994. 3.2 Certificate of Amendment to Articles of Incorporation of ZAP Power Systems, endorsed and filed on November 8, 1996. 3.3 Certificate of Amendment of Articles of Incorporation of ZAP Power Systems, endorsed and filed on June 2, 1999. 3.4 Certificate of Amendment of Articles of Incorporation of ZAPWORLD.COM, endorsed and filed June 28, 2000. 3.5 Certificate of Determination of Rights and Preferences of the Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock, endorsed and filed June 28, 2000. 3.6 Bylaws of ZAP Power Systems, dated September 26, 1994. 3.7 Amended Bylaws of ZAPWORLD.COM, dated June 24, 2000. 5.1 Opinion of Foley & Lardner 10.1 Agreement and Plan of Reorganization By and Among ZAPWORLD.COM and ZAP OF SANTA CRUZ, INC. dated January 20, 2000. 10.2 Agreement of Merger of ZAPWORLD.COM and ZAP OF SANTA CRUZ, INC. dated January 20, 2000. -48- 10.3 Plan of Reorganization for EMB, Inc. dated May 5, 2000. 10.4 Agreement between ZAPWORLD.COM and American Scooter & Cycles Rental, Inc. dated July 12, 1999. 10.5 Asset Purchase Agreement between ZAPWORLD.COM and American Scooter and Cycle Rentals, Inc. dated January 31, 2000. 10.6 Stock Purchase Agreement and Plan of Reorganization between ZAPWORLD.COM, Barbary Coast Pedi Cab Leasing Corporation, and Jeff Sears and Helena Sears as Trustees of the Jeff Sears and Helena Sears Revocable Trust dated January 31, 2000. 10.7 Agreement and Plan of Reorganization by and among ZAPWORLD.COM and Aquatic Propulsion Technology, Inc. dated July 1, 2000. 10.8 Agreement of Merger of ZAPWORLD.COM and Aquatic Propulsion Technology, Inc. dated July 1, 2000. 10.9 Agreement and Plan of Reorganization by and among ZAPWORLD.COM, emPower Acquisition, Inc. and EMPower Corporation dated December 17, 1999. 10.10 Lease Agreement between ZAP Power Systems and Daniel O. Davis and Robin H. Davis for premises known as 117 Morris Street dated January 12, 1996. 10.11 Extension of Lease Between ZAP Power Systems and Daniel O. Davis and Robin H. Davis for premises known as 117 Morris Street dated July 10, 1998. 10.12 Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6780 Depot Street dated August 6, 1999. 10.13 Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6784 Sebastopol Ave. dated August 24, 2000. 10.14 Lease Agreement Between ZAP POWER SYSTEMS and Daniel O. Davis and Robbin H. Davis for 111 Morris Street dated June 5, 1998. -49- 10.15 Lease Agreement Between ZAPWORLD.COM and Ron Basso DBA/R. S. Basso Company for 7190 Keating Avenue dated July 1, 1996. 10.16 Sublease Agreement Between ZAPWORLD.COM and Ron Basso, an individual doing business as R.S. Basso Company for 7190 Keating Avenue dated August 1, 1999. 10.17 Sublease Agreement Between ZAPWORLD.COM and American Scooter and Cycle Rental, Inc. for 2715 Hyde Street, San Francisco, CA dated July 13, 1999, plus addendum thereto dated April 4, 2000. 10.18 Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6780-B Depot Street dated October 16, 2000. 23.1 Consent of Foley & Lardner 23.2 Consent of Grant Thornton LLP Item 28. Undertakings a) The Registrant hereby undertakes that it will: 1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: -50- (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. 2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the bona fide offering. 3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the Offering. -51- SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the city of San Francisco, state of California, on February 12, 2001. Zapworld.com By: /s/ Gary Starr Gary Starr Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated. Signature Title Date /s/ Gary Starr Chief Executive Officer, Chief February 12, 2001 - ------------------------ Gary Starr Financial Officer, and Director /s/ Robert E. Swanson Chairman of the Board February 12, 2001 - ------------------------ Robert E. Swanson and Director /s/ William D. Evers Director February 12, 2001 - ------------------------ William D. Evers /s/ Harry Kraatz Director February 12, 2001 - ------------------------ Harry Kraatz EX-3.1 2 0002.txt ARTICLES OF INCORPORATION 1913349 ENDORSED FILED In the office of the Secretary of State of the State of California SEP 23 1994 TONY MILLER, Acting Secretary of State ARTICLES OF INCORPORATION OF ZAP POWER SYSTEMS ONE: The name of this corporation is ZAP POWER SYSTEMS. TWO: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE: The name and address in this state of the corporation's initial agent for service of process is Gary Starr, 6933 Nolan Rd., Forestville, California 95436. FOUR: This corporation is authorized to issue only one class of shares of stock which shall be designated common stock. The total number of shares it is authorized to issue is 1,000,000 shares. FIVE: The names and addresses of the persons who are appointed to act as the initial directors of this corporation are: James McGreen 2235 Clement St., Alameda, California 94501 Gary Starr 6933 Nolan Rd., Forestville, California 95436 Nancy K. Cadigan 2235 Clement St., Alameda, California 94501 Susan Bryer Starr 6933 Nolan Rd., Forestville, California 95436 SIX: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. SEVEN: The corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under California law. IN WITNESS WHEREOF, the undersigned, being all the persons named above as the initial directors, have executed these Articles of Incorporation. Dated: September 21, 1994 /s/ JAMES McGREEN ------------------------------------- James McGreen /s/ GARY STARR ------------------------------------- Gary Starr /s/ NANCY K. CADIGAN ------------------------------------- Nancy K. Cadigan /s/ SUSAN BRYER STARR ------------------------------------- Susan Bryer Starr -2- The undersigned, being all the persons named above as the initial directors, declare that they are the persons who executed the foregoing Articles of Incorporation, which execution is their act and deed. Dated: September 21, 1994 /s/ JAMES McGREEN ------------------------------------- James McGreen /s/ GARY STARR ------------------------------------- Gary Starr /s/ NANCY K. CADIGAN ------------------------------------- Nancy K. Cadigan /s/ SUSAN BRYER STARR ------------------------------------- Susan Bryer Starr -3- EX-3.2 3 0003.txt CERTIFICATE OF AMENDMENT A483656 ENDORSED--FILED In the office of the Secretary of State of the State of California NOV 08 1996 BILL JONES, Secretary of State CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION OF ZAP POWER SYSTEMS JAMES McGREEN and GARY STARR certify that: 1. They are the Chief Executive and Chief Financial Officers of ZAP POWER SYSTEMS, a California corporation. 2. The Board of Directors of ZAP POWER SYSTEMS has approved the following amendment to Article FOUR of the Articles of Incorporation of the corporation: ARTICLE FOUR: This corporation is authorized to issue only one class of shares of stock which shall be designated common stock. The total number of shares it is authorized to issue is 10,000,000 (ten million) shares. 3. The amendment has been approved by the required vote of the shareholders in accordance with Section 902 of the California Corporations Code. The corporation has only one class of shares. Each outstanding share is entitled to one vote. The corporation has 712,790 shares outstanding and, hence, the total number of shares entitled to vote with respect to the amendment was 712,790. The number of shares voting in favor of the amendment exceeded the vote required, in that the affirmative vote of the majority, that is, more than 50 percent of the outstanding shares was required for approval of the amendment and the amendment was approved by the affirmative vote of 581,830 shares, or slightly more than 81% percent of the outstanding voting shares. Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of their own knowledge and that this declaration was executed on: Date: 10/10/96 /s/ James McGreen ------------------------------- James McGreen, Director/Chief Executive Officer Date: 10/10/96 /s/ Gary Starr ------------------------------- Gary Starr, Director/Chief Financial Officer Date: 10/10/96 /s/ Nancy Cadigan ------------------------------- Nancy Cadigan, Director Date: /s/ Lee Sannella ------------------------------- Lee Sannella, Director Date: 10/10/96 /s/ Jessalyn Nash ------------------------------- Jessalyn Nash, Director -2- EX-3.3 4 0004.txt CERTIFICATE OF AMENDMENT A0526118 ENDORSED--FILED In the office of the Secretary of State of the State of California JUN 2 1999 Bill Jones, Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF ZAP POWER SYSTEMS James McGreen and Nancy K. Cadigan hereby certify that: 1. They are the President and Secretary, respectively, of ZAP Power Systems, a California corporation. 2. Article I of the Articles of Incorporation of this corporation is amended to read as follows: "The name of this corporation is "ZAPWORLD.COM" 3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors as being advisable for adoption. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902, Corporations Code. The total number of outstanding shares of the corporation is 3,679,566. There are no outstanding shares of preferred stock. The number of shares voting in favor of the amendment exceeded the vote required. The percentage vote required was more than fifty percent (50%). We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct to our knowledge. DATED: May 26, 1999 /s/ James McGreen ------------------------------- James McGreen, President /s/ Nancy K. Cadigan ------------------------------- Nancy K. Cadigan, Secretary EX-3.4 5 0005.txt CERTIFICATE OF AMENDMENT A0548534 ENDORSED--FILED in the office of the Secretary of State of the State of California JUN 28 2000 Bill Jones, Secretary of State CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF ZAPWORLD.COM A California corporation The undersigned certify that: 1. They are the President and Secretary of ZAPWORLD.COM, a California corporation (the "Corporation"). 2. The Articles of Incorporation of the Corporation dated September 21, 1994 and filed with the California Secretary of State on September 23, 1994 under File No. 1913349, as amended by Certificate of Amendment of Articles of Incorporation dated October 10, 1996 and filed with the California Secretary of State on November 8, 1996 under File No. A483656, and as amended by Certificate of Amendment of Articles of Incorporation dated May 26, 1999 and filed with the California Secretary of State on June 2, 1999 under File No A0526118, are hereby amended as follows: 3. Article FOUR is deleted and the text stated below is inserted in its place: Four (a) The corporation is authorized to issue two classes of stock, designated `Common Stock' and `Preferred Stock,' respectively. The number of shares of Common Stock the corporation is authorized to issue is ten million (10,000,000). The number of shares of Preferred Stock the corporation is authorized to issue is ten million (10,000,000). (b) The Preferred Stock may be divided into such number of series as the board of directors may determine. The board of directors is authorized to determine and alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, and to fix the number of shares and the designation of any series of Preferred Stock. The board of directors may, within the limits stated in any resolution or resolutions of the board of directors originally fixing the number of shares constituting any series, increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series subsequent to the issue of shares of that series." 4. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors. 5. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902, California Corporations Code. The total number of outstanding shares of Common Stock of the Corporation is 5,226,594. There are no outstanding shares of Preferred Stock. The number of outstanding shares of Common Stock voting in favor of the amendment exceeded the vote required. The percentage vote required was more than fifty percent (50%). The undersigned further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: June 26, 2000 /s/ John Dabels ---------------------- John Dabels, President /s/ Oonagh Duggan ---------------------- Oonagh Duggan, Secretary -2- EX-3.5 6 0006.txt CERTIFICATE OF DETERMINATION ANNEX I TO SECURITIES PURCHASE AGREEMENT 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, GARY STARR 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 "Initial Preferred Stock") is 3,000, none of which is presently outstanding, and the authorized number of shares of Series A-2 Convertible Preferred Stock (the "Series A-2 Convertible Preferred Stock") is 2,000, 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 (3,000) shares of Preferred Stock as Series A-1 Convertible Preferred Stock, $1,000 Par Value and two thousand hundred (2,000) 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. "Additional Closing Date" means the date of the closing of the purchase and sale of the Additional Preferred Stock, as provided herein. 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 in Article III Paragraph B(7)) over (ii) the net proceeds (after brokerage commissions, if any) received by the Converting Holder (as defined in Article III Paragraph B(7)) 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 in Article III Paragraph B(7)) 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. "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. D. "Closing Date" means the Initial Closing Date or the Additional Closing Date, as the case may be. E. "Common Stock" means the Company's common stock, no par value per share. F. "Conversion Price" means, with respect to any relevant date, in the event the Closing Date of the Initial Preferred Stock is on or before Friday, June 23, 2000, the Conversion Price for the Initial Preferred Stock shall be $4.50 per share. The Conversion Price for (1) the Initial Preferred Stock, if the Closing Date of the Initial Preferred Stock is after Wednesday, June 21, 2000, and (2) the Series A-2 Preferred Stock, shall be the lesser of (i) the Fixed Conversion Price or (ii) the Variable Conversion Price, which is in effect as of such date. G. "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. H. "Fixed Conversion Price" means 110% of the Closing Bid Price of the Common Stock on the trading day immediately preceding the Closing Date of the Initial Preferred Stock, which amount shall be subject to the adjustment as provided herein. I. "Holder" means a person or entity holding shares of the Preferred Stock. J. "Initial Closing Date" means the date of the closing of the purchase and sale of the Initial Preferred Stock, as provided herein. K. "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. L. "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. M. "Market Price," means, (i) as of any date between the day after the relevant Closing Date and the second annual anniversary of such Closing Date, the average of the Closing Bid Price (in U.S. Dollars) during the twenty-two (22) consecutive trading days ending on the trading day immediately preceding the relevant date (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during such 22 trading day period), (ii) as of any date thereafter and through and including the day prior to the Maturity Date, the average of the Closing Bid Price (in U.S. Dollars) during the forty-five (45) consecutive trading days ending on the trading day immediately preceding the relevant date (subject to equitable adjustment for any stock splits, stock dividends, reclassifications or similar events during such 45 trading day period). N. "Maturity Date" means the date which is thirty-six (36) months after the Closing Date of the Initial Preferred Stock. O. "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, dissolution or winding up of the Company, whether voluntary or involuntary. P. "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. Q. "Securities" means the Preferred Stock, the Warrants and the Common Stcok issuable upon conversion of the Preferred Stock or the exercise of the Warrants. 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 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 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% per annum. Except as described below, the dividend shall be payable upon June 30 of each year (the "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 four (4) business days after the Dividend Payment Date (such fourth 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: 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 major accounting firms or another firm reasonably acceptable to Holders of a majority of the Preferred Stock. The auditors, at the expense of the party in error, shall audit the calculations and notify the Company and the Holder of the results as soon as practicable 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 five (5) 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 five (5) business days after the Delivery Date): 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 those terms are 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 four 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 four (4) 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. 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 Article III hereof, 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 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 Default. If, at any time: a. the Company challenges, disputes or denies the right of a Holder of Preferred Stock to effect a conversion of the Preferred Stock 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, or b. 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 cash at a redemption price (the "Mandatory Purchase Amount") equal to the Cap Redemption Amount (as defined in Article V Paragraph B) of the unconverted Preferred Stock held by such Holder, provided, however, that the Company shall have a period of sixty (60) days within which to (i) have the lawsuit or proceeding dismissed and honor the Conversion Notice, or (ii) raise the capital required to redeem the Mandatory Purchase Price, as the case may be. Under any of the circumstances set forth above, the Company shall be responsible fore the payment of all costs and expenses of such holder, including, but not necessarily limited to, reasonable legal fees and expenses, as and when incurred in connection with such holder's disputing any such action or pursuing such Holder's rights hereunder (in addition to any other rights such Holder may have hereunder or otherwise). The Mandatory Purchase Amount will be payable to such Holder in cash within five (5) business days from the date such Holder give 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 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 automatically converted (an "Automatic Conversion"), 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 expiration of ??? days from the date a Holder has exercised a right pursuant to which the last share of Common Stock issuable under the Cap Regulations is to be issued, the then issuable number of shares of Common Stock upon conversion of all of the then outstanding Preferred Stock pursuant to the Cap Regulations (the "Cap Amount") is less than the number of shares of Common Stock which would then be otherwise issuable upon conversion of all of the then outstanding shares of Series A Preferred Stock without regard to such Cap Regulations (a "Trading Market Trigger Event"), 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 ("Trading Market Prohibitions"). In this event, the Holder of a share of Preferred Stock which can not be converted as result of the Cap Regulations after all such Preferred Stock which can be converted under the Cap Amount have been converted (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 the three (3) consecutive 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 (as defined in Article V Paragraph B), 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. 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. Anything herein to the contrary notwithstanding, the remedy contained in clauses (a) and (b) of this Paragraph E(1) of this Article III shall not be available to the Holder of such shares until after the expiration of 60 days from the date a Holder has exercised a right pursuant to which the last share of Common Stock issuable under the Cap Regulations is to be issued. The Cap Limitation 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. 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) with respect to an Automatic Conversion, if any, of the shares of Preferred Stock as described in Article III Paragraph C hereof, (ii) as specifically provided in this Certificate of Determination as an exception to this provision, (iii) while there is outstanding a tender offer for any or all of the shares of the Company's Common Stock, or (iv) 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), 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 (the "1934 Act"). 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 Closing Date of the Initial Preferred Stock 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 Article IX Paragraph D. 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 (such event being the "Reserved Amount Trigger Event"), 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 in Article V Paragraph C) to the Company, to require the Company to purchase for cash, at an amount per share equal to the Redemption Amount (as defined in Article V Paragraph B), a portion of the holder's Preferred Stock such that, after giving effect to such purchase, the holder's allocated portion of 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 Article V Paragraph A(2). 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 or refusal to delivery Conversion Certificates under Paragraph B(1) 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 all or part of such holders 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 (as defined in Paragraph B below) in effect at the time of the redemption hereunder. Upon the Company's receipt of any Redemption Notice hereunder, the Company shall immediately (and in any event within five (5) business days following such receipt) deliver a written notice (a "Redemption Announcement") to all holders of Preferred Stock stating the date upon which the Company received such Redemption Notice and the amount of Preferred Stock covered thereby. 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) "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 Bid Prices for the twenty-two (22) consecutive trading days prior to 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 60 days after the latter of (i) its receipt of Redemption Notice, and (ii) the date of its Redemption Announcement, 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. 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 Designate 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 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, the Initial 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, the Initial 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, the Initial Conversion Price shall be deemed to be the amount of such Initial Conversion Price calculated immediately prior to such record date 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 of shares plus the dividend share(s) issuable or issued thereon (11 in the example). D. 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 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. 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 ____, 2000. - ------------------------- -------------------------------- Gary Starr Oonagh Duggan President Secretary EX-3.6 7 0007.txt BYLAWS BYLAWS OF Zap Power Systems ARTICLE I OFFICES SECTION 1. PRINCIPAL EXECUTIVE OFFICE The location of the principal executive office of the corporation shall be fixed by the board of directors. It may be located at any place within or outside the state of California. The secretary of this corporation shall keep the original or a copy of these bylaws, as amended to date, at the principal executive office of the corporation if this office is located in California. If this office is located outside California, the bylaws shall be kept at the principal business office of the corporation within California. The officers of this corporation shall cause the corporation to file an annual statement with the Secretary of State of California as required by Section 1502 of the California Corporations Code specifying the street address of the corporation' s principal executive office. SECTION 2. OTHER OFFICES The corporation may also have offices at such other places as the board of directors may from time to time designate, or as the business of the corporation may require. ARTICLE II SHAREHOLDERS' MEETING SECTION 1. PLACE OF MEETINGS All meetings of the shareholders shall be held at the principal executive office of the corporation or at such other place as may be determined by the board of directors. SECTION 2. ANNUAL MEETINGS The annual meeting of the shareholders shall be held each year on February 15, at which time the shareholders shall elect a board of directors and transact any other proper business. If this date falls on a legal holiday, then the meeting shall be held on the following business day at the same hour. -1- SECTION 3. SPECIAL MEETINGS Special meetings as of the shareholders may be called by the board of directors, the chairperson of the board of directors, the president, or by one or more shareholders holding at least 10 percent of the voting power of the corporation. SECTION 4. NOTICES OF MEETINGS Notices of meetings, annual or special, shall be given in writing to shareholders entitled to vote at the meeting by the secretary or an assistant secretary or, if there be no such officer, or in the case of his or her neglect or refusal, by any director or shareholder. Such notices shall be given either personally or by first-class mail or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the stock transfer books of the corporation or given by the shareholder to the corporation for the purpose of notice. Notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting. Such notice shall state the place, date, and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and that no other business may be transacted, or (2) in the case of an annual meeting, those matters which the board at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of Section 6 of this Article, any proper matter may be presented at the annual meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of the nominees which, at the time of the notice, the board of directors intends to present for election. Notice of any adjourned meeting need not be given unless a meeting is adjourned for forty-five (45) days or more from the date set for the original meeting. SECTION 5. WAIVER OF NOTICE The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present, whether in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers or consents shall be filed with the corporate records or made part of the minutes of the meeting. Neither the business to be transacted at the meeting, nor the purpose or any annual or special meeting of shareholders need be specified in any written waiver of notice, except as provided in Section 6 of this Article. SECTION 6. SPECIAL NOTICE AND WAIVER OF NOTICE REQUIREMENTS Except as provided below, any shareholder approval at a meeting, with respect to the following proposals, shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting, or in any written waiver of notice: -2- a. Approval of a contract or other transaction between the corporation and one or more of its directors or between the corporation and any corporation, firm, or association in which one or more of the directors has a material financial interest, pursuant to Section 310 of the California Corporations Code; b. Amendment of the Articles of Incorporation after any shares have been issued pursuant to Section 902 of the California Corporations Code; c. Approval of the principal terms of a reorganization pursuant to Section 1201 of the California Corporations Code; d. Election to voluntarily wind up and dissolve the corporation pursuant to Section 1900 of the California Corporations Code; e. Approval of a plan of distribution of shares as part of the winding up of the corporation pursuant to Section 2007 of the California Corporations Code. Approval of the above proposals at a meeting shall be valid with or without such notice, if it is by the unanimous approval of those entitled to vote at the meeting. SECTION 7. ACTION WITHOUT MEETING Any action that may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent, in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholders' approval, with respect to any one of the following proposals, without a meeting, by less than unanimous written consent shall be given at least ten (10) days before the consummation of the action authorized by such approval: a. Approval of a contract or other transaction between the corporation and one or more of its directors or another corporation, firm or association in which one or more of its directors has a material financial interest, pursuant to Section 310 of the California Corporations Code; b. To indemnify an agent of the corporation pursuant to Section 317 of the California Corporations Code; c. To approve the principal terms of a reorganization, pursuant to Section 1201 of the California Corporations Code; or d. Approval of a plan of distribution as part of the winding up of the corporation pursuant to Section 2007 of the California Corporations Code. -3- Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than a unanimous written consent to those shareholders entitled to vote who have not consented in writing. Notwithstanding any of the foregoing provisions of this section, and except as provided in Article III, Section 4 of these bylaws, directors may not be elected by written consent except by the unanimous written consent of all shares entitled to vote for the election of directors. A written consent may be revoked by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not be revoked thereafter. Such revocation is effective upon its receipt by the secretary of the corporation. SECTION 8. QUORUM AND SHAREHOLDER ACTION A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If a quorum is present, the affirmative vote of the majority of shareholders represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number is required by law and except as provided in the following paragraphs of this section. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action is approved by an least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted except as provided in the foregoing provisions of this section. SECTION 9. VOTING Only shareholders of record on the record date fixed for voting purposes by the board of directors pursuant to Article VIII, Section 3 of these bylaws, or, if there be no such date fixed, on the record dates given below, shall be entitled to vote at a meeting. If no record date is fixed: a. The record date for determining shareholders entitled to notice of, or to vote at a meeting of shareholders, shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. b. The record date for determining the shareholders entitled to a give consent to corporate actions in writing without a meeting, when no prior action by the board is necessary, shall be the day on which the first written consent is given. -4- c. The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution related thereto, or the 60th day prior to the date of such other action, whichever is later. Every shareholder entitled to vote shall be entitled to one vote for each share held, except as otherwise provided by law, by the Articles of Incorporation or by other provisions of these bylaws. Except with respect to election of directors, any shareholder entitled to vote may vote part of his or her shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal. If a shareholder fails to specify the number of shares he or she is affirmatively voting, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares the shareholder is entitled to vote. At each election of directors, shareholders shall not be entitled to cumulate votes unless the candidates' names have been placed in nomination before the commencement of the voting and a shareholder has given notice at the meeting, and before the voting has begun, of his or her intention to cumulate votes. If any shareholder has given such notice, then all shareholders entitled to vote may cumulate their votes by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of his or her shares or by distributing such votes on the same principle among any number of candidates as he or she thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Votes cast against a candidate or which are withheld shall have no effect. Upon the demand of any shareholder made before the voting begins, the election of directors shall be by ballot rather than by voice vote. SECTION 10. PROXIES Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares by filing a written proxy with the secretary of the corporation, executed by such person or his or her duly authorized agent. A proxy shall not be valid after the expiration of eleven (11)months from the date thereof unless otherwise provided in the proxy: Every proxy shall continue in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the California Corporations Code. ARTICLE III DIRECTORS SECTION 1. POWERS Subject to any limitations in the Articles of Incorporation and to the provisions of the California Corporations Code, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by, or under tie direction of, the board of directors. -5- SECTION 2. NUMBER The authorized number of directors shall be four until changed by amendment to this article of these bylaws. After issuance of shares, this bylaw may only be amended by approval off a majority of the outstanding shares entitled to vote; provided, moreover, that a bylaw reducing the fixed number of directors to a number less than five (5) cannot be adopted unless in accordance with the additional requirements of Article IX of these Bylaws. SECTION 3. ELECTION AND TENURE OF OFFICE The directors shall be elected at the annual meeting of the shareholders and hold office until the next annual meeting and until their successors have been elected and qualified. SECTION 4. VACANCIES A vacancy on the board of directors shall exist in the case of death, resignation, or removal of any director or in case the authorized number of directors is increased, or in case the shareholders fail to elect the full authorized number of directors at any annual or special meeting of the shareholders at which any director is elected. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. Except for a vacancy created by the removal of a director, vacancies on the board of directors may be filled by approval of the board or, if the number of directors then in office is less than a quorum, by (1) the unanimous written consent of the directors then in office, (2) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice complying with this Article of these Bylaws, or (3) a sole remaining director. Vacancies occurring on the board by reason of the removal of directors may be filled only by approval of the shareholders. Each director so elected shall hold office until the next annual meeting of the shareholders and until his or her successor has been elected and qualified. The shareholders may elect a director at any time to fill a vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by the removal of a director requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the chairperson of the board of directors, the president, the secretary or to the board of directors unless the notice specifies a later time for the effectiveness of the resignation. If the resignation is effective at a later time, a successor may be elected to take office when the resignation becomes effective. Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term in office. -6- SECTION 5. REMOVAL Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote, subject to the provisions of Section 303 of the California Corporations Code. Except as provided in Sections 302, 303 and 304 of the California Corporations Code, a director may not be removed prior to the expiration of such director's tern of office. The Superior Court of the proper county may, on the suit of shareholders holding at least 10 percent of the number of outstanding shares of any class, remove from office any director in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation and may bar from re-election any director so removed for a period prescribed by the court. The corporation shall be made a party to such action. SECTION 6. PLACE OF MEETINGS Meetings of the board of directors shall be held at any place, within or without the State of California, which has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation or as may be designated from time to time by resolution of the board of directors. Meetings of the board may be held through use of conference telephone or similar communications equipment, as long as all directors participating in the meeting can hear one another. SECTION 7. ANNUAL, REGULAR AND SPECIAL DIRECTORS' MEETINGS An annual meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of the shareholders. Other regular meetings of the board of directors shall be held at such times and places as may be fixed from time to time by the board of directors. Call and notice of these regular meetings shall not be required. Special meetings of the board of directors may be called by the chairperson of the board, the president, vice president, secretary, or any two directors. Special meetings of the board of directors shall be held upon four (4) days' notice by mail, or forty-eight (48) hours' notice delivered personally or by telephone or telegraph. A notice or waiver of notice need not specify the purpose of any special meeting of the board of directors. If any meeting is adjourned for more than 24 hours, notice of the adjournment to another time or place shall be given before the time of the resumed meeting to all directors who were not present at the time of adjournment of the original meeting. SECTION 8. QUORUM AND BOARD ACTION A quorum for all meetings of the board of directors shall consist of a majority of the members of the board of directors until changed by amendment to this article of these bylaws. -7- Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the board, subject to the provisions of Section 310 (relating to the approval of contracts and transactions in which a director has a material financial interest); the provisions of Section 311 (designation of committees); and Section 317(e) (indemnification of directors) of the California Corporations Code. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. A majority of the directors present at a meeting may adjourn any meeting to another time and place, whether or not a quorum is present at the meeting. SECTION 9. WAIVER OF NOTICE The transactions of any meeting of the board, however called and noticed or wherever held, are as valid as though undertaken at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting, or an approval of the minutes thereof. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Waivers of notice or consents need not specify the purpose of the meeting. SECTION 10. ACTION WITHOUT MEETING Any action required or permitted to be taken by the board may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Such action by written consent shall have the same force and effect as a unanimous vote of the directors. SECTION 11. COMPENSATION No salary shall be paid directors, as such, for their services but, by resolution, the board of directors. may allow a reasonable fixed sum and expenses to be paid for attendance at regular or special meetings. Nothing contained herein shall prevent a director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attendance at meetings. ARTICLE IV OFFICERS SECTION 1. OFFICERS The officers or the corporation shall be a president, a vice president, a secretary, and a treasurer who shall be the chief financial officer of the corporation. The corporation also may have such other officers with such titles and duties as shall be determined by the board of directors. Any number of offices may be held by the same person. -8- SECTION 2. ELECTION All officers or the corporation shall be chosen by, and serve at the pleasure of, the board of directors. SECTION 3. REMOVAL AND RESIGNATION An officer may be removed at any time, either with or without cause, by the board. An officer may resign at any time upon written notice to the corporation given to the board, the president, or the secretary of the corporation. Any such resignation shall take effect at the date or receipt of such notice or at any other time specified therein. The removal or resignation of an officer shall be without prejudice to the rights, if any, of the officer or the corporation under any contract of employment to which the officer is a party. SECTION 4. PRESIDENT The president shall be the chief executive officer and general manager of the corporation and shall, subject to the direction and control of the board of directors, have general supervision, direction, and control of the business and affairs of the corporation. He/she shall preside at all meetings of the shareholders and directors and be an ex-officio member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 5. VICE PRESIDENT In the absence or disability of the president, the vice presidents, in order of their rank as fixed by the board of directors (or if not ranked, the vice president designated by the board) shall perform all the duties of the president and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the president. Each vice president shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 6. SECRETARY The secretary shall keep, or cause to be kept, at the principal executive office of the corporation, a book of minutes of all meetings of directors and shareholders. The minutes shall state the time and place of holding of all meetings; whether regular or special, and if special, how called or authorized; the notice thereof given or the waivers of notice received; the names of those present at directors' meetings; the number of shares present or represented at shareholders' meetings; and an account of the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation, or at the office of the corporation' s transfer agent , a share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, -9- the number and date of certificates issued for shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation, the original or a copy of the bylaws of the corporation, as amended or otherwise altered to date, certified by him or her. The secretary shall give, or cause to be given, notice of all meetings of shareholders and directors required to be given by law or by the provisions of these bylaws. The secretary shall have charge of the seal of the corporation and have such other powers and perform such other duties as may from time to time be prescribed by the board or these bylaws. In the absence or disability of the secretary, the assistant secretaries if any, in order of their rank as fixed by the board of directors (or if not ranked, the assistant secretary designated by the board of directors), shall have all the powers of, and be subject to all the restrictions upon, the secretary. The assistant secretaries, if any, shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 7. TREASURER The treasurer shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation. The treasurer shall deposit monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He or she shall disburse the funds of the corporation in payment of the just demands against the corporation as authorized by the board of directors; shall render to the president and directors, whenever they request it, an account of all his or her transactions as treasurer and of the financial condition of the corporation; and shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or the bylaws. In the absence or disability of the treasurer, the assistant treasurers, if any, in order of their rank as fixed by the board of directors (or if not ranked, the assistant treasurer designated by the board of directors), shall perform all the duties of the treasurer and, when so acting, shall have all the powers of and be subject to all the restrictions upon the treasurer. The assistant treasurers, if any, shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 8. COMPENSATION The officers of this corporation shall receive such compensation for their services as may be fixed by resolution of the board of directors. -10- ARTICLE V EXECUTIVE COMMITTEES SECTION 1. The board may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. Any such committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: a. The approval of any action for which the approval of the shareholders or approval of the outstanding shares is also required. b. The filling of vacancies on the board or in any committee. c. The fixing of compensation of the directors for serving on the board or on any committee. d. The amendment or repeal of bylaws or the adoption of new bylaws. e. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable. f. A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board. g. The appointment of other committees of the board or the members thereof. ARTICLE VI CORPORATE RECORDS AND REPORTS SECTION 1. INSPECTION BY SHAREHOLDERS The share register shall be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Such inspection and copying under this section may be made in person or by agent or attorney. The accounting books and records of the corporation and the minutes of proceedings of the shareholders and the board and committees of the board shall be open to inspection upon the written demand of the corporation by any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for any proper purpose reasonably related to such holder's interests as a shareholder or as the colder of such voting trust certificate. Such inspection by a shareholder or holder of voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. -11- Shareholders shall also have the right to inspect the original or copy of these bylaws, as amended to date and kept at the corporation's principal executive office, at all reasonable times during business hours. SECTION 2. INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney. The right of inspection includes the right to copy and make extracts. SECTION 3. RIGHT TO INSPECT WRITTEN RECORDS If any record subject to inspection pursuant to this chapter is not maintained in written form, a request for inspection is not complied, with unless and until the corporation at its expense makes such record available in written form. SECTION 4. WAIVER OF ANNUAL REPORT The annual retort to shareholders, described in Section 1501 of the California Corporations Code is hereby expressly waived, as long as this corporation has less than 100 holders of record of its shares. This waiver shall be subject to any provision of law, including Section 1501(c) of the California Corporations Code, allowing shareholders to request the corporation to furnish financial statements. SECTION 5. CONTRACTS, ETC. The board of directors, except as otherwise provided in the bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the board of directors, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract, or to pledge its credit, or to render it liable for any purpose or to any amount. ARTICLE VII INDEMNIFICATION AND INSURANCE OF CORPORATE AGENTS SECTION 1. INDEMNIFICATION The directors and officers of the corporation shall be indemnified by the corporation to the fullest extent not indemnified by the corporation to the fullest extent not prohibited by the California Corporations Code. SECTION 2. INSURANCE The corporation shall have the power to purchase and maintain insurance on behalf of any agent (as defined in Section 317 of the California Corporations Code) against any liability -12- asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of Section 317 of the California Corporations Code. ARTICLE VIII SHARES SECTION 1. CERTIFICATES The corporation shall issue certificates for its shares when fully paid. Certificates of stock shall be issued in numerical order, and shall state the name of the recordholder of the shares represented thereby; the number, designation, if any, and the class or series of shares represented thereby; and contain any statement or summary required by any applicable provision of the California Corporations Code. Every certificate for shares shall be signed in the name of the corporation by 1) the chairperson or vice-chairperson of the board or the president or a vice president and 2) by the treasurer or the secretary or an assistant secretary. SECTION 2. TRANSFER OF SHARES Upon surrender to the secretary or transfer agent of the corporation or a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it shall be the duty of the secretary of the corporation to issue a new certificate to the person entitled thereto, to cancel the old certificate, and to record the transaction upon the share register of the corporation. SECTION 3. RECORD DATE The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to receive payment of any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall not be more than sixty (60) days nor less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise the rights as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. ARTICLE IX AMENDMENT OF BYLAWS SECTION 1. BY SHAREHOLDERS Bylaws may be adopted, amended, or repealed by the affirmative vote or by the written consent of holders of a majority of the outstanding shares of the corporation entitled to vote. -13- However, a bylaw amendment which reduces the fixed number of directors to a number less than five (5) shall not be effective if the votes cast against the amendment or the shares not consenting to its adoption are equal to more than 162/3 percent of the outstanding shares entitled to vote. SECTION 2. BY DIRECTORS Subject to the right of shareholders to adopt, amend, or repeal bylaws, the directors may adopt, amend or repeal any bylaw, except that a bylaw amendment changing the authorized number of directors may be adopted by the board of directors only if prior to the issuance of shares. CERTIFICATE This is to certify that the. foregoing is a true and correct copy of the Bylaws of the corporation named in the title thereto and that such Bylaws were duly adopted by the board of directors of the corporation on the date set forth below. Dated: Sept. 26, 1994 (in handwriting) --------------------------------------- Nancy K. Cadigan (in handwriting) ---------------------------------- Nancy K. Cadigan Secretary -14- EX-3.7 8 0008.txt AMENDED BYLAWS BYLAWS OF ZAPWORLD.COM TABLE OF CONTENTS ARTICLE I DEFINITIONS..............................................1 1.1 Articles of Incorporation........................................1 1.2 Board............................................................1 1.3 Code.............................................................1 1.4 Corporation......................................................1 1.5 Plurals, Gender..................................................1 ARTICLE II CORPORATE OFFICES........................................1 2.1 Principal Office.................................................1 2.2 Other Offices....................................................1 ARTICLE III MEETINGS OF SHAREHOLDERS................................1 3.1 Place of Meetings................................................1 3.2 Annual Meeting...................................................1 3.3 Special Meetings.................................................2 3.4 Notice of Shareholders' Meetings................................2 3.5 Manner of Giving Notice, Affidavit of Notice.....................2 3.6 Quorum...........................................................3 3.7 Adjourned Meeting, Notice........................................3 3.8 Voting...........................................................3 3.9 Validation of Meetings, Waiver of Notice: Consent................4 3.10 Shareholder Action by Written Consent Without a Meeting.........4 3.11 Record Date for Shareholder Notice, Voting and Consents.........5 3.12 Proxies........................................................5 3.13 Inspectors of Election.........................................6 3.14 Conduct of Meeting..............................................6 ARTICLE IV DIRECTORS.........................................6 4.1 Powers...........................................................6 4.2 Number of Directors..............................................6 4.3 Election and Term of Office of Directors.........................6 4.4 Removal..........................................................7 4.5 Resignation and Vacancies........................................7 4.6 Place of Meetings, Meetings by Telephone.........................7 4.7 Regular Meetings.................................................8 4.8 Special Meetings, Notice.........................................8 4.9 Quorum...........................................................8 4.10 Waiver of Notice................................................8 4.11 Adjournment.....................................................8 4.12 Board Action by Written Consent Without a Meeting..............8 4.13 Fees and Compensation of Directors..............................9 ARTICLE V COMMITTEES...............................................9 5.1 Committees of Directors..........................................9 i 5.2 Meetings and Action of Committees................................9 ARTICLE VI OFFICERS................................................10 6.1 Officers........................................................10 6.2 Appointment of Officers.........................................10 6.3 Subordinate Officers............................................10 6.4 Removal and Resignation of Officers.............................10 6.5 Vacancies in Offices............................................10 6.6 Chairman of the Board...........................................10 6.7 President.......................................................10 6.8 Vice Presidents.................................................11 6.9 Secretary.......................................................11 6.10 Chief Financial Officer........................................11 ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS...................... ...............11 7.1 General.........................................................12 7.2 Payment of Expenses in Advance..................................12 7.3 Indemnification of Heirs, Etc...................................12 7.4 Insurance.......................................................12 7.5 Conflicts.......................................................12 7.6 Indemnity Not Exclusive -- Agreements...........................13 ARTICLE VIII RECORDS AND REPORTS....................................13 8.1 Maintenance and Inspection of Share Register....................13 8.2 Maintenance and Inspection of Bylaws............................14 8.3 Maintenance and Inspection of Other Corporate Records...........14 8.4 Inspection by Directors.........................................14 8.5 Annual Report to Shareholders; Waiver...........................14 8.6 Financial Statements............................................14 8.7 Representation of Shares of Other Corporations..................15 ARTICLE IX GENERAL MATTERS........................................15 9.1 Record Date for Purposes Other than Notice and Voting...........15 9.2 Checks, Drafts, Evidences of Indebtedness.......................15 9.3 Corporate Contracts and Instruments, How Executed...............15 9.4 Certificates for Shares.........................................16 9.5 Lost Certificates...............................................16 ARTICLE X AMENDMENTS.............................................16 10.1 Amendment by Shareholders......................................16 10.2 Amendment by Directors.........................................16 10.3 Record of Amendments...........................................16 ii BYLAWS OF ZAPWORLD.COM ARTICLE I DEFINITIONS 1.1 Articles of Incorporation. "Articles of Incorporation" shall refer to the Articles of Incorporation of the corporation, including all amendments thereto and Certificates of Determination with respect to any shares of the corporation. 1.2 Board. "Board of Directors" and "Board" shall mean the Board of Directors of the corporation. 1.3 Code. "Code" shall mean the California Corporations Code, including all amendments thereto. 1.4 Corporation. "Corporation" shall refer to ZAPWORLD.COM. 1.5 Plurals, Gender. Unless the context requires otherwise, the singular number includes the plural. All personal pronouns and references to gender shall also include persons of the opposite sex. ARTICLE II CORPORATE OFFICES 2.1 Principal Office. The principal executive office of the corporation shall be located at such address as the Board of Directors may from time to time determine. 2.2 Other Offices. The Board of Directors may at any time establish branch or subordinate offices at any place or places. ARTICLE III MEETINGS OF SHAREHOLDERS 3.1 Place of Meetings. Meetings of shareholders shall be held at any place designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation or at any place consented to in writing by all persons entitled to vote at such meeting, given before or after the meeting and filed with the Secretary of the corporation. 3.2 Annual Meeting. An annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. Directors shall be elected and any other proper business may be transacted at the annual meeting of shareholders. 1 3.3 Special Meetings. Special meetings of the shareholders may be called at any time, subject to the provisions of Sections 3.4 and 3.5 of these Bylaws, by the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by anyone other than the Board of Directors or the President or the Chairman of the Board, then the request shall be in writing, specifying the date and time of such meeting and the nature of the business proposed to be transacted, and shall be delivered personally or sent by registered or certified mail to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The date of the meeting shall not be less than thirty-five (35) nor more than sixty (60) days after the officer has received the request from the person or persons calling the meeting. If the officer who received the request does not cause a notice of the meeting to be given to the shareholders within twenty (20) days after his or her receipt of that request, then the person or persons requesting the meeting may give the notice of the meeting to the shareholders. 3.4 Notice of Shareholders' Meetings. Notice of a shareholders' meeting shall be sent to each shareholder entitled to vote at that meeting. Notice shall be given in accordance with Section 3.5 of these Bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 3.5 of these Bylaws, not less than thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall state the place, date, and hour of the meeting. In the case of a special meeting, the notice shall state the general nature of the business to be transacted and no business other than that specified in the notice may be acted upon. In the case of the annual meeting, the notice shall set forth those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of the next paragraph of this Section 3.4, any proper matter may be presented at the meeting for shareholder action. The notice of any meeting at which Directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election. If action is proposed to be taken at any annual meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) an amendment of the Articles of Incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of any outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. 3.5 Manner of Giving Notice, Affidavit of Notice. Notice of a shareholders' meeting shall be given either personally or by first-class mail. If the corporation has outstanding shares held of record by five hundred (500) or more persons on the record date for the shareholders' meeting, notice may be sent by third-class mail. The notice shall be sent to the shareholder at the address of the shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears or is given, notice may be given to the shareholder at the corporation's principal executive office or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice shall be deemed to have been given at the time when delivered personally or deposited in the mail. An affidavit of mailing of any notice or report in accordance with the provisions of this Section 3.5, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. 2 3.6 Quorum. Unless otherwise provided in the Articles of Incorporation, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of the shareholders. The shareholders present at a duly called and held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented at that meeting, either in person or by proxy, but no other business may be transacted, except as provided in the last sentence of the preceding paragraph. 3.7 Adjourned Meeting, Notice. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if its time and place are announced at the meeting at which the adjournment is taken. However, if the adjournment is for more than forty-five (45) days from the date set for the original meeting or if a new record date for the adjourned meeting is fixed, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 3.4 and 3.5 of these Bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 3.8 Voting. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 3.11 of these Bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). Elections for directors and voting on any other matter at a shareholders' meeting need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins. Except as provided in the last paragraph of this Section 3.8, or as may be otherwise provided in the Articles of Incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or may vote them against the proposal other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. The affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the Code or by the Articles of Incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are normally entitled or (ii) by distributing the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. A shareholder may cumulate votes for a candidate if the candidate or candidates' names have been placed 3 in nomination prior to the voting and the shareholder has given notice prior to the voting of his intention to cumulate his votes. If any one shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination. The candidates receiving the highest number of affirmative votes up to the number of directors to be elected shall be elected. Votes against any candidate and votes withheld shall have no legal effect. 3.9 Validation of Meetings, Waiver of Notice: Consent. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, are as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. Neither the business to be transacted at nor the purpose of any annual or special meeting of shareholders need be specified in any written waiver of notice or consent to the holding of the meeting or approval of the minutes thereof, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 3.4 of these Bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 3.10 Shareholder Action by Written Consent Without a Meeting. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. However, a director may be elected at any time to fill any vacancy on the Board of Directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors, provided that the vacancy was not created by removal of a director and that the vacancy has not been filled by the directors. All shareholder consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the Secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, the Secretary shall give prompt notice of any corporate action approved by the shareholders to those shareholders entitled to vote who have not consented in writing. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding 4 preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval, unless the consents of all shareholders entitled to vote have been solicited in writing. 3.11 Record Date for Shareholder Notice, Voting and Consents. The Board of Directors may fix in advance a record date of shareholders entitled to vote at a meeting or to consent to an action without a meeting. The record date shall not be more than sixty (60) days nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days before any other action. Shareholders at the close of business on the record date are entitled to notice and to vote, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five (45) days from the date set for the original meeting. If the Board of Directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Section 9.1 of these Bylaws. 3.12 Proxies. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder's name or other authorization is placed on the proxy (whether by manual signature, typewriting, telegraphic or electronic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by attendance at such meeting and voting in person, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date thereof, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. 3.13 Inspectors of Election. In advance of any meeting of shareholders, the Board of Directors may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed or designated or if any persons so appointed fail to appear or refuse to act, then the Chairman 5 of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail to appear) at the meeting. The number of inspectors shall be either one (1) or three (3). If appointed at a meeting on the request of one (1) or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one (1) or three (3) inspectors are to be appointed. The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. 3.14 Conduct of Meeting. The Chairman of the Board or, in the absence of the Chairman of the Board, the President shall preside over meetings of the shareholders. The person presiding over the meeting shall conduct the meeting in a business-like and fair manner in accordance with such rules and procedures as that person deems appropriate. The presiding officer's rulings on procedural matters shall be conclusive and binding on all shareholders, unless at the time of ruling a request for a vote is made to the shareholders holding shares entitled to vote and which are represented in person or by proxy at the meeting, in which case the decision of a majority of such shares shall be conclusive and binding on all shareholders with respect to that procedural matter. ARTICLE IV DIRECTORS 4.1 Powers. Subject to the provisions of the Code and any limitations in the Articles of Incorporation and these Bylaws relating to actions requiring shareholder approval, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 4.2 Number of Directors. The number of directors shall be no less than five (5) nor greater than nine (9), with the exact number of directors within this range being determined by the Board of Directors or the shareholders. The exact number of directors shall be seven (7) until this number is changed, within the limits specified in the previous sentence, by the Board of Directors or the shareholders. The maximum and minimum number of directors set forth in the first sentence of this Section 4.2 may only be changed by an amendment to the Articles of Incorporation or by an amendment to this Bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. An amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 4.3 Election and Term of Office of Directors. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified, except in the case of the death, resignation, or removal of such a director. 6 4.4 Removal. The entire Board of Directors or any individual director may be removed from office without cause by the affirmative vote of a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against that director's removal, or not consenting in writing to his removal, would be sufficient to elect that director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of that director's most recent election were then being elected. 4.5 Resignation and Vacancies. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective. Vacancies on the Board of Directors may be filled by a majority of the remaining directors, or if the number of directors then in office is less than a quorum, by (i) unanimous written consent of the directors then in office, (ii) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice, or (iii) a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting of shareholders at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified, or until his or her death, resignation or removal. A vacancy or vacancies in the Board of Directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the Board of Directors by resolution removes a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent, other than to fill a vacancy created by removal, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. A director may not be elected by written consent to fill a vacancy created by removal except by unanimous consent of all shares entitled to vote for the election of directors. 4.6 Place of Meetings, Meetings by Telephone. Regular meetings of the Board of Directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the Board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the Board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Members of the Board may participate in a meeting through the use of conference telephone or similar communications equipment, so long as all directors participating in such meeting can hear one another. Participation in a meeting pursuant to this paragraph constitutes presence in person at that meeting. 7 4.7 Regular Meetings. Regular meetings of the Board of Directors may be held without notice if the time and place of the meetings are fixed by the Board of Directors. 4.8 Special Meetings, Notice. Subject to the provisions of the following paragraph, special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board, the President, any Vice President, the Secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally, by telephone (including by means of a voice messaging system designed to record and communicate messages), telegraph, facsimile, electronic mail or by first-class mail, postage prepaid. All notices (unless delivered in person) shall be addressed to each director at that director's address and/or facsimile number or electronic mail address as shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered by any other permissible means, it shall be delivered at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director whom the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting. 4.9 Quorum. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 4.11 of these Bylaws. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees) and Section 317(e) of the Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. 4.10 Waiver of Notice. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. A waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. 4.11 Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of an adjournment to another time and place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. 4.12 Board Action by Written Consent Without a Meeting. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to that action. The written consent or consents shall be filed with the minutes of the proceedings of the Board. Actions by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. 4.13 Fees and Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services and reimbursement of expenses as may be fixed or determined by resolution of the Board of Directors. This Section 4.13 shall not be construed to preclude any director from 8 serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. ARTICLE V COMMITTEES 5.1 Committees of Directors. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee shall have authority to act in the manner and to the extent provided in the resolution of the Board and may have all the authority of the Board, except with respect to: (a) The approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares. (b) The filling of vacancies on the Board of Directors or in any committee. (c) The fixing of compensation of the directors for serving on the Board or on any committee. (d) The amendment or repeal of these Bylaws or the adoption of new Bylaws. (e) The amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable. (f) A distribution to the shareholders of the corporation, except at a rate, in a periodic amount or within a price range set forth in the Articles of Incorporation or determined by the Board of Directors. (g) The appointment of any other committees of the Board of Directors or the members thereof. 5.2 Meetings and Action of Committees. Meetings and actions of committees shall be governed by, and held and taken in accordance with the provisions of Section 4.6 (place of meetings), Section 4.7 (regular meetings), Section 4.8 (special meetings and notice), Section 4.9 (quorum), Section 4.10 (waiver of notice), Section 4.11 (adjournment), and Section 4.12 (action without meeting), with such changes in the context of those Bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. 9 ARTICLE VI OFFICERS 6.1 Officers. The officers of the corporation shall be a President, a Secretary, and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chief Executive Officer, a Chairman of the Board, a Vice Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries and such other officers as may be appointed in accordance with the provisions of Section 6.3 of these Bylaws. Any number of offices may be held by the same person. 6.2 Appointment of Officers. The officers of the corporation, except those officers that may be appointed in accordance with the provisions of Section 6.3 or Section 6.5 of these Bylaws, shall be chosen by the Board and serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. 6.3 Subordinate Officers. The Board of Directors may appoint, or may empower the Chairman of the Board or the President to appoint, other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 6.4 Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, all officers serve at the pleasure of the Board of Directors and any officer may be removed, either with or without cause, by the Board of Directors at any regular or special meeting of the Board or, except in case of an officer appointed by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 6.5 Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointments to that office. 6.6 Chairman of the Board. The Chairman of the Board, if one is appointed, shall preside at meetings of the Board of Directors and shareholders and exercise and perform other powers and duties as may from time to time be assigned to the Chairman of the Board by the Board of Directors or as may be prescribed by these Bylaws. If there is no President, then the Chairman of the Board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 6.7 of these Bylaws. 6.7 President and Chief Executive Officer. Subject to those supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, the President and the Chief Executive Officer of the corporation may be the same officer or different officers as the Board dictates. The President and/ or the Chief Executive Officer (or the person holding title to both positions) shall, as respectively assigned by the Board, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. In the absence of the Chairman of the Board, the President shall preside at meetings of the Board of Directors and shareholders. The President shall have the general powers and duties 10 of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 6.8 Vice Presidents. In the absence of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have other powers and perform other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the President or the Chairman of the Board. 6.9 Secretary. The Secretary shall keep or cause to be kept, at the principal executive office of the corporation or other place as the Board of Directors may direct, a book of minutes of all meetings and actions of Directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required to be given by law or by these Bylaws. The Secretary shall keep the seal of the corporation, if one is adopted, in safe custody and shall have other powers and perform other duties as may be prescribed by the Board of Directors or by these Bylaws. 6.10 Chief Financial Officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The Chief Financial Officer shall deposit all money and other valuables in the name and to the credit of the corporation with depositaries as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his or her transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or these Bylaws. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 7.1 General. The corporation shall have the power to indemnify each of its directors, employees, officers, and agents (for the purposes of Article VII, hereinafter defined as "agents") against expenses (as defined 11 in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. The corporation shall indemnify its agents in all circumstances in which it is required to do so under Section 317(d) of the Code. In cases in which indemnification is permissible under Section 317 of the Code but is not mandatory, an agent shall be indemnified only if the agent has met the applicable standard of conduct set forth in Section 317 of the Code as determined by any of the following: (a) A majority vote of a quorum consisting of directors who are not parties to the proceeding in connection with which indemnification is being sought; (b) If such a quorum of directors is not obtainable, independent legal counsel in a written opinion; (c) The shareholders in accordance with Section 153 of the Code, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (d) The court in which the proceeding is or was pending. For the purposes of this Article VII, "agent" of the corporation includes any person (i) who is or was a director, employee, officer, or agent of the corporation, (ii) who is or was serving at the request of the corporation as a director, employee, officer, or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director, employee, officer, or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 7.2 Payment of Expenses in Advance. Expenses and attorneys' fees incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 7.1, or if otherwise authorized by the Board of Directors, shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VII. 7.3 Indemnification of Heirs, Etc.. The rights to indemnity hereunder shall continue as to a person who has ceased to be an agent and shall inure to the benefit of the heirs, executors, and administrators of that person. 7.4 Insurance. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was an agent of the corporation against any liability asserted against or incurred by that person in his capacity or arising out of that person's status as an agent of the corporation, whether or not the corporation would have the power to indemnify that person against liability under the provisions of this Article VII. 7.5 Conflicts. No indemnification or advance shall be made under this Article VII, except where the indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Articles of Incorporation, these Bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause 12 of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 7.6 Indemnity Not Exclusive -- Agreements. The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. The Board of Directors is authorized to enter into a contract with any agent of the corporation, or any person who is or was serving at the request of the corporation as an agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, or any person who was an agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation, providing for indemnification rights equivalent to or, if the Board of Directors so determines and to the extent permitted by applicable law, in excess of those provided for in this Article VII or in Section 317 of the Code. ARTICLE VIII RECORDS AND REPORTS 8.1 Maintenance and Inspection of Share Register. The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either is appointed), as determined by resolution of the Board of Directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation, or a shareholder or shareholders holding at least one percent (1%) of such voting shares who have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors, shall have an absolute right to do either or both of the following (i) inspect and copy the record of shareholders' names, addresses, and shareholdings during usual business hours upon five (5) days' prior written demand upon the corporation, or (ii) obtain from the transfer agent for the corporation, upon written demand and upon the tender of such transfer agent's usual charges for such list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to the holder's interests as a shareholder or holder of a voting trust certificate. Any inspection and copying under this Section 8.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 13 8.2 Maintenance and Inspection of Bylaws. The corporation shall keep at its principal executive office the original or a copy of these Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. 8.3 Maintenance and Inspection of Other Corporate Records. The accounting books and records and the minutes of proceedings of the shareholders and the Board of Directors, and committees of the Board of Directors shall be kept at a place or places as are designated by the Board of Directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to that holder's interests as a shareholder or as the holder of a voting trust certificate. Inspection by a shareholder or holder of a voting trust certificate may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts. Rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 8.4 Inspection by Directors. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation and each of its subsidiary corporations, domestic or foreign. Inspection by a director may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts. 8.5 Annual Report to Shareholders; Waiver. The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. The annual report shall be sent to the shareholders at least fifteen (15) (or, if sent by third-class mail, thirty-five (35)) days prior to the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 3.5 of these Bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of cash flows for the fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 8.6 Financial Statements. If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of that period. The statements shall be delivered or mailed to the person making the request within thirty (30) days thereafter. A copy of the statements shall be kept on file in the principal office of the corporation for twelve (12) months and it shall be exhibited at all reasonable times to any shareholder demanding an examination of the statements or 14 a copy shall be mailed to the shareholder. If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 8.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 8.7 Representation of Shares of Other Corporations. The Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Secretary or Assistant Secretary of this corporation, or any other person authorized by the Board of Directors or the President or a Vice President, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation standing in the name of this corporation. The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by a person having that authority. ARTICLE IX GENERAL MATTERS 9.1 Record Date for Purposes Other than Notice and Voting. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than with respect to notice or voting at a shareholders meeting or action by shareholders by written consent without a meeting), the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action. Only shareholders of record at the close of business on the record date are entitled to receive the dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles of Incorporation or the Code. If the Board of Directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto or the sixtieth (60th) day prior to the date of that action, whichever is later. 9.2 Checks, Drafts, Evidences of Indebtedness. From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 9.3 Corporate Contracts and Instruments, How Executed. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation. This authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 15 9.4 Certificates for Shares. A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The Board of Directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the Chairman of the Board or the Vice Chairman of the Board or the President or a Vice President or the Chief Executive Officer and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be by facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 9.5 Lost Certificates. Except as provided in this Section 9.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation or its transfer agent or registrar and canceled at the same time. The Board of Directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed (as evidenced by a written affidavit or affirmation of such fact), authorize the issuance of replacement certificates on such terms and conditions as the Board may require. The Board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. ARTICLE X AMENDMENTS 10.1 Amendment by Shareholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of Incorporation of the corporation set forth the number of authorized Directors of the corporation, then the authorized number of Directors may be changed only by an amendment of the Articles of Incorporation. 10.2 Amendment by Directors. Subject to the limitations set forth in Sections 204(a)(5) and 212 of the California Corporations Code, these Bylaws may be adopted, amended or repealed by the Board of Directors, except that no amendment to the Bylaws which changes the authorized number of directors (other than to fix the authorized number of directors within the minimum and maximum number specified in these Bylaws) shall be effective without the approval of that amendment by a majority of the outstanding shares entitled to vote. 10.3 Record of Amendments. Whenever an amendment or new Bylaw is adopted, it shall be copied in the book of minutes with the original Bylaws. If any Bylaw is repealed, the fact of repeal, with the date of the meeting at which the repeal was enacted or written consent was filed, shall be stated in said book. 16 SECRETARY'S CERTIFICATE OF ADOPTION OF BYLAWS OF ZAPWORLD.COM I, the undersigned, do hereby certify that: 1. I am the duly elected and acting Secretary of ZAPWORLD.COM, a California corporation. 2. The foregoing document, consisting of 17 pages, contains the Bylaws of that corporation as duly adopted by the Board of Directors and shareholders of that corporation on June 24th, 2000. IN WITNESS WHEREOF, I have hereunto subscribed my name this 24th day of June, 2000. /s/ Signature By: EX-5.1 9 0009.txt OPINION BRUSSELS FOLEY & LARDNER ORLANDO CHICAGO SACRAMENTO DENVER ATTORNEYS AT LAW SAN DIEGO DETROIT SAN FRANCISCO JACKSONVILLE ONE MARITIME PLAZA, SIXTH FLOOR TALLAHASSEE LOS ANGELES SAN FRANCISCO, CALIFORNIA 94111-3404 TAMPA MADISON TELEPHONE: (415) 434-4484 WASHINGTON, D.C. MILWAUKEE FACSIMILE: (415) 434-4507 WEST PALM BEACH CLIENT/MATTER NUMBER 059284/0112 February 9, 2001 ZAPWORLD.COM 117 Morris Street Sebastopol, California 95472 Re: Zapworld.com Gentlemen: We have acted as counsel to Zapworld.com (the "Company"), in connection with the registration of 2,400,000 Shares of Common Stock (the "Shares") to be offered for sale by the Company as described in the Company's Registration Statement on Form SB-2 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. We have reviewed such documents and have made such inquiries as we have deemed necessary and appropriate to render the opinion set forth herein. We have assumed that all documents that have been submitted to us as originals are true and correct and those documents submitted to us, as copies conform to the originals of those documents. The shares will be, when issued, duly authorized, validly issued, fully paid and non-assessable. We are not providing an opinion as to any other statements contained in the Form SB-2 Registration Statement, nor as to matters that occur after the date thereof. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the heading "Legal Matters." Sincerely, /s/ FOLEY & LARDNER EX-10.1 10 0010.txt AGREEMENT AND PLAN OF REORGANIZATION Agreement and Plan of Reorganization By and Among Zapworld.com and Zap of Santa Cruz, Inc. Dated as of January 20, 2000 INDEX OF EXHIBITS Exhibit Description Exhibit A Form of Agreement of Merger Exhibit B Articles of Incorporation and Bylaws of Zap Santa Cruz INDEX OF SCHEDULES Schedule Description 2.7 Unaudited Asset List of Zap Santa Cruz 2.10 Tax Payments 2.12 Real Property Leases 2.13 Intellectual Property Rights 2.14 Agreements, Contracts and Commitments 2.15 Change of Control Payments 2.16 Interested Party Transactions 2.23 Bank Accounts AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of January 20, 2000 among Zapworld.com, a California corporation doing business at 117 Morris Street, Sebastopol, California 95472 ("Zapworld") and Zap of Santa Cruz, Inc., a California corporation doing business at 131 Center Street, #2 Santa Cruz, California 95061 ("Zap Santa Cruz"). RECITALS A. Zapworld and Zap Santa Cruz intend to effect a merger (the "Merger") of Zap Santa Cruz with and into Zapworld in accordance with this Agreement and California General Corporation Law ("California Law"). Upon consummation of the Merger, Zap Santa Cruz will be merged into Zapworld and Zap Santa Cruz will cease to exist. B. It is intended that the Merger qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). C. The Board of Directors of Zap Santa Cruz has: (i) determined that the Merger is consistent with and in furtherance of the long-term strategy of Zap Santa Cruz and is in the best interests of its Shareholders; (ii) approved this Agreement, the Merger and the other transactions contemplated by this Agreement; and (iii) recommended that the shareholders of Zap Santa Cruz adopt and approve the terms of this Agreement, the Merger, and the other transactions contemplated by this Agreement. D. The Shareholders of Zap Santa Cruz have approved this Agreement, the Merger and the other transactions contemplated by this Agreement. E. The Board of Directors of Zapworld has approved this Agreement, the Merger and other transactions contemplated by this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and California Law, Zap Santa Cruz shall be merged with and into Zapworld. After the merger, the separate corporate existence of Zap Santa Cruz shall cease and Zapworld shall continue as the surviving corporation. 1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 9.1, the closing of the Merger (the "Closing") will take place as promptly as practicable, but no later than one (1) business day following satisfaction or waiver of the conditions set forth in Article VI, at the law offices of Evers & Hendrickson, LLP, 155 Montgomery Street, 12th Floor, San Francisco, California 94104, unless another place or time is agreed to by Zapworld and the Zap Santa Cruz. The date upon which the Closing actually occurs is herein referred to as the "Closing Date." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing an Agreement of Merger, in substantially the form attached hereto as Exhibit A (the "Agreement of Merger"), with the Secretary of State of the State of California, in accordance with the relevant provisions of California Law (the time of acceptance by the Secretary of State of California of such filing being referred to herein as the "Effective Time"). The parties currently intend that the Closing Date will occur on or prior to January 20, 2000. 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of California Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, power and franchises of Zap Santa Cruz shall vest in Zapworld and all debts, liabilities and duties of Zap Santa Cruz shall become the debts, liabilities and duties of the Zapworld. 1.4 Articles of Organization; Bylaws. The Bylaws of Zapworld, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Zapworld after the merger of Zap Santa Cruz into Zapworld. 1.5 Directors and Officers. The officers and directors of Zap Santa Cruz shall no longer hold office immediately after the Effective Time, and the officers and directors of Zapworld before the Effective Time shall be the respective officers and directors of Zapworld after the Effective Time, each to hold office in accordance with the Articles of Organization and Bylaws of Zapworld. 1.6 Effect of Merger on Zap Santa Cruz Capital Stock. At the Effective Time, all shares of Zap Santa Cruz Capital Stock ("Company Capital Stock") and any right to acquire any shares of Zap Santa Cruz Capital Stock, including any options or warrants issued and outstanding, whether or not vested, shall cease to exist. 1.7 Effect of Merger on Zapworld Common Stock. The shares of Zapworld outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately thereafter and shall be unaffected by the transaction described herein. 1.8 Aggregate Shares to be Issued. As consideration for the transactions described herein, Zapworld shall issue to the holders of Zap Santa Cruz, shares of Zapworld Common Stock. The aggregate number of shares of Common Stock that Zapworld shall issue to the holders of Zap Santa Cruz is 8,803 (Eight Thousand Eight Hundred and Three). 1.9 Allocation and Fractional Shares. (a) Allocation. The allocation of shares of Zapworld Common Stock set forth in this Agreement shall be adjusted to reflect the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Zapworld -2- Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Zapworld Common Stock occurring after the date hereof and prior to the Effective Time. (b) Fractional Shares. No fraction of a share of Zapworld Common Stock will be issued at the Effective Time, but in lieu thereof, each holder of Zap Santa Cruz Stock who would otherwise be entitled to a fraction of a share of Zapworld Common Stock (after aggregating all fractional shares of Zapworld Common Stock to be received by such holder) shall be entitled to receive from Zapworld an amount of cash (rounded to the nearest whole cent) equal to the product of: (i) such fraction, multiplied by; (ii) the average closing price of a share of Zapworld Common Stock as reported on the OTC Bulletin Board for the 30-day period ending three days prior to the Closing Date or, if any such day there are no sales reported, the average of the closing bid and ask prices for Zapworld Common Stock reported on that date. 1.10 Surrender of Certificates and Check for $25,000. (a) Exchange Agent. The Corporate Secretary of Zapworld shall serve as the exchange agent (the "Exchange Agent") in the Merger. (b) Zapworld to Provide Common Stock And $25,000 Check. Promptly after the Effective Time, Zapworld shall make available to the Exchange Agent for exchange in accordance with this Article I, a valid check in the amount of $25,000 and the aggregate number of shares of Zapworld Common Stock issuable pursuant to Section 1.8, in exchange for all outstanding shares of Zap Santa Cruz Common Stock. (c) Zap Santa Cruz to Deliver all Its Outstanding Stock. Promptly after the Effective Time, Zap Santa Cruz shall deliver to the Exchange Agent all share certificates of Zap Santa Cruz Common Stock outstanding as of the Effective Time. 1.11 No Further Ownership Rights in Zap Santa Cruz Capital Stock. All shares of Zap Santa Cruz Common Stock issued shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Zapworld Common Stock, and after the Effective Time there shall be no further registration of transfers on the records of the Zap Santa Cruz of shares of Zap Santa Cruz Common Stock which were outstanding immediately prior to the Effective Time. 1.12 Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of Zap Santa Cruz shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Zapworld Common Stock, if any, as may be required pursuant to Section 1.9; provided, however, that Zapworld may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Zapworld or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. -3- 1.13 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest Zapworld with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Zap Santa Cruz, the officers and directors of the Zapworld are fully authorized in the name of Zap Santa Cruz to take, and will take, all such lawful and necessary action. ARTICLE II REPRESENTATIONS/WARRANTIES OF ZAP SANTA CRUZ Zap Santa Cruz hereby represents and warrants to Zapworld, subject to the exceptions disclosed in the disclosure schedules supplied by the Zap Santa Cruz to Zapworld, as follows: 2.1 Organization and Qualification. Zap Santa Cruz is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Zap Santa Cruz has the corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Zap Santa Cruz is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified or licensed would have a material adverse effect on the business, assets (including intangible assets), financial condition, results of operations or prospects of the Zap Santa Cruz. Zap Santa Cruz has delivered a true and correct copy of its Articles of Organization and Bylaws, each as amended to date, to Zapworld. Exhibit B lists the Articles of Incorporation and Bylaws of Zap Santa Cruz, and all amendments thereto. Such Articles of Organization and Bylaws are in full force and effect. Zap Santa Cruz is not in violation of any of the provisions of its Articles of Organization or Bylaws. 2.2 Subsidiaries. Zap Santa Cruz does not have, and has never had, any subsidiaries or affiliated companies and does not otherwise own, and has never otherwise owned, directly or indirectly, any shares of capital stock or any equity, debt or similar interest in or any interest convertible, exchangeable or exercisable for any equity, debt or similar interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity. Zap Santa Cruz has not agreed, nor is Zap Santa Cruz obligated, to make or be bound by any written, oral or other agreement, contract, sub-contract, commitment or undertaking of any nature, as of the date hereof or as may hereafter be in effect under which it may become obligated to make, any future investment in or capital contribution to any other entity. 2.3 Zap Santa Cruz Capital Structure. (a) Outstanding Stock. The authorized Zap Santa Cruz Capital Stock consists entirely of 10,000 shares of No Par Common Stock, of which a total of 1,000 are issued and outstanding. All 1,000 shares of Zap Santa Cruz Common Stock are now owned and held (and all of which at the Closing will be owned and held) by Sarka Enterprises, Inc. Other than the 1,000 shares of Common Stock, no other shares of the Zap Santa Cruz's Capital Stock are (or will at Closing be) issued or outstanding. No fractional shares of the Zap Santa Cruz's Capital Stock are (or will at Closing be) issued or outstanding. All issued -4- and outstanding shares of the Zap Santa Cruz's Capital Stock have been duly authorized and validly issued, are fully paid and non-assessable, are not subject to any claim, lien, preemptive right, or right of rescission, and have been offered, issued, sold and delivered by Zap Santa Cruz (and, if applicable, transferred) in compliance with all registration or qualification requirements (or applicable exemptions therefrom) of all applicable securities laws, the Zap Santa Cruz's Articles of Organization and other charter documents and all agreements to which the Zap Santa Cruz is a party. (b) No Options, Warrants or Rights. There are no options, warrants, convertible or other securities, calls, commitments, conversion privileges, preemptive rights or other rights or agreements outstanding to purchase or otherwise acquire (whether directly or indirectly) any shares of Zap Santa Cruz's authorized but unissued Capital Stock or any securities convertible into or exchangeable for any shares of Zap Santa Cruz's Capital Stock or obligating Zap Santa Cruz to grant, issue, extend, or enter into, any such option, warrant, convertible or other security, call, commitment, conversion privilege, preemptive right or other right or agreement, and Zap Santa Cruz has no liability for any dividends accrued but unpaid. No person or entity holds or has any option, warrant or other right to acquire any issued and outstanding shares of Zap Santa Cruz's Capital Stock from any record or beneficial holder of Zap Santa Cruz's shares. No shares of Zap Santa Cruz's Capital Stock are reserved for issuance under any stock purchase, stock option or other benefit plan. As a result of the Merger, Zapworld will be the record and sole beneficial owner of all outstanding Zap Santa Cruz's Capital Stock and all rights to acquire or receive any Zap Santa Cruz's Capital Stock, whether or not such Capital Stock is outstanding. All options expire, if not exercised immediately prior to the Effective Time. (c) No Voting Arrangements or Registration Rights. There are no voting agreements, voting trusts, rights of first refusal or other restrictions (other than normal restrictions on transfer under applicable securities laws) applicable to any of the Zap Santa Cruz Capital Stock. Zap Santa Cruz is not under any obligation to register under the 1933 Act or otherwise any of its currently outstanding securities or any securities that may be subsequently issued. 2.4 Authority. Zap Santa Cruz has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The requisite shareholder approval has been obtained in accordance with Zap Santa Cruz's bylaws, charter provisions and the regulatory requirements of the State of California. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Zap Santa Cruz. Zap Santa Cruz's Board of Directors has approved the Merger and this Agreement. 2.5 No Conflict. The execution and delivery of this Agreement by the Company does not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "Conflict"): (i) any provision of the Articles of Organization or Bylaws of the Zap Santa Cruz; or (ii) any -5- mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Zap Santa Cruz or its properties or assets. 2.6 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or commission ("Governmental Entity") or any third party (so as not to trigger any Conflict), is required by or with respect to Zap Santa Cruz in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for: (i) the filing of the Agreement/Articles of Merger with the California Secretary of State and (ii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws. 2.7 Unaudited Asset List. Schedule 2.7 of the Disclosure Schedule sets forth true and correct list of Zap Santa Cruz's unaudited assets as of the Effective Time. Schedule 2.7 is complete and correct in all material respects. 2.8 No Liabilities. As of the Effective Time, Zap Santa Cruz does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, known or unknown, matured or unmatured (whether or not required to be reflected in financial statements in accordance with GAAP) ("Liabilities"). 2.9 No Changes. As of the Effective Time, there has not been, occurred or arisen any: (a) amendments or changes to the Articles of Organization or Bylaws of Zap Santa Cruz as listed in Exhibit B; (b) destruction of, damage to or loss of any material assets listed in Schedule 2.7; (c) split, combination or reclassification of any Zap Santa Cruz Capital Stock; (d) sale, lease, license or other disposition of any of the assets of Zap Santa Cruz listed in Schedule 2.7 2.10 Tax and Other Returns and Reports. (a) Definition of Taxes. For the purposes of this Agreement, "Tax," or collectively "Taxes," means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such -6- amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. Except as set forth in Schedule 2.10, as of the Effective Time: (i) Zap Santa Cruz has prepared and filed all federal, state, local and foreign returns, estimates, information statements and reports required to be filed ("Returns") relating to any and all Taxes concerning or attributable to the Company or its operations and such Returns are true and correct and have been completed in accordance with applicable law. (ii) Zap Santa Cruz: (a) has paid or accrued all Taxes it is required to pay or accrue; and (b) has withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld as of that date. (iii) Zap Santa Cruz has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against Zap Santa Cruz, nor has Zap Santa Cruz executed any unexpired waiver of any statute of limitations on or extended the period for the assessment or collection of any Tax. (iv) No audit or other examination of any Return of Zap Santa Cruz by any Tax authority is presently in progress, nor has Zap Santa Cruz been notified of any request for such an audit or other examination. (v) Zap Santa Cruz has no knowledge of any basis for the assertion of any claim relating or attributable to Taxes that, if adversely determined, would result in any Lien on the assets of the Company. (vi) No adjustment or deficiency relating to any Return filed or required to be filed by Zap Santa Cruz has been proposed formally or, to the knowledge of Zap Santa Cruz, informally by any Tax authority to Zap Santa Cruz or any representative thereof. 2.11 Restrictions on Business Activities. There is no agreement (noncompete or otherwise), commitment, judgment, injunction, order or decree to which Zap Santa Cruz is a party or otherwise binding upon Zap Santa Cruz which has or reasonably would be expected to have the effect of: (a) prohibiting or impairing in any material respect: (i) any material business practice of Zap Santa Cruz; (ii) any acquisition of property (tangible or intangible) by Zap Santa Cruz; or (iii) the conduct of business by Zap Santa Cruz. -7- OR (b) after the consummation of the Merger, prohibiting or impairing in any material respect: (i) any material business practice of Zapworld; (ii) any acquisition of property (tangible or intangible) by Zapworld; or (iii) the conduct of business by Zapworld. Without limiting the foregoing, Zap Santa Cruz has not entered into any agreement under which Zap Santa Cruz is restricted from selling, licensing or otherwise distributing any of its products or services to any class of customers, in any geographic area, during any period of time or in any segment of the market. 2.12 Title to Properties; Absence of Liens and Encumbrances. (a) Zap Santa Cruz does not own any real property, nor has it ever owned any real property. Schedule 2.12 sets forth a list of all real property currently leased by Zap Santa Cruz, the name of the lessor and the date of the lease and each amendment thereto and, with respect to any current lease, the aggregate annual rental and/or other fees payable under any such lease. All such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). (b) Zap Santa Cruz has good and marketable title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens. (c) All facilities, machinery, equipment, fixtures, vehicles, and other properties owned or leased by Zap Santa Cruz are: (i) adequate for the conduct of the business of Zap Santa Cruz as currently conducted; and (ii) in good operating condition, regularly and properly maintained, subject to normal wear and tear and reasonably fit and usable for the purposes for which they are being used. 2.13 Intellectual Property. (a) Definitions. For all purposes of this Agreement, the following terms shall have the following respective meanings: (i) "Technology" shall mean any or all of the following: (A) works of authorship including, without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, documentation, designs, files, -8- net lists, records, data and mask works; (B) inventions (whether or not patentable), improvements and technology; (C) proprietary and confidential information, including technical data and customer and supplier lists, trade secrets and know how; (D) databases, data compilations and collections and technical data; (E) logos, trade names, trade dress, trademarks and service marks; (F) World Wide Web addresses, domain names and sites; (G) tools, methods and processes; and (H) all instantiations of the foregoing in any form and embodied in any media. (ii) "Intellectual Property Rights" shall mean any or all of the following and all rights in, arising out of, or associated therewith: (A) all United States and foreign patents, utility models and applications therefor and all reissues, divisions, re-examinations, renewals, extensions, provisionals, continuations and continuations-in-part thereof and equivalent or similar rights anywhere in the world in inventions and discoveries including without limitation invention disclosures ("Patents"); (B) all trade secrets and other rights in know-how and confidential or proprietary information; (C) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the world ("Copyrights"); (D) all industrial designs and any registrations and applications therefor throughout the world; (E) all rights in World Wide Web addresses and domain names and applications and registrations therefor; (F) all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world ("Trademarks"); (G) all computer software including all source code, object code, firmware, development tools, files, records and data, and all media on which any of the foregoing is recorded; and (H) any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world. (iii) "Zap Santa Cruz Intellectual Property" shall mean any Technology and Intellectual Property Rights including Zap Santa Cruz Registered Intellectual Property Rights (as defined below) that are owned (in whole or in part) by or exclusively licensed to Zap Santa Cruz. (iv) "Registered Intellectual Property Rights" shall mean all United States, international and foreign: (A) Patents, including applications therefor; (B) registered Trademarks, applications to register Trademarks, including intent-to-use applications, or other registrations or applications related to Trademarks; (C) Copyrights registrations and applications to register Copyrights; and (E) any other Technology that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public or private legal authority at any time. (b) Schedule 2.13 lists all Registered Intellectual Property Rights owned by, filed in the name of, or applied for, by Zap Santa Cruz and lists any proceedings or actions known to Zap Santa Cruz before any court, tribunal (including the United States Patent and Trademark Office (the "PTO") or equivalent authority anywhere in the world) related to any of Zap Santa Cruz's Registered Intellectual Property Rights or Company Intellectual Property. (c) There are no facts or circumstances that would render any Zap Santa Cruz Intellectual Property invalid or unenforceable. -9- (d) Each item of Zap Santa Cruz Intellectual Property is free and clear of any Liens. (e) All Zap Santa Cruz Intellectual Property will be fully transferable, alienable or licensable by Zapworld without restriction and without payment of any kind to any third party. (f) Zap Santa Cruz has not transferred ownership of, or granted any exclusive license of or exclusive right to use, any Technology or Intellectual Property Right. 2.14 Agreements, Contracts and Commitments. Except as set forth in Schedule 2.14, Zap Santa Cruz is not currently a party to nor is it currently bound by: (a) any employment or consulting agreement, contract or commitment with any officer, director, employee or member of the Zap Santa Cruz's Board of Directors, other than those that are terminable by Zap Santa Cruz at will; (b) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements; (c) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement; (d) any lease of personal property having a value individually in excess of $500; (e) any agreement of indemnification or guaranty; (f) any agreement, contract or commitment containing any covenant limiting in any respect the right of Zap Santa Cruz to engage in any line of business or to compete with any person or granting any exclusive distribution rights; (g) any agreement relating to capital expenditures and involving future payments in excess of $500; (h) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit; (i) any purchase order or contract involving $500 or more in total payments; (j) any construction contracts; (k) any dealer, distribution, joint marketing (excluding joint marketing agreements: (i) involving financial obligations or liabilities to the Company; or (ii) that do not -10- involve rights to sell Company Products to end-users), development, content provider, destination site or merchant agreement; (l) any agreement pursuant to which the Company has advanced or loaned any amount to any shareholder of the Company or any director, officer, employee or consultant; (m) any settlement agreement entered into since the Company's initial incorporation; or (n) any other agreement that involves $500 in total payment or more or is not cancelable without penalty within thirty (30) days. Zap Santa Cruz has not, and has not received notice that it has, breached, violated or defaulted under, any of the terms or conditions of any agreement, contract or commitment required to be set forth on Schedule 2.14. 2.15 Change of Control Payments. Schedule 2.15 sets forth each plan or agreement pursuant to which any amounts may become payable (whether currently or in the future) to current or former officers, directors or employees of Zap Santa Cruz as a result of or in connection with the Merger. 2.16 Interested Party Transactions. Except as set forth in Schedule 2.16, to Zap Santa Cruz's knowledge, no officer, director or affiliate (as defined under Regulation C under the Securities Act) of Zap Santa Cruz (nor any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an economic interest), has or has had, directly or indirectly: (a) an economic interest in any entity that purchases from or sells or furnishes to, Zap Santa Cruz, any goods or services; or (b) a beneficial interest in any contract or agreement set forth in Schedule 2.14; provided, that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation shall not be deemed an "economic interest in any entity" for purposes of this Section 2.16. There are no receivables of Zap Santa Cruz owing by any director, officer, employee or consultant to Zap Santa Cruz (or any ancestor, sibling, descendant, or spouse of any such persons, or any trust, partnership, or corporation in which any of such persons has an economic interest). 2.17 Compliance with Laws. Zap Santa Cruz is not in material conflict with, or in default or violation in any material respect of any law, rule, regulation, order, judgment or decree applicable to Zap Santa Cruz or by which its properties is bound or affected. No investigation or review by any governmental or regulatory body or authority is pending or, to the knowledge of Zap Santa Cruz, threatened against Zap Santa Cruz. 2.18 Litigation. There is no action, suit or proceeding of any nature pending or to Zap Santa Cruz's knowledge threatened against Zap Santa Cruz, its properties or any of its officers, directors or employees. There is no investigation pending or, to Zap Santa Cruz's knowledge, threatened against Zap Santa Cruz, its properties or any of its officers, directors or employees by or before any Governmental Entity. -11- 2.19 Insurance. With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of Zap Santa Cruz, there is no claim by Zap Santa Cruz pending under any of such policies or bonds as to which coverage has been denied or disputed by the underwriters of such policies or bonds. 2.20 Minute Books. The minute books of Zap Santa Cruz made available to Zapworld are the only minute books of Zap Santa Cruz and contain an accurate summary of all meetings of directors (or committees thereof) and shareholders or actions by written consent since the time of incorporation of Zap Santa Cruz. 2.21 Environmental Matters. The Zap Santa Cruz: (a) has obtained all applicable and material permits, licenses and other authorizations that are required under Environmental Laws; (b) is in compliance with all material terms and conditions of such required permits, licenses and authorizations, and also is in compliance with all other material limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder; (c) is not aware of and has not received notice of any event, condition, circumstance, activity, practice, incident, action or plan that is reasonably likely to interfere with or prevent continued compliance or that would give rise to any common law or statutory liability, or otherwise form the basis of any Environmental Claim with respect to Zap Santa Cruz or any person or entity whose liability for any Environmental Claim Zap Santa Cruz has retained or assumed either contractually or by operation of law; (d) has not disposed of, released, discharged or emitted any Hazardous Materials into the soil or groundwater at any properties owned or leased at any time by Zap Santa Cruz, or at any other property, or exposed any employee or other individual to any Hazardous Materials or condition in such a manner as would result in any material liability or result in any corrective or remedial action obligation under Environmental Laws; and (e) has taken all actions necessary under Environmental Laws to register any products or materials required to be registered by Zap Santa Cruz (or any of its agents) thereunder. No Hazardous Materials are present in, on, or under any properties owned or leased at any time (including both land and improvements thereon) by Zap Santa Cruz so as to give rise to any liability or corrective or remedial obligation of Zap Santa Cruz under any Environmental Laws. For the purposes of this Section 2.21, "Environmental Claim" means any notice, claim, act, cause of action or investigation by any person alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from: (i) the presence, or release into the environment, of any Hazardous Materials; or (ii) any violation, or alleged violation, of any Environmental Laws. "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) or the protection of human health and worker safety, including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic -12- substances, radioactive and biological materials, asbestos-containing materials (ACM), hazardous substances, petroleum and petroleum products or any fraction thereof, excluding, however, Hazardous Materials contained in products typically used for office and janitorial purposes properly and safely maintained in accordance with Environmental Laws. 2.22 Brokers' and Finders' Fees. Zap Santa Cruz has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.23 Bank Accounts. Schedule 2.23 constitutes a full and complete list of all the bank accounts and safe deposit boxes of Zap Santa Cruz, the number of each such account or box, and the names of the persons authorized to draw on such accounts or to access such boxes. 2.24 Indemnification Obligations. To Zap Santa Cruz's knowledge, there is no action, proceeding or other event pending against any officer or director of Zap Santa Cruz which would give rise to any indemnification obligation of Zap Santa Cruz to its officers and directors under its Articles of Organization, Bylaws or any agreement between Zap Santa Cruz and any of such officers or directors. ARTICLE III REPRESENTATIONS/WARRANTIES OF ZAPWORLD Zapworld represent and warrants to the Zap Santa Cruz as follows: 3.1 Organization of Parent and Merger Sub. Zapworld is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 3.2 Authority. Zapworld has all requisite corporate power and authority to enter into this Agreement and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of Zapworld. No vote of Zapworld's stockholders is required with respect to this Agreement and the transactions contemplated thereby. 3.3 Zapworld Common Stock. The shares of Zapworld Common Stock to be issued pursuant to the Merger will, when issued and delivered in accordance with this Agreement, be duly authorized, validly issued, fully paid and non-assessable and will be issued in compliance with applicable federal and state securities laws; provided, however, that the Zapworld Common Stock to be issued hereunder will be subject to restrictions on transfer under applicable federal and state securities laws. ARTICLE IV SECURITIES ACT COMPLIANCE; REGISTRATION 4.1 Securities Act Exemption. Zapworld Common Stock to be issued pursuant to this Agreement initially will not be registered under the Securities Act in reliance on the exemptions from the registration requirements of Section 5 of the Securities Act set forth in -13- Section 4(2) thereof. Prior to the Closing Date, each of Zap Santa Cruz's shareholders shall have provided Zapworld such representations, warranties, certifications and additional information as Zapworld may reasonably request to ensure the availability of such exemptions from the registration requirements of the Securities Act. 4.2 Stock Restrictions. In addition to any legend imposed by applicable state securities laws or by any contract which continues in effect after the Effective Time, the certificates representing the shares of Zapworld Common Stock issued pursuant to this Agreement shall bear a restrictive legend (and stop transfer orders shall be placed against the transfer thereof with Zapworld's transfer agent), stating substantially as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH RULE 144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT, OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. 4.3 The Company Shareholders' Restrictions Regarding Securities Law Matters. Each shareholder of the Zap Santa Cruz, by virtue of the Merger and the conversion into Zapworld Common Stock of the Zap Santa Cruz's Capital Stock held by such shareholder, shall be bound by the following provisions: (a) Such shareholder will not offer, sell, or otherwise dispose of any shares of Zapworld Common Stock except in compliance with the Securities Act and the rules and regulations thereunder. (b) Such shareholder will not sell, transfer or otherwise dispose of any shares of Zapworld Common Stock unless: (i) such sale, transfer or other disposition is within the limitations of and in compliance with Rule 144 promulgated by the SEC under the Securities Act and the Shareholder furnishes Zapworld with reasonable proof of compliance with such Rule; (ii) in the opinion of counsel, reasonably satisfactory to Zapworld and its counsel, some other exemption from registration under the Securities Act is available with respect to any such proposed sale, transfer, or other disposition of Zapworld Common Stock; or (iii) the offer and sale of Zapworld Common Stock is registered under the Securities Act. -14- ARTICLE V ADDITIONAL AGREEMENTS 5.1 Access to Information. The Zap Santa Cruz shall afford Zapworld and its accountants, legal counsel and other representatives reasonable access during normal business hours during the period prior to the Effective Time to: (a) all of the properties, books, contracts, commitments and records of Zap Santa Cruz; (b) all other information concerning the business, properties, and personnel of the Zap Santa Cruz as Zapworld may reasonably request; and (c) all key employees of Zap Santa Cruz as identified by Zapworld. Zap Santa Cruz agrees to provide Zapworld and its accountants, legal counsel and other representatives copies of internal financial statements promptly upon request. 5.2 Confidentiality. All information not previously disclosed to the public which shall have been furnished by Zap Santa Cruz or Zapworld to the other party shall not be disclosed prior to the Closing Date to any person other than the party's respective employees, legal counsel, and accountants, in confidence, or used for any purpose other than as contemplated herein. 5.3 Consents. Zap Santa Cruz shall promptly apply for or otherwise seek and use reasonable commercial efforts to obtain all consents and approvals required to be obtained by it for the consummation of the Merger, including all consents, waivers or approvals under any of the Contracts which are necessary in order to preserve the benefits thereunder for Zapworld, or otherwise in connection with the Merger. 5.4 Legal Conditions to the Merger. Zapworld and Zap Santa Cruz will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger and will promptly cooperate with and furnish information to any other party hereto in connection with any such requirements imposed upon such other party in connection with the Merger ARTICLE VI CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of Zap Santa Cruz. The obligations of Zap Santa Cruz to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the representations and warranties of Zapworld contained in this Agreement. 6.2 Conditions to the Obligations of Zapworld. The obligations of Zapworld to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the representations and warranties of Zap Santa Cruz contained in this Agreement. -15- ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES 7.1 Survival of Representations and Warranties. (a) All of the Zap Santa Cruz's representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall terminate not later than 5:00 p.m., California time, the date which is one year following the Closing Date (the "Expiration Date"); provided, however, that the representations and warranties relating or pertaining to any Tax or Returns related to such Tax set forth in Section 2.10 hereof, shall survive until the expiration of all applicable statues of limitations, or extensions thereof, governing each Tax or Returns related to such Tax. (b) All of Zapworld's representations and warranties contained herein or in any instrument delivered pursuant to this Agreement shall terminate at the Effective Time. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.1 Termination. Except as provided in Section 9.2 below, this Agreement may be terminated and the Merger abandoned at any time prior to the Closing Date: (a) by mutual written consent duly authorized by the Board of Directors of Zapworld and Zap Santa Cruz; (b) by either Zapworld or Zap Santa Cruz if: (i) the Closing Date has not occurred by January 20, 2000; (ii) there shall be a final non-appealable order of a federal or state court in effect preventing consummation of the Merger; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity that would make consummation of the Merger illegal; (c) by Zapworld, if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger, by any Governmental Entity, which would: (i) prohibit Zapworld's ownership or operation of any portion of the business of Zap Santa Cruz; or (ii) compel Zapworld to dispose of or hold separate, as a result of the Merger, any portion of the business or assets of Zap Santa Cruz; (d) by Zapworld, if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Zap Santa Cruz; (e) by Zap Santa Cruz if, it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Zapworld; Where action is taken to terminate this Agreement pursuant to Section 9.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action. 8.2 Effect of Termination. Any termination of this Agreement under Section 9.1 above will be effective immediately upon the delivery of written notice of the terminating party. -16- 8.3 Amendment. Except as is otherwise required by applicable law, prior to the Closing, this Agreement may be amended by the parties hereto at any time only by execution of an instrument in writing signed by Zapworld and Zap Santa Cruz. 8.4 Extension; Waiver. At any time prior to the Effective Time, Zapworld and Zap Santa Cruz, may, to the extent legally allowed: (a) extend the time for the performance of any of the obligations of the other party hereto; (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE IX GENERAL PROVISIONS 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or at the time sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice), provided, however, that notices sent by mail will not be deemed given until received: (a) if to Zapworld, to: Zapworld.com 117 Morris Street Sebastopol, California 95472 Attention: Garry Starr, President Telephone: (707) 824-4150 Facsimile: (707) 824-4159 with a copy to: Evers & Hendrickson, LLP 155 Montgomery Street, 12th Floor San Francisco, California 94104 Attention: William D. Evers, Esq. Telephone: (415) 772-8100 Facsimile: (415) 772-8101 (b) if to Zap Santa Cruz, to: Zap of Santa Cruz, Inc. P.O. Box 1202 Santa Cruz, California 95061-1202 Attention: Rosemary Sarka Telephone: (831) 458-3573 -17- 9.2 Expenses. Each party will bear its respective expenses and legal fees incurred with respect to this Agreement, and the transactions contemplated hereby. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 9.4 Entire Agreement; Assignment. This Agreement, the schedules and Exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 9.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. 9.6 Arbitration. Any controversy between Zapworld and Zap Santa Cruz involving the construction or application of any of the terms, provisions, or conditions of this Agreement shall, on the written request of either party served on the other, be submitted to mediation before a mediator suitable to both parties. If the parties fail to resolve any such controversy through mediation, such controversy shall, on the written request of either party served on the other, be submitted to arbitration. Arbitration shall comply with and be governed by the provisions of the California Arbitration Act. 9.7 Selection of Arbitrators. Zapworld and Zap Santa Cruz shall each appoint one person to hear and determine the dispute. If the two persons so appointed are unable to agree, then those persons shall select a third impartial arbitrator whose decision shall be final and conclusive upon both parties. 9.8 Costs of Arbitration. The costs of arbitration shall be allocated to the losing party or in such proportions as the arbitrators decide. 9.9 Attorneys' Fees and Costs. If any legal action (including mediation and arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs, and necessary disbursements in addition to any other relief to which that party may be entitled. This provision shall be construed as applicable to the entire agreement. 9.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each of the parties hereto consents to the jurisdiction and venue of the federal and state courts for San Francisco, California for purposes of any action arising out of this Agreement, and agrees that process may be served upon them in any manner authorized by this Agreement for delivery of notices, -18- and waives any covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 9.11 Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. (THIS SPACE INTENTIONALLY LEFT BLANK) -19- WITNESS WHEREOF, Zapworld and Zap Santa Cruz have caused this Agreement to be signed by their duly authorized respective officers, all as of the date first written above. Zapworld.com By: /s/ Gary Starr -------------------------- Name: Gary Starr Dated: ____________________ Title: President By: /s/ William Evers ------------------------- Name: William Evers Dated:_____________________ Title: Assistant Secretary Zap of Santa Cruz, Inc. By: /s/ Michael F. Sarka ------------------------- Name: Michael F. Sarka Dated: ____________________ Title: President By: /s/ Rosemary Sarka ------------------------- Name: Rosemary Sarka Dated: ____________________ Title: Secretary -20- EX-10.2 11 0011.txt AGREEMENT OF MERGER AGREEMENT OF MERGER OF ZAPWORLD.COM (a California corporation) AND ZAP SANTA CRUZ, INC. (a California corporation) - -------------------------------------------------------------------------------- THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of January 20, 2000 by and between Zapworld.com, a California corporation doing business at 117 Morris Street, Sebastopol, California 95472 ("Zapworld") and Zap Santa Cruz, Inc., a California corporation doing business at 131 Center Street, #2 Santa Cruz, California 95061 ("Zap Santa Cruz"). WHEREAS, the respective Boards of Directors of Zapworld and Zap Santa Cruz, in light of, and subject to, the terms and conditions in that certain Agreement and Plan of Reorganization, dated January 20, 2000, between Zapworld and Zap Santa Cruz (the "Reorganization Agreement"), deem it advisable and in the best interests of each of such corporations and their respective shareholders that Zap Santa Cruz be merged with and into Zapworld. NOW, THEREFORE, in consideration of the mutual agreements and covenants set for the herein, and intending to be legally bound hereby, Zapworld and Zap Santa Cruz hereby agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and California Law, Zap Santa Cruz shall be merged with and into Zapworld. After the merger, the separate corporate existence of Zap Santa Cruz shall cease and Zapworld shall continue as the surviving corporation. 1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 9.1, the closing of the Merger (the "Closing") will take place as promptly as practicable, but no later than one (1) business day following satisfaction or waiver of the conditions set forth in Article VI, at the law offices of Evers & Hendrickson, LLP, 155 Montgomery Street, 12th Floor, San Francisco, California 94104, unless another place or time is agreed to by Zapworld and the Zap Santa Cruz. The date upon which the Closing actually occurs is herein referred to as the "Closing Date." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing an Agreement of Merger, in substantially the form attached hereto as Exhibit A (the "Agreement of Merger"), with the Secretary of State of the State of California, in accordance with the relevant provisions of California Law (the time of acceptance by the Secretary of State of California of such filing being referred to herein as the "Effective Time"). The parties currently intend that the Closing Date will occur on or prior to January 20, 2000. 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of California Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, power and franchises of Zap Santa Cruz shall vest in Zapworld and all debts, liabilities and duties of Zap Santa Cruz shall become the debts, liabilities and duties of the Zapworld. 1.4 Articles of Organization; Bylaws. The Bylaws of Zapworld, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Zapworld after the merger of Zap Santa Cruz into Zapworld. 1.5 Directors and Officers. The officers and directors of Zap Santa Cruz shall no longer hold office immediately after the Effective Time, and the officers and directors of Zapworld before the Effective Time shall be the respective officers and directors of Zapworld after the Effective Time, each to hold office in accordance with the Articles of Organization and Bylaws of Zapworld. 1.6 Effect of Merger on Zap Santa Cruz Capital Stock. At the Effective Time, all shares of Zap Santa Cruz Capital Stock ("Company Capital Stock") and any right to acquire any shares of Zap Santa Cruz Capital Stock, including any options or warrants issued and outstanding, whether or not vested, shall cease to exist. 1.7 Effect of Merger on Zapworld Common Stock. The shares of Zapworld outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately thereafter and shall be unaffected by the transaction described herein. 1.8 Aggregate Shares to be Issued. As consideration for the transactions described herein, Zapworld shall issue to the holders of Zap Santa Cruz, shares of Zapworld Common Stock. The aggregate number of shares of Common Stock that Zapworld shall issue to the holders of Zap Santa Cruz is 8,803 (Eight Thousand Eight Hundred and Three). 1.9 Allocation and Fractional Shares. (1) Allocation. The allocation of shares of Zapworld Common Stock set forth in this Agreement shall be adjusted to reflect the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Zapworld Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Zapworld Common Stock occurring after the date hereof and prior to the Effective Time. (2) Fractional Shares. No fraction of a share of Zapworld Common Stock will be issued at the Effective Time, but in lieu thereof, each holder of Zap Santa Cruz Stock who would otherwise be entitled to a fraction of a share of Zapworld Common Stock (after aggregating all fractional shares of Zapworld Common Stock to be received by such holder) shall be entitled to receive from Zapworld an amount of cash (rounded to the nearest whole -2- cent) equal to the product of: (i) such fraction, multiplied by; (ii) the average closing price of a share of Zapworld Common Stock as reported on the OTC Bulletin Board for the 30-day period ending three days prior to the Closing Date or, if any such day there are no sales reported, the average of the closing bid and ask prices for Zapworld Common Stock reported on that date. 1.10 Surrender of Certificates. (1) Exchange Agent. The Corporate Secretary of Zapworld shall serve as the exchange agent (the "Exchange Agent") in the Merger. (2) Zapworld to Provide Common Stock. Promptly after the Effective Time, Zapworld shall make available to the Exchange Agent for exchange in accordance with this Article I, a valid check in the amount of $25,000 and the aggregate number of shares of Zapworld Common Stock issuable pursuant to Section 1.8, in exchange for all outstanding shares of Zap Santa Cruz Common Stock. (3) Zap Santa Cruz to Deliver all Its Outstanding Stock. Promptly after the Effective Time, Zap Santa Cruz shall deliver to the Exchange Agent all share certificates of Zap Santa Cruz Common Stock outstanding as of the Effective Time. 1.11 No Further Ownership Rights in Zap Santa Cruz Capital Stock. All shares of Zap Santa Cruz Common Stock issued shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Zapworld Common Stock, and after the Effective Time there shall be no further registration of transfers on the records of the Zap Santa Cruz of shares of Zap Santa Cruz Common Stock which were outstanding immediately prior to the Effective Time. 1.12 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest Zapworld with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Zap Santa Cruz, the officers and directors of the Zapworld are fully authorized in the name of Zap Santa Cruz to take, and will take, all such lawful and necessary action. ARTICLE II MISCELLANEOUS 2.1 Termination of Agreement and Plan of Reorganization. Notwithstanding the approval of this Agreement by the shareholders of Zapworld and Zap Santa Cruz, this Agreement shall terminate forthwith in the event that the Reorganization Agreement shall be terminated as therein provided. 2.2 Amendment. This Agreement shall not be amended except by an instrument in writing signed on behalf of each of the parties hereto. -3- 2.3 Counterparts. 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 agreement. 2.4 Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement. Zapworld.com By: /s/ Gary Starr ------------------------------- Name: Gary Starr Title: President By: /s/ William Evers ------------------------------- Name: William Evers Title: Assistant Secretary Zap Santa Cruz, Inc. By: /s/ Michael F. Sarka ----------------------------- Name: Michael F. Sarka Title: President By: /s/ Rosemary Sarka ---------------------------- Name: Rosemary Sarka Title: Secretary -4- EX-10.3 12 0012.txt EMB - PLAN OF REORGANIZATION ABBEY, WEITZENBERG, HOFFMAN & EMERY PC TIMOTHY W. HOFFMAN, ESQ., SB# 114962 1105 North Dutton Avenue, P. O. Box 1566 Santa Rosa, CA 95402 Telephone: (707) 542-5050 Attorneys for Debtor and Debtor-In-Possession UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA In re ) CASE NO. 00-10035 ) EMB, Inc. ) CHAPTER 11 ) Debtor and Debtor-In-Possession. ) - --------------------------------------) PLAN OF REORGANIZATION This Plan of Reorganization (hereinafter this "Plan") is proposed by EMB, Inc., the Debtor and Debtor-in-Possession herein (hereinafter the "Debtor"). Through this Plan the Debtor seeks to resolve and reorganize its financial affairs. Please refer to the accompanying Disclosure Statement for a discussion of the Debtor's history, assets and liabilities, and for a summary and analysis of this Plan. All creditors are encouraged to consult the Disclosure Statement before voting to accept this Plan. No solicitation materials other than the Disclosure Statement have been authorized by the Court for use in soliciting acceptances or rejections of this Plan. ARTICLE I DEFINITIONS The following terms when used in this Plan shall, unless the context otherwise requires, have the following meaning: A. "Administrative Expense" means those expenses described in Section 503 of the Bankruptcy Code. B. "Allowed Claim" or "Allowed Interest" means a claim or interest (a) for which a -1- PLAN OF REORGANIZATION proof of claim or interest was timely filed with the Court, or (b) scheduled in a list of creditors or shareholders, or any amendment thereto, prepared and filed with the Court pursuant to Rule 1007 of the Bankruptcy Rules of Procedure and not listed as disputed, contingent or unliquidated, and in either case as to which no objection has been filed or the claim or interest is allowed by Final Order or deemed allowed by this Plan. C. "Allowed Priority Claim" means an allowed claim for which the holder asserts and is determined to be entitled to priority under Section 507 of the Bankruptcy Code. D. "Allowed Secured Claim" means an allowed claim that is secured by a valid lien on property of the Debtor which is not void or voidable under any state or federal law including any provisions of the Bankruptcy Code. That portion of such claim exceeding the value of security held therefore shall be an allowed unsecured claim except as modified by this Plan. E. "Allowed Unsecured Claim" means an allowed claim against the Debtor which is not an Allowed Priority Claim or an Allowed Secured Claim. F. "Bankruptcy Code" means Title 11 of the United States Code and shall also include Sections 157, 158, 1334, 1408-1412, and 1452 of Title 28 of the United States Code. G. "Bankruptcy Court" means the United States Bankruptcy Court for the Northern District of California, Division One, or such other court or forum as may be vested with original jurisdiction to confirm plans of reorganization under Chapter 11 of the Bankruptcy Code and to adjudicate matters with respect to such plans. H. "Confirmation" means entry of an order by the Bankruptcy Court confirming this Plan. I. "Debtor" or "Debtor-In-Possession" means EMB, Inc. J. "Effective Date" means 10 days after entry of an order confirming this Plan regardless of whether such order is a Final Order. K. "Estate" means all of the Debtor's now existing legal or equitable interests in any tangible or intangible property, whether real or personal. L. "Final Order" means an order or judgment of a court of appropriate jurisdiction as to which (a) any appeal that has been taken has been finally determined or dismissed, or (b) the time -2- PLAN OF REORGANIZATION for appeal has expired and a notice of appeal has not been filed timely. M. "Lien" means any charge against or interest in property of the Estate to secure payment of a debt or performance of an obligation and includes, without limitation, any judicial lien, security interest, mortgage, deed of trust and statutory lien as defined in Section 101 of the Bankruptcy Code. N. Any term used in this Plan that is not defined here but that is used in the Bankruptcy Code shall have the meaning assigned to that term in the Bankruptcy Code. ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS The following is a designation of the classes of claims and the class of interests provided for in this Plan. Administrative claims and priority tax claims of the kinds specified in Bankruptcy Code ss. 507(a)(1) and ss.507(a)(8) respectively, have not been classified and are excluded from the following classes in accordance with the provisions of ss.1123(a)(1) of the Bankruptcy Code. A claim or interest shall be deemed classified in a different class to the extent that any remainder of the claim or interest qualifies within the description of such different class. A claim is in a particular class only to the extent that the claim is an Allowed Claim in that class. Class 1 The claim of Zapworld.com secured by all of the Debtor's assets. Class 2 The claims entitled to priority under ss.ss.507(a)(3) and (4) of the Bankruptcy Code. Class 3 The unsecured claims not entitled to priority under ss.507(a) of the Bankruptcy Code. Class 4 The unsecured claims not entitled to priority under ss.507(a) of the Bankruptcy Code of $100 or less, and all unsecured claims not entitled to priority under ss.507(a) of the Bankruptcy Code of larger amounts that are reduced to $100 by their holders by written election received by Debtor's counsel on or before the date first set for confirmation of this Plan. -3- PLAN OF REORGANIZATION Class 5 The interests of the Debtor's preferred shareholders. Class 6 The interests of the Debtor's common shareholders. ARTICLE III IMPAIRMENT OF CLAIMS The claims in Classes 2 and 4 are impaired in that holders of claims in such class will not receive interest on their Allowed Claims. The Class 2 and 4 claimants shall receive cash equal to their Allowed Claims on or before the Effective Date of the Plan. The claim in Class 1 is impaired insofar as that claim will not be paid under this Plan. The remaining claims are impaired insofar as payments on those claims are not current and will be further delayed under this Plan as more particularly described in Article V, below. ARTICLE IV TREATMENT OF NON-CLASSIFIED CLAIMS Each holder of an Allowed Claim of the kind specified in ss. 507(a)(1) or (8) of the Bankruptcy Code, not otherwise separately classified herein, shall receive on account of such claim cash equal to the allowed amount of such claim, unless such holder shall have agreed to a less favorable treatment. Payments on account of such a claim shall be distributed on the later of the following dates: (1) The Effective Date; or (2) As soon as practical after the order allowing the claim becomes a Final Order, if the claim is disputed or if applicable provisions of the Bankruptcy Code otherwise require Bankruptcy Court approval. /// /// /// -4- PLAN OF REORGANIZATION ARTICLE V MEANS FOR EXECUTION OF PLAN A. Sale of Assets 1. The Debtor shall proceed to consummate its existing Agreement to sell all of its assets to Zapworld.com pursuant to the terms and conditions contained in a certain letter agreement dated December 15, 1999. 2. On the Effective Date, Zapworld.com shall pay to the Debtor cash in an amount equal to Allowed Claims entitled to priority under ss.507)(a) of the Bankruptcy Code up to a maximum of $100,000 and shall issue to creditors and shareholders of the Debtor 140,000 shares of Zapworld.com's common stock as provided herein. Transfer of the stock will be restricted as more particularly described below. Zapworld.com can increase the cash portion of the purchase price in exchange for a corresponding reduction in the number of shares of common stock. 3. The Debtor shall transfer to Zapworld.com title to all of its rights, assets and intangible assets, including but not limited to, the following: (a) All of the Debtor's rights of every kind and nature with respect to its business of manufacturing and selling electric vehicles; (b) All equipment, furniture and other fixed assets whether owned or leased. (c) All inventory and work in progress. (d) All patents (including patents pending), copyrights, trade secrets, trademarks and all other proprietary rights of the Debtor and all rights under any licenses of any patents, copyrights, trade secrets, trademarks and all other intangible assets, whether the Debtor holds those rights as a licensor or licensee; (e) All causes of action, claims and rights other than avoiding powers arising under Sections 544,547, 548 and 549 of the Bankruptcy Code. (f) All rights under any lease of any personal or real property used or operated by the Debtor. B. Transferability of Zapworld.com Stock -5- PLAN OF REORGANIZATION 1. Securities Law Treatment Pursuant to the provisions of Section 1145 of the Bankruptcy Code, the Zapworld.com common stock issued hereunder in exchange for claims and interests under this Plan, except for Zapworld.com common stock issued to underwriters (as that term is defined in section 1145(b) of the Bankruptcy Code), shall be exempt from the registration requirements of the Securities Act of 1933, as amended, and any state or local laws requiring the registration for offer or sale of a security or registration or licensing of an issuer, underwriter or dealer. 2. Contractual Restriction On Transfer a. Subject to applicable provisions of federal and state laws governing the sales of securities, no shares of Zapworld.com common stock issued pursuant to this Plan may be sold in a brokerage transaction for 18 months after the Effective Date. On or after the first day of the 18th month which begins after the Effective Date, each holder of a Class 3 claim which receives shares of Zapworld.com common stock under this Plan may sell or transfer such shares in any manner such holder chooses. On or after the first day of the 24th month which begins after the Effective Date, each holder of a Class 5 or 6 interest which receives shares of Zapworld.com common stock under this Plan may sell or transfer such shares in any manner such holder chooses. b. The foregoing restrictions shall not prevent the sale, transfer, or encumbrance of shares in transactions outside the public market if the transferor receives from the transferee written acknowledgment that the securities will continue to be subject to the foregoing restrictions in the hands of the transferee. C. Assumption and Assignment of Leases 1. Confirmation of this Plan shall serve as an assumption of the Conseco equipment lease as well as the real property lease with Pine Creek Properties pursuant to Bankruptcy Code section 365. Upon Confirmation these leases shall be assumed by and assigned to Zapworld.com, and the Debtor shall have no further liability thereunder. D. Distributions To Creditors And Interest Holders 1. On or before the Effective Date, the Debtor shall distribute cash to the -6- PLAN OF REORGANIZATION holders of allowed administrative claims, Allowed Claims in Classes 2 and 4, and Allowed Claims entitled to priority under ss.507(a)(8) of the Bankruptcy Code . 2. Not later than 30 days after the Effective Date, the Debtor shall send to Zapworld.com a list of all Allowed Claims and Allowed Interests entitled to share in the pool of 140,000 shares of Zapworld.com common stock. Not later than 30 days after receive of the foregoing list, Zapworld.com shall distribute shares of Zapworld.com stock to each holder of an Allowed Claim in Class 3 with a value equal to the amount of such holder's Allowed Claim. If there are insufficient shares to pay all Allowed Claims in Class 3 in full, the shares shall be distributed pro rata to such holders. If shares remain undistributed after such distributions, Zapworld.com shall distribute shares of Zapworld.com stock to each holder of an Allowed Interest in Class 5 with a value equal to the amount of the fixed liquidation preference applicable to such shares. If there are insufficient shares to pay all Allowed Interests in Class 5 in full, the shares shall be distributed pro rata to such holders. If shares remain undistributed after such distributions, Zapworld.com shall distribute shares of Zapworld.com stock, pro rata, to all holders of an Allowed Interests in Class 6. For purposes of this distribution the stock shall be deemed to have a value equal to the average daily trading price of the Zapworld.com stock for the period of 30 days immediately preceding the first hearing set on the Disclosure Statement which accompanies this Plan. The certificates for such shares shall bear legends indicating the applicable restrictions on their transferability. Fractional shares shall not be distributed. Instead, the number of shares to be distributed to any particular creditor shall be rounded up to the nearest whole number. E. Miscellaneous. 1. All secured creditors shall retain their existing liens. 2. Zapworld.com shall not assume any of the Debtor's liabilities, debts or obligations other than those created by the leases with Conseco and Pine Creek Properties. 3. Where objections have been filed with the Bankruptcy Court or are -7- PLAN OF REORGANIZATION contemplated by the Debtor with respect to a claim, whether classified or nonclassified, any payment otherwise payable on account of said claim shall be held in reserve by the Debtor to be paid at such time as the claim becomes an Allowed Claim pursuant to a Final Order. In the event that such claim is disallowed by a Final Order, the amount so held in reserve shall be distributed with other funds in the manner provided generally by this Plan. 4. The Debtor shall pay all post-confirmation quarterly fees owed to the Office of the United States Trustee and shall file any and all required post-confirmation reports with the Bankruptcy Court with a copy served on the United States Trustee. ARTICLE VI EXECUTORY CONTRACTS AND UNEXPIRED LEASES The Debtor hereby rejects any of its executory contracts and unexpired leases not otherwise assumed in this Plan. ARTICLE VII RETENTION OF JURISDICTION BY THE BANKRUPTCY COURT Following Confirmation, the Bankruptcy Court shall retain jurisdiction over all matters concerning the administration of the case and this Plan, including but not limited to, the consideration and approval of administrative expenses; the determination whether compensation paid to professionals is reasonable; the determination of objections to claims; any proceedings which may be necessary to collect claims of the Debtor, including avoidable transfers; the enforcement of any order in this case; and entry of an order terminating this case. DATED: May ___, 2000 EMB, Inc. By_________________________________ Scott Cronk, President /// /// /// -8- PLAN OF REORGANIZATION ABBEY, WEITZENBERG, HOFFMAN & EMERY PC Attorneys for Debtor and Debtor-In-Possession By: -------------------------- Timothy W. Hoffman Zapworld.com hereby joins in this Plan of Reorganization and agrees to be bound thereby. -------------------- Zapworld.com By: __________________ Gary Starr, President -9- PLAN OF REORGANIZATION EX-10.4 13 0013.txt AGREEMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into effective as of July 12, 1999 (the "Effective Date"), by and between ZAP WORLD.com, a California corporation having its principal place of business at 117 Morris Street, Sebastopol, California 95472 ("ZAP"), and American Scooter and Cycle Rentals, Inc. a California corporation having its principal place of business at 2715 Hyde Street, San Francisco, California 94109 ("ASCR"). ZAP and ASCR are referred to collectively herein as the "parties." 1. RECITALS A. The parties contemplate a two-stage process to the end that ZAP will initially sublease a portion of ASCR's premises at 2715 Hyde Street in San Francisco where ZAP will maintain business offices and conduct a bicycle rental business. Subsequently, ZAP will acquire a substantial portion of ASCR's rental equipment and assume certain listed liabilities. B. Stage One, which entails the leasing of some of ASCR's rental equipment, the leasing of approximately 49% of ASCR's premises, and the hiring of Jeff and Helena Sears to manage ZAP's bicycle rental business, will end on October 31, 1999. C. Stage Two is contingent upon SBA approval of the proposed transaction. It will entail the acquisition of certain specified ASCR assets and the assumption of certain listed liabilities for the sum of $150,000; $70,000 in cash and $80,000 of market value of ZAP common stock. Stage Two will follow immediately after Stage One. Jeff and Helena Sears will continue to manage the operation until April 30, 2001. D. The purpose of this Agreement is to set forth the understanding of the parties relative to the matters above. By this reference these Recitals are incorporated into the Agreement which follows below. a. AGREEMENT NOW, THEREFORE, in consideration of these premises, the benefits to be derived by the parties, and the terms, conditions, representations and covenants set forth herein, the parties hereby agree as follows: ARTICLE I STAGE ONE 1.01 Lease of Rental Equipment. Subject to the terms and conditions set forth in this Agreement, on the Stage One Closing Date (as hereinafter defined), ZAP shall lease from ASCR, and ASCR shall lease and deliver to ZAP, all of the ASCR's inventory of conventional bicycles, used ZAP bicycles, and new ZAP products (collectively, the "Rental Equipment"), as described in Exhibit A attached hereto. 1.02 Consideration For Lease of Rental Equipment. In consideration of ASCR's lease of the Rental Equipment as provided herein, ZAP shall issue the number of shares of Common Stock of ZAP, having no par value, with the rights, preferences, privileges and restrictions set forth in the Articles of Incorporation (the "Shares") that result from the division of $50,000 by the number equal to the average closing price of the Shares as reported on the "Bulletin Board" for the ten (10) days prior to the date of the Stage One Closing. These shares shall be "restricted", subject to Rule 144 promulgated by the Securities and Exchange Commission. The issuance of stock by ZAP is exempt from registration with the securities regulators pursuant to Section 25102(f) of the California Corporations Code. 1.03 Equipment Lease Agreement. At the Stage One Closing Date, the parties shall execute a standard form equipment lease to cover ZAP's lease of the Rental Equipment. The lease shall be in substantially the form of the attached Exhibit B. 1.04 Premises Lease Agreement. ZAP will lease, commencing July 14, 1999, a certain portion of the premises at 2715 Hyde Street ("the Premises"), as defined in Exhibit C attached hereto, through April 30, 2001. ZAP will use such Premises as a showroom/office and also to operate a rental business specializing in electric powered bicycles and scooters as well as conventional bikes. ZAP intends to make certain improvements to the Premises, also defined in Exhibit C attached hereto. The rent for the leased portion of the Premises, payable monthly by ZAP, shall be $1.00 per month until October 31, 1999 and $5,950 for November, 1999 and $10,500 per month thereafter until April 30, 2001, plus a $13,000 cash deposit covering the last month's rent and security. The security will carry over to the Stage Two lease and be returned at the end of the term. The security is for complying with lease obligations only. ASCR will retain the major portion of the lower garage area from which ASCR will continue to operate its gasoline powered scooter business, as well as a portion of the ground level Premises also as shown on Exhibit C, to display its products and maintain a small office. 1.05 Operating and Advertising Expenses. ZAP hereby agrees to assume responsibility for all of the normal operating expenses related to bicycles and electric powered scooters, and will contribute approximately $3,000 per month towards advertising expenses related to the bicycle and scooter rental business in the form, media and times as approved by ZAP. 1.06 Bicycle and Electric Powered Scooter Revenue. ASCR hereby agrees to transfer all revenues generated after the Stage One Closing Date related to bicycles and electric powered scooters to ZAP. 2 1.07 Jeff and Helena Sears Employment Agreement. ZAP hereby agrees to employ Jeff and Helena Sears as Operation Consultants to manage operations of ZAP's bicycle and scooter rental business through the end of April, 2001. Jeff and Helena Sears, together (i.e. not "each"), will work a total of 40 hours per week, and will receive a combined (i.e. not "each") salary of $5,000 per month, in addition to receiving medical benefits. 1.08 ASCR's Existing Employees. ZAP hereby agrees to offer ASCR's existing employees the opportunity to continue as employees of ZAP. 1.09 Stage One Closing. The Stage One Closing under this Agreement shall take place in the offices of Evers & Hendrickson, LLP in San Francisco, California at 2:00 p.m. on July 12, 1999 (the "Stage One Closing Date"); provided, that if ZAP and ASCR are not in a position on such date to close due to the failure to meet the conditions precedent to close as set forth in Article V hereof, the Stage One Closing Date shall be extended to a date two (2) business days after the date on which such conditions are satisfied or otherwise waived in writing by both ZAP and ASCR, but in no event shall the Stage One Closing Date be later than July 20, 1999. 1.10 Cooperation in Transfer of Business. Both prior and subsequent to the Stage One Closing Date, ZAP shall cooperate and assist ASCR in the transfer of the possession of the Rental Equipment as contemplated by this Agreement. ARTICLE II 2. STAGE TWO 2.01 Purchase and Sale of the Assets. Subject to the terms and conditions set forth in this Agreement, on the Stage Two Closing Date (as hereinafter defined), ZAP shall purchase and accept from ASCR, and ASCR shall sell, transfer, convey and deliver to ZAP, all of the Rental Equipment and all other tangible and intangible assets of ASCR listed on the attached Exhibit D (collectively, the "Assets"), including, but not limited to, the following: (a) All of ASCR's rights of every kind and nature with respect to its scooter and cycle rental business (the "Business") including, without limitation, all goodwill and intellectual property assets of ASCR applicable to ASCR's Business; (b) Any remaining physical and fixed assets and equipment described in Exhibit D attached hereto and incorporated herein by this reference. Exhibit D may be supplemented at the time of the Stage Two Closing in order to reflect any change in assets which occurred between the Stage One closing and the Stage Two Closing. ASCR shall retain all of its gasoline-powered motor scooters, tools related to such equipment, cash on hand, and such other assets as are described on Exhibit D. 3 2.02 Purchase Price of Assets. In consideration of ASCR's sale of the Assets as provided herein, ZAP shall tender $70,000 in cash and issue the number of shares of Common Stock of ZAP, having no par value, with the rights, preferences, privileges and restrictions set forth in the Articles of Incorporation (the "Shares") that result from the division of $80,000 by the number equal to the average closing price of the Shares as reported on the "Bulletin Board" for the ten (10) days prior to the date of the Stage One Closing. The cash and the currency shall be deposited in a purchase escrow account at Evers & Hendrickson, LLP, 155 Montgomery Street, 12th Floor, San Francisco, CA 94104 on the Stage One Closing Date, to be held until the Stage Two Closing Date and pending the satisfaction or waiver of the ASCR's closing conditions and obligations as set forth in Article V, hereof; provided, however, that in consideration of the purchase, ASCR may withdraw from the escrow, towards the purchase price (assuming ultimate approval by the Small Business administration ("SBA")) the sum of $10,500 per month until the Second Closing. Such withdrawals shall be made in the following manner: The July withdrawal of $10,500 shall be made immediately following the Stage One Closing. Thereafter, ASCR may withdraw the sum of $10,500 on the first day of each month commencing on August 1, 1999 and continuing on the first day of each month thereafter until the Second Closing. In the event the SBA does not consent, these payments shall be treated as advances of lease payments (see Section 3.16 below). 2.03 Assumption of Liabilities. It is expressly understood and agreed that ZAP is not assuming and shall not be liable for any of the debts, obligations or liabilities of ASCR whether now known or unknown, accrued, absolute, contingent or otherwise, except for the liabilities and obligations directly related to ASCR's business as specifically assumed in Schedule 2.03 attached hereto, and incorporated herein by reference; provided, in no event shall the amount of liabilities assumed by ZAP exceed the aggregate amount of seventeen thousand dollars ($17,000). 2.04 Delivery of Assets. At the Closing, the following shall be delivered by ASCR to ZAP: (a) A bill of sale in a form mutually agreeable to ASCR and ZAP, transferring to ZAP the Assets to be acquired by it under the terms of this Agreement free and clear of any encumbrance of any kind upon any of the Assets; (b) Evidence of payment of all debts which are secured by liens on the Assets with evidence of release of all such liens to be provided within five (5) days after Closing; and (c) Such other deeds, instruments of assignment and other appropriate documents as may be reasonably requested by ZAP in order to carry out the intentions of this Agreement and the transfer of the Assets. 2.05 Stage Two Closing. The closing under this Agreement shall take place in the offices of Evers & Hendrickson, LLP in San Francisco, California at 10:00 a.m. on October 31, 1999 (the "Stage Two Closing Date"); provided, that if ZAP and ASCR are not 4 in a position on such date to close due to the failure to meet the conditions precedent to close as set forth in Article V hereof, the Stage Two Closing Date shall be extended to a date two (2) business days after the date on which such conditions are satisfied or otherwise waived in writing by both ZAP and ASCR, but in no event shall the Stage Two Closing Date be later than November 15, 1999. 2.06 Effective Date. Notwithstanding the Stage Two Closing Date, the close of business on October 31, 1999 (the "Effective Date") shall be deemed to be the effective date for certain purposes set forth herein. 2.07 Bulk Transfer Compliance. The sale and purchase of the Assets described in this Agreement shall be conducted according to and in full compliance with the requirements of the Bulk Transfer Provisions of the California Uniform Commercial Code (Business and Commerce Code Sections 6101 et seq.) (the "Bulk Transfer Provisions"). At the Closing Date, ASCR shall furnish to ZAP, as Exhibit E attached hereto, a list of (I) the names of existing creditors of ASCR, including the amounts owed to such creditors, if known; and (II) the names of all persons who are known to ASCR to assert claims against ASCR, even though such claims are disputed. ASCR shall also furnish ZAP, as Exhibit D attached hereto, a list of the property that is to be transferred sufficient to identify such property. ASCR shall, as necessary, cooperate with ZAP by furnishing the information to ZAP that may be needed by ZAP in order to give notice to creditors pursuant to the provisions of Section 6105 of the Bulk Transfer Provisions. 2.08 Taxes. ZAP shall pay all costs associated with bulk transfer compliance and all sales and use taxes, if any, arising out of the transfer of the Assets, or otherwise as a consequence of the transactions contemplated by this Agreement. 2.09 Cooperation in Transfer of Business. Both prior and subsequent to the Closing Date, ZAP shall cooperate and assist ASCR in the transfer of the ownership of the assets as contemplated by this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ASCR 3.01 General. ASCR hereby represents and warrants the following: 3.02 Organization and Good Standing. ASCR is a corporation duly organized, validly existing and in good standing under the applicable laws of the State of California, and qualified to do business in the State of California, with requisite corporate power and authority to enter into and perform this Agreement. 3.03 Financial Statements. ASCR has previously furnished to ZAP ASCR's Balance Sheet as of December 31, 1998, a copy of which is attached hereto as Exhibit E. ASCR represents and warrants that such financial statements, which are unaudited, have been 5 prepared in accordance with the books and records of ASCR and correctly presents ASCR's financial condition, sales, operations and net income (loss) as therein specified. 3.04 Authorization and Consents. The execution of this Agreement by ASCR and the consummation by ASCR of the transactions contemplated hereby has been duly authorized and approved by ASCR's Board of Directors and its shareholders, which authorization and approval has not since been amended or revoked. ASCR has the corporate power and requisite authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by ASCR and constitutes the valid and binding obligation of ASCR enforceable against ASCR in accordance with its terms. No agreement, consent, approval, release or waiver of any person or entity, not a party to this Agreement, and no consent of any governmental agency or authority is required (i) to permit the performance by ASCR of its obligations under the terms of this Agreement; or (ii) in order to make the representations and warranties within this Article 2. true and accurate. 3.05 Absence of Restrictions. ASCR shall not be subject to any provision of any agreement, charter, bylaw, mortgage, lease, indenture, instrument, order, judgment, decree or other restriction or right of other parties which would prohibit the execution of this Agreement by ASCR or which would prevent the consummation of the transactions contemplated hereunder or which would prevent or affect in any way compliance by ASCR with the terms, conditions and provisions hereof. With respect to the Assets and the Business, except as set forth in section 3.16, the execution and delivery of this Agreement by ASCR and performance by ASCR of its obligations under the terms hereof will not accelerate, terminate, or result in a breach, under any existing material agreements, contract, lease, loan, loan commitment, joint venture or combination of any kind, to which ASCR is a party, or result in the creation of any lien or encumbrance under any indenture, mortgage, deed of trust, or other contract or agreement to which ASCR is a party or by which it is bound. 3.06 Title to Assets. ASCR has good and marketable title to all the Assets set forth in Exhibits A and D, attached hereto, except as provided in Schedule 3.06, attached hereto. The assets set forth in Exhibits A and D, attached hereto, are in good condition, normal wear and tear excepted, and usable in the ordinary course of business. 3.07 Litigation and Claims. ASCR is aware of no material claims, actions, proceedings or investigations pending, asserted or threatened against, or involving the Business or the Assets, except as disclosed in Schedule 3.07, attached hereto. 3.08 Taxes. There are no unpaid taxes to ASCR for which ZAP would be liable as a transferee of ASCR's Assets pursuant to the Internal Revenue Code or other applicable Federal, state or local law. ASCR shall remain liable for any obligations of ASCR which arose either subsequent or prior to Closing, except those obligations and liabilities which ZAP has expressly assumed as provided hereunder. 6 3.09 Agreements, Contracts and Commitments. ASCR is not a party to or otherwise subject to any oral or written agreements or arrangement for the purchase or sale of any of the Assets or agreement, contract or commitment containing any covenant limiting the freedom of ASCR to engage in the Business. ASCR is not in default in any material respect under any agreement, contract, lease or other material document relating to the Business or the Assets, except as indicated in Schedule 2.09, attached hereto. Except as stated in such Schedule 3.09, there have been no claims of such material defaults and, to the best of ASCR's knowledge, information and belief, there are no facts or conditions which can reasonably be expected to result in such a material default by ASCR. 3.10 Compliance with Laws. ASCR has complied in all material respects with, and is not in violation in any material respect of any federal, state or local statute, law, rule, or regulation with respect to the conduct of its Business, or the ownership, operation, sale, purchase or possession of the Assets. 3.11 Intellectual Property. ASCR's Intellectual Property constitutes all such proprietary rights which are owned or held by ASCR and which are reasonably necessary to, or used in the conduct of, the business of ASCR. ASCR has taken all reasonably necessary steps required under applicable law to protect its trade secrets. ASCR owns or has valid rights to use its Intellectual Property without conflict with the rights of others. Except as set forth in Schedule 3.11, attached hereto, no person has made or, to the knowledge of ASCR, threatened to make any claim that ASCR's use of Intellectual Property is in violation of any license held by ASCR or infringes any proprietary right or interest of any third party. To the knowledge of ASCR, no third party is infringing upon any of ASCR's Intellectual Property. ASCR holds its Intellectual Property free and clear of all Liens. 3.12 Expenses and Broker's Fees. To the knowledge of ASCR, ZAP shall not incur, directly or indirectly, any liability for brokerage, finder's, financial advisor's or agent's fees or commissions or expenses in connection with this Agreement, or the transactions contemplated hereby, by reason of any action or agreement on the part of ASCR. Each Party shall bear its own costs incurred in connection with this Agreement, including attorneys' fees. 3.13 Full Disclosure. The representations and warranties contained in this Agreement are subject to the exceptions specifically noted in the disclosure schedules attached hereto and the Supplemental Schedules, if any, provided by the parties after the date of execution of this Agreement and up until the Closing. By this reference, such Schedules are incorporated in and made a part of this Agreement. No representation or warranty, as supplemented pursuant to the terms and provisions hereof, by ASCR in this Agreement or in any Exhibit or schedule hereto, nor any documents, written information, written statements or certificates furnished or to be furnished by or on behalf of ASCR to ZAP pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact; and, in the case of the statements set forth in Paragraph 3.03 hereof, omits or will omit to state a material fact necessary to make the statement contained therein not misleading. 7 3.14 Notice of Certain Events. ASCR shall give prompt notice to ZAP of any event subsequent to the date of this Agreement and prior to the Closing of which ASCR has knowledge which would render inaccurate, in any material respect, any representation or warranty of ASCR herein. 3.15 Implementation of Representations and Warranties and Certificates. ASCR shall take all reasonable action necessary to render true, complete and accurate, as of the Stage One and Stage Two Closing Dates, as if made on those dates, ASCR's representations and warranties contained in this Agreement as supplemented above, and to perform or cause to be performed as of the Stage One and Stage Two Closing Dates the covenants and the obligations of ASCR contained in this Agreement and ASCR shall refrain from taking any action (other than action permitted under this Agreement or with the consent of ZAP) which would render inaccurate, as of the Stage One and Stage Two Closing Dates, any such representations or warranties. 3.16 SBA Approval. Notwithstanding the provisions of Section 3.05 herein or any other provision of this Agreement, the parties acknowledge that ASCR has recently acted as a guarantor of an SBA loan, and that such guaranty imposes certain restrictions on the use of ASCR's business premises and the disposition of ASCR's assets. The parties further understand that ASCR's ability to perform its Stage Two Closing obligations depends on the waiver of certain of these restrictions by SBA. ASCR has advised SBA of the transactions contemplated by this Agreement, and has received preliminary assurances that such waivers will probably be granted on or before the scheduled Stage Two Closing Date. Both parties agree to cooperate and use their reasonable best efforts to obtain such SBA approval. However, in the event that SBA does not approve the proposed transactions, the parties agree to extend the term of the Rental Equipment lease until April 30, 2001, and Jeff and Helena Sears will continue to manage ZAP's equipment rental business at the 2715 Hyde Street premises until such date. The purchase price specified in Sections 2.02 and 2.03 herein shall be paid as provided therein, but such payment shall be treated as an advance of the lease payments, and the amount of the payment shall be reduced by the salvage value of the Rental Equipment as of April 30, 2001. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ZAP 4.01 General. ZAP hereby represents and warrants the following: 4.02 Organization and Good Standing. ZAP is a California corporation duly organized, validly existing and in good standing under the applicable laws of the State of California, with requisite corporate power and authority to enter into and perform this Agreement. 4.03 Financial Statement. ZAP has heretofore furnished to ASCR ZAP's Balance Sheet as of March 30, 1999, a copy of which is attached hereto as Exhibit F. ZAP represents and warrants that such financial statements are in accordance with the books and 8 records of ZAP, and correctly presents, in all material respects, ZAP's financial condition, sales, operations and net income (loss) as therein specified. 4.04 Authorization and Consents. The execution of this Agreement by ZAP and the consummation by it of the transactions contemplated hereby has been duly authorized and approved or ratified by all necessary corporate action. ZAP has the corporate power and requisite authority to enter into this Agreement and consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by ZAP and constitutes the valid and binding obligation of ZAP, enforceable against ZAP in accordance with its terms. No agreement, consent, approval, release or waiver of any person or entity, not a party to this Agreement and no consent of any governmental agency or authority is required (i) to permit the performance by ZAP of its obligations under the terms of this Agreement; or (ii) in order to render the representations and warranties within this Article IV true and accurate. 4.05 Absence of Restrictions. ZAP is not subject to any provision of any charter, bylaw, mortgage, lease, indenture, agreement, instrument, order, judgment, or decree or any other restriction or right of other parties which would prohibit the execution of this Agreement by ZAP, or which would prevent the consummation of the transactions contemplated hereunder, or which would prevent or affect in any way compliance by ZAP with the terms, conditions and provisions hereof. 4.06 Litigation and Claims. ZAP is aware of no material claim, action, proceeding or investigation pending, asserted or threatened against, or involving its business or assets. 4.07 Agreements, Contracts and Commitments. ZAP is not a party to, or otherwise subject to, any oral or written agreement or arrangement for the purchase or sale of any of its assets or agreement, contract or commitment, containing any covenant limiting the freedom of ZAP to engage in its business. ZAP is not in default in any material respect under any agreement, contract, lease or other material document relating to its business or assets. There have been no claims of such material defaults and, to the best of ZAP's knowledge, information and belief, there are no facts or conditions which can reasonably be expected to result in such a material default by ZAP. 4.08 Compliance with Laws. ZAP has complied in all material respects with, and is not in violation in any material respect of any federal, state or local statute, law, rule, or regulation with respect to the conduct of its business, or the ownership, operation, sale, purchase or possession of its assets. 4.09 Expenses and Broker's Fees. To the knowledge of ZAP, ASCR shall not incur, directly or indirectly, any liability for brokerage, finder's, financial advisor's or agent's fees or commissions or expenses in connection with this Agreement, or the transactions contemplated hereby, by reason of any action or agreement on the part of ZAP; provided, however, that, except as otherwise provided in Paragraph 8.07 hereof, each of the 9 parties shall bear their respective costs incurred, including attorneys' fees, in connection with this Agreement. 4.10 Capitalization. (a) Authorized and Outstanding Shares. The total authorized capital stock of ZAP is ten million (10,000,000) shares of common stock,, 4,319,210 shares of which are issued and outstanding as of the date of this Agreement, and will be issued and outstanding as of the Stage One Closing Date prior to the issuance of the Shares. Upon the issuance of the Shares to ASCR, ASCR shall become the record and beneficial owner of 8,077 Shares of ZAP. Said Shares shall be "Restricted" subject to Rule 144. (b) Valid Issuance. The Shares are validly issued, fully paid and nonassessable. (c) No Options or Rights. There are no outstanding options, warrants or other rights to purchase any Shares or other capital stock of ZAP, nor are there any securities which are convertible into capital stock of ZAP, except as listed in Exhibit G, attached hereto. (d) No Encumbrances. The Shares to be issued to the ASCR shall be free from any mortgages, pledges, liens, charges, restrictions, conditional sales agreements, interests (security or otherwise), or other encumbrances of any kind. The Shares will be "Restricted" and subject to the restraints of Rule 144 promulgated by the Securities and Exchange Commission. (e) Stock Transfer and Voting Agreements. None of the ZAP's outstanding Common Shares are subject to any voting trusts, voting agreements, or other agreements between or among ZAP and any other person. This representation does not, and is not intended to limit in any way ZAP's right to enter into a shareholders agreement with any or all of its shareholders after the Closing Date. (f) No Distributions. Between the effectiveness of this Agreement and the Closing the ZAP shall not make any distributions to its shareholders or purchase any of its shares of common stock. 4.11 Full Disclosure. The representations and warranties contained in this Agreement are subject to the exceptions specifically noted in the disclosure Schedules attached hereto and the Supplemental Schedules, if any, provided by the parties after the date of execution of this Agreement and up until the Stage One and Stage Two Closing Dates. By this reference, such schedules are incorporated in and made a part of this Agreement. No representation or warranty, as supplemented pursuant to the terms and provisions hereof, by ZAP in this Agreement or in any Exhibit or schedule hereto, nor any documents, written information, written statements or certificates furnished or to be furnished by or on behalf of ZAP to ASCR pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact. 10 ZAP has furnished to ASCR its latest 10K filed with the Securities and Exchange Commission and has provided ASCR with answers to all questions ASCR may have had relative to the financial and operating condition of ZAP to the end that the owners of ASCR have been supplied by ZAP with all material information necessary for them to make an informed judgment as to accepting ZAP common stock in payment for the assets of their business. 4.12 Notice of Certain Events. ZAP shall give prompt notice to ASCR of any event subsequent to the date of this Agreement and prior to the Stage One and Stage Two Closing Dates of which ZAP has knowledge or should have knowledge which would render inaccurate, in any material respect, any representation or warranty of ZAP herein, or which would materially affect the financial condition of ZAP 4.13 Implementation of Representations and Warranties and Certificates. ZAP shall take all reasonable action necessary to render true, complete and accurate, as of the Stage One and Stage Two Closing Dates, as if made on those dates, ZAP's representations and warranties contained in this Agreement as supplemented pursuant above, and to perform or cause to be performed as of the Stage One and Stage Two Closing Dates the covenants and the obligations of ZAP contained in this Agreement and ZAP shall refrain from taking any action (other than action permitted under this Agreement or with the consent of ASCR) which would render inaccurate, as of the Stage One and Stage Two Closing Dates, any such representations or warranties. ARTICLE V CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ZAP AND ASCR TO CLOSE 5.01 Conditions Precedent to Obligation of ZAP to Close. The obligations of ZAP to consummate the transactions contemplated by this Agreement are subject to the fulfillment to ZAP's satisfaction on or before the Closing of each of the following conditions set forth below, subject to ZAP's rights to waive in writing any such condition: (a) Representations, Warranties and Covenants. All representations and warranties of ASCR contained in this Agreement, as supplemented pursuant to Paragraph 3.14 above, shall be true and correct in all material respects as of the Stage One and Two Closing Dates as if such representations and warranties were made as of the Stage One and Two Closing Dates, respectively, and ASCR shall have performed and shall have caused to be performed all agreements, obligations and covenants required by this Agreement to be performed by it on or prior to the Stage One and Two Closing Dates. (b) Adverse Changes. There shall have been no adverse change in the Business or the Assets including, without limitation, any adverse change in ASCR's relationship with its customers, distributors, and suppliers, except as listed in Schedule 5.01, attached hereto. 11 (c) Financial Statements. ASCR shall have delivered to ZAP for ZAP's review and approval ASCR's financial statements described in Paragraph 3.03, which approval shall not be unreasonably withheld. (d) Supplemental Schedules Approved. All Supplemental Schedules given by ASCR, if any, shall have been reviewed and approved by ZAP, which approval shall not be unreasonably withheld. (e) Litigation. No action or proceeding before a court or any other governmental agency or body shall have been instituted and be pending or threatened by a third party to restrain or prohibit any of the transactions contemplated hereby. (f) Delivery of Certificate and Resolutions. ASCR shall have delivered to ZAP a certificate of ASCR's president and secretary: (i) stating that the representations and warranties made by ASCR herein are true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date, (ii) stating that there has been no breach of any covenant contained herein by ASCR, (iii) stating that all ASCR conditions to Closing stated in this Agreement have been satisfied or waived, (iv) stating that there has been no material adverse change with respect to ASCR, (v) stating that ASCR knows of no challenge to the consummation of the transactions contemplated by this Agreement and (vi) containing a copy of the resolutions of ASCR's board of directors and its shareholders approving this Agreement and the consummation of the transactions contemplated hereby. (g) Agreement and Consents. At or prior to the Closing, ASCR shall have obtained all necessary consents to the transfer of the Assets to ZAP. (h) Delivery of Assets; No Encumbrances. ASCR shall deliver good and marketable title to the Assets free and clear of any encumbrances of any kind, except for any encumbrances disclosed in Schedule 3.06, attached hereto. 5.02 Conditions Precedent to Obligation of ASCR to Close. The obligations of ASCR to consummate the transactions contemplated by this Agreement are subject to the fulfillment to ASCR's satisfaction on or before the Closing Date of each of the following conditions set forth below, subject to ASCR's rights to waive in writing any such condition: (a) Representations, Warranties and Covenants. All representations and warranties of ZAP contained in this Agreement, as supplemented pursuant to Paragraph 4.11 above, shall be true and correct in all material respects as of the Stage One and Two Closing Dates as if such representations and warranties were made as of the Stage One and Two Closing Dates, respectively, and ZAP shall have performed and shall have caused to be performed all agreements, obligations and covenants required by this Agreement to be performed by it on or prior to the Stage One and Two Closing Dates. 12 (b) Adverse Changes. There shall have been no adverse change in the ZAP's business or its financial condition, except as described in Schedule 5.02, attached hereto. (c) Supplemental Schedules Approved. All Supplemental Schedules given by ZAP, if any, shall have been reviewed and approved by ASCR, which approval shall not be unreasonably withheld. (d) Litigation. No action or proceeding before a court or any other governmental agency or body shall have been instituted and be pending or threatened by a third party to restrain or prohibit any of the transactions contemplated hereby. (e) Delivery of Certificate and Resolutions. ZAP shall have delivered to ASCR a certificate of ZAP's president and secretary: (i) stating that the representations and warranties made by ZAP herein are true and correct in all material respects on the Stage One and Two Closing Dates with the same force and effect as if they had been made on and as of the Stage One and Two Closing Dates, respectively, (ii) stating that there has been no breach of any covenant contained herein by ZAP, (iii) stating that all ZAP conditions to the Stage One and Two Closings stated in this Agreement have been satisfied or waived, (iv) stating that there has been no material adverse change with respect to ZAP, (v) stating that ZAP knows of no challenge to the consummation of the transactions contemplated by this Agreement and (vi) containing a copy of the resolutions of ZAP's board of director and shareholders approving this Agreement and the consummation of the transactions contemplated hereby. (f) Delivery of Initial Share Certificates; No Encumbrances. ZAP shall , within sixty (60) days from the Stage One Closing Date, deliver the certificates representing the Shares free and clear of any encumbrances of any kind. ARTICLE VI INDEMNIFICATION; SURVIVAL OR REPRESENTATIONS, WARRANTIES AND AGREEMENTS 6.01 Indemnification by ASCR. ASCR agrees to indemnify and hold ZAP, its directors, officers, shareholders, agents, employees, successors and assigns (collectively, "ZAP Indemnitees"), harmless from and against any and all claims, causes of action, demands, losses, cost, expenses, obligations, damages, deficiencies, or liabilities, including interest, penalties, and reasonable attorneys fees resulting from (I) any liability of ASCR relating to the operation of ASCR's Business prior to the Closing Date except for those liabilities specifically assumed by ZAP pursuant to Paragraph 2.03 hereof and (II) a breach of any representation, warranty or agreement of ASCR contained in this Agreement. The foregoing indemnification shall survive the Closing, and shall remain operative and in full force and effect, regardless of any investigation or statement as to the result thereof made by or on behalf of any party. 13 6.02 Claims. In the event a claim is made against ZAP or any ZAP Indemnitee for which they are (or either of them is) indemnified hereunder, ZAP shall notify ASCR of such claim. In the event that any action indemnified hereunder is brought against ZAP or a ZAP Indemnitee and ZAP shall notify ASCR of the commencement thereof, ASCR shall, at its sole expense, assume the defense thereof with counsel reasonably satisfactory to ZAP. ZAP shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such separate counsel shall be at the expense of ZAP unless ASCR has authorized the employment of such counsel in writing. ASCR shall have the right to settle any such action or judgment, based on any such action, provided that ASCR has previously rendered to ZAP satisfactory evidence of its ability to pay any action or judgment, and contemporaneously with such settlement ASCR shall pay the amount of such settlement. If ASCR shall fail to diligently defend such action, ZAP, after written notice to ASCR, may do so with attorneys of its own selection and ASCR shall be responsible for and shall pay any settlement or judgment effected by ZAP and all attorneys' fees. 6.03 Indemnification by ZAP. ZAP agrees to indemnify and hold ASCR, its directors, officers, shareholders, agents, employees, successors and assigns (collectively, "ASCR's Indemnitees"), harmless from and against any and all claims, causes of action, demands, losses, cost, expenses, obligations, damages, deficiencies, or liabilities, including interest, penalties, and reasonable attorneys fees resulting from a breach of any representation, warranty or agreement of ZAP contained in this Agreement. The foregoing indemnification shall survive the Closing, and shall remain operative and in full force and effect, regardless of any investigation or statement as to the result thereof made by or on behalf of any party. 6.04 Claims. In the event a claim is made against ASCR or any ASCR Indemnitee for which they are (or either of them is) indemnified hereunder, ASCR shall notify ZAP of such claim. In the event that any action indemnified hereunder is brought against ASCR or a ASCR Indemnitee and ASCR shall notify ZAP of the commencement thereof, ZAP shall, at its sole expense, assume the defense thereof with counsel reasonably satisfactory to ASCR. ASCR shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such separate counsel shall be at the expense of ASCR unless ZAP has authorized the employment of such counsel in writing. ZAP shall have the right to settle any such action or judgment, based on any such action provided that ZAP has previously rendered to ASCR satisfactory evidence of its ability to pay any action or judgment, and contemporaneously with such settlement ZAP shall pay the amount of such settlement. If ZAP shall fail to diligently defend such action, ASCR, after written notice to ZAP, may do so with attorneys of its own selection and ZAP shall be responsible for and shall pay any settlement or judgment effected by ASCR and all attorneys' fees. 14 ARTICLE VII ACCESS TO INFORMATION 7.01 Confidentiality. All information not previously disclosed to the public which shall have been furnished by ASCR or ZAP to the other party shall not be disclosed prior to the Closing to any person other than the party's respective employees, legal counsel, and accountants, in confidence, or used for any purpose other than as contemplated herein. In the event that the sale of the Assets shall not be consummated, all such information, including any schedule, analysis or other documents prepared by ASCR or ZAP, which shall be in writing, shall remain confidential. The parties acknowledge that disclosure by a party of such information except as permitted hereunder may result in substantial harm to the other party. 7.02 Effect of Investigation. Any investigation of ASCR or ZAP by the other party shall not affect any of the representations, agreements, covenants or warranties set forth herein. Except as expressly waived in writing or otherwise provided herein, all representations and warranties shall continue in full force and effect, and the parties shall continue to be bound by them. If an exception to any representation or warranty has been disclosed on a disclosure Schedule or Supplemental Schedule delivered by a party prior to Closing, and the other party receiving such disclosure proceeds to close notwithstanding such disclosure, then such other party's right to damages or indemnification from the disclosing party as to matters covered by such disclosure shall be deemed waived by such other party. ARTICLE VIII GENERAL 8.01 Notices. Any notice or demand required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally and signed receipt for such notice or demand is secured, or mailed by registered mail or certified mail, postage prepaid, return receipt requested, and addressed to the following persons at the following respective address unless by any such notice a different person or address shall have been designated by the addressee: Notices to ZAP shall be sent to: ZAP WORLD.com 117 Morris Street Sebastopol, CA 95472 Attn: Gary Starr Notice to ASCR shall be sent to: American Scooter & Cycle Rental 2715 Hyde Street San Francisco, CA 94109 8.02 Governing Law; Arbitration. The validity, construction, interpretation and enforcement of this Agreement shall be determined and governed by the laws of the State of California. Further, in the event of any dispute between the parties relative to this Agreement, 15 the inducements or representations to enter into this Agreement, or the parties' performance of the terms of this Agreement, said dispute(s) shall be resolved through binding arbitration pursuant to the rules of the American Arbitration Association or other mutually agreeable body, before one (1) arbitrator selected by the parties, with the sites of the arbitration agreed to be in San Francisco, California. 8.03 Waiver and Modification. Any term or provision of this Agreement may be waived at any time by a written instrument executed by the party which is entitled to the benefit thereof; provided, however, that no such waiver shall constitute a waiver by such party of any of its other rights and remedies, at law or in equity. This Agreement may be amended, modified or supplemented at any time only by a written instrument executed by all the parties hereto. 8.04 Cooperation and Further Assurances. The parties to this Agreement shall fully cooperate with each other in connection with all general matters and tax matters (including tax audits) involving either party, which relate in any way to this Agreement. Such cooperation shall include, but not be limited to the preparation of an asset purchase valuation and classification schedule, prepared pursuant to Internal Revenue Code Section 1060 et seq., as revised, and the granting to the individual party and the taxing authorities reasonable access to relevant business records and evidence of payment; provided, however, the party requesting such cooperation shall pay costs and expenses of the cooperating party in connection with such cooperation. 8.05 Entire Agreement. This Agreement, including documents incorporated herein by reference, the Exhibits and schedules attached hereto when duly executed and delivered, constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior proposals, oral and written, all previous negotiations and all other communications between the parties with respect to the subject matter hereof (except to the extent any other agreement may be incorporated into this Agreement by writing executed by ZAP and ASCR). 8.06 Headings. The titles to articles and paragraphs hereof are used for convenience only and shall not be deemed to be a part hereof, or affect the construction or interpretation of any provision hereof. 8.07 Attorneys' Fees. Except as otherwise provided herein, in connection with enforcement of their respective rights hereunder, the parties shall each be entitled to any right or remedy available at law or in equity, and the prevailing party shall be entitled to reasonable attorneys' fees actually incurred in connection therewith. 8.08 Severability. If any provision of this Agreement is held invalid under any applicable statute or rule of law, such invalidity shall not affect the other provisions of this Agreement which can be given effect without the invalid provisions, and to this end the provisions of this Agreement are declared severable. Notwithstanding the above, such invalid 16 provision or clause shall be construed and enforced, to the extent possible, in accordance with the original intent of the parties. 8.09 Assignment. This Agreement may not be assigned to any party without the written consent of the other party hereto. 8.10 Recitals. The recitals herein are incorporated by this reference into this Agreement and shall bind the parties in accordance with their terms. 8.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered to be an original, but all of which together shall constitute one and the same instrument. 17 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written. ASCR: American Scooter and Cycle Rental, Inc., a California corporation By: /s/ Jeffrey Sears By: /s/ Helena Sears ----------------------------- ----------------------- Jeffrey Sears Helena Sears Its: ----------------------------- Its: ---------------------- ZAP: ZAP WOLRD.com, a California corporation By: /s/ Signature ---------------------------- Its: ____________________________ 18 AGREEMENT BY AND AMONG ZAP WORLD.COM, A CALIFORNIA CORPORATION AND AMERICAN SCOOOTER AND CYCLE RENTALS, INC., A CALIFORNIA CORPORATION DISCLOSURE SCHEDULES The following is the schedule of exceptions to the representations and warranties of American Scooter and Cycle Rentals, Inc. ("ASCR"), a California corporation, which is being provided pursuant to the Agreement by and among ASCR and ZAP WORLD.com ("ZAP"). The numbers below correspond to those sections of the Agreement to which the exceptions to the representations and warranties pertain. Unless otherwise defined herein, all capitalized terms and other definitions shall have the same meanings in these disclosure schedules as they have in the Agreement. ASCR has provided ZAP, at ZAP's request, with various materials (including but not limited to those described in these schedules) regarding the financial condition and business of the ASCR. - ------------------------------------------------------------------------------ Schedule 2.03 Assumption of Liabilities Schedule 3.06 Title to Assets Schedule 3.07 Litigation and Claims Schedule 3.09 Agreements, Contracts and Commitments Schedule 3.11 Intellectual Property Schedule 5.01 Adverse Changes to ASCR. Schedule 5.02 Adverse Changes to ZAP. 19 Schedule 5.02(e) OFFICER'S CERTIFICATE ZAP WORLD.COM, A CALIFORNIA CORPORATION The undersigned, being the duly elected President and Secretary of ZAP WORLD.COM, a California corporation ("ZAP"), hereby certify that, as of the date indicated below: (i) the representations and warranties made by ZAP in the Agreement with American Scooter and Cycle Rental, Inc., dated July 12, 1999 (the "Agreement") are true and correct in all material respects; and (ii) there has been no breach of any covenant contained in the Agreement by ZAP; and (iii) all ZAP conditions to the Stage One Closings (as this phrase is defined in the Agreement) as stated in the Agreement have been satisfied or waived; and (iv) there has been no material adverse change with respect to ZAP; and (v) ZAP knows of no challenge to the consummation of the transactions contemplated by this Agreement; and (vi) attached hereto is a true and correct copy of the resolutions of ZAP's board of directors approving the Agreement and the consummation of the transactions contemplated thereby. IN WITNESS WHEREOF, the undersigned have executed this certificate on this ____ day of July, 1999. /s/ James McGreen /s/ Nancy K. Cadigan - ------------------------ ---------------------------- James McGreen Nancy K. Cadigan President Secretary 20 AGREEMENT BY AND AMONG ZAP WORLD.COM, A CALIFORNIA CORPORATION AND AMERICAN SCOOOTER AND CYCLE RENTALS, INC., A CALIFORNIA CORPORATION LIST OF EXHIBITS Exhibit A List of Assets, Equipment and Inventory for Stage One Closing Exhibit B Equipment Lease Exhibit C Lease and Plat of the Premises Showing Contemplated Improvements of Space Exhibit D List of Assets Being Transferred in Stage Two Exhibit E ASCR's Balance Sheet as of December 31, 1998 Exhibit F Balance Sheet of ZAP as of March 30, 1999 Exhibit G List of ZAP Options and Warrants EX-10.5 14 0014.txt ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into effective as of January 31, 2000 (the "Effective Date"), by and between ZAPWORLD.com, a California corporation having its principal place of business at 117 Morris Street, Sebastopol, California 95472 ("ZAP"), and American Scooter and Cycle Rentals, Inc., a California corporation having its principal place of business at 2715 Hyde Street, San Francisco, California 94109 ("ASCR"). ZAP and ASCR are referred to collectively herein as the "parties." RECITALS A. ASCR wishes to sell and ZAP wishes to purchase certain assets of ASCR's scooter and motorcycle rental business and assume certain listed liabilities for the sum of One Hundred Thousand Dollars ($100,000). The parties would also like to have Scott Todd, currently an employee of ASCR, continue to manage and maintain the motorized rental operation. B. The purpose of this Agreement is to set forth the understanding of the parties relative to the matters above. By this reference these Recitals are incorporated into the Agreement that follows below. AGREEMENT NOW, THEREFORE, in consideration of these premises, the benefits to be derived by the parties, and the terms, conditions, representations and covenants set forth herein, the parties hereby agree as follows: ARTICLE I 1.01 Purchase and Sale of the Assets. Subject to the terms and conditions set forth in this Agreement, on the Closing Date (as hereinafter defined), ZAP shall purchase and accept from ASCR, and ASCR shall sell, transfer, convey and deliver to ZAP, all of the Motorized Equipment and all other tangible and intangible assets of ASCR listed on the attached Exhibit A (collectively, the "Assets"), including, but not limited to, the following: (a) All of ASCR's rights of every kind and nature with respect to its motorized rental business (the "Business") including, without limitation, all goodwill and intellectual property assets of ASCR applicable to ASCR's Business; (b) (Any remaining physical and fixed assets and equipment described in Exhibit A attached hereto and incorporated herein by this reference. 1.02 Purchase Price of Assets. In consideration of ASCR's sale of the Assets as provided herein, ZAP shall tender One Hundred Thousand Dollars ($100,000) (the "Purchase Price") in cash to be paid to ASCR at the Closing. 1.03 Assumption of Liabilities. It is expressly understood and agreed that ZAP is not assuming and shall not be liable for any of the debts, -1- obligations or liabilities of ASCR whether now known or unknown, accrued, absolute, contingent or otherwise, except for the liabilities and obligations directly related to ASCR's business as specifically assumed in Schedule 1.03 attached hereto, and incorporated herein by reference; provided, in no event shall the amount of liabilities assumed by ZAP exceed the aggregate amount of two thousand dollars ($2,000). 1.04 Delivery of Assets. At the Closing, the following shall be delivered by ASCR to ZAP: (a) A bill of sale in a form mutually agreeable to ASCR and ZAP, transferring to ZAP the Assets to be acquired by it under the terms of this Agreement free and clear of any encumbrance of any kind upon any of the Assets; (b) Evidence of payment of all debts which are secured by liens on the Assets with evidence of release of all such liens to be provided within five (5) days after Closing; and (c) Such other deeds, instruments of assignment and other appropriate documents as may be reasonably requested by ZAP in order to carry out the intentions of this Agreement and the transfer of the Assets. 1.05 Closing. The closing under this Agreement shall take place in the offices of ZAP in Sebastopol, California at 10:00 a.m. on March 29, 2000 (the "Closing Date"); provided, that if ZAP and ASCR are not in a position on such date to close due to the failure to meet the conditions precedent to close as set forth in Article IV hereof, the Closing Date shall be extended to a date two (2) business days after the date on which such conditions are satisfied or otherwise waived in writing by both ZAP and ASCR, but in no event shall the Closing Date be later than April 15, 2000. 1.06 Effective Date. Notwithstanding the Closing Date, the close of business on January 31, 2000 (the "Effective Date") shall be deemed to be the effective date for certain purposes set forth herein. 1.07 Taxes. ZAP shall pay all sales and use taxes, if any, arising out of the transfer of the Assets, or otherwise as a consequence of the transactions contemplated by this Agreement. 1.08 Cooperation in Transfer of Business. Both prior and subsequent to the Closing Date, ZAP shall cooperate and assist ASCR in the transfer of the ownership of the assets as contemplated by this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF ASCR 2.01 General. ASCR hereby represents and warrants the following: -2- 2.02 Organization and Good Standing. ASCR is a corporation duly organized, validly existing and in good standing under the applicable laws of the State of California, and qualified to do business in the State of California, with requisite corporate power and authority to enter into and perform this Agreement. 2.03 Financial Statements. ASCR has previously furnished to ZAP ASCR's Balance Sheet as of December 31, 1999, a copy of which is attached hereto as Exhibit B. ASCR represents and warrants that such financial statements, which are unaudited, have been prepared in accordance with the books and records of ASCR and correctly presents ASCR`s financial condition, sales, operations and net income (loss) as therein specified. 2.04 Authorization and Consents. The execution of this Agreement by ASCR and the consummation by ASCR of the transactions contemplated hereby have been duly authorized and approved by ASCR`s Board of Directors and its shareholders, which authorization and approval has not since been amended or revoked. ASCR has the corporate power and requisite authority to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by ASCR and constitutes the valid and binding obligation of ASCR enforceable against ASCR in accordance with its terms. No agreement, consent, approval, release or waiver of any person or entity, not a party to this Agreement, and no consent of any governmental agency or authority is required (i) to permit the performance by ASCR of its obligations under the terms of this Agreement; or (ii) in order to make the representations and warranties within this Article II true and accurate. 2.05 Absence of Restrictions. ASCR shall not be subject to any provision of any agreement, charter, bylaw, mortgage, lease, indenture, instrument, order, judgment, decree or other restriction or right of other parties which would prohibit the execution of this Agreement by ASCR or which would prevent the consummation of the transactions contemplated hereunder or which would prevent or affect in any way compliance by ASCR with the terms, conditions and provisions hereof. With respect to the Assets and the Business, the execution and delivery of this Agreement by ASCR and performance by ASCR of its obligations under the terms hereof will not accelerate, terminate, or result in a breach, under any existing material agreements, contract, lease, loan, loan commitment, joint venture or combination of any kind, to which ASCR is a party, or result in the creation of any lien or encumbrance under any indenture, mortgage, deed of trust, or other contract or agreement to which ASCR is a party or by which it is bound. 2.06 Title to Assets. ASCR has good and marketable title to all the Assets set forth in Exhibit A, attached hereto, except as provided in Schedule 2.06, attached hereto. The assets set forth in Exhibit A are in good condition, normal wear and tear excepted, and usable in the ordinary course of business. 2.07 Litigation and Claims. ASCR is aware of no material claims, actions, proceedings or investigations pending, asserted or threatened against, or involving the Business or the Assets, except as disclosed in Schedule 2.07, attached hereto. -3- 2.08 Taxes. There are no unpaid taxes to ASCR for which ZAP would be liable as a transferee of ASCR's Assets pursuant to the Internal Revenue Code or other applicable Federal, state or local law. ASCR shall remain liable for any obligations of ASCR which arose either subsequent or prior to Closing, except those obligations and liabilities which ZAP has expressly assumed as provided hereunder. 2.09 Agreements, Contracts and Commitments. ASCR is not a party to or otherwise subject to any oral or written agreements or arrangement for the purchase or sale of any of the Assets or agreement, contract or commitment containing any covenant limiting the freedom of ASCR to engage in the Business. ASCR is not in default in any material respect under any agreement, contract, lease or other material document relating to the Business or the Assets, except as indicated in Schedule 2.09, attached hereto. Except as stated in such Schedule 2.09, there have been no claims of such material defaults and, to the best of ASCR's knowledge, information and belief, there are no facts or conditions which can reasonably be expected to result in such a material default by ASCR. 2.10 Compliance with Laws. ASCR has complied in all material respects with, and is not in violation in any material respect of any federal, state or local statute, law, rule, or regulation with respect to the conduct of its Business, or the ownership, operation, sale, purchase or possession of the Assets. 2.11 Intellectual Property. ASCR's Intellectual Property constitutes all such proprietary rights which are owned or held by ASCR and which are reasonably necessary to, or used in the conduct of, the business of ASCR. ASCR owns or has valid rights to use its Intellectual Property without conflict with the rights of others. Except as set forth in Schedule 2.11, attached hereto, no person has made or, to the knowledge of ASCR, threatened to make any claim that ASCR's use of Intellectual Property is in violation of any license held by ASCR or infringes any proprietary right or interest of any third party. To the knowledge of ASCR, no third party is infringing upon any of ASCR's Intellectual Property. ASCR holds its Intellectual Property free and clear of all Liens. 2.12 Expenses and Broker's Fees. To the knowledge of ASCR, ZAP shall not incur, directly or indirectly, any liability for brokerage, finder's, financial advisor's or agent's fees or commissions or expenses in connection with this Agreement, or the transactions contemplated hereby, by reason of any action or agreement on the part of ASCR. Each Party shall bear its own costs incurred in connection with this Agreement, including attorneys' fees. 2.13 Full Disclosure. The representations and warranties contained in this Agreement are subject to the exceptions specifically noted in the disclosure schedules attached hereto. By this reference, such Schedules are incorporated in and made a part of this Agreement. No representation or warranty, as supplemented pursuant to the terms and provisions hereof, by ASCR in this Agreement or in any Exhibit or schedule hereto, nor any documents, written information, written statements or certificates furnished or to be furnished by or on behalf of ASCR to ZAP pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact; and, in the case of the statements set forth in Section 2.03 hereof, omits or will omit to state a material fact necessary to make the statement contained therein not misleading. -4- 2.14 Implementation of Representations and Warranties and Certificates. ASCR shall take all reasonable action necessary to render true, complete and accurate, as of the Closing Date, ASCR`s representations and warranties contained in this Agreement as supplemented above, and to perform or cause to be performed as of the Closing Date the covenants and the obligations of ASCR contained in this Agreement and ASCR shall refrain from taking any action (other than action permitted under this Agreement or with the consent of ZAP) which would render inaccurate, as of the Closing Date, any such representations or warranties. ARTICLE III REPRESENTATIONS AND WARRANTIES OF ZAP 3.01 General. ZAP hereby represents and warrants the following: 3.02 Organization and Good Standing. ZAP is a California corporation duly organized, validly existing and in good standing under the applicable laws of the State of California, with requisite corporate power and authority to enter into and perform this Agreement. 3.03 Authorization and Consents. The execution of this Agreement by ZAP and the consummation by it of the transactions contemplated hereby has been duly authorized and approved or ratified by all necessary corporate action. ZAP has the corporate power and requisite authority to enter into this Agreement and consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by ZAP and constitutes the valid and binding obligation of ZAP, enforceable against ZAP in accordance with its terms. No agreement, consent, approval, release or waiver of any person or entity, not a party to this Agreement and no consent of any governmental agency or authority is required (i) to permit the performance by ZAP of its obligations under the terms of this Agreement; or (ii) in order to render the representations and warranties within this Article IV true and accurate. 3.04 Absence of Restrictions. ZAP is not subject to any provision of any charter, bylaw, mortgage, lease, indenture, agreement, instrument, order, judgment, or decree or any other restriction or right of other parties which would prohibit the execution of this Agreement by ZAP, or which would prevent the consummation of the transactions contemplated hereunder, or which would prevent or affect in any way compliance by ZAP with the terms, conditions and provisions hereof. 3.05 Litigation and Claims. ZAP is aware of no material claim, action, proceeding or investigation pending, asserted or threatened against, or involving its business or assets. 3.06 Agreements, Contracts and Commitments. ZAP is not a party to, or otherwise subject to, any oral or written agreement or arrangement for the purchase or sale of any of its assets or agreement, contract or commitment, containing any covenant limiting the freedom of ZAP to engage in its business. ZAP is not in default in any material respect under any agreement, contract, lease or other material document relating to its business or assets. There have been no claims of such material defaults and, to the best of ZAP's knowledge, -5- information and belief, there are no facts or conditions that can reasonably be expected to result in such a material default by ZAP. 3.07 Compliance with Laws. ZAP has complied in all material respects with, and is not in violation in any material respect of any federal, state or local statute, law, rule, or regulation with respect to the conduct of its business, or the ownership, operation, sale, purchase or possession of its assets. 3.08 Full Disclosure. The representations and warranties contained in this Agreement are subject to the exceptions specifically noted in the disclosure Schedules attached hereto. By this reference, such schedules are incorporated in and made a part of this Agreement. No representation or warranty, as supplemented pursuant to the terms and provisions hereof, by ZAP in this Agreement or in any Exhibit or schedule hereto, nor any documents, written information, written statements or certificates furnished or to be furnished by or on behalf of ZAP to ASCR pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact. 3.09 Implementation of Representations and Warranties and Certificates. ZAP shall take all reasonable action necessary to render true, complete and accurate, as of the Closing Date, ZAP`s representations and warranties contained in this Agreement as supplemented pursuant above, and to perform or cause to be performed as of the Closing Date the covenants and the obligations of ZAP contained in this Agreement and ZAP shall refrain from taking any action (other than action permitted under this Agreement or with the consent of ASCR) which would render inaccurate, as of the Closing Date, any such representations or warranties. ARTICLE IV CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ZAP AND ASCR TO CLOSE 4.01 Conditions Precedent to Obligation of ZAP to Close. The obligations of ZAP to consummate the transactions contemplated by this Agreement are subject to the fulfillment to ZAP`s reasonable satisfaction on or before the Closing of each of the following conditions set forth below, subject to ZAP`s rights to waive in writing any such condition: (a) Representations, Warranties and Covenants. All representations and warranties of ASCR contained in this Agreement, as supplemented pursuant to Section 2.13 above, shall be true and correct in all material respects as of the Closing Date as if such representations and warranties were made as of the Closing Date, and ASCR shall have performed and shall have caused to be performed all agreements, obligations and covenants required by this Agreement to be performed by it on or prior to the Closing Date. (b) Adverse Changes. There shall have been no adverse change in the Business or the Assets including, without limitation, any adverse change in ASCR's relationship with its customers, distributors, and suppliers, except as listed in Schedule 4.01, attached hereto. -6- (c) Financial Statements. ASCR shall have delivered to ZAP for ZAP's review and approval ASCR's financial statements described in Section 2.03, which approval shall not be unreasonably withheld. (d) Supplemental Schedules Approved. All Supplemental Schedules given by ASCR, if any, shall have been reviewed and approved by ZAP, which approval shall not be unreasonably withheld. (e) Litigation. No action or proceeding before a court or any other governmental agency or body shall have been instituted and be pending or threatened by a third party to restrain or prohibit any of the transactions contemplated hereby. (f) Delivery of Certificate and Resolutions. ASCR shall have delivered to ZAP a certificate of ASCR`s president and secretary: (i) stating that the representations and warranties made by ASCR herein are true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date, (ii) stating that there has been no breach of any covenant contained herein by ASCR, (iii) stating that all ASCR conditions to Closing stated in this Agreement have been satisfied or waived, (iv) stating that there has been no material adverse change with respect to ASCR, (v) stating that ASCR knows of no challenge to the consummation of the transactions contemplated by this Agreement and (vi) containing a copy of the resolutions of ASCR`s board of directors and its shareholders approving this Agreement and the consummation of the transactions contemplated hereby. (g) Agreement and Consents. At or prior to the Closing, ASCR shall have obtained all necessary consents to the transfer of the Assets to ZAP. (h) Delivery of Assets; No Encumbrances. ASCR shall deliver good and marketable title to the Assets free and clear of any encumbrances of any kind, except for any encumbrances disclosed in Schedule 2.06, attached hereto. 4.02 Conditions Precedent to Obligation of ASCR to Close. The obligations of ASCR to consummate the transactions contemplated by this Agreement are subject to the fulfillment to ASCR`s satisfaction on or before the Closing Date of each of the following conditions set forth below, subject to ASCR`s rights to waive in writing any such condition: (a) Representations, Warranties and Covenants. All representations and warranties of ZAP contained in this Agreement, as supplemented pursuant to Section 3.08 above, shall be true and correct in all material respects as of the Closing Date as if such representations and warranties were made as of the Closing Date, and ZAP shall have performed and shall have caused to be performed all agreements, obligations and covenants required by this Agreement to be performed by it on or prior to the Closing Date. (b) Adverse Changes. There shall have been no adverse change in ZAP's business or its financial condition, except as described in Schedule 4.02, attached hereto. -7- (c) Supplemental Schedules Approved. All Supplemental Schedules given by ZAP, if any, shall have been reviewed and approved by ASCR, which approval shall not be unreasonably withheld. (d) Litigation. No action or proceeding before a court or any other governmental agency or body shall have been instituted and be pending or threatened by a third party to restrain or prohibit any of the transactions contemplated hereby. (e) Delivery of Certificate and Resolutions. ZAP shall have delivered to ASCR a certificate of ZAP's president and secretary: (i) stating that the representations and warranties made by ZAP herein are true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date, respectively, (ii) stating that there has been no breach of any covenant contained herein by ZAP, (iii) stating that all ZAP conditions to the Closing stated in this Agreement have been satisfied or waived, (iv) stating that there has been no material adverse change with respect to ZAP, (v) stating that ZAP knows of no challenge to the consummation of the transactions contemplated by this Agreement and (vi) containing a copy of the resolutions of ZAP's board of directors approving this Agreement and the consummation of the transactions contemplated hereby. (f) Payment of Purchase Price. ZAP shall deliver the Purchase Price. ARTICLE V INDEMNIFICATION; SURVIVAL OR REPRESENTATIONS, WARRANTIES AND AGREEMENTS 5.01 Indemnification by ASCR. ASCR agrees to indemnify and hold ZAP, its directors, officers, shareholders, agents, employees, successors and assigns (collectively, "ZAP Indemnitees"), harmless from and against any and all claims, causes of action, demands, losses, cost, expenses, obligations, damages, deficiencies, or liabilities, including interest, penalties, and reasonable attorneys fees resulting from (i) any liability of ASCR relating to the operation of ASCR's Business prior to the Closing Date except for those liabilities specifically assumed by ZAP pursuant to Section 2.03 hereof and (ii) a breach of any representation, warranty or agreement of ASCR contained in this Agreement. The foregoing indemnification shall survive the Closing, and shall remain operative and in full force and effect, regardless of any investigation or statement as to the result thereof made by or on behalf of any party. 5.02 Claims. In the event a claim is made against ZAP or any ZAP Indemnitee for which they are (or either of them is) indemnified hereunder, ZAP shall notify ASCR of such claim. In the event that any action indemnified hereunder is brought against ZAP or a ZAP Indemnitee and ZAP shall notify ASCR of the commencement thereof, ASCR shall, at its sole expense, assume the defense thereof with counsel reasonably satisfactory to ZAP. ZAP shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such separate counsel shall be at the expense of ZAP unless ASCR has authorized the employment of such counsel in writing. ASCR shall have the -8- right to settle any such action or judgment, based on any such action, provided that ASCR has previously rendered to ZAP satisfactory evidence of its ability to pay any action or judgment, and contemporaneously with such settlement ASCR shall pay the amount of such settlement. If ASCR shall fail to diligently defend such action, ZAP, after written notice to ASCR, may do so with attorneys of its own selection and ASCR shall be responsible for and shall pay any settlement or judgment effected by ZAP and all attorneys' fees. 5.03 Indemnification by ZAP. ZAP agrees to indemnify and hold ASCR, its directors, officers, shareholders, agents, employees, successors and assigns (collectively, "ASCR`s Indemnitees"), harmless from and against any and all claims, causes of action, demands, losses, cost, expenses, obligations, damages, deficiencies, or liabilities, including interest, penalties, and reasonable attorneys fees resulting from a breach of any representation, warranty or agreement of ZAP contained in this Agreement. The foregoing indemnification shall survive the Closing, and shall remain operative and in full force and effect, regardless of any investigation or statement as to the result thereof made by or on behalf of any party. 5.04 Claims. In the event a claim is made against ASCR or any ASCR Indemnitee for which they are (or either of them is) indemnified hereunder, ASCR shall notify ZAP of such claim. In the event that any action indemnified hereunder is brought against ASCR or an ASCR Indemnitee and ASCR shall notify ZAP of the commencement thereof, ZAP shall, at its sole expense, assume the defense thereof with counsel reasonably satisfactory to ASCR. ASCR shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such separate counsel shall be at the expense of ASCR unless ZAP has authorized the employment of such counsel in writing. ZAP shall have the right to settle any such action or judgment, based on any such action provided that ZAP has previously rendered to ASCR satisfactory evidence of its ability to pay any action or judgment, and contemporaneously with such settlement ZAP shall pay the amount of such settlement. If ZAP shall fail to diligently defend such action, ASCR, after written notice to ZAP, may do so with attorneys of its own selection and ZAP shall be responsible for and shall pay any settlement or judgment effected by ASCR and all attorneys' fees. ARTICLE VI ACCESS TO INFORMATION 6.01 Confidentiality. All information not previously disclosed to the public which shall have been furnished by ASCR or ZAP to the other party shall not be disclosed prior to the Closing to any person other than the party's respective employees, legal counsel, and accountants, in confidence, or used for any purpose other than as contemplated herein. In the event that the sale of the Assets shall not be consummated, all such information, including any schedule, analysis or other documents prepared by ASCR or ZAP, which shall be in writing, shall remain confidential. The parties acknowledge that disclosure by a party of such information except as permitted hereunder may result in substantial harm to the other party. 6.02 Effect of Investigation. Any investigation of ASCR or ZAP by the other party shall not affect any of the representations, agreements, covenants or warranties set forth herein. Except as expressly waived in writing or otherwise provided herein, all -9- representations and warranties shall continue in full force and effect, and the parties shall continue to be bound by them. If an exception to any representation or warranty has been disclosed on a disclosure Schedule or Supplemental Schedule delivered by a party prior to Closing, and the other party receiving such disclosure proceeds to close notwithstanding such disclosure, then such other party's right to damages or indemnification from the disclosing party as to matters covered by such disclosure shall be deemed waived by such other party. ARTICLE VII GENERAL 7.01 Notices. Any notice or demand required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally and signed receipt for such notice or demand is secured, or mailed by registered mail or certified mail, postage prepaid, return receipt requested, and addressed to the following persons at the following respective address unless by any such notice a different person or address shall have been designated by the addressee: Notices to ZAP shall be sent to: ZAPWORLD.com 117 Morris Street Sebastopol, CA 95472 Attn: Gary Starr Notice to ASCR shall be sent to: American Scooter & Cycle Rental c/o Jeff and Helena Sears 2715 Hyde Street San Francisco, CA 94109 7.02 Governing Law; Arbitration. The validity, construction, interpretation and enforcement of this Agreement shall be determined and governed by the laws of the State of California. Further, in the event of any dispute between the parties relative to this Agreement, the inducements or representations to enter into this Agreement, or the parties' performance of the terms of this Agreement, said dispute(s) shall be resolved through binding arbitration pursuant to the rules of the American Arbitration Association or other mutually agreeable body, before one (1) arbitrator selected by the parties, with the sites of the arbitration agreed to be in San Francisco, California. 7.03 Waiver and Modification. Any term or provision of this Agreement may be waived at any time by a written instrument executed by the party which is entitled to the benefit thereof; provided, however, that no such waiver shall constitute a waiver by such party of any of its other rights and remedies, at law or in equity. This Agreement may be amended, modified or supplemented at any time only by a written instrument executed by all the parties hereto. -10- 7.04 Cooperation and Further Assurances. The parties to this Agreement shall fully cooperate with each other in connection with all general matters and tax matters (including tax audits) involving either party, which relate in any way to this Agreement. Such cooperation shall include, but not be limited to the preparation of an asset purchase valuation and classification schedule, prepared pursuant to Internal Revenue Code Section 1060 et seq., as revised, and the granting to the individual party and the taxing authorities reasonable access to relevant business records and evidence of payment; provided, however, the party requesting such cooperation shall pay costs and expenses of the cooperating party in connection with such cooperation. 7.05 Entire Agreement. This Agreement, including documents incorporated herein by reference, the Exhibits and schedules attached hereto when duly executed and delivered, constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior proposals, oral and written, all previous negotiations and all other communications between the parties with respect to the subject matter hereof (except to the extent any other agreement may be incorporated into this Agreement by a writing executed by ZAP and ASCR). 7.06 Headings. The titles to articles and paragraphs hereof are used for convenience only and shall not be deemed to be a part hereof, or affect the construction or interpretation of any provision hereof. 7.07 Attorneys' Fees. Except as otherwise provided herein, in connection with enforcement of their respective rights hereunder, the parties shall each be entitled to any right or remedy available at law or in equity, and the prevailing party shall be entitled to reasonable attorneys' fees actually incurred in connection therewith. 7.08 Severability. If any provision of this Agreement is held invalid under any applicable statute or rule of law, such invalidity shall not affect the other provisions of this Agreement that can be given effect without the invalid provisions, and to this end the provisions of this Agreement are declared severable. Notwithstanding the above, such invalid provision or clause shall be construed and enforced, to the extent possible, in accordance with the original intent of the parties. 7.09 Assignment. This Agreement may not be assigned to any party without the written consent of the other party hereto. 7.10 Recitals. The recitals herein are incorporated by this reference into this Agreement and shall bind the parties in accordance with their terms. 7.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered to be an original, but all of which together shall constitute one and the same instrument. -11- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the date first above written. ASCR: ZAP: American Scooter and Cycle Rental, ZAP WORLD.com, a California Inc., a California corporation corporation By: /s/ Jeffrey Sears By: /s/ Signature ------------------------------------ --------------------------- Jeffrey Sears, CEO Its: --------------------------- -12- EXHIBIT A ASCR INVENTORY FOR ZAPWORLD TRANSFER MARCH 27, 2000 Yamaha Razz Scooters Unit # Year Vin Plate Mileage 2 RED 1987 JYA3EPAOONA187470 CO21472 9,933 4 RED 1987 JYA3EPA07NA187501 CO21475 7,525 1 RED 1988 JYA3EPA09JA007042 CO21474 6,529 3 RED 1987 JYA3EPA00NA187467 CO21473 8,508 4 BLK 1987 JYA2HU003HA003520 14Y5199 4,824 5 1987 JYA3EPA00NA180178 CO21476 10,375 2 BLK 1987 JYA3EPA08NA187212 CO22991 4,424 8 1988 1JH2AF1607JK004219 HONDA 14J5753 4,440 Honda Elite 80 Scooters Unit # Year Vin Plate Mileage 12 1996 3HIHF031OTD100036 14P7853 17,018 15 1996 3H1HF0319TD100018 14P6611 16,070 35 1994 3H1HF0313RD900418 14Y5211 21,419 34 1996 3H1HF0318TD100012 14K5885 24,125 16 1996 3H1HF0318TD100009 14P9311 6,308 33 1995 3H1HF0319RD900200 14K5903 24,995 24 1994 3H1HF0312RD900197 14K6702 23,968 18 1994 3H1HFO311RD900143 12V1291 21,640 20 1994 31HFO319SD000001 14M5654 26,381 EXHIBIT A Honda Elite 150 Scooters Unit # Year Vin Plate Mileage 48 1987 JH2KF0113HK204975 12X9166 11,132 49 1987 JH2KF011XHK200535 12G4244 12,870 white 1987 JH2KF0110HK201533 14J5753 4,558 Honda Helix 250 Scooters Unit # Year Vin Plate Mileage 1 1996 JH2MF0204TK100342 14T9143 28,072 4 1996 JH2MF0208TK100361 14J5838 27,112 Motorcycles
Unit # Year Make Model Vin Plate Mileage 3 1994 Harley Davidson Sportster 883 1HD4CAM30RY214910 13X6466 47,823 2 1994 Harley Davidson Sportster 883 1HD4CAM37RY208411 13W7402 43,513 2 1998 Yamaha V-Star Classic JYAVM01Y9000222 14V6166 23,738 4 1998 Yamaha V-Star Classic JYAVM01Y2WA000224 14V6164 22,110 3 1998 Yamaha V-Star Classic JYAVM01Y4WA000242 14V6167 20,059 1 1998 Yamaha V-Star Classic JYAVM01Y2WA000241 14V6165 27,204
1 1987 FORD RANGER TRUCK VIN# 1FTCR14T2HPA53704 PLATE# 3F85877 EXHIBIT B AMERICAN SCOOTER RENTAL, INC. Balance Sheet As of December 31, 1999 ASSETS Current Assets West America Bank 5,289.41 Wells Fargo Bank 93,313.58 ------------------ 98,602.99 Fixed Assets Furniture & Fixtures 3,123.06 Machines & Equipment 253,031.14 Electric Vehicle 11,030.20 Office Equipment 8,523.01 Less: Accumulated Depreciation (222,986.41) ------------------ 52,721.00 Other Assets Charles Schwab Investment 50,000.00 Organizational Expense 627.00 Less: Accumulated Amortization (627.00) Goodwill 85,543.00 ------------------ 135,543.00 ------------------ 286,866.99 ================== LIABILITIES Current Liabilities Federal Tax Withheld 1,240.00 FICA Withheld 558.00 Medicare 130.50 State Income Tax Withheld 710.00 ----------------- 2,638.50 Stockholders' Equity Issued Common Stock 10,000.00 Paid in Capital 116,218.00 Retained Earnings 72,234.57 Net income YTD 85,775.92 ----------------- 284,228.49 ------------------ 286,866.99 ================== Asset Purchase Agreement American Scooter and Cycle Rental, Inc. - ZAP WORLD.com Schedule 2.06 ASCR has good and marketable title to all of the Assets set forth in Exhibit A. Schedule 2.07 The only pending or threatened legal action asserted against ASCR is the matter of Boop v. American Scooter and Cycle Rental, Inc., San Francisco Superior Court Action No. 998587. The suit involves a claim by a customer who rented a motor scooter and sustained personal injuries as the result of a vehicular accident. The matter is covered by ASCR's liability insurance. Recently a court appointed arbitrator awarded the plaintiff the sum of $50,000, a sum that is well within the policy limits. The matter is expected to settle without any exposure to ASCR. Aside from the foregoing matter, ASCR is unaware of any other material claims, actions, proceedings or investigations pending, asserted or threatened against, or involving the Business or the Assets. Schedule 2.09 ASCR is not in default in any material respect under any agreement, contract, lease or other material document relating to the Business or the Assets. There have been no claims of such material defaults and, to the best of ASCR's knowledge, information and belief, there are no facts or conditions which can reasonably be expected to result in such a material default by ASCR. Schedule 2.11 No claims have been threatened or asserted by any person that the manner in which ASCR conducts its business is in violation of any license held by ASCR or that ASCR's use of Intellectual Property infringes any proprietary right or interest of any third party. ASCR makes no warranties or representations whatsoever concerning its ownership or right to use any particular intellectual property. EX-10.6 15 0015.txt STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT AND PLAN OF REORGANIZATION THIS STOCK PURCHASE AGREEMENT, made as of the 31st day of January, 2000, by and among ZAPWORLD.com, a California corporation ("Buyer"), Barbary Coast Pedi Cab Leasing Corporation, a California corporation ("Company"), and Jeff Sears and Helena Sears as Trustees of the Jeff Sears and Helena Sears Revocable Trust Dated January 3, 1997 (hereinafter referred to individually as a "Shareholder"); Recitals A. Shareholder owns Fifty Thousand shares of the capital stock of Company which shares represent one hundred percent (100%) of the issued and outstanding shares of capital stock of Company. B. Buyer desires to acquire all of the issued and outstanding capital stock of Company held by the Shareholder in exchange solely for shares of voting stock of Buyer on the terms and conditions hereinafter set forth. C. The Parties intend to effect a reorganization (the "Reorganization") of Company in accordance with the terms and conditions of this Agreement. D. It is intended that the Reorganization qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code"). E. Company is engaged in the business of leasing pedi cabs (the "Business"). Agreement NOW, THEREFORE, in consideration of the promises and of the mutual covenants hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Defined Terms. The following terms used in this Agreement shall have the meanings indicated below unless the context otherwise indicates: 1.1 "Business" shall have the meaning given in the recital to this Agreement. 1.2 "Buyer" shall have the meaning given in the heading of this Agreement. 1.3 "Buyer Stock" shall have the meaning given in Section 1 of this Agreement. 1.4 "Closing" shall have the meaning given in Section 10.1 of this Agreement. 1.5 "Closing Date" shall have the meaning given in Section 10.1 of this Agreement. 1.6 "Company" shall have the meaning given in the heading of this Agreement. 1.7 "Contest Notice" shall have the meaning given in Section 11.3.2 of this Agreement. 1.8 "Deficiencies" shall have the meaning given in Section 11.2 of this Agreement. 1.9 "1933 Act" shall mean the Securities Act of 1933, as amended. 1.10 "SEC" shall mean the Securities and Exchange Commission. 1.11 "Shareholder" shall have the meaning given in the heading of this Agreement. 1.12 "Shareholder's Agent" shall have the meaning given in Section 15 of this Agreement. 1.13 "Stock Rights" shall have the meaning given in Section 3.1 of this Agreement. 2. Acquisition of Stock. On the Closing Date (as hereinafter defined), Shareholder shall convey, transfer and assign, upon the terms and conditions herein set forth, to Buyer, free and clear of all liens, security interests, pledges, claims and encumbrances of every kind, nature and description, and Buyer shall accept from Shareholder, all but not less than all of the outstanding capital stock of Company in exchange for a total of Twenty-Four Thousand (24,000) shares of Common Stock of Buyer (said Twenty-Four Thousand (24,000) shares hereinafter called the "Buyer Stock") to be delivered on or before the Closing (as hereinafter defined) to Shareholder. 3. Representations and Warranties of Company and Shareholder with Respect to Company. As material inducement to Buyer to enter into this Agreement and to close hereunder, Company and Shareholder hereby jointly and severally make the following representations, warranties and agreements to and with Buyer: 3.1 Corporate Status and Authority. Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. The execution, delivery and performance of this Agreement by Company have been duly authorized by all necessary corporate action on the part of Company, and this Agreement constitutes the valid and binding obligation of Company, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. 3.2 Capitalization. 3.2.1 Authorized and Outstanding Shares. The total authorized capital stock of Company is One Hundred Thousand (100,000) shares of common stock, 50,000 shares of -2- which are issued and outstanding as of the date of this Agreement, and will be issued and outstanding as of the Closing Date. 3.2.2 Valid Issuance. All issued shares of common stock of Company are duly authorized, validly issued and outstanding, fully paid and non-assessable. 3.2.3 No Options or Rights. There are no outstanding options, warrants or other rights to purchase any capital stock of Company, nor are there any securities which are convertible into capital stock of Company. 3.2.4 Stock Transfer and Voting Agreements. None of Company's outstanding capital stock is subject to any voting trusts, voting agreements, or other agreements between or among Company and any other person. This representation does not, and is not intended to limit in any way Company's right to enter into a shareholders agreement with any or all of its shareholders after the Closing Date. 3.3 Agreement Not in Breach of Other Instruments Affecting Company. The execution and delivery of this Agreement and the consummation of the transactions provided for herein by Company do not and will not, with or without the giving of notice, the lapse of time or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation of Company under, any agreement, indenture or other instrument by which Company is bound, Company's Articles of Incorporation or Bylaws, any judgment, decree, order or award of any court, governmental body, or arbitrator, or any applicable law, rule or regulation. 3.4 Financial Statements. The financial statements of Company as of December 31, 1999 and the fiscal year then ended, fairly present the financial condition of Company as of such date. Since such date, there has been no material adverse change in the financial condition of the Company. The cash balances shown on the balance sheet shall be reduced to a nominal sum prior to closing. 3.5 Litigation and Claims. Company is aware of no material claims, actions, proceedings or investigations pending, asserted or threatened against, or involving the Business. 3.6 Agreements, Contracts and Commitments. Company is not a party to or otherwise subject to any oral or written agreements or arrangement, contract or commitment containing any covenant limiting the freedom of Company to engage in the Business. Company is not in default in any material respect under any agreement, contract, lease or other material document relating to the Business. There have been no claims of such material defaults and, to the best of Company's knowledge, information and belief, there are no facts or conditions which can reasonably be expected to result in such a material default by Company. 3.7 Compliance with Laws. Company has complied in all material respects with, and is not in violation in any material respect of any federal, state or local statute, law, rule, or regulation with respect to the conduct of its Business. -3- 3.8 Intellectual Property. Company's Intellectual Property constitutes all such proprietary rights which are owned or held by Company and which are reasonably necessary to, or used in the conduct of, the Business. Company owns or has valid rights to use its Intellectual Property without conflict with the rights of others. No person has made or, to the knowledge of Company, threatened to make any claim that Company's use of Intellectual Property is in violation of any license held by Company or infringes any proprietary right or interest of any third party. To the knowledge of Company, no third party is infringing upon any of Company's Intellectual Property. Company holds its Intellectual Property free and clear of all Liens. 4. Further Representations and Warranties of Shareholder. As material inducement to Buyer to enter into this Agreement and to close hereunder, each Shareholder severally makes the following representations and warranties to Buyer: 4.1 Ownership of Capital Stock of Company. Shareholder owns 50,000 shares of common stock of Company. The Shareholder has good, marketable and unencumbered title to such shares, free and clear of all liens, security interests, pledges, claims, options and rights of others (collectively, "Stock Rights"). There are no restrictions on the Shareholder's right to transfer such shares to Buyer pursuant to this Agreement. 4.2 All Outstanding Capital Stock of Company. The shares of common stock of Company owned by Shareholder represent all of the issued and outstanding capital stock of Company on the Closing Date. 4.3 Authorization; Valid and Binding Agreement. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action by Shareholder. This Agreement and the documents contemplated hereby have been, or will be when executed and delivered at or prior to the Closing, duly executed and delivered by Shareholder and constitute, or will constitute when executed and delivered, the legal, valid and binding obligations of the Shareholder, enforceable against the Shareholder in accordance with their terms, except as the enforceability hereof or thereof may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. No approval of any governmental body or governmental agency is required to consummate the transactions contemplated hereby, except any approvals heretofore obtained. 4.4 Agreement Not in Breach of Other Instruments Affecting the Shareholder. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof by the Shareholder do not and will not, with or without the giving of notice, the lapse of time, or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, any agreement or other instrument (including without limitation, Company's Articles of Incorporation and Bylaws) by which such Shareholder is bound, any judgment, decree, order, or award of any court, governmental body, or arbitrator, or any applicable law, rule or regulation. -4- 4.5 Purchase for Investment. Shareholder is acquiring the shares of Buyer stock for its own investment and not with a view to distribution or resale. 5. Representations and Warranties of Buyer. As material inducement to Company and Shareholder to enter into this Agreement, Buyer makes the following representations and warranties to Company and Shareholder: 5.1 Corporate Status and Authority; Outstanding Stock. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has the corporate power to acquire the stock to be acquired hereunder. Buyer has a sufficient number of authorized but unissued shares of Common Stock to be able to issue all of the shares of Buyer Stock which are to be issued hereunder. The execution, delivery and performance of this Agreement by Buyer have been duly authorized by all necessary corporate action on the part of Buyer, and this Agreement constitutes the valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and by general principles of equity, whether considered in a proceeding at law or in equity. 5.2 Status of Buyer Stock. The shares of Buyer Stock, when issued pursuant to the terms of this Agreement, will be duly authorized, validly issued and outstanding, fully paid and non-assessable. 5.3 Agreement Not in Breach of Other Instruments Affecting Buyer. The execution and delivery of this Agreement and the consummation of the transactions provided for herein by Buyer do not and will not, with or without the giving of notice, the lapse of time or both, result in the breach of any of the terms and provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation of Buyer under, any agreement, indenture or other instrument by which Buyer is bound, Buyer's Articles of Incorporation or Bylaws, any judgment, decree, order or award of any court, governmental body, or arbitrator, or any applicable law, rule or regulation. 5.4 Financial Statements. The financial statements of Buyer as of March 31, 1999, have been prepared in accordance with generally accepted accounting principles and fairly present the financial condition of Buyer as of such date. Since such date, there has been no material adverse change in the financial condition of Buyer. 5.5 Purchase for Investment. Buyer is acquiring the shares of Company stock for its own investment and not with a view to distribution or resale. 6. Continuation and Survival of Representations and Warranties. All representations and warranties, including information disclosed in Schedules, made in this Agreement shall continue to be true and correct at and as of the Closing Date, as if made at each of such times. If any party hereto shall learn of a representation or warranty being or becoming untrue at or prior to Closing, such party shall promptly give notice thereof to all of the other parties hereto. All representations and warranties contained herein shall survive the consummation of the transactions provided for in this Agreement; shall continue in full force and effect; and -5- shall provide the basis for the remedies set forth herein or otherwise available to the non-breaching party. Each representation and warranty contained herein is independent of all other representations and warranties contained herein (whether or not covering an identical or a related subject matter) and must be independently and separately complied with and satisfied. Exceptions or qualifications to any representations or warranties contained herein shall not be construed as exceptions or qualifications to any other warranty or representation. No representation or warranty contained herein shall be deemed to have been waived, affected or impaired by any investigation made by or knowledge of any party to this Agreement. 7. Buyer's Inspection Rights. Company shall give to Buyer and its designated employees or representatives full access to all of the properties and assets of Company, to Company's stock books, and to all of Company's documents, books and records relating to its current and past operations and Business. Company shall permit such employees and representatives to make copies of Company's written materials and to interview and question Company's employees. 8. Conditions Precedent to Buyer's Obligation to Close. The following shall be conditions precedent to the obligation of Buyer to close hereunder, any of which may be waived in whole or in part by Buyer: 8.1 Each of the representations and warranties of Company and Shareholder contained in this Agreement is now and, except as to those expressly limited to the date hereof or some other specific date, at all times after the date of this Agreement to and including the time of Closing shall be, true and correct individually and collectively in all material respects, provided that any references to materiality in any representation and warranty shall be disregarded for purposes of this provision. 8.2 Each of the agreements, covenants and undertakings of Company and Shareholder contained in this Agreement, except for those calling for performance after Closing, will have been fully performed and complied with both individually and collectively in all material respects at or before Closing. 8.3 No litigation, governmental actions or other proceeding involving or potentially involving a liability, obligation or loss on the part of Company of Five Thousand Dollars ($5,000) or more, in the aggregate, or which by reason of the nature of the relief sought might have more than a remote possibility of having a material adverse effect on Company's Business or financial condition, shall be threatened or commenced against Company with respect to any matter; no material litigation, governmental action or other proceeding shall be threatened or commenced against Company or any Shareholder with respect to the consummation of the transactions provided for herein; and neither Company nor any Shareholder has any knowledge of any basis for such material litigation, governmental action or proceeding. 8.4 All indebtedness owing to Company by any director, officer, employee or Shareholder of Company will be paid in full at or prior to Closing. -6- 8.5 All actions, proceedings, instruments and documents required to enable Company and Shareholder to perform this Agreement or matters incident thereto (other than matters for which Buyer is responsible under the terms of this Agreement), and all other legal matters not relating to a default by Buyer of its obligations hereunder, shall have been duly taken, satisfied, executed or delivered, as the case may be, to the reasonable satisfaction of Buyer. 8.6 All documents required to be delivered by Shareholder at or prior to Closing shall have been delivered or shall be tendered at the time and place of Closing. 8.7 No Shareholder shall have filed or attempted to file an application for approval of a repurchase offer with respect to the transactions contemplated hereby in accordance with Section 25507(b) of the California Corporate Securities Laws of 1968, as amended. 9. Conditions Precedent to Company's and Shareholder's Obligation to Close. The following shall be conditions precedent to the obligation of Company and Shareholder to close hereunder, any of which may be waived in whole or in part by Company and Shareholder: 9.1 Each of the representations and warranties of Buyer contained in this Agreement is now and, except as to those expressly limited to the date hereof or some other specified date, at all times after the date of this Agreement to and including the time of Closing shall be, true and correct individually and collectively in all material respects, provided that any references to materiality in any representation or warranty shall be disregarded for purposes of this provision. 9.2 Each of the agreements, covenants and undertakings of Buyer contained in this Agreement, except for those calling for performance after Closing, will have been fully performed and complied with both individually and collectively in all material respects at or before Closing. 9.3 No material litigation, governmental action or other proceeding shall be threatened or commenced against Buyer with respect to the consummation of the transactions provided for herein, and Buyer has no knowledge of any basis for any such material litigation, governmental action or other proceeding. 9.4 All actions, proceedings, instruments and documents required to enable Buyer to perform this Agreement or matters incident thereto (other than matters for which Company and/or Shareholder are responsible under the terms of this Agreement), and all other legal matters not relating to a default by Company or Shareholder of their obligations hereunder, shall have been duly taken, satisfied, executed or delivered, as the case may be, to the reasonable satisfaction of Company and Shareholder. 9.5 All documents required to be delivered by Buyer at or prior to Closing shall have been delivered or shall be tendered at the time and place of Closing. -7- 10. Closing. 10.1 Closing Date. The closing of the transactions provided for in this Agreement (herein sometimes called the "Closing") shall take place in the offices of ZAP, in Sebastopol, California at 10:00 a.m. on March 29, 2000 or such other place and time as shall be agreed to between the Buyer, the Company and Shareholder. The date and time of Closing is sometimes herein called the "Closing Date." 10.2 Deliveries by Shareholder and Company at Closing. At Closing, Shareholder and Company will deliver or cause to be delivered to Buyer the following: 10.2.1 certificates for fifty thousand (50,000) shares of Common Stock of Company, endorsed by Shareholder in blank, or with stock transfer powers executed by Shareholder in blank attached; 10.2.2 the signed resignations of all directors and all officers of Company dated and effective as of the Closing Date; 10.2.3 the stock books and records, corporate minute books (containing the originals of all minutes and resolutions ever adopted or consented to or agreed to by the shareholders, directors or any committee of directors of Company) and the corporate seal of Company; 10.3 Deliveries by Buyer at Closing. At the Closing, Buyer will deliver or cause to be delivered to Shareholder certificates for an aggregate Twenty-Four Thousand (24,000) shares of validly issued, fully paid and non-assessable Buyer Stock registered in the name of the Shareholder 11. Indemnification of Buyer. 11.1 Basic Provision. Shareholder hereby jointly and severally indemnifies and agrees to hold harmless Buyer and its successors and assigns and each such entity's officers, directors, shareholders and agents (each of whom shall be a third party beneficiary hereof) from, against and in respect of the amount of any and all Deficiencies (as hereinafter defined). 11.2 Definition of "Deficiencies." As used in this Section 11, "Deficiencies" means any and all loss or damage to Buyer or Company resulting from: 11.2.1 any misrepresentation, breach of warranty, or any non-fulfillment of any representation, warranty, covenant or agreement on the part of Company or Shareholder contained herein; 11.2.2 any error contained in any statement, report, certificate or other document or instrument delivered to Buyer pursuant to this Agreement or contained in any Schedule attached hereto; 11.2.3 any actual or alleged claim, debt, liability, obligation, loss, fine, penalty, damage or diminution in value suffered by Company or incurred by Company to any party, incurred prior -8- to Closing hereunder or arising from any matter or thing occurring prior to Closing hereunder, including but not limited to claims made by governmental authorities for taxes or otherwise, except for (a) liabilities expressly disclosed in this Agreement, including the Schedules attached hereto, and (b) liabilities incurred between the date of this Agreement and the Closing Date, the incurrence of which is not in violation of the provisions of this Agreement; and 11.2.4 any and all actions, suits, proceedings, demands, assessments, judgments, reasonable attorneys' fees, costs, expenses and interest incident to any of the foregoing. 11.3 Procedures for Establishment of Deficiencies. 11.3.1 In the event that any claim shall be asserted against Buyer or Company which, if sustained, would result in a Deficiency, Buyer, within a reasonable time after learning of such claim, shall notify Shareholder of such claim, and shall extend to Shareholder a reasonable opportunity to defend against such claim, at the Shareholder's sole expense and through legal counsel satisfactory to Buyer, such satisfaction not to be withheld unreasonably, provided that the Shareholder proceeds in good faith, expeditiously and diligently. No effort to recover the amount of the Deficiency related to such claim shall be made by Buyer pursuant to Section 11.3.2 while such defense is still being made until the earlier of (a) the resolution of said claim by the Shareholder with the claimant, or (b) the termination of the defense by the Shareholder against such claim or the failure of the Shareholder to prosecute such defense in good faith in an expeditious and diligent manner. Buyer shall be entitled to rely upon the opinion of its counsel as to the occurrence of either of said events. Buyer shall, at its option and expense, have the right to participate in any defense undertaken by the Shareholder with legal counsel of its own selection. No settlement or compromise of any claim which may result in a Deficiency may be made by the Shareholder without the prior written consent of Buyer unless prior to such settlement or compromise the Shareholder acknowledges in writing its obligation to pay in full the amount of the settlement or compromise and all associated expenses and Buyer is furnished with security reasonably satisfactory to Buyer that the Shareholder will in fact pay such amount and expenses. 11.3.2 In the event that Buyer asserts the existence of any Deficiency, Buyer shall give written notice to the Shareholder of the nature and amount of the Deficiency asserted. If the Shareholder, within a period of fifteen (15) days after the giving of such notice by Buyer, shall not give written notice to Buyer announcing its intention to contest such assertion of Buyer (such notice by the Shareholder being hereinafter called the "Contest Notice"), such assertion of Buyer shall be deemed accepted and the amount of the Deficiency shall be deemed established. In the event, however, that a Contest Notice is given to Buyer within said 15-day period, then the contested assertion of a Deficiency shall be settled by arbitration to be held in San Francisco, California in accordance with the commercial arbitration rules of the American Arbitration Association then obtaining. The determination of the arbitrator(s) shall be delivered in writing to Shareholder and Buyer and shall be final, binding and conclusive upon all of the parties hereto, and the amount of the Deficiency, if any, determined to exist by the arbitrator(s) shall be deemed established. -9- 11.3.3 Buyer and the Shareholder may agree in writing, at any time, as to the existence and amount of a Deficiency, and, upon the execution of such agreement, such Deficiency shall be deemed established. 11.4 Payment of Deficiencies. The Shareholder hereby agrees to pay the amount of each established Deficiency to Buyer within five (5) days after the establishment thereof in cash or, at the election of the Shareholder, in shares of Buyer Stock at the rate of Six Dollars and Twenty-Five Cents ($6.25) per share, rounding off the result to the nearest full number of shares, subject to equitable adjustment for stock dividends, stock splits, stock distributions, share reclassifications, exchanges, mergers, consolidations or other changes in capitalization affecting the common stock of Buyer occurring after the Closing Date and prior to such payment date. Any amounts not paid by the Shareholder when due under this Section 11.4 shall bear interest from the due date thereof until the date paid at a rate equal to the lesser of twelve percent (12%) per annum or the highest legal rate permitted by applicable law. 11.5 Limitation. Notwithstanding the foregoing, there shall be no liability for any Deficiency: (a) unless the aggregate of all Deficiencies exceeds Five Thousand Dollars ($5,000), in which event there shall be liability for all Deficiencies, and (b) unless the claim therefor has been asserted pursuant to Section 11.3 within one year after the Closing. 11.6 Remedy Not Exclusive. The remedies of Buyer under this Section 11 for matters covered by this Section 11 shall not be exclusive of any other remedies that Buyer may have in law or equity. 12. Securities Laws Compliance Procedures. 12.1 Knowledge Respecting Buyer. Shareholder represents and acknowledges that it is a sophisticated investor with knowledge and experience in business and financial matters, knows, or has had the opportunity to acquire, all information concerning the business, affairs, financial condition and prospects of Buyer which he or she deems relevant to make a fully informed decision regarding the consummation of the transactions contemplated hereby and is able to bear the economic risk and lack of liquidity inherent in holding the Buyer Stock. Without limiting the foregoing, Shareholder understands and acknowledges that neither Buyer nor anyone acting on its behalf has made any representations or warranties other than those contained herein respecting Buyer or the future conduct of Buyer's business or of Company's business, and no Shareholder has relied upon any representations or warranties other than those contained herein in the belief that they were made on behalf of Buyer. 12.2 Status of Shares to be Issued. Shareholder agrees, acknowledges and confirms that it has been advised and understands as follows: 12.2.1 Shareholder is acquiring the shares of Buyer Stock to be issued to him or her for his or her own account and without a view to any distribution or resale thereof, other than a distribution or resale which, in the opinion of counsel for such Shareholder (which opinion shall be satisfactory in form and substance to Buyer), may be made without violating the registration provisions of the Securities Act of 1933, as amended (the "1933 Act") or any applicable blue sky laws. Shareholder acknowledges that the shares of Buyer -10- Stock are "restricted securities" within the meaning of Rule 144 under the 1933 Act and have not been registered under the 1933 Act or any state securities laws and thereafter must be held indefinitely unless they are subsequently registered under the 1933 Act or an exemption from such registration is available. Buyer is under no obligation to register the shares of Buyer Stock under the 1933 Act or any state securities law or to take any action which would make available an exemption from such registration. 12.2.2 There shall be endorsed on the certificates evidencing the shares of Buyer Stock delivered at Closing a legend substantially similar to the following: "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE SECURITIES LAWS OF ANY OTHER JURISDICTION AND ARE "RESTRICTED SECURITIES" AS DEFINED BY RULE 144 UNDER THE 1933 ACT. THE SHARES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR DISTRIBUTED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT REGISTERING THE SHARES UNDER THE 1933 ACT AND THE SECURITIES LAWS OF ANY STATE REQUIRING SUCH REGISTRATION, OR IN LIEU THEREOF, AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY TO THE ISSUER OF THE SHARES, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACTS. WITHOUT LIMITING THE FOREGOING, THE SHARES MAY NOT BE SOLD WITHIN TWELVE MONTHS AFTER THE DATE OF THIS CERTIFICATE WITHOUT AN OPINION OF COUNSEL, WHICH OPINION IS SATISFACTORY TO THE ISSUER, THAT SUCH SALE DOES NOT VIOLATE THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968, AS AMENDED, OR THE RULES AND REGULATIONS THEREUNDER." 12.2.3 Except under certain limited circumstances, the above restrictions on the transfer of the shares of Buyer Stock will also apply to any and all shares of capital stock or other securities issued or otherwise acquired with respect to such shares, including, without limitation, shares and securities issued or acquired as a result of any stock dividend, stock split or exchange or any distribution of shares or securities pursuant to any corporate reorganization, reclassification or similar event. 12.2.4 Buyer and its transfer agent may refuse to effect a transfer of any of the shares of Buyer Stock by the Shareholder or any of its successors, personal representatives or assigns otherwise than as contemplated hereby. -11- 13. Further Assurances. Buyer and Shareholder agree to execute and deliver all such other instruments and take all such other action as any party may reasonably request from time to time, before or after Closing and without payment of further consideration, in order to effectuate the transactions provided for herein. The parties shall cooperate fully with each other and with their respective counsel and accountants in connection with any steps required to be taken as part of their respective obligations under this Agreement, including, without limitation, the preparation of financial statements and tax returns. 14. Restrictive Covenants. 14.1 Duration and Extent of Restriction. For a period of two (2) years following the Closing hereunder, Shareholder will not (individually, collectively, or in any combination, as principal, partner, member, investor, director, officer, agent, employee, consultant or otherwise) directly or indirectly (except as employees of Buyer or a subsidiary of Buyer) engage in, or directly or indirectly be financially interested in, any business which is engaged in pedi cab leasing at any place in the City and county of San Francisco. Nothing in the foregoing sentence shall be deemed, however, to prevent any Shareholder from owning securities of Buyer, or of any other publicly owned corporation engaged in any such business, provided that the total amount of securities of each class owned by such Shareholder either of record or beneficially in such other publicly owned corporation does not exceed one percent (1%) of the outstanding securities of such class. In addition, for a period of two (2) years following the Closing hereunder, Shareholder will not, directly or indirectly, induce or attempt to influence any employee, customer, independent contractor or supplier of Company to terminate his or her employment or any other relationship with Company. Shareholder shall not at any time use for Shareholder's personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person or entity, any confidential information of Company. "Confidential information," as used in the preceding sentence, means any information regarding Company's business methods, business policies, procedures, techniques, research or development projects or results; historical or projected financial information, budgets, trade secrets or other knowledge or processes of or developed by Company; any names and addresses of customers or clients or any data on or relating to past, present or prospective Company customers or clients; or any other confidential information relating to or dealing with the business, operations or activities of Company, excepting in each case information otherwise lawfully known generally by, or readily accessible to, the trade or the general public. 14.2 Remedies for Breach. Each Shareholder acknowledges that the restriction contained in Section 14.1 is reasonable and necessary in order to protect Buyer's legitimate interests and that any violation thereof would result in irreparable injury to Buyer. Each Shareholder therefore acknowledges and agrees that, in the event of any violation thereof, Buyer shall be authorized and entitled to obtain, from any court of competent jurisdiction, preliminary and permanent injunctive relief as well as an equitable accounting of all profits or benefits arising out of such violation, which rights and remedies shall be cumulative and in addition to any other rights or remedies to which Buyer may be entitled. -12- 14.3 Extension of Restriction. In the event of any breach or violation of the restriction contained in Section 14.1, the time period therein specified shall abate during the time of any violation thereof and that portion remaining at the time of commencement of any violation shall not begin to run until such violation has been fully and finally cured. 14.4 No Separate Consideration. The parties agree that the restrictions on Shareholder in this Section 14 are an incidental part of the overall transaction contemplated by this Agreement; no part of the overall consideration being paid by Buyer to Shareholder hereunder is being allocated separately to such restrictions; and no party will take a position inconsistent with this Section 14.4 for tax or any other purpose. 15. Indemnity Against Brokerage Commissions and Finder's Fees. Buyer and each Shareholder hereby represents and warrants that there is no person or entity entitled to receive from Buyer or such Shareholder any brokerage commission or finder's fee in connection with this Agreement or the transactions provided for herein, and each hereby indemnifies and agrees to save the other parties hereto harmless from and against any claim for brokerage commission or finder's fee based on any retention or alleged retention of a broker or finder by such party. 16. Miscellaneous. 16.1 Notices. Any notice or demand required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally and signed receipt for such notice or demand is secured, or mailed by registered mail or certified mail, postage prepaid, return receipt requested, and addressed to the following persons at the following respective address unless by any such notice a different person or address shall have been designated by the addressee: Notices to Buyer shall be sent to: ZAPWORLD.com 117 Morris Street Sebastopol, CA 95472 Attn: Gary Starr Notices to Company shall be sent to: Barbary Coast Pedi Cab Leasing Corporation 2715 Hyde Street San Francisco, CA 94109 Notices to Shareholder shall be sent to: Jeff and Helena Sears 2715 Hyde Street San Francisco, CA 94109 -13- 16.2 Governing Law; Arbitration. The validity, construction, interpretation and enforcement of this Agreement shall be determined and governed by the laws of the State of California. Further, in the event of any dispute between the parties relative to this Agreement, the inducements or representations to enter into this Agreement, or the parties' performance of the terms of this Agreement, said dispute(s) shall be resolved through binding arbitration pursuant to the rules of the American Arbitration Association or other mutually agreeable body, before one (1) arbitrator selected by the parties, with the sites of the arbitration agreed to be in San Francisco, California. 16.3 Waiver and Modification. Any term or provision of this Agreement may be waived at any time by a written instrument executed by the party which is entitled to the benefit thereof; provided, however, that no such waiver shall constitute a waiver by such party of any of its other rights and remedies, at law or in equity. This Agreement may be amended, modified or supplemented at any time only by a written instrument executed by all the parties hereto. 16.4 Cooperation and Further Assurances. The parties to this Agreement shall fully cooperate with each other in connection with all general matters and tax matters (including tax audits) involving either party, which relate in any way to this Agreement. Such cooperation shall include, but not be limited to the preparation of an asset purchase valuation and classification schedule, prepared pursuant to Internal Revenue Code Section 1060 et seq., as revised, and the granting to the individual party and the taxing authorities reasonable access to relevant business records and evidence of payment; provided, however, the party requesting such cooperation shall pay costs and expenses of the cooperating party in connection with such cooperation. 16.5 Entire Agreement. This Agreement, including documents incorporated herein by reference, the Exhibits and schedules attached hereto when duly executed and delivered, constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior proposals, oral and written, all previous negotiations and all other communications between the parties with respect to the subject matter hereof (except to the extent any other agreement may be incorporated into this Agreement by writing executed by Buyer, Company and Shareholder). 16.6 Headings. The titles to articles and paragraphs hereof are used for convenience only and shall not be deemed to be a part hereof, or affect the construction or interpretation of any provision hereof. 16.7 Attorneys` Fees. Except as otherwise provided herein, in connection with enforcement of their respective rights hereunder, the parties shall each be entitled to any right or remedy available at law or in equity, and the prevailing party shall be entitled to reasonable attorneys' fees actually incurred in connection therewith. 16.8 Severability. If any provision of this Agreement is held invalid under any applicable statute or rule of law, such invalidity shall not affect the other provisions of this Agreement that can be given effect without the invalid provisions, and to this end the -14- provisions of this Agreement are declared severable. Notwithstanding the above, such invalid provision or clause shall be construed and enforced, to the extent possible, in accordance with the original intent of the parties. 16.9 Assignment. This Agreement may not be assigned to any party without the written consent of the other party hereto. 16.10 Recitals. The recitals herein are incorporated by this reference into this Agreement and shall bind the parties in accordance with their terms. 16.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. BARBARY COAST PEDI CAB LEASING CORPORATION By: /s/ Jeffrey Sears -------------------------------------------------- Jeffrey Sears Its: -------------------------------------------------- ZAPWORLD.COM By: /s/ Signature -------------------------------------------------- Its: -------------------------------------------------- SHAREHOLDER The Jeff Sears and Helena Sears Revocable Trust Dated January 3, 1997 By: /s/ Jeffrey Sears -------------------------------------------------- Jeffrey Sears, Trustee By: /s/ Helena Sears -------------------------------------------------- Helena Sears, Trustee -15- EX-10.7 16 0016.txt AGREEMENT AND PLAN OF REORGANIZATION Agreement and Plan of Reorganization By and Among ZAPWORLD.COM, Inc. and Aquatic Propulsion Technology, Inc. Dated as of July 1, 2000 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of June 15, 2000 among ZAPWORLD.COM, Inc., a California corporation doing business at 117 Morris Street, Sebastopol, California 95472 ("ZAPWORLD") and Aquatic Propulsion Technology, Inc., a Bahaman corporation doing business at 984 Southwest 13th Court, Pompano Beach, FL 33069 ("AQUATIC"). RECITALS A. ZAPWORLD and AQUATIC intend to effect a merger (the "Merger") of AQUATIC with and into ZAPWORLD in accordance with this Agreement and California General Corporation Law ("California Law"). Upon consummation of the Merger, AQUATIC will be merged into ZAPWORLD and AQUATIC will cease to exist. B. It is intended that the Merger qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). C. The Board of Directors of AQUATIC has: (i) determined that the Merger is consistent with and in furtherance of the long-term strategy of AQUATIC and is in the best interests of its Shareholders; (ii) approved this Agreement, the Merger and the other transactions contemplated by this Agreement; and (iii) recommended that the shareholders of AQUATIC adopt and approve the terms of this Agreement, the Merger, and the other transactions contemplated by this Agreement. D. The Shareholders of AQUATIC have approved this Agreement, the Merger and the other transactions contemplated by this Agreement. E. The Board of Directors of ZAPWORLD has approved this Agreement, the Merger and other transactions contemplated by this Agreement. AGREEMENT NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and California Law and in accordance with the applicable provisions of the general corporation law of the Bahamas, AQUATIC shall be merged with and into ZAPWORLD. After the merger, the separate corporate existence of AQUATIC shall cease and ZAPWORLD shall continue as the surviving corporation. The separate corporate existence of ZAPWORLD and all of its rights, privileges, immunities and franchises, public or private, and all its duties and liabilities as a corporation organized under California law, will continue unaffected by the merger. 1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 8.1, the closing of the Merger (the "Closing") will take place as promptly as practicable, but no later than one (1) business day following satisfaction or waiver of the conditions set forth in Article VI, at the law offices of Evers & Hendrickson, LLP, 155 Montgomery Street, 12th Floor, San Francisco, California 94104, unless another place or time is agreed to by ZAPWORLD and AQUATIC. The date upon which the Closing actually occurs is herein referred to as the "Closing Date." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing an Agreement of Merger, in substantially the form attached hereto as Exhibit A (the "Agreement of Merger"), with the Secretary of State of the State of California, in accordance with the relevant provisions of California Law (the time of acceptance by the Secretary of State of California of such filing being referred to herein as the "Effective Time"). The parties currently intend that the Closing Date will occur on or prior to July 3, 2000. Each of the parties hereto will use its best efforts to cause the merger to be consummated as soon as practicable following the fulfillment or waiver of the conditions specified in Article VI hereof. 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of California Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, power and franchises of AQUATIC shall vest in ZAPWORLD and all debts, liabilities and duties of AQUATIC shall become the debts, liabilities and duties of the ZAPWORLD. 1.4 Articles of Incorporation; Bylaws. The Articles of Incorporation and Bylaws of ZAPWORLD, as in effect immediately prior to the Effective Time, shall remain the Articles of Incorporation and Bylaws, respectively, of ZAPWORLD after the merger of AQUATIC into ZAPWORLD. 1.5 Directors and Officers. The officers and directors of AQUATIC shall no longer hold office immediately after the Effective Time, and the officers and directors of ZAPWORLD before the Effective Time shall be the respective officers and directors of ZAPWORLD after the Effective Time, each to hold office in accordance with the Articles of Incorporation and Bylaws of ZAPWORLD. 1.6 Effect of Merger on AQUATIC Capital Stock. At the Effective Time, all shares of AQUATIC capital stock ("AQUATIC Capital Stock") and any right to acquire any shares of AQUATIC Capital Stock, including any options or warrants issued and outstanding, whether or not vested, shall be cancelled and cease to exist. The owner of each share of AQUATIC Capital Stock will receive eighteen and sixty-five hundredths (18.65) shares of ZAPWORLD.COM common stock. 1.7 Effect of Merger on ZAPWORLD Common Stock. The shares of ZAPWORLD outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately thereafter and shall be unaffected by the transaction described herein. -2- 1.8 Aggregate Shares to be Issued. As consideration for the transactions described herein, ZAPWORLD shall issue to the holders of AQUATIC, shares of ZAPWORLD common stock (the "Common Stock") and twenty thousand dollars ($20,000) in cash to be used for payment toward existing liabilities prior to closing. The aggregate number of shares of Common Stock that ZAPWORLD shall issue to the holders of AQUATIC is one hundred twenty thousand (120,000). 1.9 Allocation and Fractional Shares. (a) Allocation. The allocation of shares of ZAPWORLD Common Stock set forth in this Agreement shall be adjusted to reflect the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into ZAPWORLD Common Stock), reorganization, recapitalization or other like change with respect to ZAPWORLD Common Stock occurring after the date hereof and prior to the Effective Time. (b) Fractional Shares. No fraction of a share of ZAPWORLD Common Stock will be issued at the Effective Time, but in lieu thereof, each holder of AQUATIC Stock who would otherwise be entitled to a fraction of a share of ZAPWORLD Common Stock (after aggregating all fractional shares of ZAPWORLD Common Stock to be received by such holder) shall be entitled to receive from ZAPWORLD an amount of cash (rounded to the nearest whole cent) equal to the product of: (i) such fraction, multiplied by; (ii) the average closing price of a share of ZAPWORLD Common Stock as reported on the Nasdaq Small Cap for the 30-day period ending three days prior to the Closing Date or, if any such day there are no sales reported, the average of the closing bid and ask prices for ZAPWORLD Common Stock reported on that date. 1.10 Surrender of Certificates . (a) Exchange Agent. The Corporate Secretary of ZAPWORLD shall serve as the exchange agent (the "Exchange Agent") in the Merger. (b) ZAPWORLD to Provide Common Stock. Promptly after the Effective Time, ZAPWORLD shall make available to the Exchange Agent for exchange in accordance with this Article I, and the aggregate number of shares of ZAPWORLD Common Stock issuable pursuant to Section 1.8, in exchange for all outstanding shares of AQUATIC Common Stock. (c) AQUATIC to Deliver all Its Outstanding Stock. Promptly after the Effective Time, AQUATIC shall deliver to the Exchange Agent all share certificates of AQUATIC Common Stock outstanding as of the Effective Time. 1.11 No Further Ownership Rights in AQUATIC Capital Stock. All shares of AQUATIC Common Stock issued shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of ZAPWORLD Common Stock, and after the Effective Time there shall be no further registration of transfers on the records of AQUATIC of shares -3- of AQUATIC Common Stock which were outstanding immediately prior to the Effective Time. 1.12 Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of AQUATIC shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of ZAPWORLD Common Stock, if any, as may be required pursuant to Section 1.9; provided, however, that ZAPWORLD may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against ZAPWORLD or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. 1.13 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest ZAPWORLD with full right, title and possession to all assets, property, rights, privileges, powers and franchises of AQUATIC, the officers and directors of the ZAPWORLD are fully authorized in the name of AQUATIC to take, and will take, all such lawful and necessary action. ARTICLE II REPRESENTATIONS/WARRANTIES OF AQUATIC AQUATIC hereby represents and warrants to ZAPWORLD, subject to the exceptions disclosed in the disclosure schedules supplied by the AQUATIC to ZAPWORLD, as follows: 2.1 Organization and Qualification. AQUATIC is a corporation duly organized, validly existing and in good standing under the laws of the Bahamas. AQUATIC has the corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. AQUATIC is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified or licensed would have a material adverse effect on the business, assets (including intangible assets), financial condition, results of operations or prospects of the AQUATIC. AQUATIC has delivered a true and correct copy of its Articles of Incorporation and Bylaws, each as amended to date, to ZAPWORLD. Exhibit B lists the Articles of Incorporation and Bylaws of AQUATIC, and all amendments thereto. Such Articles of Incorporation and Bylaws are in full force and effect. AQUATIC is not in violation of any of the provisions of its Articles of Incorporation or Bylaws. 2.2 Subsidiaries. AQUATIC does not have, and has never had, any subsidiaries or affiliated companies and does not otherwise own, and has never otherwise owned, directly or indirectly, any shares of capital stock or any equity, debt or similar interest in or any interest convertible, exchangeable or exercisable for any equity, debt or similar interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity. AQUATIC has not agreed, nor is AQUATIC obligated, to make or be bound -4- by any written, oral or other agreement, contract, sub-contract, commitment or undertaking of any nature, as of the date hereof or as may hereafter be in effect under which it may become obligated to make, any future investment in or capital contribution to any other entity. 2.3 AQUATIC Capital Structure. (a) Outstanding Stock. The authorized AQUATIC Capital Stock consists entirely of seven thousand (7,000) shares of No Par Common Stock, of which a total of 6,434 are issued and outstanding. The list of shares of AQUATIC Common Stock are now owned and held (and all of which at the Closing will be owned and held) by the list of shareholders in Exhibit "6/1/00." Other than the authorized shares listed above, and listed in Exhibit "1/1/00," there are no other, and there will be no other at Closing, authorized or outstanding shares of AQUATIC Capital Stock. No fractional shares of AQUATIC Capital Stock are, or will at Closing be, issued or outstanding. All issued and outstanding shares of AQUATIC Capital Stock have been duly authorized and validly issued, are fully paid and non-assessable, are not subject to any claim, lien, preemptive right, or right of rescission, and have been offered, issued, sold and delivered by AQUATIC (and, if applicable, transferred) in compliance with all registration or qualification requirements (or applicable exemptions therefrom) of all applicable securities laws, AQUATIC's Articles of Incorporation and other charter documents and all agreements to which AQUATIC is a party. (b) No Options, Warrants or Rights. There are no options, warrants, convertible or other securities, calls, commitments, conversion privileges, preemptive rights or other rights or agreements outstanding to purchase or otherwise acquire (whether directly or indirectly) any shares of AQUATIC's authorized but unissued Capital Stock or any securities convertible into or exchangeable for any shares of AQUATIC's Capital Stock or obligating AQUATIC to grant, issue, extend, or enter into, any such option, warrant, convertible or other security, call, commitment, conversion privilege, preemptive right or other right or agreement, and AQUATIC has no liability for any dividends accrued but unpaid. No person or entity holds or has any option, warrant or other right to acquire any issued and outstanding shares of AQUATIC's Capital Stock from any record or beneficial holder of AQUATIC's shares, with the exception of employee Ted Dixon as previously disclosed to ZAPWORLD. No shares of AQUATIC's Capital Stock are reserved for issuance under any stock purchase, stock option or other benefit plan. As a result of the Merger, ZAPWORLD will be the record and sole beneficial owner of all outstanding AQUATIC's Capital Stock and all rights to acquire or receive any AQUATIC's Capital Stock, whether or not such Capital Stock is outstanding. All options expire, if not exercised immediately prior to the Effective Time. (c) No Voting Arrangements or Registration Rights. There are no voting agreements, voting trusts, rights of first refusal or other restrictions (other than normal restrictions on transfer under applicable securities laws) applicable to any of the AQUATIC Capital Stock. AQUATIC is not under any obligation to register under the 1933 Act or otherwise any of its currently outstanding securities or any securities that may be subsequently issued. -5- 2.4 Authority. AQUATIC has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The requisite shareholder approval has been obtained in accordance with AQUATIC's bylaws, charter provisions and the regulatory requirements of the Bahamas. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of AQUATIC. AQUATIC's Board of Directors has approved the Merger and this Agreement. 2.5 No Conflict. The execution and delivery of this Agreement by the Company does not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "Conflict"): (i) any provision of the Articles of Incorporation or Bylaws of AQUATIC; or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to AQUATIC or its properties or assets. 2.6 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or commission ("Governmental Entity") or any third party (so as not to trigger any Conflict), is required by or with respect to AQUATIC in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for: (i) the filing of the Agreement of Merger with the California Secretary of State and (ii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws. 2.7 Unaudited Asset List. Schedule 2.7 of the Disclosure Schedule sets forth a true and correct list of AQUATIC's unaudited assets as of the Effective Time. Schedule 2.7 is complete and correct in all material respects. 2.8 Liabilities. As of the Effective Time, AQUATIC does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of any type, whether accrued, absolute, contingent, known or unknown, matured or unmatured (whether or not required to be reflected in financial statements in accordance with GAAP), except those listed in Schedule 2.8 (the "Liabilities"), and the convertible note in Schedule 2.81 (the "Note"). Five percent (5%) of the ZAPWORLD shares transferred to AQUATIC shareholders will be withheld in escrow for a period of 120 days to ensure that no material, undisclosed liabilities exist. The shares shall be withheld proportionately from each AQUATIC shareholder. For purposes of this paragraph, "material" shall mean undisclosed, aggregate liabilities in excess of five thousand dollars ($5,000). In the event undisclosed liabilities do not exceed five thousand dollars ($5,000), all escrowed shares shall immediately be released to the AQUATIC shareholders upon the expiration of the 120-day period. If undisclosed liabilities exceed five thousand dollars ($5,000), then an equivalent amount of escrowed shares shall be retained by ZAPWORLD and the balance of the shares shall be -6- released to AQUATIC shareholders. In addition, both John Englander and Tom Furbish, as evidenced in Exhibit C and Exhibit D, respectively, shall jointly and severally guarantee the material accuracy of the representation and warranties in this section 2, and specifically, this section 2.8. 2.9 No Changes. As of the Effective Time, there has not been, occurred or arisen any: (a) amendments or changes to the Articles of Incorporation or Bylaws of AQUATIC as listed in Exhibit B; (b) destruction of, damage to or loss of any material assets listed in Schedule 2.7; (c) split, combination or reclassification of any AQUATIC Capital Stock; (d) sale, lease, license or other disposition of any of the assets of AQUATIC listed in Schedule 2.7. 2.10 Tax and Other Returns and Reports. (a) Definition of Taxes. For the purposes of this Agreement, "Tax," or collectively "Taxes," means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. Except as set forth in Schedule 2.10, as of the Effective Time: (i) AQUATIC has prepared and filed all federal, state, local and foreign returns (collectively, "Returns"), estimates, information statements and reports required to be filed ("Returns") relating to any and all Taxes concerning or attributable to AQUATIC or its operations and such Returns are true and correct and have been completed in accordance with applicable law. (ii) AQUATIC has: (a) paid or accrued all Taxes it is required to pay or accrue; and (b) withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld as of that date. (iii) AQUATIC has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against AQUATIC, nor has AQUATIC executed any unexpired waiver of any statute of limitations on or extended the period for the assessment or collection of any Tax. -7- (iv) No audit or other examination of any Return of AQUATIC by any Tax authority is presently in progress, nor has AQUATIC been notified of any request for such an audit or other examination. (v) AQUATIC has no knowledge of any basis for the assertion of any claim relating or attributable to Taxes that, if adversely determined, would result in any Lien on the assets of AQUATIC. (vi) No adjustment or deficiency relating to any Return filed or required to be filed by AQUATIC has been proposed formally or, to the knowledge of AQUATIC, informally by any Tax authority to AQUATIC or any representative thereof. 2.11 Restrictions on Business Activities. There is no agreement (noncompete or otherwise), commitment, judgment, injunction, order or decree to which AQUATIC is a party or otherwise binding upon AQUATIC which has or reasonably would be expected to have the effect of either: (a) prohibiting or impairing in any material respect: (i) any material business practice of AQUATIC; (ii) any acquisition of property (tangible or intangible) by AQUATIC; or (iii) the conduct of business by AQUATIC. OR (b) after the consummation of the Merger, prohibiting or impairing in any material respect: (i) any material business practice of ZAPWORLD; (ii) any acquisition of property (tangible or intangible) by ZAPWORLD; or (iii) the conduct of business by ZAPWORLD. Without limiting the foregoing, AQUATIC has not entered into any agreement under which AQUATIC is restricted from selling, licensing or otherwise distributing any of its products or services to any class of customers, in any geographic area, during any period of time or in any segment of the market. -8- 2.12 Title to Properties; Absence of Liens and Encumbrances. (a) AQUATIC does not own any real property, nor has it ever owned any real property. Schedule 2.12 sets forth a list of all real property currently leased by AQUATIC, the name of the lessor and the date of the lease and each amendment thereto and, with respect to any current lease, the aggregate annual rental and/or other fees payable under any such lease. All such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). (b) AQUATIC has good and marketable title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens except that security interest retained by the Lashman Family Ltd. Partnership and evidenced by that certain security agreement dated this ____ day of June. (c) All facilities, machinery, equipment, fixtures, vehicles, and other properties owned or leased by AQUATIC are: (i) adequate for the conduct of the business of AQUATIC as currently conducted; and (ii) in good operating condition, regularly and properly maintained, subject to normal wear and tear and reasonably fit and usable for the purposes for which they are being used. 2.13 Intellectual Property. (a) Definitions. For all purposes of this Agreement, the following terms shall have the following respective meanings: (i) Technology" shall mean any or all of the following: (A) works of authorship including, without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, documentation, designs, files, net lists, records, data and mask works; (B) inventions (whether or not patentable), improvements and technology; (C) proprietary and confidential information, including technical data and customer and supplier lists, trade secrets and know how; (D) databases, data compilations and collections and technical data; (E) logos, trade names, trade dress, trademarks and service marks; (F) World Wide Web addresses, domain names and sites; (G) tools, methods and processes; and (H) all instantiations of the foregoing in any form and embodied in any media. (ii) Intellectual Property Rights" shall mean any or all of the following and all rights in, arising out of, or associated therewith: (A) all United States and foreign patents, utility models and applications therefor and all reissues, divisions, re-examinations, renewals, extensions, provisionals, continuations and continuations-in-part thereof and equivalent or similar rights anywhere in the world in inventions and discoveries including without limitation invention disclosures ("Patents"); (B) all trade secrets and other rights in know-how and confidential or proprietary information; (C) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the -9- world ("Copyrights"); (D) all industrial designs and any registrations and applications therefor throughout the world; (E) all rights in World Wide Web addresses and domain names and applications and registrations therefor; (F) all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world ("Trademarks"); (G) all computer software including all source code, object code, firmware, development tools, files, records and data, and all media on which any of the foregoing is recorded; and (H) any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world. (iii) AQUATIC Intellectual Property" shall mean any Technology and Intellectual Property Rights including AQUATIC Registered Intellectual Property Rights (as defined below) that are owned (in whole or in part) by or exclusively licensed to AQUATIC. (iv) Registered Intellectual Property Rights" shall mean all United States, international and foreign: (A) Patents, including applications therefore; (B) registered Trademarks, applications to register Trademarks, including intent-to-use applications, or other registrations or applications related to Trademarks; (C) Copyrights registrations and applications to register Copyrights; and (E) any other Technology that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public or private legal authority at any time. (b) Schedule 2.13 lists all Registered Intellectual Property Rights owned by, filed in the name of, or applied for, by AQUATIC and lists any proceedings or actions known to AQUATIC before any court, tribunal (including the United States Patent and Trademark Office (the "PTO") or equivalent authority anywhere in the world) related to any of AQUATIC's Registered Intellectual Property Rights or AQUATIC Intellectual Property. (c) There are no facts or circumstances that would render any AQUATIC Intellectual Property invalid or unenforceable. (d) Each item of AQUATIC Intellectual Property is free and clear of any Liens other than the Lashman Family Ltd. Partnership's security interest in the Patents. (e) All AQUATIC Intellectual Property will be fully transferable, alienable or licensable by ZAPWORLD without restriction and without payment of any kind to any third party except the Lashman Family Ltd. Partnership's Security Interest. (f) AQUATIC has not transferred ownership of, or granted any exclusive license of or exclusive right to use, any Technology or Intellectual Property Right. 2.14 Agreements, Contracts and Commitments. Except as set forth in Schedule 2.14, AQUATIC is not currently a party to nor is it currently bound by: (a) any employment or consulting agreement, contract or commitment with any officer, director, employee or member of AQUATIC's Board of Directors, other than those that are terminable by AQUATIC at will; -10- (b) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements; (c) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement; (d) any lease of personal property having a value individually in excess of $500; (e) any agreement of indemnification or guaranty; (f) any agreement, contract or commitment containing any covenant limiting in any respect the right of AQUATIC to engage in any line of business or to compete with any person or granting any exclusive distribution rights; (g) any agreement relating to capital expenditures and involving future payments in excess of $500; (h) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit; (i) any purchase order or contract involving $500 or more in total payments; (j) any construction contracts; (k) any dealer, distribution, joint marketing (excluding joint marketing agreements: (i) involving financial obligations or liabilities to AQUATIC; or (ii) that do not involve rights to sell AQUATIC Products to end-users), development, content provider, destination site or merchant agreement; (l) any agreement pursuant to which AQUATIC has advanced or loaned any amount to any shareholder of AQUATIC or any director, officer, employee or consultant; (m) any settlement agreement entered into since the AQUATIC's initial incorporation; or (n) any other agreement that involves five hundred dollars ($500) in total payment or more or is not cancelable without penalty within thirty (30) days. AQUATIC has not, and has not received notice that it has, breached, violated or defaulted under, any of the terms or conditions of any agreement, contract or commitment required to be set forth on Schedule 2.14. -11- 2.15 Change of Control Payments. Schedule 2.15 sets forth each plan or agreement pursuant to which any amounts may become payable (whether currently or in the future) to current or former officers, directors or employees of AQUATIC as a result of or in connection with the Merger. 2.16 Interested Party Transactions. Except as set forth in Schedule 2.16, to AQUATIC's knowledge, no officer, director or affiliate (as defined under Regulation C under the Securities Act) of AQUATIC (nor any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an economic interest), has or has had, directly or indirectly: (a) an economic interest in any entity that purchases from or sells or furnishes to, AQUATIC, any goods or services; or (b) a beneficial interest in any contract or agreement set forth in Schedule 2.14; provided, that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation shall not be deemed an "economic interest in any entity" for purposes of this Section 2.16. There are no receivables of AQUATIC owing by any director, officer, employee or consultant to AQUATIC (or any ancestor, sibling, descendant, or spouse of any such persons, or any trust, partnership, or corporation in which any of such persons has an economic interest). 2.17 Compliance with Laws. AQUATIC is not in material conflict with, or in default or violation in any material respect of any law, rule, regulation, order, judgment or decree applicable to AQUATIC or by which its properties is bound or affected. No investigation or review by any governmental or regulatory body or authority is pending or, to the knowledge of AQUATIC, threatened against AQUATIC. 2.18 Litigation. There is no action, suit or proceeding of any nature pending or to AQUATIC's knowledge threatened against AQUATIC, its properties or any of its officers, directors or employees. There is no investigation pending or, to AQUATIC's knowledge, threatened against AQUATIC, its properties or any of its officers, directors or employees by or before any Governmental Entity. 2.19 Insurance. With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of AQUATIC, there is no claim by AQUATIC pending under any of such policies or bonds as to which coverage has been denied or disputed by the underwriters of such policies or bonds. 2.20 Minute Books. The minute books of AQUATIC made available to ZAPWORLD are the only minute books of AQUATIC and contain an accurate summary of all meetings of directors (or committees thereof) and shareholders or actions by written consent since the time of incorporation of AQUATIC. 2.21 Environmental Matters. (a) For the purposes of this Section 2.21, "Environmental Claim" means any notice, claim, act, cause of action or investigation by any person alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out -12- of, based on or resulting from: (i) the presence, or release into the environment, of any hazardous materials; or (ii) any violation, or alleged violation, of any environmental laws. "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) or the protection of human health and worker safety, including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of hazardous materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous materials. "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic substances, radioactive and biological materials, asbestos-containing materials (ACM), hazardous substances, petroleum and petroleum products or any fraction thereof, excluding, however, hazardous materials contained in products typically used for office and janitorial purposes properly and safely maintained in accordance with Environmental Laws. (b) AQUATIC: (i) has obtained all applicable and material permits, licenses and other authorizations that are required under Environmental Laws; (ii) is in compliance with all material terms and conditions of such required permits, licenses and authorizations, and also is in compliance with all other material limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder; (iii) is not aware of and has not received notice of any event, condition, circumstance, activity, practice, incident, action or plan that is reasonably likely to interfere with or prevent continued compliance or that would give rise to any common law or statutory liability, or otherwise form the basis of any Environmental Claim with respect to AQUATIC or any person or entity whose liability for any Environmental Claim AQUATIC has retained or assumed either contractually or by operation of law; (iv) has not disposed of, released, discharged or emitted any Hazardous Materials into the soil or groundwater at any properties owned or leased at any time by AQUATIC, or at any other property, or exposed any employee or other individual to any Hazardous Materials or condition in such a manner as would result in any material liability or result in any corrective or remedial action obligation under Environmental Laws; and (v) has taken all actions necessary under Environmental Laws to register any products or materials required to be registered by AQUATIC (or any of its agents) thereunder. No Hazardous Materials are present in, on, or under any properties owned or leased at any time (including both land and improvements thereon) by AQUATIC so as to give rise to any liability or corrective or remedial obligation of AQUATIC under any Environmental Laws. 2.22 Brokers' and Finders' Fees. AQUATIC has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.23 Bank Accounts. Schedule 2.23 constitutes a full and complete list of all the bank accounts and safe deposit boxes of AQUATIC, the number of each such account or box, and the names of the persons authorized to draw on such accounts or to access such boxes. -13- 2.24 Indemnification Obligations. To AQUATIC's knowledge, there is no action, proceeding or other event pending against any officer or director of AQUATIC which would give rise to any indemnification obligation of AQUATIC to its officers and directors under its Articles of Organization, Bylaws or any agreement between AQUATIC and any of such officers or directors. ARTICLE III REPRESENTATIONS/WARRANTIES OF ZAPWORLD ZAPWORLD represents and warrants to AQUATIC as follows: 3.1 Organization of Parent and Merger Sub. ZAPWORLD is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 3.2 Authority. ZAPWORLD has all requisite corporate power and authority to enter into this Agreement and the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of ZAPWORLD. No vote of ZAPWORLD's stockholders is required with respect to this Agreement and the transactions contemplated thereby. 3.3 ZAPWORLD Common Stock. The shares of ZAPWORLD Common Stock to be issued pursuant to the Merger will, when issued and delivered in accordance with this Agreement, be duly authorized, validly issued, fully paid and non-assessable and will be issued in compliance with applicable federal and state securities laws; provided, however, that the ZAPWORLD Common Stock to be issued hereunder will be subject to restrictions on transfer under applicable federal and state securities laws. ARTICLE IV SECURITIES ACT COMPLIANCE; REGISTRATION 4.1 Securities Act Exemption. ZAPWORLD Common Stock to be issued pursuant to this Agreement initially will not be registered under the Securities Act in reliance on the exemptions from the registration requirements of Section 5 of the Securities Act set forth in Section 4(2) thereof and is exempt from registration under Section 25102(f) of the California Corporations Code. Prior to the Closing Date, each of AQUATIC's shareholders shall have provided ZAPWORLD such representations, warranties, certifications and additional information as ZAPWORLD may reasonably request to ensure the availability of such exemptions from the registration requirements of the Securities Act. 4.2 Stock Restrictions. In addition to any legend imposed by applicable state securities laws or by any contract which continues in effect after the Effective Time, the certificates representing the shares of ZAPWORLD Common Stock issued pursuant to this Agreement shall bear a restrictive legend (and stop transfer orders shall be placed against the transfer thereof with ZAPWORLD's transfer agent), stating substantially as follows: -14- THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH RULE 144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT, OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. 4.3 The Company Shareholders' Restrictions Regarding Securities Law Matters. Each shareholder of AQUATIC, by virtue of the Merger and the conversion into ZAPWORLD Common Stock of AQUATIC's Capital Stock held by such shareholder, shall be bound by the following provisions: (a) Such shareholder will not offer, sell, or otherwise dispose of any shares of ZAPWORLD Common Stock except in compliance with the Securities Act and the rules and regulations thereunder; and (b) Such shareholder will not sell, transfer or otherwise dispose of any shares of ZAPWORLD Common Stock unless: (i) such sale, transfer or other disposition is within the limitations of and in compliance with Rule 144 promulgated by the SEC under the Securities Act and the Shareholder furnishes ZAPWORLD with reasonable proof of compliance with such Rule; (ii) in the opinion of counsel, reasonably satisfactory to ZAPWORLD and its counsel, some other exemption from registration under the Securities Act is available with respect to any such proposed sale, transfer, or other disposition of ZAPWORLD Common Stock; or (iii) the offer and sale of ZAPWORLD Common Stock is registered under the Securities Act. ARTICLE V ADDITIONAL AGREEMENTS 5.1 Access to Information. AQUATIC shall afford ZAPWORLD and its accountants, legal counsel and other representatives reasonable access during normal business hours during the period prior to the Effective Time to: (a) all of the properties, books, contracts, commitments and records of AQUATIC; (b) all other information concerning the business, properties, and personnel of AQUATIC as ZAPWORLD may reasonably request; and (c) all key employees of AQUATIC as identified by ZAPWORLD. AQUATIC agrees to provide ZAPWORLD and its accountants, legal counsel and other representatives copies of internal financial statements promptly upon request. -15- 5.2 Confidentiality. All information not previously disclosed to the public which shall have been furnished by AQUATIC or ZAPWORLD to the other party shall not be disclosed prior to the Closing Date to any person other than the party's respective employees, legal counsel, and accountants, in confidence, or used for any purpose other than as contemplated herein without the prior written consent of the other party. 5.3 Consents. AQUATIC shall promptly apply for or otherwise seek and use reasonable commercial efforts to obtain all consents and approvals required to be obtained by it for the consummation of the Merger, including all consents, waivers or approvals under any of the Contracts which are necessary in order to preserve the benefits thereunder for ZAPWORLD, or otherwise in connection with the Merger. 5.4 Legal Conditions to the Merger. ZAPWORLD and AQUATIC will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger and will promptly cooperate with and furnish information to any other party hereto in connection with any such requirements imposed upon such other party in connection with the Merger ARTICLE VI CONDITIONS TO THE MERGER 6.1 Conditions to Obligations of AQUATIC. The obligations of AQUATIC to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the representations and warranties of ZAPWORLD contained in this Agreement. 6.2 Conditions to the Obligations of ZAPWORLD. The obligations of ZAPWORLD to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the representations and warranties of AQUATIC contained in this Agreement. ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES 7.1 Survival of Representations and Warranties. (a) All of AQUATIC's representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall terminate not later than 5:00 p.m., California time, the date which is one year following the Closing Date (the "Expiration Date"); provided, however, that the representations and warranties relating or pertaining to any Tax or Returns related to such Tax set forth in Section 2.10 hereof, shall survive until the expiration of all applicable statues of limitations, or extensions thereof, governing each Tax or Returns related to such Tax. -16- (b) All of ZAPWORLD's representations and warranties contained herein or in any instrument delivered pursuant to this Agreement shall terminate at the Effective Time. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.1 Termination. Except as provided in Section 8.2 below, this Agreement may be terminated and the Merger abandoned at any time prior to the Closing Date as follows: (a) by mutual written consent duly authorized by the Board of Directors of ZAPWORLD and AQUATIC; (b) by either ZAPWORLD or AQUATIC if: (i) the Closing Date has not occurred by July 3, 2000; (ii) there shall be a final non-appealable order of a federal or state court in effect preventing consummation of the Merger; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity that would make consummation of the Merger illegal; (c) by ZAPWORLD, if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger, by any Governmental Entity, which would: (i) prohibit ZAPWORLD's ownership or operation of any material portion of the business of AQUATIC; or (ii) compel ZAPWORLD to dispose of or hold separate, as a result of the Merger, any portion of the business or assets of AQUATIC; (d) by ZAPWORLD, if it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of AQUATIC and which has not been cured by AQUATIC within 30 days of receipt of notice of the breech; or (e) by AQUATIC if, it is not in material breach of its obligations under this Agreement and there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of ZAPWORLD. Where action is taken to terminate this Agreement pursuant to Section 8.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action. 8.2 Effect of Termination. Any termination of this Agreement under Section 8.1 above will be effective immediately upon the delivery of written notice of the terminating party and this Agreement shall forthwith become void and there shall be no liability on the part of either ZAPWORLD or AQUATIC, or their respective officers or directors (except as set forth in this Section 8.2). Nothing in this Section 8.2 shall relieve any party from liability for any breach of this Agreement. -17- 8.3 Amendment. Except as is otherwise required by applicable law, prior to the Closing, this Agreement may be amended by the parties hereto at any time only by execution of an instrument in writing signed by ZAPWORLD and AQUATIC and approved by the shareholders of the respective companies. 8.4 Extension; Waiver. At any time prior to the Effective Time, ZAPWORLD and AQUATIC may, to the extent legally allowed: (a) extend the time for the performance of any of the obligations of the other party hereto; (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE IX GENERAL PROVISIONS 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or at the time sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice), provided, however, that notices sent by mail will not be deemed given until received: (a) if to ZAPWORLD, to: ZAPWORLD.COM, Inc. 117 Morris Street Sebastopol, California 95472 Attention: Garry Starr, President Telephone:(707) 824-4150 Facsimile:(707) 824-4159 with a copy to: Evers & Hendrickson LLP 155 Montgomery Street, 12th Floor San Francisco, California 94104 Attention: William D. Evers, Esq. Telephone:(415) 772-8100 Facsimile:(415) 772-8101 -18- (b) if to AQUATIC, to: AQUATIC 984 Southwest 13th Court Pompano Beach, Florida 33069 Attention: John Englander Telephone:(954) 786-9991 with a copy to: Benson, Moyle & Mucci, LLP One Financial Plaza, Suite 1600 Ft. Lauderdale, Florida 33394 Attention: Mark J. Loterstein, Esq. Telephone:(954) 524-6800 Facsimile:(954) 463-6963 and a copy to: Frederick R. M. Smith, Esq. Callenders & Co., Suite C The Regent Centre East Regent Square PO Box F-40132 Freeport, Grand Bahama, Bahamas Telephone: (809) 352-7458 Facsimile: (809) 352-4000 9.2 Expenses. Each party will bear its respective expenses and legal fees incurred with respect to this Agreement, and the transactions contemplated hereby. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 9.4 Entire Agreement; Assignment. This Agreement, the schedules and Exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. 9.5 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. -19- 9.6 Arbitration. Any controversy between ZAPWORLD and AQUATIC involving the construction or application of any of the terms, provisions, or conditions of this Agreement shall, on the written request of either party served on the other, be submitted to mediation before a mediator suitable to both parties. If the parties fail to resolve any such controversy through mediation, such controversy shall, on the written request of either party served on the other, be submitted to arbitration. Arbitration shall comply with and be governed by the provisions of the California Arbitration Act. 9.7 Selection of Arbitrators. ZAPWORLD and AQUATIC shall each appoint one person to hear and determine the dispute. If the two persons so appointed are unable to agree, then those persons shall select a third impartial arbitrator whose decision shall be final and conclusive upon both parties. 9.8 Costs of Arbitration. The costs of arbitration shall be allocated to the losing party or in such proportions as the arbitrators decide. 9.9 Attorneys' Fees and Costs. If any legal action (including mediation and arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs, and necessary disbursements in addition to any other relief to which that party may be entitled. This provision shall be construed as applicable to the entire agreement. 9.10 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each of the parties hereto consents to the jurisdiction and venue of the federal and state courts for San Francisco, California for purposes of any action arising out of this Agreement, and agrees that process may be served upon them in any manner authorized by this Agreement for delivery of notices, and waives any covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 9.11 Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. (THIS SPACE INTENTIONALLY LEFT BLANK) -20- WITNESS WHEREOF, ZAPWORLD and AQUATIC have caused this Agreement to be signed by their duly authorized respective officers as of the date first written above. ZAPWORLD.COM, Inc. By: /s/ Gary Starr ---------------------------- Name: Gary Starr Dated:__________________ Title: CEO By: /s/ William D. Evers ---------------------------- Name: William D. Evers Dated:__________________ Title: Assistant Secretary AQUATIC PROPULSION TECHNOLOGY, INC. By: /s/ John Englander ---------------------------- Name: John Englander Dated:__________________ Title: President By: /s/ Tom Furbish ---------------------------- Name: Tom Furbish Dated:__________________ Title: Secretary INDEX OF EXHIBITS Exhibit Description - --------------- -------------------------------------------------- Exhibit A Agreement of Merger Exhibit B Articles of Incorporation and Bylaws of Aquatic Propulsion Technology, Inc. Exhibit C Guaranty of John Englander Exhibit D Guaranty of Tom Furbish Exhibit A: Agreement of Merger Exhibit B: Articles of Incorporation and Bylaws of AQUATIC Previously provided under Tab #1 of the "AQUATIC Due Diligence Materials" loose-leaf binder dated May 23, 2000: INDEX OF SCHEDULES Schedule Description 2.7 Unaudited Asset List of Aquatic Propulsion Technology, Inc. 2.8 Liabilities 2.10 Tax Payments 2.12 Real Property Leases 2.13 Intellectual Property Rights 2.14 Agreements, Contracts and Commitments 2.15 Change of Control Payments 2.16 Interested Party Transactions 2.23 Bank Accounts Schedule 2.7 Unaudited List of Assets - AQUATIC A. Aggregate Valuations of Assets were recently provided by means of Combined Balance Sheet in Financial Statements dated April 30, 2000. B. By June 21, 2000 APT will provide ZAPWORLD with a detailed list of furniture, fixtures, and equipment. C. On June 30, an inventory of product, work in production, and production components will be taken, certified by a CPA. This will be provided to ZAPWORLD upon completion. [Balance of Page intentionally left blank.] Schedule 2.8 Liabilities 1. The liabilities of APT are those trade payables and notes represented on the monthly Financial Statements, which have been provided to ZAPWORLD.COM during the course of the merger discussions. 2. A detailed listing of all accounts payable will be presented as of June 30, 2000 as soon as it is available. APT warrants that there is nothing unusual that has arisen since the last information provided to ZAPWORLD, and that the changes in payables are merely the additions and deletions in accordance with the normal course of business. 3. The only guarantee APT, is that relating to the Lashman Family note which is being assumed directly by ZAPWORLD.COM. [Balance of Page intentionally left blank.] Schedule 2.10 Tax Payments 1. APT has not made any domestic retail sales and therefore has not paid Florida Sales tax or the Florida battery disposal tax. (These were all handled through the related company Marine Marketing, LC which is not being acquired.) 2. APT has made all appropriate payroll related tax payments. 3. APT began business during July 1999. Although the company showed a loss for 1999, that return has not yet been filed with the IRS. We filed for an extension to file the IRS #1120F. [Balance of Page intentionally left blank.] Schedule 2.12 Real Property Leases The only lease is on the premises at 984 13th Court, Pompano Beach, Florida. A copy of the lease was provided to ZAPWORLD under Tab #23 of the "AQUATIC Due Diligence Materials" loose-leaf binder dated May 23, 2000. [Balance of Page intentionally left blank.] Schedule 2.13 Intellectual Property Rights The IP is documented under Tab #24 of the "AQUATIC Due Diligence Materials" loose-leaf binder dated May 23, 2000. As background, these assets were acquired as part of the Purchase Agreement between APT and MODE Industries, Inc. dated July 2, 1999. This document can be found under Tab #12 of the above referenced material. [Balance of Page intentionally left blank.] Schedule 2.14 Agreements, Contracts and Commitments b) The only employment agreements in force are with Tom Furbish and Ted Dixon. Documentation of Dixon's agreement was provided under Tab #7 of the "Marine Marketing, LC Due Diligence Materials" loose-leaf binder dated May 23, 2000. The only commitment to any APT Board member is the 6-month compensation agreement with "Englander & Associates, Inc." dated May 17, 2000. this was provided under Tab #11 of the "AQUATIC Due Diligence Materials" loose-leaf binder dated May 23, 2000. c) As part of his initial hiring, Tom Furbish was offered a potential 10% bonus on his salary, although this was neither formula-based, nor included in any written contract. It was explained that this was to be solely at the company's discretion. e) The only guaranty is that covering the note to the Lashman Family Limited Partnership, subject to execution by ZAPWORLD.COM. k) The dealer/distributor agreements were generally provided under Tab #16 of the "AQUATIC Due Diligence Materials" loose-leaf binder dated May 23, 2000: Specifically they can be summarized as: 1. World Rides International: Costa Rica 2. GMH Motorbikes, Ltd. (John Zenios): Cypress 3. Maverick Enterprises, Inc.: Non-exclusive web marketing 4. Peter Bailey of Guam for private label pink dolphins. Noformal contract or special pricing. Correspondence via e-mail only. 5. Sales commission override agreement with Tom Loeb of Ledbetter Sales, Inc. for 7%. Verbal agreement only, without specified duration. Schedule 2.15 Change of Control Payments The only payment made to a former Officer or Director of APT is the previously disclosed 6-month agreement with John Englander & Associates, Inc. dated May 17. This actually preceded the merger and was agreed by the shareholders of that date as compensation for Englander's efforts leading up to the merger, its execution, and follow up involvement as necessary. [Balance of Page intentionally left blank.] Schedule 2.16 Interested Party Transactions There are no interested party transactions that will survive the merger. Previously the shareholders of APT were all involved in a related distribution company, Marine Marketing, LC for non-exclusive marketing of APT products. In accordance with the merger discussions with ZAPWORLD, it was agreed that Marine Marketing will be put into dissolution. Based upon the proposed merger, all sales have been put through APT, effective June 1, 2000. [Balance of Page intentionally left blank.] Schedule 2.23 Bank Accounts 1. The company has only one account with First Union National Bank, with head office in Jacksonville, Florida. The account is: #2090002778814. 2. In addition, the company has funds in a money market account pledged as security against the real estate lease with Charles Grogan. The account is: #2000007401671. [Balance of Page intentionally left blank.] EX-10.8 17 0017.txt AGREEMENT OF MERGER AGREEMENT OF MERGER OF ZAPWORLD.COM (a California corporation) AND AQUATIC PROPULSION TECHNOLOGY, INC. (a Bahamian corporation) - -------------------------------------------------------------------------------- THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of July 1, 2000 by and between Zapworld.com, a California corporation doing business at 117 Morris Street, Sebastopol, California 95472 ("Zapworld") and Aquatic Propulsion Technology, Inc., a Bahamian corporation doing business at 984 Southwest 13th Court, Pompano Beach, FL 33069 ("Aquatic Propulsion"). WHEREAS, the respective Boards of Directors of Zapworld and Aquatic Propulsion, in light of, and subject to, the terms and conditions in that certain Agreement and Plan of Reorganization, dated July 1, 2000, between Zapworld and Aquatic Propulsion (the "Reorganization Agreement"), deem it advisable and in the best interests of each of such corporations and their respective shareholders that Aquatic Propulsion be merged with and into Zapworld. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, and intending to be legally bound hereby, Zapworld and Aquatic Propulsion hereby agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and California Law, Aquatic Propulsion shall be merged with and into Zapworld. After the merger, the separate corporate existence of Aquatic Propulsion shall cease and Zapworld shall continue as the surviving corporation. 1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 9.1 of the Agreement & Plan of Reorganization, the closing of the Merger (the "Closing") will take place as promptly as practicable, but no later than one (1) business day following satisfaction or waiver of the conditions set forth in Article VI of the Agreement & Plan of Reorganization, at the law offices of Evers & Hendrickson, LLP, 155 Montgomery Street, 12th Floor, San Francisco, California 94104, unless another place or time is agreed to by Zapworld and Aquatic Propulsion. The date upon which the Closing actually occurs is herein referred to as the "Closing Date." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing this Agreement with the Secretary of State of the State of California, in accordance with the relevant provisions of California Law (the time of acceptance by the Secretary of State of California of such filing being referred to herein as the "Effective Time"). The parties currently intend that the Closing Date will occur on or prior to July 1, 2000. 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of California Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, power and franchises of Aquatic Propulsion shall vest in Zapworld and all debts, liabilities and duties of Aquatic Propulsion shall become the debts, liabilities and duties of the Zapworld. 1.4 Articles of Incorporation; Bylaws. The Articles of Incorporation and Bylaws of Zapworld, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation and Bylaws, respectively, of Zapworld after the merger of Aquatic Propulsion into Zapworld. 1.5 Directors and Officers. The officers and directors of Aquatic Propulsion shall no longer hold office immediately after the Effective Time, and the officers and directors of Zapworld before the Effective Time shall be the respective officers and directors of Zapworld after the Effective Time, each to hold office in accordance with the Articles of Incorporation and Bylaws of Zapworld. 1.6 Effect of Merger on Aquatic Propulsion Capital Stock. At the Effective Time, all shares of Aquatic Propulsion capital stock ("Aquatic Propulsion Capital Stock") and any right to acquire any shares of Aquatic Propulsion Capital Stock, including any options or warrants issued and outstanding, whether or not vested, shall cease to exist. 1.7 Effect of Merger on Zapworld Common Stock. The shares of Zapworld outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately thereafter and shall be unaffected by the transaction described herein. 1.8 Aggregate Shares to be Issued. As consideration for the transactions described herein, Zapworld shall issue to the holders of Aquatic Propulsion, shares of Zapworld common stock ("Zapworld Common Stock"). The aggregate number of shares of Zapworld Common Stock that Zapworld shall issue to the holders of Aquatic Propulsion is one hundred twenty thousand (120,000). 1.9 Allocation and Fractional Shares. (a) Allocation. The allocation of shares of Zapworld Common Stock set forth in this Agreement shall be adjusted to reflect the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Zapworld Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Zapworld Common Stock occurring after the date hereof and prior to the Effective Time. (b) Fractional Shares. No fraction of a share of Zapworld Common Stock will be issued at the Effective Time, but in lieu thereof, each holder of Aquatic Propulsion Stock who would otherwise be entitled to a fraction of a share of Zapworld Common Stock -2- (after aggregating all fractional shares of Zapworld Common Stock to be received by such holder) shall be entitled to receive from Zapworld an amount of cash (rounded to the nearest whole cent) equal to the product of: (i) such fraction, multiplied by; (ii) the average closing price of a share of Zapworld Common Stock as reported on the OTC Bulletin Board for the 30-day period ending three days prior to the Closing Date or, if any such day there are no sales reported, the average of the closing bid and ask prices for Zapworld Common Stock reported on that date. 1.10 Surrender of Certificates. (a) Exchange Agent. The Corporate Secretary of Zapworld shall serve as the exchange agent (the "Exchange Agent") in the Merger. (b) Zapworld to Provide Common Stock. Promptly after the Effective Time, Zapworld shall make available to the Exchange Agent for exchange in accordance with this Article I, a valid check in the amount of $20,000 and the aggregate number of shares of Zapworld Common Stock issuable pursuant to Section 1.8, in exchange for all outstanding shares of Aquatic Propulsion Common Stock. (c) Aquatic Propulsion to Deliver all Its Outstanding Stock. Promptly after the Effective Time, Aquatic Propulsion shall deliver to the Exchange Agent all share certificates of Aquatic Propulsion Common Stock outstanding as of the Effective Time. 1.11 No Further Ownership Rights in Aquatic Propulsion Capital Stock. All shares of Aquatic Propulsion Common Stock issued shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Zapworld Common Stock, and after the Effective Time there shall be no further registration of transfers on the records of the Aquatic Propulsion of shares of Aquatic Propulsion Common Stock which were outstanding immediately prior to the Effective Time. 1.12 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest Zapworld with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Aquatic Propulsion, the officers and directors of Zapworld are fully authorized in the name of Aquatic Propulsion to take, and will take, all such lawful and necessary action. ARTICLE II MISCELLANEOUS 2.1 Termination of Agreement and Plan of Reorganization. Notwithstanding the approval of this Agreement by the shareholders of Aquatic Propulsion, this Agreement shall terminate forthwith in the event that the Reorganization Agreement shall be terminated as therein provided. -3- 2.2 Amendment. This Agreement shall not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 2.3 Counterparts. 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 agreement. 2.4 Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect by the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Agreement. Zapworld.com By: /s/ Gary Starr Name: Gary Starr Title: President By: /s/ William Evers Name: William Evers Title: Assistant Secretary Aquatic Propulsion Technology, Inc. By: /s/ John Englander Name: John Englander Title: President By: /s/ Tom Furbish Name: Tom Furbish Title: Secretary -4- EX-10.9 18 0018.txt AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG Zapworld.com, Inc. emPower Acquisition, Inc. AND EMPower Corporation Dated as of December 17, 1999 CONFIDENTIAL INDEX OF EXHIBITS Exhibit Description ------------------------------------------------------------------ Exhibit A Form of Agreement of Merger Exhibit B Priority and Exchange Ratio for Each Class/Series of Company Stock Exhibit C Warrants Exhibit D Form of Legal Opinion of Counsel to the Parent Exhibit E Form of Legal Opinion of Counsel to the Company CONFIDENTIAL INDEX OF SCHEDULES Schedule Description 2 Disclosure Schedule 2.3(a) Shareholder List 2.3(b) Option and Warrant Holder List 2.5 Conflicts 2.6 Governmental and Third Party Consents 2.7 Company Financials 2.8 Undisclosed Liabilities 2.9 No Changes 2.10(b) Tax Returns and Audits 2.12(a) Leased Real Property 2.12(b) Liens on Property 2.13 Government Authorizations 2.14(b) Registered Intellectual Property Rights 2.14(f) Intellectual Property In-Licenses 2.14(h) Form of Proprietary Information, Confidentiality and Assignment Agreement 2.14(i) Third-Party Ownership Rights to Licensed Technology or Intellectual Property 2.14(k) Intellectual Property Obligations 2.15 Product Warranties and Standard Forms of Agreements 2.16(a) Agreements, Contracts and Commitments 2.16(b) Breaches 2.17 Change of Control Payments 2.18 Interested Party Transactions 2.20 Litigation 2.21 Insurance 2.24 Brokers/Finders Fees 2.25(b) Employee Benefit Plans and Employees 2.25(d) Employee Plan Compliance 2.25(g) Post-Employment Obligations 2.25(i)(i) Effect of Transaction 2.25(i)(ii) Excess Parachute Payments 2.25(j) Officers, Directors and Employees 2.25(k) Labor 2.27 Bank Accounts 2.30 Unaccredited and Unsophisticated Shareholders 2.31(a) Converted Creditors Consent 2.31(b) Acceptance of Partial Payment in Exchange for Debt 2.6 Consent and Approval of Merger 8.2 Escrow Schedule -ii- TABLE OF CONTENTS Page THE MERGER....................................................................1 The Merger...........................................................1 Effective Time.......................................................2 Effect of the Merger.................................................2 Articles of Organization; Bylaws.....................................2 Directors and Officers...............................................2 Effect of Merger on Company Capital Stock............................2 Effect of Merger on Merger Sub Common Stock..........................3 Aggregate Shares to be Issued........................................3 Allocation of Shares.................................................3 Dissenters' Rights...................................................5 Surrender of Certificates............................................5 No Further Ownership Rights in Company Capital Stock.................7 Lost, Stolen or Destroyed Certificates...............................7 Tax Consequences.....................................................7 Taking of Necessary Action; Further Action...........................7 REPRESENTATIONS/WARRANTIES OF THE COMPANY.....................................8 Organization and Qualification.......................................8 Subsidiaries.........................................................8 Company Capital Structure............................................8 Authority............................................................9 No Conflict.........................................................10 Consents 10 Company Financial Statements........................................10 No Undisclosed Liabilities..........................................10 No Changes..........................................................11 Tax and Other Returns and Reports...................................13 Restrictions on Business Activities.................................14 Title to Properties; Absence of Liens and Encumbrances..............15 Governmental Authorization..........................................16 Intellectual Property...............................................16 Product Warranties; Defects; Liabilities............................20 Agreements, Contracts and Commitments...............................20 Change of Control Payments..........................................22 Interested Party Transactions.......................................22 Compliance with Laws................................................23 Litigation..........................................................23 Insurance...........................................................23 Minute Books........................................................23 -i- Environmental Matters...............................................23 Brokers' Fees.......................................................24 Employee Matters and Benefit Plans..................................24 Hart-Scott-Rodino Act...............................................29 Bank Accounts.......................................................29 Indemnification Obligations.........................................29 Board Approval......................................................29 Shareholder Sophistication or Accredited Status.....................29 Creditor Consents...................................................29 Representations Complete............................................29 REPRESENTATIONS/WARRANTIES OF PARENT AND MERGER SUB..........................30 Organization of Parent and Merger Sub...............................30 Authority...........................................................30 Parent Common Stock.................................................31 SEC Filings; Parent Financial Statements............................31 No Material Adverse Change..........................................32 Litigation..........................................................32 Brokers' Fees.......................................................32 SECURITIES ACT COMPLIANCE; REGISTRATION......................................32 Securities Act Exemption............................................32 Stock Restrictions..................................................32 The Company Shareholders' Restrictions Regarding Securities Law Matters................................. ..........33 CONDUCT PRIOR TO THE EFFECTIVE TIME..........................................33 Conduct of Business of the Company..................................33 Notices 36 No Solicitation.....................................................36 ADDITIONAL AGREEMENTS........................................................37 Shareholder Approval................................................37 Access to Information...............................................37 Confidentiality.....................................................37 Public Disclosure...................................................38 Consents 38 FIRPTA Compliance...................................................38 Legal Conditions to the Merger......................................38 Best Efforts; Additional Documents and Further Assurances...........38 Notification of Certain Matters.....................................39 Reorganization......................................................39 Blue Sky Laws.......................................................39 Indemnification.....................................................39 Termination of Company Investor Rights..............................40 401(k) Plan.........................................................40 Raising of Additional Capital.......................................40 -ii- CONDITIONS TO THE MERGER.....................................................40 Conditions to Obligations of Each Party to Effect the Merger........40 Additional Conditions to Obligations of the Company.................41 Additional Conditions to the Obligations of Parent and Merger Sub....................................... .......................42 Consents/Covenants from Creditors...................................43 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW...........................43 Survival of Representations and Warranties..........................43 Escrow Arrangements.................................................43 TERMINATION, AMENDMENT AND WAIVER............................................51 Termination.........................................................51 Effect of Termination...............................................52 Amendment...........................................................52 Extension; Waiver...................................................52 GENERAL PROVISIONS...........................................................52 Notices 52 Expenses 54 Interpretation......................................................54 Counterparts........................................................54 Entire Agreement; Assignment........................................54 Severability........................................................54 Other Remedies......................................................54 Governing Law.......................................................55 Rules of Construction...............................................55 Specific Performance................................................55 Miscellaneous.......................................................55 -iii- AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of December __, 1999 among Zapworld.com, Inc. ("Zapworld") a California corporation doing business at 117 Morris Street, Sebastopol, California 95472 ("Parent"), emPower Acquisition, Inc., a California corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), and EMPower Corporation, a Massachusetts corporation ("EMPower") doing business at 210 Broadway, Building 3, 3rd Floor, Everett, Massachusetts 02149 (the "Company"). RECITALS A. Parent, Merger Sub and the Company intend to effect a merger (the "Merger") of Merger Sub with and into the Company in accordance with this Agreement, the California General Corporation Law ("California Law") and the Massachusetts Business Corporation Law ("Massachusetts Law"). Upon consummation of the Merger, the Company will be merged into the Merger Sub and the Company will cease to exist. B. It is intended that the Merger qualify as a tax-free reorganization within the meaning of Section 368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code"). C. The Board of Directors of the Company has: (i) determined that the Merger is consistent with and in furtherance of the long-term strategy of the Company and fair to, and in the best interests of, the Company and its shareholders; (ii) approved this Agreement, the Merger and the other transactions contemplated by this Agreement; and (iii) determined to recommend that the shareholders of the Company adopt and approve the principal terms of this Agreement and approve the Merger. D. The respective Boards of Directors of Parent and Merger Sub have approved this Agreement and the Merger. AGREEMENT NOW, THEREFORE, in consideration of the covenants, promises and representations set forth herein, and for other good and valuable consideration, intending to be legally bound hereby the parties agree as follows: ARTICLE I THE MERGER 1.1 The Merger. At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement, California Law and Massachusetts Law, Merger Sub shall be merged with and into the Company, the separate corporate existence of the Company shall cease and the Merger Sub shall continue as the surviving corporation and as a wholly-owned subsidiary of Parent. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." -1- 1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to Section 9.1, the closing of the Merger (the "Closing") will take place as promptly as practicable, but no later than one (1) business day following satisfaction or waiver of the conditions set forth in Article VII, at the law offices of Evers & Hendrickson, LLP, 155 Montgomery Street, 12th Floor, San Francisco, California 94104, unless another place or time is agreed to by Parent and the Company. The date upon which the Closing actually occurs is herein referred to as the "Closing Date." On the Closing Date, the parties hereto shall cause the Merger to be consummated by filing an Agreement of Merger, in substantially the form attached hereto as Exhibit A (the "Agreement of Merger"), with the Secretary of State of the State of California, in accordance with the relevant provisions of California Law (the time of acceptance by the Secretary of State of California of such filing being referred to herein as the "Effective Time") and with the Secretary of State of the Commonwealth of Massachusetts in accordance with the relevant provisions of Massachusetts Law. The parties currently intend that the Closing Date will occur on or prior to December 31, 1999. 1.3 Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of California Law and Massachusetts Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the property, rights, privileges, power and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. 1.4 Articles of Organization; Bylaws (a) Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time, the Articles of Organization of the Merger Sub shall be the Articles of Organization of the Surviving Corporation until thereafter amended as provided by law and such Articles. (As used in this Agreement, "Articles of Organization" shall mean the Articles of Organization and/or the Articles of Incorporation). (b) The Bylaws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation until thereafter amended. 1.5 Directors and Officers. The directors of Surviving Corporation immediately after the Effective Time shall be the directors of the Merger Sub, each to hold office in accordance with the Articles of Organization and Bylaws of the Surviving Corporation. The officers of Surviving Corporation immediately after the Effective Time shall be the officers of the Merger Sub, each to hold office in accordance with the Bylaws of the Surviving Corporation. 1.6 Effect of Merger on Company Capital Stock. At the Effective Time, all shares of Company Capital Stock ("Company Capital Stock") and any right to acquire any shares of Company Capital Stock, including any options or warrants issued and outstanding, whether or not vested, shall cease to exist. The Company's Series B Preferred Stock, $0.001 par value ("Series B Preferred Stock"), and each share of the Series D Preferred Stock, $0.001 par -2- value ("Series D Preferred Stock"), shall become a right to receive shares of Parent Common Stock as provided in Section 1.9 below. 1.7 Effect of Merger on Merger Sub Common Stock. The shares of Merger Sub outstanding immediately prior to the Effective Time shall remain issued and outstanding immediately thereafter and shall be unaffected by the transaction described herein. 1.8 Aggregate Shares to be Issued. As consideration for the transactions described herein, Parent shall issue to the holders of Series B Preferred Stock and Series D Preferred Stock and certain creditors (the "Converted Creditors") of the Company shares of Parent Common Stock. The aggregate number of shares that Parent shall be obligated to issue shall equal the following: T = 525,000 x (5.75/A) Where: T = the total number of shares of Parent Common Stock to be issued. A = the average of the daily closing sales price per share of Parent Common Stock, as quoted on the OTC Bulletin Board, during the ten (10) trading days prior to the Closing, or, if any such day there are no sales reported, the average of the closing bid and ask prices for Parent Common Stock reported on that date. If any of the Company's shareholders demand and perfect their dissenter's rights, the aggregate number of shares of Parent Common Stock to be issued shall be reduced by the number of shares that would have been issued to that shareholder if he, she or it had not demanded and perfected dissenter's rights. 1.9 Allocation of Shares. The shares of Parent Common Stock to be issued pursuant to Section 1.8 shall be allocated among the Converted Creditors and holders of Series B Preferred Stock and Series D Preferred Stock in the manner described in Exhibit B to this Agreement. Each such shareholder shall be entitled to receive a percentage of Parent Common Stock to be allocated to the holder of such series of stock equal to the percentage of the outstanding shares of that series which the shareholder owns. Each Converted Creditor shall be entitled to receive a percentage of the Parent Stock to be allocated to the creditors equal to that set forth in Exhibit B. Holders of Company Common Stock, $0.001 par value ("Company Common Stock"), shall receive no consideration for the cancellation of the Company Common Stock in this Merger. (a) Reduction in Purchase Price - Liabilities. If total liabilities of Company exceed $25,000 as of the Closing Date (excluding claims of the Converted Creditors which are forgiven as of the Closing Date in exchange for receipt of Parent Common Stock), after reduction for all liabilities that have been agreed to be paid in Parent Company Stock or product, the total number of shares of Parent Common Stock issuable will be reduced by one (1) share for each $5.75 by which those liabilities exceed $25,000. -3- (b) Term of Warrants. In addition to the shares of Parent Common Stock, at the Effective Time, the Warrants to purchase an aggregate of 200,000 shares of Parent Common Stock shall be issued to the holders of Series B Preferred Stock and certain managers of the Company in the manner set forth in Exhibit B to this Agreement. The Warrants shall have an exercise price of $5.75 per share (subject to antidilution adjustments). The Warrants shall be in the form attached hereto as Exhibit C and allocated in the manner described in Exhibit B. The Warrants shall be exercisable beginning upon issuance and continuing until expiration, three (3) years after issuance. (c) Escrow. Parent Common Stock to be issued at the Effective Time pursuant to Section 1.9(a) and (b) hereof (none of which shares of Parent Common Stock shall be unvested, subject to any right of repurchase, risk of forfeiture or other condition in favor of the Surviving Corporation) with a value of $100,000 shall be withheld from the holders of the Series B Preferred Stock and the Series D Preferred Stock and placed in escrow (the "Escrow Amount") pursuant to Article VIII of this Agreement. If claims are made against Parent based on a breach of the representations and warranties by the Company, Parent may apply the shares held in escrow to satisfy these claims. To the extent that claims are not made against the shares held in escrow, Parent Common Stock with a value of $50,000 will be released six (6) months after the Closing Date, and the remainder will be released one (1) year after the Closing Date. This escrow shall not be the only remedy available to Parent for a breach of the representations and warranties made by the Company. For the purpose of this subsection, the value per share shall be deemed to equal the average of the daily closing sales prices per share of Parent Common Stock, as quoted on the OTC Bulletin Board, Nasdaq or any national securities exchange during the ten (10) trading days prior to which the value of the Parent Common Stock is being calculated or, if any such day there are no sales reported, the average of the closing bid and ask prices for Parent Common Stock reported on that date. (d) Cancellation of Parent-Owned and Company-Owned Stock. Each share of Company Capital Stock owned by Merger Sub, Parent, the Company or any direct or indirect wholly-owned subsidiary of Parent or of the Company immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof. (e) Adjustments to Allocation of Shares. The allocation of shares of Parent Common Stock set forth in Exhibit B to this Agreement shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Stock or Company Capital Stock), reorganization, recapitalization or other like change with respect to Parent Common Stock or Company Capital Stock occurring after the date hereof and prior to the Effective Time. (f) Fractional Shares. No fraction of a share of Parent Common Stock will be issued at the Effective Time, but in lieu thereof, each holder of Series B Preferred Stock and Series D Preferred Stock who would otherwise be entitled to a fraction of a share of Parent Common Stock (after aggregating all fractional shares of Parent Common Stock to be received by such holder) shall be entitled to receive from Parent an amount of cash (rounded to the nearest whole cent) equal to the product of: (i) such fraction, multiplied by; (ii) the average closing price of a share of Parent Common Stock as reported on the OTC Bulletin -4- Board for the 30-day period ending three days prior to the Closing Date or, if any such day there are no sales reported, the average of the closing bid and ask prices for Parent Common Stock reported on that date. 1.10 Dissenters' Rights (a) Notwithstanding any provision of this Agreement to the contrary, any shares of Company Capital Stock held by a holder who has demanded and perfected dissenters' rights for such shares in accordance with Mass. Gen. L. Ann., Ch. 156 and Ch. 156B and who, as of the Effective Time, has not effectively withdrawn or lost such appraisal or dissenters' rights ("Dissenting Shares"), shall not be converted into or represent a right to receive Parent Common Stock pursuant to Section 1.9, but the holder thereof shall only be entitled to such rights as are granted by Massachusetts Law. (b) Notwithstanding the provisions of Section 1.9, if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) his or her appraisal rights, then, as of the later of the Effective Time and the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive the consideration for Parent Common Stock as provided in Sections 1.9(a) and (b), as the case may be, without interest thereon, upon surrender of the certificate representing such shares. (c) The Company shall give Parent: (i) prompt notice of any written demands for appraisal of any shares of Company Capital Stock, withdrawals of such demands, and any other instruments served pursuant to Massachusetts Law and received by the Company; and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent or as required by Massachusetts Law, voluntarily make any payment with respect to any such demands or offer to settle or settle any such demands. 1.11 Surrender of Certificates (a) Exchange Agent. The Corporate Secretary of Parent shall serve as exchange agent (the "Exchange Agent") in the Merger. (b) Parent to Provide Common Stock. Promptly after the Effective Time, Parent shall make available to the Exchange Agent for exchange in accordance with this Article I, the aggregate number of shares of Parent Common Stock issuable pursuant to Section 1.8 and the Agreement of Merger in exchange for outstanding shares of Series B Preferred Stock and Series D Preferred Stock; provided, however, that, on behalf of the holders of Series B Preferred Stock and Series D Preferred Stock, and pursuant to Article VIII hereof, Parent shall deposit into an escrow account a number of shares of Parent Common Stock equal to the Escrow Amount out of the aggregate number of shares of Parent Common Stock otherwise issuable pursuant to Section 1.8. The portion of the Escrow Amount contributed on behalf of each holder of Series B Preferred Stock and Series D Preferred Stock shall be in proportion to the aggregate number of shares of Parent Common Stock which such holder would otherwise be entitled to receive under Section 1.9 by virtue of being an owner of -5- outstanding shares of Series B Preferred Stock and Series D Preferred Stock as of immediately prior to the Effective Time. (c) Exchange Procedures. Promptly after the Effective Time, the Exchange Agent shall cause to be mailed to each holder of record of a certificate or certificates (the "Certificates"): (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify); and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing shares of Parent Common Stock. Upon surrender of a Certificate for cancellation (or an appropriate affidavit as provided in Section 1.13 hereof) to the Exchange Agent or to such other agent or agents as may be appointed by Parent, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, the holder of such Certificate shall be entitled to promptly receive in exchange therefor a certificate representing the number of whole shares of Parent Common Stock (less the number of shares of Parent Common Stock, if any, to be deposited in the Escrow Fund on such holder's behalf pursuant to Section 1.9(d) and Article VIII hereof), plus cash in lieu of fractional shares in accordance with Section 1.9, to which such holder is entitled pursuant to Section 1.9 and the Agreement of Merger, and the Certificate so surrendered shall forthwith be canceled. As soon as practicable after the Effective Time, and subject to and in accordance with the provisions of Article VIII hereof, Parent shall cause to be distributed to the Escrow Agent (as defined in Article VIII) a certificate or certificates representing that number of shares of Parent Common Stock equal to the Escrow Amount which shall be registered in the name of the Escrow Agent. As set forth in Section 8.2(c)(iii), such shares shall be beneficially owned by the holders on whose behalf such shares were deposited in the Escrow Fund and such shares shall be available to compensate Parent as provided in Article VIII. Until so surrendered, each outstanding Certificate will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of Parent Common Stock and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.9. (d) Distributions With Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time with respect to Parent Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered Certificate with respect to the shares of Parent Common Stock represented thereby until the holder of record of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Stock issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Stock. (e) Transfers of Ownership. If any certificate for shares of Parent Common Stock is to be issued in a name other than that in which the certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the certificate so -6- surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Parent or any agent designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Parent Common Stock in any name other than that of the registered holder of the certificate surrendered, or established to the reasonable satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable. (f) No Liability. Notwithstanding anything to the contrary in this Section 1.11, neither the Exchange Agent, the Surviving Corporation or any party hereto shall be liable to a holder of shares of Parent Common Stock or Company Capital Stock or a Converted Creditor for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat or similar law. 1.12 No Further Ownership Rights in Company Capital Stock. All shares of Parent Common Stock issued upon the surrender for exchange of shares of Company Capital Stock in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Company Capital Stock, and after the Effective Time there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Company Capital Stock which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Company Stock Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. 1.13 Lost, Stolen or Destroyed Certificates. In the event any certificates evidencing shares of Company Capital Stock shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed certificates, upon the making of an affidavit of that fact by the holder thereof, such shares of Parent Common Stock, if any, as may be required pursuant to Section 1.9; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the certificates alleged to have been lost, stolen or destroyed. 1.14 Tax Consequences. It is intended by the parties hereto that the Merger shall constitute a reorganization within the meaning of Section 368 of the Code (and this Agreement is intended to constitute a plan of reorganization for purposes of Section 368 of the Code). 1.15 Taking of Necessary Action; Further Action. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. -7- ARTICLE II REPRESENTATIONS/WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Merger Sub, subject to the exceptions disclosed in the disclosure schedule supplied by the Company to Parent (the "Company Schedules"), (it being understood that the Company has no employees and is no longer conducting business, but is attempting only to pay or reach settlements with its creditors, raise $1 million by the sale of Series D Preferred Stock and prepared to have this Agreement approved by its shareholders, and that all of the representations are qualified by the foregoing, and that none of the foregoing shall constitute a Material Adverse Effect) as follows: 2.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. The Company has the corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company is duly qualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified or licensed would have a material adverse effect on the business, assets (including intangible assets), financial condition, results of operations or prospects of the Company not including any material adverse effect following the date of this Agreement on the business, assets (including intangible assets), financial condition or results of operations or prospects of the Company to the extent attributable to the Merger contemplated by this Agreement or changes in general conditions of the industry in which the Company operates (hereinafter referred to as a "Company Material Adverse Effect"). The Company has delivered a true and correct copy of its Articles of Organization and Bylaws, each as amended to date, to Parent. Such Articles of Organization and Bylaws are in full force and effect. Company is not in violation of any of the provisions of its Articles of Organization or Bylaws. 2.2 Subsidiaries. The Company does not have, and has never had, any subsidiaries or affiliated companies and does not otherwise own, and has never otherwise owned, directly or indirectly, any shares of capital stock or any equity, debt or similar interest in or any interest convertible, exchangeable or exercisable for any equity, debt or similar interest in, or control, directly or indirectly, any other corporation, partnership, association, joint venture or other business entity. Company has not agreed nor is Company obligated to make or be bound by any written, oral or other agreement, contract, sub-contract, commitment or undertaking of any nature, as of the date hereof or as may hereafter be in effect under which it may become obligated to make, any future investment in or capital contribution to any other entity. 2.3 Company Capital Structure (a) Outstanding Stock. The authorized Company Capital Stock consists entirely of 1,000,000 shares of Series B Preferred Stock, $ 0.001 par value per share, of which a total of 348,601 shares are issued and outstanding, 2,000,000 shares of Series C Preferred Stock, $ 0.001 par value per share, of which a total of no shares are issued and -8- outstanding, 10,000,000 shares of Company Common Stock, $ 0.001 par value per share, of which a total of 1,697,808 are issued and outstanding. All such Company Capital Stock is now owned and held (and all of which at the Closing will be owned and held) only by the Company Shareholders. The Company Capital Stock is held by the persons, with the domicile addresses and in the amount set forth in Schedule 2.3(a). Immediately prior to the Merger, the Company intends to authorize and issue approximately 250,000 shares of its Series D Preferred Stock in order to comply with Section 7.3(g) of this Agreement. Immediately upon issuance, the shares of Series D Preferred Stock will be placed in escrow and will be released only immediately prior to the Effective Time. Other than the Series D Preferred Stock, no other shares of the Company Capital Stock are (or will at Closing be) authorized, issued or outstanding. No fractional shares of the Company Capital Stock are (or will at Closing be) issued or outstanding. All issued and outstanding shares of the Company Capital Stock have been duly authorized and validly issued, are fully paid and non-assessable, are not subject to any claim, lien, preemptive right, or right of rescission, and have been offered, issued, sold and delivered by the Company (and, if applicable, transferred) in compliance with all registration or qualification requirements (or applicable exemptions therefrom) of all applicable securities laws, the Company's Articles of Organization and other charter documents and all agreements to which the Company is a party. (b) No Options, Warrants or Rights. Except as set forth in Schedule 2.3(b), there are no options, warrants, convertible or other securities, calls, commitments, conversion privileges, preemptive rights or other rights or agreements outstanding to purchase or otherwise acquire (whether directly or indirectly) any shares of the Company's authorized but unissued Capital Stock or any securities convertible into or exchangeable for any shares of the Company Capital Stock or obligating the Company to grant, issue, extend, or enter into, any such option, warrant, convertible or other security, call, commitment, conversion privilege, preemptive right or other right or agreement, and the Company has no liability for any dividends accrued but unpaid. No person or entity holds or has any option, warrant or other right to acquire any issued and outstanding shares of the Company Capital Stock from any record or beneficial holder of shares of the Company Capital Stock. No shares of the Company Capital Stock are reserved for issuance under any stock purchase, stock option or other benefit plan. As a result of the Merger, Parent will be the record and sole beneficial owner of all outstanding Company Capital Stock and all rights to acquire or receive any Company Capital Stock, whether or not such Company Capital Stock is outstanding. All options expire, if not exercised immediately prior to the Effective Time. (c) No Voting Arrangements or Registration Rights. There are no voting agreements, voting trusts, rights of first refusal or other restrictions (other than normal restrictions on transfer under applicable securities laws) applicable to any of the Company Capital Stock. The Company is not under any obligation to register under the 1933 Act or otherwise any of its currently outstanding securities or any securities that may be subsequently issued. 2.4 Authority. Subject only to the requisite approval of the Merger and the principal terms of this Agreement by the Company's shareholders, the Company has all requisite corporate power and authority to enter into this Agreement and to consummate the -9- transactions contemplated hereby. The requisite shareholder approval will be obtained in accordance with the Company bylaws, charter provisions and the regulatory requirements of the Commonwealth of Massachusetts. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, subject only to the approval of the principal terms of this Agreement and the Merger by the Company's shareholders. The Company's Board of Directors has approved the Merger and this Agreement. This Agreement has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, subject to the requirement of obtaining Company shareholder approval. 2.5 No Conflict. Except as set forth in Schedule 2.5 of the Disclosure Schedule, subject only to the approval of the principal terms of this Agreement and the Merger by the Company's shareholders, the execution and delivery of this Agreement by the Company does not, and, as of the Effective Time, the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default under (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or loss of any benefit under (any such event, a "Conflict"): (i) any provision of the Articles of Organization or Bylaws of the Company; or (ii) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or its properties or assets. 2.6 Consents. No consent, waiver, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other federal, state, county, local or foreign governmental authority, instrumentality, agency or commission ("Governmental Entity") or any third party (so as not to trigger any Conflict), is required by or with respect to the Company in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except for: (i) the filing of the Agreement/Articles of Merger with the California Secretary of State and the Massachusetts Secretary of State; (ii) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws; and (iii) such other material consents, waivers, authorizations, filings, approvals and registrations which are set forth in Schedule 2.6. 2.7 Company Financial Statements. Schedule 2.7 of the Disclosure Schedule sets forth true and correct copies of the Company's unaudited balance sheets as of November 30, 1999 and December 31, 1998 and the related statements of income (loss). The Company Financials are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods indicated and consistent with each other. The Company Financials present fairly the financial condition and operating results of the Company as of the respective dates and during the respective period indicated therein. 2.8 No Undisclosed Liabilities. Except as set forth in Schedule 2.8, the Company does not have any liability, indebtedness, obligation, expense, claim, deficiency, guaranty or -10- endorsement of any type, whether accrued, absolute, contingent, known or unknown, matured or unmatured (whether or not required to be reflected in financial statements in accordance with GAAP) ("Liabilities"), except for such Liabilities which have been incurred in the ordinary course of the Company's business consistent with past practice. 2.9 No Changes. Except as set forth in Schedule 2.9 of the Disclosure Schedule, since the date of the balance sheet included in the Company interim financials, and through the date of this Agreement, there has not been, occurred or arisen any: (a) transaction by the Company except in the ordinary course of business as conducted on that date and consistent with past practices and except as contemplated by this Agreement; (b) amendments or changes to the Articles of Organization or Bylaws of the Company, except for filing of a Certificate of Designation, Preferences and Rights to establish and authorize the Series D Preferred Stock; (c) capital expenditure or capital commitment by the Company of more than $25,000 in any individual case or $50,000 in the aggregate (other than commitments to pay expenses incurred in connection with this transaction); (d) destruction of, damage to or loss of any material assets, business or customer of the Company (whether or not covered by insurance); (e) work stoppage, labor strike or other labor trouble, or any material action, suit, claim, labor dispute or grievance relating to any labor, safety or discrimination matter involving the Company, including, without limitation, charges of wrongful discharge or other unlawful labor practices or actions; (f) change in accounting methods, principles or practices (including any change in depreciation or amortization policies or rates) by the Company; (g) revaluation in any material respect by the Company of any of its assets, including, without limitation, writing down the value of capitalized inventory or writing off notes or accounts receivable; (h) declaration, setting aside or payment of a dividend or other distribution with respect to any Company Capital Stock, or any direct or indirect redemption, purchase or other acquisition by the Company of any Company Capital Stock, other than repurchases of Company Capital Stock from directors, officers, employees, consultants or other persons performing services for the Company pursuant to agreements under which the Company has the option to repurchase such shares at cost upon the termination of employment or other services; (i) split, combination or reclassification of any Company Capital Stock; -11- (j) increase in the salary or other compensation payable or to become payable by the Company to any of its officers, directors, employees or advisors, including, but not limited to, the modification of any existing compensation or equity arrangements with such individuals (which modification may include the amendment of any vesting terms related to Company Options held by such individuals), or the declaration, payment or commitment or obligation of any kind for the payment, by the Company, of a bonus or other additional salary or compensation to any such person except for in the ordinary course of the Company's business or as the Company is obligated as of the date hereof; (k) granting of any increase in severance or termination pay or entry into any currently effective employment, severance, termination or indemnification agreement or any agreement the benefits of which are contingent or the terms of which are materially altered upon the occurrence of the Merger; (l) material agreement, contract, covenant, instrument, lease, license or commitment to which the Company is a party or by which it or any of its assets is bound or any termination, extension, amendment or modification of the terms of any agreement, contract, covenant, instrument, lease, license or commitment to which the Company is a party or by which it or any of its assets is bound; (m) sale, lease, license or other disposition of any of the assets or properties of the Company, or creation of any lien or security interest (except for those arising by operation of law and statute) in such assets or properties except in the ordinary course of business and consistent with past practices ("Liabilities"), or such liens or interests which do not materially impair the value or use of such assets or properties; (n) loan by the Company to any person or entity, incurring by the Company of any indebtedness, guaranteeing by the Company of any indebtedness, issuance or sale of any debt securities of the Company or guaranteeing of any debt securities of others, except for advances to employees for travel and business expenses in the ordinary course of business, consistent with past practices; (o) waiver or release of any material right or claim of the Company, including any write-off or other compromise of any account receivable of the Company (other than as required by GAAP); (p) commencement or notice or threat of commencement of any lawsuit or proceeding against or investigation of the Company or its affairs; (q) except as set forth in Schedule 2.3(b) or as contemplated by this Agreement (including the issue of shares of Series D Preferred Stock for cash), issuance or sale by the Company of any Company Capital Stock, or securities exchangeable, convertible or exercisable therefor, or any securities, warrants, options or rights to purchase any of the foregoing or any amendment of any existing equity arrangement; (r) event or condition of any character that has or reasonably would be expected to have a Company Material Adverse Effect; or -12- (s) agreement by the Company or any officer or employees thereof to do any of the things described in the preceding clauses (a) through (s) (other than negotiations and other actions with Parent and its representatives regarding the transactions contemplated by this Agreement). 2.10 Tax and Other Returns and Reports (a) Definition of Taxes. For the purposes of this Agreement, "Tax," or collectively "Taxes," means any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity. (b) Tax Returns and Audits. Except as set forth in Schedule 2.10(b): (i) As of the Effective Time, the Company has prepared and filed all federal, state, local and foreign returns, estimates, information statements and reports required to be filed ("Returns") relating to any and all Taxes concerning or attributable to the Company or its operations and such Returns are true and correct and have been completed in accordance with applicable law. (ii) As of the Effective Time, the Company: (a) has paid or accrued all Taxes it is required to pay or accrue; and (b) has withheld with respect to its employees all federal and state income taxes, FICA, FUTA and other Taxes required to be withheld as of that date. (iii) The Company has not been delinquent in the payment of any Tax nor is there any Tax deficiency outstanding, proposed or assessed against the Company, nor has the Company executed any unexpired waiver of any statute of limitations on or extended the period for the assessment or collection of any Tax. (iv) No audit or other examination of any Return of the Company by any Tax authority is presently in progress, nor has the Company been notified of any request for such an audit or other examination. (v) The Company has no liabilities for unpaid federal, state, local or foreign Taxes which have not been accrued or reserved against in the Company Financials, whether asserted or unasserted, contingent or otherwise, and the Company has not incurred any liability for Taxes since the date of the Interim Financials other than in the ordinary course of business consistent with past practice. (vi) The Company has provided to Parent copies of all foreign, federal and state income and all state sales and use Returns for all periods since the date of Company's Organization. -13- (vii) There are (and as of immediately following the Effective Time there will be) no liens, pledges, charges, claims, restrictions on transfer, mortgages, security interests or other encumbrances of any sort (collectively, "Liens") on the assets of the Company relating to or attributable to Taxes, other than Liens for Taxes not yet due and payable as of such date. (viii) The Company has no knowledge of any basis for the assertion of any claim relating or attributable to Taxes that, if adversely determined, would result in any Lien on the assets of the Company. (ix) None of the Company's assets are treated as "tax-exempt use property" within the meaning of Section 168(h) of the Code. (x) There is no contract, agreement, plan or arrangement to which the Company is a party, including but not limited to the provisions of this Agreement, covering any employee or former employee of the Company that, individually or collectively, could give rise to the payment of any amount that would not be deductible by the Company as an expense under applicable law pursuant to Section 280G, 404 or 162(m) of the Code. (xi) The Company has not filed any consent agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company. (xii) The Company is not a party to a tax sharing, indemnification or allocation agreement nor does the Company owe any amount under any such agreement. The Company has not been a member of an affiliated group (within the meaning of Section 1504(a) of the Code) filing a consolidated income tax return. (xiii) The Company is not, and has not been at any time, a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code. (xiv) No adjustment or deficiency relating to any Return filed or required to be filed by the Company has been proposed formally or, to the knowledge of the Company, informally by any Tax authority to the Company or any representative thereof. (xv) The Company has not distributed the stock of any corporation in a transaction satisfying the requirements of Section 355 of the Code. (xvi) The foregoing notwithstanding, there will be a cancellation of indebtedness income when Parent Common Stock is issued to Converted Creditors. 2.11 Restrictions on Business Activities. There is no agreement (noncompete or otherwise), commitment, judgment, injunction, order or decree to which the Company is a party or otherwise binding upon the Company which has or reasonably would be expected to have the effect of: -14- (a) prohibiting or impairing in any material respect: (i) any material business practice of the Company; (ii) any acquisition of property (tangible or intangible) by the Company; or (iii) the conduct of business by the Company OR (b) after the consummation of the Merger, prohibiting or impairing in any material respect: (i) any material business practice of Parent; (ii) any acquisition of property (tangible or intangible) by Parent; or (iii) the conduct of business by Parent. Without limiting the foregoing, the Company has not entered into any agreement under which the Company is restricted from selling, licensing or otherwise distributing any of its products or services to any class of customers, in any geographic area, during any period of time or in any segment of the market. 2.12 Title to Properties; Absence of Liens and Encumbrances (a) The Company does not own any real property, nor has it ever owned any real property. Schedule 2.12(a) sets forth a list of all real property currently leased by the Company, the name of the lessor and the date of the lease and each amendment thereto and, with respect to any current lease, the aggregate annual rental and/or other fees payable under any such lease. All such current leases are in full force and effect, are valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event of default (or event which with notice or lapse of time, or both, would constitute a default). To the knowledge of the Company, the operations of the Company on such real property do not violate any applicable building code, zoning requirement, or classification or pollution control ordinance or statute relating to such operations, and such non-violation is not dependent, in any instance, on so-called non-conforming use exceptions. (b) The Company has good and marketable title to, or, in the case of leased properties and assets, valid leasehold interests in, all of its tangible properties and assets, real, personal and mixed, used or held for use in its business, free and clear of any Liens (as defined in Section 2.10(b)(vii)), except as reflected in the Company Financials or in Schedule 2.12(b) and except for Liens for taxes not yet due and payable and such imperfections of title and encumbrances, if any, which do not materially impair the value, or materially interfere with the present use, of such property and assets. -15- (c) All facilities, machinery, equipment, fixtures, vehicles, and other properties owned or leased by the Company are: (i) adequate for the conduct of the business of the Company as currently conducted; and (ii) in good operating condition, regularly and properly maintained, subject to normal wear and tear and reasonably fit and usable for the purposes for which they are being used, except where a failure to be in such condition would not have a Company Material Adverse Effect. (d) Except for the sharing of Company Customer Information (as defined herein) with any marketing or other strategic partner where such sharing would not, upon the termination or expiration of such relationship, have a Company Material Adverse Effect, the Company has not sold or otherwise released for distribution any of its customer files and other customer information relating to the Company's current and former customers (the "Company Customer Information"). No person other than the Company possesses any claims or rights with respect to use of the Company Customer Information. 2.13 Governmental Authorization. Schedule 2.13 accurately lists each material consent, license, permit, grant or other authorization issued to the Company by a Governmental Entity: (a) pursuant to which the Company currently operates or holds any interest in any of its material properties; or (b) which is required for the operation of its business or the holding of any such interest (herein collectively called "Company Authorizations"). The Company Authorizations are in full force and effect and constitute all Company Authorizations required to permit the Company to operate or conduct its business or hold any interest in its properties or assets. The Company is in compliance in all material respects with the terms of each Company Authorization. 2.14 Intellectual Property (a) Definitions. For all purposes of this Agreement, the following terms shall have the following respective meanings: (i) "Technology" shall mean any or all of the following: (A) works of authorship including, without limitation, computer programs, source code and executable code, whether embodied in software, firmware or otherwise, documentation, designs, files, net lists, records, data and mask works; (B) inventions (whether or not patentable), improvements and technology; (C) proprietary and confidential information, including technical data and customer and supplier lists, trade secrets and know how; (D) databases, data compilations and collections and technical data; (E) logos, trade names, trade dress, trademarks and service marks; (F) World Wide Web addresses, domain names and sites; (G) tools, methods and processes; and (H) all instantiations of the foregoing in any form and embodied in any media. (ii) "Intellectual Property Rights" shall mean any or all of the following and all rights in, arising out of, or associated therewith: (A) all United States and foreign patents, utility models and applications therefor and all reissues, divisions, re-examinations, renewals, extensions, provisionals, continuations and continuations-in-part thereof and equivalent or similar rights anywhere in the world in inventions and discoveries -16- including without limitation invention disclosures ("Patents"); (B) all trade secrets and other rights in know-how and confidential or proprietary information; (C) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the world ("Copyrights"); (D) all industrial designs and any registrations and applications therefor throughout the world; (E) all rights in World Wide Web addresses and domain names and applications and registrations therefor; (F) all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world ("Trademarks"); (G) all computer software including all source code, object code, firmware, development tools, files, records and data, and all media on which any of the foregoing is recorded; and (H) any similar, corresponding or equivalent rights to any of the foregoing anywhere in the world. (iii) "Company Intellectual Property" shall mean any Technology and Intellectual Property Rights including the Company Registered Intellectual Property Rights (as defined below) that are owned (in whole or in part) by or exclusively licensed to the Company. (iv) "Registered Intellectual Property Rights" shall mean all United States, international and foreign: (A) Patents, including applications therefor; (B) registered Trademarks, applications to register Trademarks, including intent-to-use applications, or other registrations or applications related to Trademarks; (C) Copyrights registrations and applications to register Copyrights; and (E) any other Technology that is the subject of an application, certificate, filing, registration or other document issued by, filed with, or recorded by, any state, government or other public or private legal authority at any time. (v) For all purposes in this Section 2.14, the term "Company" shall be deemed to refer to both Company and any of its subsidiaries. (b) Schedule 2.14(b) lists all Registered Intellectual Property Rights owned by, filed in the name of, or applied for, by the Company and lists any proceedings or actions known to the Company before any court, tribunal (including the United States Patent and Trademark Office (the "PTO") or equivalent authority anywhere in the world) related to any of the Company Registered Intellectual Property Rights or Company Intellectual Property. (c) There are no facts or circumstances that would render any Company Intellectual Property invalid or unenforceable. Without limiting the foregoing, there are no materials, facts or circumstances, including any information or fact that would constitute prior art, that would render any of the Company Registered Intellectual Property Rights invalid or unenforceable, or would adversely effect any pending application for any Company Registered Intellectual Property Right, and the Company has not misrepresented, or failed to disclose, and has no knowledge of any misrepresentation or failure to disclose, any fact or circumstances in any application for any Company Registered Intellectual Property Right that would constitute fraud or a misrepresentation with respect to such application or that would otherwise affect the validity or enforceability of any Company Registered Intellectual Property Right. -17- (d) Each item of Company Intellectual Property is free and clear of any Liens except for non-exclusive licenses granted to end-user customers in the ordinary course of business. The Company is the exclusive owner or exclusive licensee of all Company Intellectual Property. Without limiting the foregoing: (i) the Company is the exclusive owner of all Trademarks used by it in connection with the operation or conduct of the business of the Company, including the sale, licensing, distribution or provision of any products or services by the Company; (ii) the Company owns exclusively, and has good title to, all Copyrights that are products of the Company or which the Company otherwise purports to own; and (iii) to the extent that any Patents would otherwise be infringed by any product or services of the Company, such Patents constitute Company Intellectual Property. (e) All Company Intellectual Property will be fully transferable, alienable or licensable by Surviving Corporation and/or Parent without restriction and without payment of any kind to any third party. (f) With the exception of "shrink-wrap" or similar widely available commercially available end-user business software, Schedule 2.14(f) describes all Company Technology that has been developed or created by any third party for the Company in connection with the use or development of Company Products (as defined below) and identifies the related agreements. In connection with all Company Technology, the Company either: (i) has obtained ownership of, and is the exclusive owner of; or (ii) has obtained a license to all such third party's Intellectual Property Rights in such Technology that is sufficient for the conduct of the Company's business as currently conducted and as proposed to be conducted. The Company is not in breach of nor has the Company failed to perform under, any of the foregoing contracts, licenses or agreements (except for such breaches or failures to perform which are curable or waivable without cost or expense) and, to the Company's knowledge, no other party to any such contract, license or agreement is in breach thereof or has failed to perform thereunder. With respect to widely available commercially available end-user business software, all used by the Company and its employees of such software is pursuant to valid licenses, and there is no unauthorized use of third-party software by the Company or its employees in the course of their employment responsibilities. (g) All employees of the Company and consultants or other third parties engaged by the Company for the purpose of developing Company Intellectual Property have entered into a valid and binding written agreement with the Company sufficient to vest title in the Company of all Technology, including all accompanying Intellectual Property Rights, created by such employee in the scope of his or her employment with the Company. (h) The Company has, and enforces, a policy requiring each employee, consultant and contractor to execute a proprietary information, confidentiality and assignment agreement, substantially in the form attached hereto as Schedule 2.14(h), and all current and former employees, consultants and contractors of the Company have executed such an agreement. (i) Except as set forth in Schedule 2.14(i), no person who has licensed Technology or Intellectual Property Rights to the Company has ownership rights or license -18- rights to improvements made by the Company in such Technology or Intellectual Property Rights. (j) The Company has not transferred ownership of, or granted any exclusive license of or exclusive right to use, or authorized the retention of any exclusive rights to use or joint ownership of, any Technology or Intellectual Property Right that is or was Company Intellectual Property, to any other person. (k) Schedule 2.14(k) lists all material contracts, licenses and agreements between the Company and any other person wherein or whereby the Company has agreed to, or assumed, any obligation or duty to warrant, indemnify, reimburse, hold harmless, guaranty or otherwise assume or incur any obligation or liability or provide a right of rescission with respect to the infringement or misappropriation by the Company or such other person of the Intellectual Property Rights of any person other than the Company. (l) There are no contracts, licenses or agreements between the Company and any other person with respect to Company Intellectual Property under which there is any dispute regarding the scope of such agreement, or performance under such agreement, including with respect to any payments to be made or received by the Company thereunder. (m) To the knowledge of the Company, the operation of the business of the Company as it was most recently conducted (none is presently conducted) by the Company, including but not limited to the design, development, use, import, branding, advertising, promotion, marketing, manufacture and sale of the products, technology or services (including products, technology or services currently under development) of the Company does not and will not when conducted by Parent and/or Surviving Corporation in substantially the same manner following the Closing, infringe or misappropriate any Intellectual Property Right of any person, violate any right of any person (including any right to privacy or publicity) or constitute unfair competition or trade practices under the laws of any jurisdiction, and the Company has not received notice from any person claiming that such operation or any act, product, technology or service (including products, technology or services currently under development) of the Company infringes or misappropriates any Intellectual Property Right of any person or constitutes unfair competition or trade practices under the laws of any jurisdiction (nor does the Company have knowledge of any basis therefor). (n) To the Company's knowledge, no person is infringing or misappropriating any Company Intellectual Property Right. (o) No Company Intellectual Property or service of the Company is subject to any proceeding or outstanding decree, order, judgment or settlement agreement or stipulation that restricts in any manner the use, transfer or licensing thereof by the Company or may affect the validity, use or enforceability of such Company Intellectual Property. (p) No: (i) product, technology, service or publication of the Company; (ii) material published or distributed by the Company; or (iii) conduct or statement of the Company constitutes obscene material, a defamatory statement or material, false advertising or otherwise violates in any material respect any law or regulation. -19- (q) Neither this Agreement nor the transactions contemplated by this Agreement, including the assignment to Parent or Surviving Corporation, by operation of law or otherwise, of any contracts or agreements to which the Company is a party, will result in: (i) either Parent's or the Surviving Corporation's granting to any third party any right to or with respect to any Technology or Intellectual Property Right owned by, or licensed to, either of them; (ii) either the Parent's or the Surviving Corporation's being bound by, or subject to, any non-compete or other restriction on the operation or scope of their respective businesses; or (iii) either the Parent's or the Surviving Corporation's being obligated to pay any royalties or other amounts to any third party in excess of those payable by the Company, Parent or Surviving Corporation, respectively, prior to the Closing. (r) All of the Company's products (including products currently under development): (i) will record, store, process, calculate and present calendar dates falling on and after (and if applicable, spans of time including) January 1, 2000, and will calculate any information dependent on or relating to such dates in the same manner, and with the same functionality, data integrity and performance, as the products record, store, process, calculate and present calendar dates on or before December 31, 1999, or calculate any information dependent on or relating to such dates (collectively, "Year 2000 Compliant"); and (ii) will lose no functionality with respect to the introduction of records containing dates falling on or after January 1, 2000. All of the Company's mission critical Information Technology (as defined below) has been tested or certified by a third party to be Year 2000 Compliant, meaning that it will not cause an interruption in the ongoing operations of the Company's business on or after January 1, 2000. For purposes of the foregoing, the term "Information Technology" shall mean and include all software, hardware, firmware, telecommunications systems, network systems, embedded systems and other systems, components and/or services (other than general utility services including gas, electric, telephone and postal) that are owned or used by the Company in the conduct of its business, or purchased by the Company from third party suppliers. 2.15 Product Warranties; Defects; Liabilities. Each Company product manufactured, sold, licensed, leased or delivered by the Company in connection with its Company's business as presently conducted (the "Company Products") has been in all material respects in conformity with all applicable contractual commitments and all applicable express and implied warranties. The Company does not have any current material liability or obligation for replacement or repair thereof except liabilities or obligations incurred in the ordinary course of business consistent with past practice which do not have a Material Adverse Effect on the Company. No Company Product is subject to any guaranty, warranty or other indemnity except as provided in the applicable standard terms and conditions of sale, license or lease or such guaranty, warranty or other indemnity that is implied or imposed by applicable law. Schedule 2.15 includes a copy of the standard terms and conditions of sale, license or lease for each of the Company Products and copies of the Company's standard forms of merchant agreements, and professional services agreements. 2.16 Agreements, Contracts and Commitments. Except as set forth in Schedule 2.16(a), the Company is not currently a party to nor is it currently bound by: -20- (a) any collective bargaining agreements; (b) any employment or consulting agreement, contract or commitment with any officer, director, employee or member of the Company's Board of Directors, other than those that are terminable by the Company at will; (c) any bonus, deferred compensation, pension, profit sharing or retirement plans, or any other employee benefit plans or arrangements; (d) any employment or consulting agreement with an employee or individual consultant or salesperson or consulting or sales agreement, under which a firm or other organization provides services to the Company; (e) any agreement or plan, including, without limitation, any stock option plan, stock appreciation rights plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement; (f) any fidelity or surety bond or completion bond; (g) any lease of personal property having a value individually in excess of $25,000; (h) any agreement of indemnification or guaranty; (i) any agreement, contract or commitment containing any covenant limiting in any respect the right of Company to engage in any line of business or to compete with any person or granting any exclusive distribution rights; (j) any agreement relating to capital expenditures and involving future payments in excess of $20,000; (k) any agreement, contract or commitment currently in force relating to the disposition or acquisition by Company after the date of this Agreement of assets in excess of $25,000 not in the ordinary course of business, or pursuant to which Company has any material ownership interest in any corporation, partnership, joint venture or other business enterprise, (l) any mortgages, indentures, loans or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit, including guaranties referred to in clause (h) hereof; (m) any purchase order or contract involving $25,000 or more; (n) any construction contracts; (o) any dealer, distribution, joint marketing (excluding joint marketing agreements: (i) involving financial obligations or liabilities to the Company; or (ii) that do not -21- involve rights to sell Company Products to end-users), development, content provider, destination site or merchant agreement; (p) any agreement pursuant to which the Company has granted or may be obligated to grant in the future, to any party a source-code license or option or other right to use or acquire source-code, including any agreements which provide for source code escrow arrangements; (q) any sales representative, original equipment manufacturer, value added, remarketer or other agreement for distribution of the Company's products or services or the products or services of any other person or entity; (r) any agreement pursuant to which the Company has advanced or loaned any amount to any shareholder of the Company or any director, officer, employee or consultant other than business travel advances in the ordinary course of business consistent with past practice; (s) any settlement agreement entered into since the Company's initial incorporation; or (t) any other agreement that involves $25,000 or more or is not cancelable without penalty within thirty (30) days. The Company has not, and has not received notice that it has, breached, violated or defaulted under, any of the terms or conditions of any agreement, contract or commitment required to be set forth on Schedule 2.16(a), Schedule 2.14(f) or Schedule 2.14(k) (any such agreement, contract or commitment, a "Contract"), nor has the Company breached, violated or defaulted under any Contract. Each Contract is in full force and effect and, except as otherwise disclosed in Schedule 2.16(b) and to the Company's knowledge, is not subject to any material default thereunder by any party obligated to the Company pursuant thereto. 2.17 Change of Control Payments. Schedule 2.17 sets forth each plan or agreement pursuant to which any amounts may become payable (whether currently or in the future) to current or former officers, directors or employees of the Company as a result of or in connection with the Merger. 2.18 Interested Party Transactions. Except as set forth in Schedule 2.18, to the Company's knowledge, no officer, director or affiliate (as defined under Regulation C under the Securities Act) of the Company (nor any ancestor, sibling, descendant or spouse of any of such persons, or any trust, partnership or corporation in which any of such persons has or has had an economic interest), has or has had, directly or indirectly: (a) an economic interest in any entity that purchases from or sells or furnishes to, the Company, any goods or services; or (b) a beneficial interest in any contract or agreement set forth in Schedule 2.16(a), Schedule 2.14(f) or Schedule 2.14(k); provided, that ownership of no more than one percent of the outstanding voting stock of a publicly traded corporation shall not be deemed an "economic interest in any entity" for purposes of this Section 2.18. There are no receivables of the Company owing by any director, officer, employee or consultant to the Company (or -22- any ancestor, sibling, descendant, or spouse of any such persons, or any trust, partnership, or corporation in which any of such persons has an economic interest), other than advances in the ordinary and usual course of business for reimbursable business expenses (as determined in accordance with the Company's established employee reimbursement policies and consistent with past practice) or promissory notes of certain employees of the Company in connection with the exercise of Company Options under the Option Plan. 2.19 Compliance with Laws. The Company is not in material conflict with, or in default or violation in any material respect of any law, rule, regulation, order, judgment or decree applicable to Company or by which its properties is bound or affected. No investigation or review by any governmental or regulatory body or authority is pending or, to the knowledge of Company, threatened against Company, nor has any governmental or regulatory body or authority indicated an intention to conduct the same. 2.20 Litigation. There is no action, suit or proceeding of any nature pending or to the Company's knowledge threatened against the Company, its properties or any of its officers, directors or employees, nor, to the knowledge of the Company, is there any reasonable basis therefor. There is no investigation pending or, to the Company's knowledge, threatened against the Company, its properties or any of its officers, directors or employees by or before any Governmental Entity. Schedule 2.20 sets forth, with respect to any pending or threatened action, suit, proceeding or investigation, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. No Governmental Entity has at any time challenged or questioned the legal right of the Company to conduct its operations as presently or previously conducted. 2.21 Insurance. With respect to the insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company, there is no claim by the Company pending under any of such policies or bonds as to which coverage has been denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and the Company is otherwise in material compliance with the terms of such policies and bonds. The Company has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies. All policies of insurance applicable to the Company are listed in Schedule 2.21. The Company maintains, and has maintained, policies of insurance of the kinds, and in the amounts, reasonable and customary or companies of a similar size in business. 2.22 Minute Books. The minute books of the Company made available to Parent are the only minute books of the Company and contain an accurate summary of all meetings of directors (or committees thereof) and shareholders or actions by written consent since the time of incorporation of the Company. 2.23 Environmental Matters. The Company: (a) has obtained all applicable and material permits, licenses and other authorizations that are required under Environmental Laws; (b) is in compliance with all material terms and conditions of such required permits, licenses and authorizations, and also is in compliance with all other material limitations, -23- restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder; (c) is not aware of and has not received notice of any event, condition, circumstance, activity, practice, incident, action or plan that is reasonably likely to interfere with or prevent continued compliance or that would give rise to any common law or statutory liability, or otherwise form the basis of any Environmental Claim with respect to the Company or any person or entity whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of law; (d) has not disposed of, released, discharged or emitted any Hazardous Materials into the soil or groundwater at any properties owned or leased at any time by the Company, or at any other property, or exposed any employee or other individual to any Hazardous Materials or condition in such a manner as would result in any material liability or result in any corrective or remedial action obligation under Environmental Laws; and (e) has taken all actions necessary under Environmental Laws to register any products or materials required to be registered by the Company (or any of its agents) thereunder. No Hazardous Materials are present in, on, or under any properties owned or leased at any time (including both land and improvements thereon) by the Company so as to give rise to any liability or corrective or remedial obligation of the Company under any Environmental Laws. For the purposes of this Section 2.23, "Environmental Claim" means any notice, claim, act, cause of action or investigation by any person alleging potential liability (including potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from: (i) the presence, or release into the environment, of any Hazardous Materials; or (ii) any violation, or alleged violation, of any Environmental Laws. "Environmental Laws" means all federal, state, local and foreign laws and regulations relating to pollution or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) or the protection of human health and worker safety, including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. "Hazardous Materials" means chemicals, pollutants, contaminants, wastes, toxic substances, radioactive and biological materials, asbestos-containing materials (ACM), hazardous substances, petroleum and petroleum products or any fraction thereof, excluding, however, Hazardous Materials contained in products typically used for office and janitorial purposes properly and safely maintained in accordance with Environmental Laws. 2.24 Brokers' Fees. Except as set out in Schedule 2.24, the Company has not incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. 2.25 Employee Matters and Benefit Plans (a) Definitions. The following terms shall have the meanings set forth below: -24- (i) "Affiliate" shall mean any other person or entity under common control with the Company within the meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations thereunder; (ii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended; (iii) "Company Employee Plan" shall refer to any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, termination pay, deferred compensation, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether written or otherwise, funded or unfunded, including without limitation, each "employee benefit plan," within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by the Company or any Affiliate for the benefit of any Employee (as defined below), or with respect to whether the Company has or may have any liability or obligation; (iv) "DOL" shall mean the United States Department of Labor. (v) "Employee" shall mean any current, former, or retired employee, officer, director or consultant of the Company or any Affiliate; (vi) "Employee Agreement" shall refer to each management, employment, severance, consulting, relocation, repatriation, expatriation, visa, work permit or other agreement, contract or understanding between the Company or any Affiliate and any Employee; (vii) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended; (viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as amended; (ix) "IRS" shall mean the Internal Revenue Service; (x) "Multiemployer Plan" shall mean any "Pension Plan" (as defined below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA; and (xi) "Pension Plan" shall refer to each Company Employee Plan which is an "employee pension benefit plan," within the meaning of Section 3(2) of ERISA. (b) Schedule. Schedule 2.25(b) contains an accurate and complete list of each Company Employee Plan and each Employee Agreement, whether or not accrued, under each Company Employee Plan or Employee Agreement. The Company does not have any plan or commitment to establish any new Company Employee Plan or Employee Agreement, to modify any Company Employee Plan or Employee Agreement (except to the extent required by law or to conform any such Company Employee Plan or Employee Agreement to the -25- requirements of any applicable law, in each case as previously disclosed to Parent in writing, or as required by this Agreement), or to enter into any Company Employee Plan or Employee Agreement, nor does it have any intention or commitment to do any of the foregoing. (c) Documents. The Company has provided to Parent: (i) correct and complete copies of each Company Employee Plan and each Employee Agreement including, without limitation, all amendments thereto, all related trust documents and written interpretations thereof; (ii) the most recent annual actuarial valuations, if any, prepared for each Company Employee Plan; (iii) the three most recent annual reports (Series 5500 and all schedules and financial statements attached thereto), if any, required under ERISA or the Code in connection with each Company Employee Plan or related trust; (iv) if the Company Employee Plan is funded, the most recent annual and periodic accounting of Company Employee Plan assets; (v) the most recent summary plan description together with the most recent summary(ies) of material modifications thereto, if any, required under ERISA with respect to each Company Employee Plan; (vi) all IRS determination, opinion, notification and advisory letters and rulings relating to Company Employee Plans and copies of all applications and correspondence to or from the IRS, DOL or any other governmental agency with respect to any Company Employee Plan; (vii) all material written agreements and contracts relating to each Company Employee Plan, including, but not limited to, administrative service agreements, group annuity contracts and group insurance contracts; (viii) all communications material to any Employee or Employees relating to any Company Employee Plan and any proposed Company Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any material liability to the Company; (ix) all correspondence to or from any governmental agency relating to any Company Employee Plan; (x) all COBRA forms and related notices; (xi) all policies pertaining to fiduciary liability insurance covering the fiduciaries of for each Company Employee Plan; (xii) all discrimination tests for each Company Employee Plan for the most recent plan year; and (xiii) all registration statements, annual reports (Form 11-K and all attachments thereto) and prospectuses prepared in connection with each Company Employee Plan. (d) Employee Plan Compliance. Except as set forth in Schedule 2.25(d): (i) the Company has performed in all respects all obligations required to be performed by it under, is not in default or violation of, and has no knowledge of any default or violation of any other party to, each Company Employee Plan, and each Company Employee Plan has been established and maintained in all respects in accordance with its terms and in compliance with all applicable laws, statutes, orders, rules and regulations, including but not limited to ERISA and the Code; (ii) each Company Employee Plan intended to qualify under Section 401(a) of the Code and each trust intended to qualify under Section 501(a) of the Code has either received a favorable determination, opinion, notification or advisory letter from the IRS with respect to each such Company Employee Plan as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has a period of time remaining under applicable Treasury regulations or IRS pronouncements in which to apply for such a letter and make any amendments necessary to obtain a favorable determination as to the qualified status of each such Company Employee Plan; (iii) no "prohibited transaction," within the meaning of Section 4975 of the Code or -26- Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred with respect to any Company Employee Plan; (iv) there are no actions, suits or claims pending, or, to the knowledge of the Company, threatened or anticipated (other than routine claims for benefits) against any Company Employee Plan or against the assets of any Company Employee Plan; (v) each Company Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without liability to the Company, Parent or any of its Affiliates (other than ordinary administration expenses typically incurred in a termination event); (vi) there are no audits, inquiries or proceedings pending or, to the knowledge of the Company or any Affiliates, threatened by the IRS or DOL with respect to any Company Employee Plan; and (vii) neither the Company nor any Affiliate is subject to any penalty or tax with respect to any Company Employee Plan under Section 501(i) of ERISA or Section 4975 through 4980 of the Code. (e) Pension Plans. Neither the Company nor any Affiliate has ever maintained, established, sponsored, participated in, or contributed to, any Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title IV of ERISA or Section 412 of the Code. (f) Multiemployer Plans. At no time has the Company or any Affiliate contributed to or been requested to contribute to any Multiemployer Plan. (g) No Post-Employment Obligations. Except as set forth in Schedule 2.25(g), no Company Employee Plan provides, or reflects or represents any liability to provide, life insurance, health or other employee benefits to any person upon his or her retirement or termination of employment for any reason, except as may be required by statute, and the Company has never represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) that such Employee(s) or any other person would be provided with life insurance, health or other employee welfare benefits upon their retirement or termination of employment, except to the extent required by statute. (h) COBRA. Neither the Company nor any Affiliate has, prior to the Effective Time, violated any of the health care continuation requirements of COBRA, the requirements of FMLA, the requirements of the Women's Healthcare Cancer Rights Act, the requirements of the Newborns' and Mothers' Health Protection Act of 1996 or any similar provisions of state law applicable to its Employees which could reasonably be expected to result in material liability to the Company. (i) Effect of Transaction (i) Except as provided in Section 1.9 of this Agreement or as set forth in Schedule 2.25(i)(i), the execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Company Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of -27- severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. (ii) Except as set forth in Schedule 2.25(i)(ii), no payment or benefit which will or may be made by the Company or any of its respective affiliates with respect to any Employee resulting from the transactions contemplated by this Agreement or otherwise will be characterized as a "parachute payment", within the meaning of Section 280G(b)(2) of the Code. (j) Employment Matters. Schedule 2.25(j) lists all current officers, directors and employees of the Company. The Company: (i) is in compliance in all respects with all applicable foreign, federal, state and local laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees (including any immigration laws with respect to the same); (ii) has withheld all amounts required by law or by agreement to be withheld from the wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund or to any governmental or administrative authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice). There are no pending, threatened or reasonably anticipated claims or actions against the Company under any workers compensation policy or long-term disability policy. Each person who is acting or has acted as a consultant to the Company is acting or acted as an "independent contractor" and could not, based on the facts and circumstances of his consultancy, reasonably be deemed to be or have been "employed" with the Company. Schedule 2.25(j) also sets forth all outstanding offers of employment, whether written or oral, made to any employee or prospective employee, which offer has not been rejected by the offeree. (k) Labor. No work stoppage or labor strike against the Company is pending, or, to the Company's knowledge, threatened. To the Company's knowledge there are no activities or proceedings of any labor union to organize any Employees. Except as set forth in Schedule 2.25(k), there are no actions, suits, claims, labor disputes or grievances pending, or, to the knowledge of the Company, threatened relating to any labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in any liability to the Company. The Company has not engaged in any unfair labor practices within the meaning of the National Labor Relations Act. Except as set forth in Schedule 2.25(k), the Company is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contract with respect to Employees and no collective bargaining agreement is being negotiated by the Company. (l) No Interference or Conflict. No shareholder, officer, employee or consultant of the Company is obligated under any contract or agreement subject to any judgment, decree or order of any court or administrative agency that would materially -28- interfere with such person's efforts to promote the interests of the Company or that would materially interfere with the Company's business. 2.26 Hart-Scott-Rodino Act. The Company: (i) is the "ultimate parent entity" of the Company as defined in 16 C.F.R. 801.1, and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); (ii) is not a manufacturer as defined by the HSR Act; and (iii) does not hold total assets worth $10,000,000 or more as shown on its most recent regularly prepared balance sheet (including unaudited statements), and did not have net sales of $10,000,000 or more in its last fiscal year and therefore is not a $10 million person under the HSR Act. 2.27 Bank Accounts. Schedule 2.27 constitutes a full and complete list of all the bank accounts and safe deposit boxes of the Company, the number of each such account or box, and the names of the persons authorized to draw on such accounts or to access such boxes. 2.28 Indemnification Obligations. To the Company's knowledge, there is no action, proceeding or other event pending against any officer or director of the Company which would give rise to any indemnification obligation of Company to its officers and directors under its Articles of Organization, Bylaws or any agreement between the Company and any of such officers or directors. 2.29 Board Approval. The Board of Directors of the Company has, as of the date of this Agreement: (a) approved and deemed advisable, subject to shareholder approval, this Agreement and the transactions contemplated hereby; (b) determined that the Merger is in the best interests of the shareholders of Company; and (c) recommended that the shareholders of Company approve the principal terms of this Agreement and approve the Merger. 2.30 Shareholder Sophistication or Accredited Status Except as set forth in Schedule 2.30, all shareholders of Company are accredited investors (as defined in Rule 501 of the Securities Act of 1933), or sophisticated (as defined in Rule 506 of the Securities Act of 1933) in financial and business matter or employs a representative who is sophisticated. 2.31 Creditor Consents. All creditors of the Company shall have signed an agreement either: (a) waiving their right to other compensation (as provided in Schedule 2.31(a)); or (b) indicating that they will accept payment of $0.33 for every dollar owed as payment if full for all debts due and owing from the Company (as provided in Schedule 2.31(b)), provided, however, liabilities will not exceed $25,000 pursuant to Section 5.1(r). 2.32 Representations Complete. None of the representations or warranties made by the Company (as modified by the Company Schedules), nor any statement made in any Schedule or certificate furnished by the Company pursuant to this Agreement, or furnished in or in connection with documents mailed or delivered to the shareholders of the Company in connection with soliciting their consent to the principal terms of this Agreement and the -29- Merger (to the extent that such documents were prepared by or include information provided by the Company), such documentation (when read together) contains or will contain at the Effective Time, any untrue statement of a material fact, or omits or will omit at the Effective Time to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which made, not misleading, provided that it is agreed that the proxy statement need not comply with the proxy rules of the United States Securities and Exchange Commission and that the representation as to "omissions" will not impose any requirement greater than applicable law. ARTICLE III REPRESENTATIONS/WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub represent and warrant to the Company as follows: 3.1 Organization of Parent and Merger Sub. Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of California. Each of Parent and Merger Sub has the corporate power to own its properties and to carry on its business as now being conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the failure to be so qualified would have a material adverse effect on the business, assets (including intangible assets), financial condition or results of operations of Parent not including: (i) any material adverse effect following the date of this Agreement on the business, assets (including intangible assets), financial condition or results of operations of Parent to the extent attributable to the Merger contemplated by this Agreement; (ii) changes in general conditions of the industry in which Parent operates; or (iii) any reduction in the trading price of Parent's Common Stock as reported on the OTC Bulletin Board (hereinafter referred to as a "Parent Material Adverse Effect") Parent or Merger Sub respectively or the ability of either to consummate the transactions contemplated hereby. 3.2 Authority. Parent and Merger Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Merger Sub. No vote of Parent stockholders is required with respect to this Agreement and the transactions contemplated thereby. This Agreement has been duly executed and delivered by Parent and Merger Sub respectively and constitutes the valid and binding obligations of Parent and Merger Sub, enforceable in accordance with its terms. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a benefit or rights under: (a) any provision of the Articles of Organization or Bylaws of Parent or the Articles of Organization or Bylaws of Merger Sub; or (b) any mortgage, indenture, lease, contract or other agreement or instrument, permit, concession, franchise, license, judgment, order, -30- decree, statute, law, ordinance, rule or representation applicable to Parent or on which Parent's business, financial condition, operations or prospects is substantially dependent. No consent, approval, waiver, order or authorization of, or registration, declaration or filing with, any Governmental Entity, is required by or with respect to Parent or Merger Sub in connection with the execution, delivery and performance of this Agreement by Parent and Merger Sub or the consummation by Parent and Merger Sub of the transactions contemplated hereby except for: (a) the filing of the Agreement of Merger with the Secretary of State of the State of California and with the Secretary of State of the Commonwealth of Massachusetts; and (b) such consents, approvals, order, authorizations, registrations, declarations and filings as may be required under applicable state and federal securities laws. 3.3 Parent Common Stock. The shares of Parent Common Stock to be issued pursuant to the Merger will, when issued and delivered in accordance with this Agreement, be duly authorized, validly issued, fully paid and non-assessable and will be issued in compliance with applicable federal and state securities laws; provided, however, that the Parent Common Stock to be issued hereunder will be subject to restrictions on transfer under applicable federal and state securities laws. 3.4 SEC Filings; Parent Financial Statements (a) Parent has filed all forms, reports, registration statements and documents required to be filed by Parent with the SEC and has made available to the Company such forms, reports, and documents in the form filed with the SEC. All such required forms, reports and documents (including those that Parent may file subsequent to the date hereof until the closing) are referred to herein as the "Parent SEC Reports;" provided that any Parent SEC Report shall be deemed to include all amendments to such report through the date hereof. As of their respective filing dates (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), the Parent SEC Reports: (i) complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC thereunder applicable to such Parent SEC Reports; and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (b) Each of the consolidated financial statements of Parent (including, in each case, the notes thereto), included in the Parent SEC Reports (the "Parent Financial Statements"), including each Parent SEC Report filed after the date hereof until the Closing: (i) complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto; (ii) was prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated; and (iii) fairly presented the consolidated financial position of Parent and its subsidiaries on the respective dates thereof and the consolidated results of Parent's operations and cash flows for the periods indicated (subject, in the case of unaudited financial statements, to audit adjustments). There has been no change in Parent's accounting policies except as described in the notes to the Parent Financial Statements. -31- 3.5 No Material Adverse Change. Since the date of the balance sheet included in the Parent's most recently filed report on Form 10-Q, Parent has conducted its business in the ordinary course and there has not occurred any material adverse change in the financial condition, liabilities, assets or business of Parent. For purposes of this section, a reduction in the trading price of Parent's Common Stock, as reported by the OTC Bulletin Board, changes in economic conditions or changes in the industry and markets in which the Parent competes shall not constitute a material adverse change, whether occurring at any time or from time to time. 3.6 Litigation. Except as disclosed in Parent SEC Reports, there are no suits, claims, actions or proceedings, pending or, to the knowledge of Parent, threatened against, or relating to or affecting Parent or Merger-Sub or any of their subsidiaries, before any Governmental Entity that seeks to enjoin or restrain the consummation of the transactions contemplated by this Agreement or which reasonably be expected either singularly or in the aggregate to be material to Parent or its financial condition. 3.7 Brokers' Fees. Neither Parent nor Merger-Sub has incurred, nor will it incur, directly or indirectly, any liability for brokerage or finders' fees or agents' commissions or any similar charges in connection with this Agreement or any transaction contemplated hereby. ARTICLE IV SECURITIES ACT COMPLIANCE; REGISTRATION 4.1 Securities Act Exemption. The Parent Common Stock to be issued pursuant to this Agreement initially will not be registered under the Securities Act in reliance on the exemptions from the registration requirements of Section 5 of the Securities Act set forth in Section 4(2) thereof. Prior to the Closing Date, each of the Company's shareholders shall have provided Parent such representations, warranties, certifications and additional information as Parent may reasonably request to ensure the availability of such exemptions from the registration requirements of the Securities Act. 4.2 Stock Restrictions. In addition to any legend imposed by applicable state securities laws or by any contract which continues in effect after the Effective Time, the certificates representing the shares of Parent Common Stock issued pursuant to this Agreement shall bear a restrictive legend (and stop transfer orders shall be placed against the transfer thereof with Parent's transfer agent), stating substantially as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH RULE 144 IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR AN OPINION OF COUNSEL, -32- SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT, OR A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION. 4.3 The Company Shareholders' Restrictions Regarding Securities Law Matters. Each shareholder of the Company, by virtue of the Merger and the conversion into Parent Common Stock of the Company Capital Stock held by such shareholder, shall be bound by the following provisions: (a) Such shareholder will not offer, sell, or otherwise dispose of any shares of Parent Common Stock except in compliance with the Securities Act and the rules and regulations thereunder. (b) Such shareholder will not sell, transfer or otherwise dispose of any shares of Parent Common Stock unless: (i) such sale, transfer or other disposition is within the limitations of and in compliance with Rule 144 promulgated by the SEC under the Securities Act and the Shareholder furnishes Parent with reasonable proof of compliance with such Rule; (ii) in the opinion of counsel, reasonably satisfactory to Parent and its counsel, some other exemption from registration under the Securities Act is available with respect to any such proposed sale, transfer, or other disposition of Parent Common Stock; or (iii) the offer and sale of Parent Common Stock is registered under the Securities Act. ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME 5.1 Conduct of Business of the Company. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement pursuant to its terms or the Effective Time, the Company agrees (except to the extent that Parent shall otherwise consent in writing) to carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, to pay its debts and Taxes when due, to pay or perform other obligations when due, and, to the extent consistent with such business, to use all commercially reasonable efforts consistent with past practice and policies to preserve its present business organization, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it, all with the goal of preserving unimpaired its goodwill and ongoing businesses at the Effective Time provided that it is understood that the Company is no longer conducting business and does not plan to conduct business prior to the effectiveness of the Merger. The Company shall promptly notify Parent of any materially adverse event involving or affecting the Company or its business of which it becomes aware. In addition, except as permitted by the terms of this Agreement, without the prior written consent of Parent, during the period from the date of this Agreement and continuing -33- until the earlier of the termination of this Agreement pursuant to its terms or the Effective Time, Company shall not do any of the following (except as contemplated by this Agreement): (a) Waive any stock repurchase rights, accelerate, amend, or change the period of exercisability of any outstanding Company Options or Company Common Stock subject to vesting, or reprice Company Options granted under the Option Plan or authorize cash payments in exchange for any such options; (b) Except in the ordinary course of business, modify, amend or terminate any material contract or agreement to which the Company is a party or waive, release or assign any material rights or claims thereunder; (c) Transfer or license to any person or entity or otherwise extend, amend or modify any rights to the Company Intellectual Property Rights (other than pursuant to non-exclusive end-user licenses granted to customers of the Company in the ordinary course of business, provided that no such license shall: (i) contain any right of refund to the license (other than refusal rights consistent with established past practices); or (ii) involve the transfer of product(s) to any person or entity in violation of applicable U.S. export laws and regulations) or enter into grants to future patent rights; (d) Except in the ordinary course of business, enter into or amend any agreements pursuant to which any other party is granted marketing, distribution or similar rights with respect to any products of the Company; (e) Amend or otherwise modify (or agree to do so), except in the ordinary course of business, or violate the terms of, any of the Contracts; (f) Commence any litigation except to enforce its rights hereunder or under any agreements related hereto; (g) Declare, set aside or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any Company Capital Stock, or split, combine or reclassify any Company Capital Stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for any Company Capital Stock; (h) Purchase, redeem or otherwise acquire, directly or indirectly, any Company Capital Stock, except repurchases of unvested shares at cost in connection with the termination of the employment relationship with any employee or consultant pursuant to the term set forth in the applicable stock option or purchase agreements in effect on the date hereof; (i) Except for the issuance of Series D Preferred Stock contemplated by this Agreement, issue, grant, deliver, sell, pledge or authorize, or otherwise encumber or propose to do any of the foregoing, any Company Capital Stock or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities (except for the issuance of Series D Preferred Stock, and the issuance of any Company Capital Stock upon -34- exercise or conversion of presently outstanding Company Options, warrants or Preferred Stock, or the grant of stock options to new employees pursuant to outstanding written offers of employment); (j) Cause or permit any amendments to its Bylaws or Articles of Organization, except in connection with the issuance of Series D Preferred Stock; (k) Acquire or agree to acquire by merging or consolidating with, or by purchasing any assets or equity securities of, or by any other manner, any business or any corporation, partnership, association, joint venture or other business organization or division thereof, or otherwise acquire or agree to acquire outside of the ordinary course of business any assets in any amount which are material, individually or in the aggregate, to the Company's business, or in the ordinary course of business in an amount in excess of $25,000 in the case of a single transaction or in excess of $50,000 in the aggregate; (l) Sell, lease, license, encumber or otherwise dispose of any properties or assets except equipment leases, non-exclusive end-user licenses of Company Products, sales of inventory in the ordinary course of business consistent with past practice or except for the sale, lease or disposition (other than through licensing) of a property or assets which are not material, individually or in the aggregate, to the business of Company; (m) Incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or options, warrants, calls or other rights to acquire any debt securities of Company, or enter into any "keep well" or other agreement to maintain any financial statement condition of any third party other than in connection with the financing of ordinary course trade payables consistent with past practice; (n) Grant any severance or termination pay: (i) to any director or officer; or (ii) to any other employee except payments made pursuant to written agreements outstanding on the date hereof and as disclosed in the Company Schedules, or adopt any new severance plan; (o) Adopt or amend any employee benefit plan, or enter into any employment contract, extend employment offers, pay or agree to pay any special bonus or special remuneration to any director or employee, or increase the salaries or wage rates of its employees, except as consistent with the ordinary course of the Company consistent with past practice. (p) Effect or agree to effect, including by way of hiring or involuntary termination, any change in the Company's directors, officers or key employees; (q) Revalue any of its assets, including without limitation, writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business, or except as required by GAAP, make any change in accounting methods, principles or practices; -35- (r) Pay, discharge or satisfy, in an amount in excess of $25,000 (in any one case) or $50,000 (in the aggregate), any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in the Company Financial Statements (or the notes thereto) or that arose in the ordinary course of business or expenses consistent with the provisions of this Agreement incurred in connection with any transaction contemplated hereby; (s) Make or change any material election in respect of Taxes, adopt or change any accounting method in respect of Taxes, enter into any closing agreement, settle any claim or assessment in respect of Taxes, or consent to any extension or waiver of the limitation period applicable to any claim or assessment in respect of Taxes; (t) Enter into any strategic alliance, joint development or joint marketing agreement; (u) Commence a lawsuit other than: (i) for the routine collection of bills; (ii) in such cases where the Company, in good faith, determines that failure to commence suit would result in the material impairment of a valuable aspect of its business, provided that it consults with Parent prior to the filing of such a suit; or (iii) for a breach of this Agreement; (v) Materially reduce the amount of any insurance coverage provided by or fail to renew any existing insurance policies; (w) Engage in any action that could reasonably be expected to cause the Merger to fail to qualify as a "reorganization" under Section 368(a)(2)(D) of the Code, whether or not otherwise permitted by the provisions of this Article V; or (x) Take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) through (y) above. 5.2 Notices. The Company shall give all notices and other information required to be given to the employees of the Company, any collective bargaining unit representing any group of employees of the Company and any applicable government authority under the WARN Act, the National Labor Relations Act, the Code, the Consolidated Omnibus Budget Reconciliation Act and any other applicable law in connection with the transaction provided for in this Agreement. 5.3 No Solicitation. Until the earlier of the Effective Time or the date of termination of this Agreement pursuant to the provisions of Section 9.1 hereof, neither the Company nor will the Company permit any of its officers, directors, agents, representative or affiliates to directly or indirectly, take any of the following actions with any party other than Parent and its designees: (a) solicit, encourage, initiate or participate in any negotiations or discussions with respect to, any offer or proposal to acquire all, substantially all or a significant portion of the Company's business, properties or technologies or any portion of the Company Capital Stock (whether or not outstanding) whether by merger, purchase of assets, tender offer or otherwise, or effect any such transaction; (b) disclose any non-public -36- information to any person concerning the Company's business, technologies or properties or afford to any person or entity access to its properties, technologies, books or records; (c) assist or cooperate with any person to make any proposal to purchase all or any part of the Company Capital Stock or assets; or (d) enter into any agreement with any person providing for the acquisition of all or any significant portion of the Company (whether by way of merger, purchase of assets, tender offer or otherwise). In addition to the foregoing, if the Company receives, prior to the Effective Time or the termination of this Agreement, any offer, proposal, or request relating to any of the above, the Company shall immediately notify Parent thereof, including information as to the identity of the offeror or the party making any such offer or proposal and the specific terms of such offer or proposal, as the case may be, and such other information related thereto as Parent may reasonably request. The parties hereto agree that irreparable damage would occur in the event that the provisions of this Section 5.3 were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed by the parties that Parent shall be entitled to seek an injunction or injunctions to prevent breaches of the provisions of this Section 5.3 and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which Parent may be entitled to at law or in equity. It is understood that Company directors may take such action as is required to discharge their fiduciary duties. ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Shareholder Approval. The Company shall, as promptly as practicable after the date hereof and in accordance with Massachusetts Law and the Company's Articles of Organization and Bylaws, seek to obtain the approval of the Company's shareholders of the principal terms of this Agreement and the Merger. The Company shall ensure that the shareholder approval is solicited in compliance with Massachusetts Law and the Articles of Organization and Bylaws of the Company. The Company agrees to use its best efforts and to take all action reasonably necessary or advisable to secure the necessary votes required by Massachusetts Law to effect the Merger. 6.2 Access to Information. The Company shall afford Parent and its accountants, legal counsel and other representatives reasonable access during normal business hours during the period prior to the Effective Time to: (a) all of the properties, books, contracts, commitments and records of the Company; (b) all other information concerning the business, properties, and personnel of the Company as Parent may reasonably request; and (c) all key employees of the Company as identified by Parent. The Company agrees to provide Parent and its accountants, legal counsel and other representatives copies of internal financial statements promptly upon request. No information or knowledge obtained in any investigation pursuant to this Section 6.3 shall affect or be deemed to modify any representation or warranty contained herein or the conditions to the obligations of the parties to consummate the Merger. 6.3 Confidentiality. All information not previously disclosed to the public which shall have been furnished by the Company or Parent to the other party shall not be disclosed -37- prior to the Closing Date to any person other than the party's respective employees, legal counsel, and accountants, in confidence, or used for any purpose other than as contemplated herein. In the event that the sale of the Assets shall not be consummated, all such information, including any schedule, analysis or other documents prepared by Seller or Buyer, which shall be in writing, shall remain confidential. The parties acknowledge that disclosure by a party of such information except as permitted hereunder may result in substantial harm to the other party. 6.4 Public Disclosure. Unless otherwise required by law (including, without limitation, securities laws), prior to the Effective Time, no disclosure (whether or not in response to an inquiry) of the subject matter of this Agreement shall be made by any party hereto (other than disclosures to the Company's Board or to Company shareholders pursuant to Section 6.2) unless approved by Parent and the Company prior to release, provided that such approval shall not be unreasonably withheld. 6.5 Consents. The Company shall promptly apply for or otherwise seek and use reasonable commercial efforts to obtain all consents and approvals required to be obtained by it for the consummation of the Merger, including all consents, waivers or approvals under any of the Contracts which are necessary in order to preserve the benefits thereunder for the Surviving Corporation and otherwise in connection with the Merger. All of such consents and approvals are set forth in Schedule 2.6. 6.6 FIRPTA Compliance. On the Closing Date, the Company shall deliver to Parent a properly executed statement in a form reasonably acceptable to Parent for purposes of satisfying Parent's obligations under Treasury Regulation Section 1.1445-2(c)(3). 6.7 Legal Conditions to the Merger. Each of Parent, Merger Sub and the Company will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger and will promptly cooperate with and furnish information to any other party hereto in connection with any such requirements imposed upon such other party in connection with the Merger. Each party will take all reasonable actions to obtain (and will cooperate with the other parties in obtaining) any consent, authorization, order or approval of or any registration, declaration or filing with, or an exemption by, any Governmental Entity, or other third party, required to be obtained or made by such party or its subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement. 6.8 Best Efforts; Additional Documents and Further Assurances. Subject to the terms and conditions of this Agreement, each of the parties agrees to use its best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including using best efforts to accomplish the following: (a) the taking of all acts reasonably necessary to cause the conditions precedent set forth in Article VI to be satisfied; (b) the obtaining of all necessary actions or nonactions, waivers, consents, approvals, orders and authorizations from -38- Governmental Entities required hereunder and the making of all necessary registrations, declarations and filings (including registrations, declarations and filings with Governmental Entities, if any) and the taking of all reasonable steps as may be necessary to avoid any suit, claim, action, investigation or proceeding by any Governmental Entity; (c) the obtaining of all necessary consents, approvals or waivers from third parties; (d) the defending of any suits, claims, actions, investigations or proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Entity vacated or reversed; and (e) the execution or delivery of any additional instruments reasonably necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. 6.9 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of: (a) the occurrence or non-occurrence of any event which is likely to cause any representation or warranty of the Company and Parent or Merger Sub, respectively, contained in this Agreement to be untrue or inaccurate in any material respect at or prior to the Effective Time except as contemplated by this Agreement; and (b) any failure of the Company or Parent, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.10 shall not limit or otherwise affect any remedies available to the party receiving such notice or affect the representations, warranties, covenants or agreements of the parties or conditions to the obligation of the parties under this Agreement. 6.10 Reorganization. It is the intent of the Company, Parent, Merger Sub and the Surviving Corporation that this Merger qualifies as a tax-free reorganization under Section 368(a)(2)(D) of the Code, and the Company, Parent, Merger Sub and the Surviving Corporation covenant and agree not to take any actions inconsistent with such intent, and each hereby agrees to use best efforts to cause the Merger to qualify as a tax-free reorganization under Section 368(a)(2)(D) of the Code. Parent and the Surviving Corporation agree not to take any action following the Effective Time that could reasonably be expected to cause the Merger to fail to constitute a "reorganization" under Section 368(a)(2)(D) of the Code. This Section 6.10 shall survive the consummation of the Merger at the Effective Time. 6.11 Blue Sky Laws. Parent shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the Parent Common Stock pursuant hereto. The Company shall use reasonable good faith efforts to assist Parent as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance of Parent Common Stock pursuant hereto. 6.12 Indemnification (a) From and after the Effective Time, Parent will, and will cause the Surviving Corporation to fulfill and honor in all respects the indemnification and other obligations of the Company pursuant to the Company's Articles of Organization or Bylaws as -39- each is in effect on the date hereof (the persons to be indemnified pursuant to the provisions referred to in this Section 6.17 shall be referred to herein as, collectively, the "Indemnified Parties"). (b) This Section 6.13 shall survive consummation of the Merger at the Effective Time, is intended to be for the benefit of, and enforceable by, the Company, Parent, the Surviving Corporation and each Indemnified Party and such Indemnified Party's heirs and representatives, and shall be binding on all successors and assigns of Parent and the Surviving Corporation. 6.13 Termination of Company Investor Rights. The Company shall terminate as of the Closing of all Company investor rights granted by the Company to its shareholders and in effect prior to the Closing, including but not limited to rights of co-sale, voting, registration, first refusal, board observation or information or operational covenants. 6.14 401(k) Plan. The Company agrees to terminate the 401(k) plan of the Company (if there is a 401(k) plan) and all other Company employee plans immediately prior to the Effective Time in a manner reasonably acceptable to Parent, unless Parent, in its sole and absolute discretion, agrees to sponsor and maintain such plans by providing the Company with written notice of such election prior to the Effective Time. 6.15 Raising of Additional Capital.. The Company agrees that it will use its best efforts to raise no less than $1,000,000 in cash from the sale of its Series D Preferred Stock by no later than December 17, 1999 (the "Series D Offering"). The Company shall conduct the Series D Offering in accordance with all applicable state and federal securities laws, and shall take all required steps to assure that the offer and sale of the Series D Preferred Stock is exempt from the registration requirements of the Act pursuant to Section 4(2) of the Act. The Company shall place the proceeds received from the offering of the Series D Preferred Stock into a separate escrow account maintained with the law firm of Evers & Hendrickson, LLP, counsel to Parent, and such proceeds shall not be released from the escrow until: (i) immediately prior to the Closing, at which time the proceeds will be released to the Company; or (ii) as of such time as this Agreement is terminated, in which case the proceeds shall be returned to investors. The Company agrees that it shall retain no less than $1,000,000 of proceeds received from the Series D Offering ("Retained Amount") once the funds have been released from escrow, and that it shall not pay the Retained Amount to any creditor, shareholder or other person whatsoever (or enter into any commitment to do so) prior to or as of the Effective Time. ARTICLE VII CONDITIONS TO THE MERGER 7.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction at or prior to the Closing of the following conditions: -40- (a) Shareholder Approval. The principal terms of this Agreement, the Merger and the transactions contemplated hereby shall have been approved and adopted by the shareholders of the Company by the requisite vote under applicable law and the Company's Articles of Organization. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal or regulatory restraint or prohibition preventing the consummation of the Merger shall be in effect. Nor shall there be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal. (c) Closing Date Payment Schedule. Parent and the Company shall each have reviewed and approved, which approval shall not be unreasonably withheld, a schedule (the "Closing Date Payment Schedule") reflecting, as of the Effective Time: (i) for each holder of Series B Preferred Stock and Series D Preferred Stock and each Converted Creditor, the number of shares of Series B Preferred Stock and Series D Preferred Stock held or the amount of the claim being converted (as the case may be), the aggregate number of shares of Parent Common Stock payable to such holder or creditor in the Merger, the number of such shares payable promptly after the Effective Time (in accordance with Section 1.9) and payable into the Escrow Fund (as defined in Section 8.2(a)), and the amount of cash payable to such holder for any fractional shares; and (ii) for each holder of Series B Preferred Stock and certain managers of the Company, the number of Warrants to purchase shares of Parent Common Stock, the number of shares of Parent Common Stock issuable upon exercise (in accordance with Section 1.9), and the per share exercise price. 7.2 Additional Conditions to Obligations of the Company. The obligations of the Company to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by the Company: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct on and as of the Effective Date, except for changes contemplated by this Agreement or which do not have a Parent Material Adverse Effect and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date), with the same force and effect as if made on and as of the Closing Date, and the Company shall have received a certificate to such effect signed on behalf of Parent by a duly authorized officer of Parent. (b) Agreements and Covenants. Parent and Merger Sub shall have performed or complied (which performance or compliance shall be subject to Parent's or Merger Sub's ability to cure as provided in Section 9.1(e) below) in all material respects with all covenants, obligations and conditions of this Agreement required to be performed or complied with by them on or prior to the Closing Date, and the Company shall have received a certificate to such effect signed by a duly authorized officer of Parent. -41- (c) Legal Opinion. The Company shall have received a legal opinion from Evers & Hendrickson, LLP, counsel to Parent, in substantially the form attached hereto as Exhibit D. 7.3 Additional Conditions to the Obligations of Parent and Merger Sub. The obligations of Parent and Merger Sub to consummate the Merger and the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of each of the following conditions, any of which may be waived, in writing, exclusively by Parent: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement shall be true and correct on and as of the Effective Time, except for changes contemplated by this Agreement or which do not have a Company Material Adverse Effect (taking into account the provisions of the first paragraph of Article II) and except for those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date), with the same force and effect as if made on and as of the Effective Time (subject, however, to the requirement that Section 2.3(c) and the provisions of Section 2.3(a) and (b) that address the outstanding capital stock of the Company and the reserves of stock set aside for outstanding options, warrants and other capital commitments shall be true and accurate without regard to the Material Adverse Effect qualification); and Parent and Merger Sub shall have received a certificate to such effect signed on behalf of the Company by the President and Chief Financial Officer of the Company; (b) Agreements and Covenants. The Company shall have performed or complied (which performance or compliance shall be subject to the Company's ability to cure as provided in Section 9.1(d) below) in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and Parent and Merger Sub shall have received a certificate to such effect signed by the President and Chief Financial Officer of the Company; (c) Third Party Consents. Parent shall have been furnished with evidence satisfactory to it that the Company has obtained the consents, approvals and waivers set forth in Schedule 2.6 where the failure to obtain such consents, approval and waivers would have a Company Material Adverse Effect. (d) Legal Opinion. Parent shall have received a legal opinion from Ropes & Gray, legal counsel to the Company, in substantially the form attached hereto as Exhibit E. (e) Termination of Company Investor Rights. Parent shall have been furnished evidence reasonably satisfactory to it that all investor rights granted by the Company to its shareholders and in effect prior to the Closing, including but not limited to rights of co-sale, voting, registration, first refusal, board observation or information or operational covenants, shall have terminated as of the Closing. (f) Escrow Schedule. The Company shall have executed and delivered to Parent the Escrow Schedule (as defined in Section 8.2 hereof). -42- (g) Raise $1,000,000. The Company shall have raised $1,000,000 in cash from the sale of Series D Preferred stock in accordance with Section 6.15. (h) Liabilities Must Not Exceed $50,000. Total liabilities of Company must not exceed $50,000, after excluding Converted Creditors who have agreed to be paid in Parent Common Stock. 7.4 Consents/Covenants from Creditors. All of the Converted Creditors shall have executed agreements, in a form reasonable to the Company, acknowledging their waiver and release of the Company from all liability for all amounts owed in exchange for the receipt of Parent Common Stock and the status of such creditors as accredited investors or the sophistication of such creditors with respect to their acquisition of Parent Company Stock. All other creditors of the Company shall have signed agreements either: (1) waiving their rights to other compensation; or (b) indicating that they will accept payment of $0.33 for every dollar owed as payment if full for all debts due and owing from the Company. ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW 8.1 Survival of Representations and Warranties. All of the Company's representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall terminate not later than 5:00 p.m., California time, the date which is one year following the Closing Date (the "Expiration Date"); provided, however, that the representations and warranties relating or pertaining to any Tax or Returns related to such Tax set forth in Section 2.10 hereof, shall survive until the expiration of all applicable statues of limitations, or extensions thereof, governing each Tax or Returns related to such Tax. All of the Parent's and Sub's representations and warranties contained herein or in any instrument delivered pursuant to this Agreement shall terminate at the Effective Time. 8.2 Escrow Arrangements (a) Escrow Fund. At the Effective Time the holders of Series B Preferred Stock and Series D Preferred Stock will be deemed to have received and deposited with the Escrow Agent (as defined below) the Escrow Amount (plus any additional shares as may be issued upon any stock split, stock dividend or recapitalization effected by Parent after the Effective Time) without any act of any shareholder. As soon as practicable after the Effective Time, the Escrow Amount, without any act of any holder, will be deposited with The Pacific Bank, 100 Montgomery Street, San Francisco, California 94104 (or other institution acceptable to Parent and the Securityholder Agent (as defined in Section 8.2(g) below)) as Escrow Agent (the "Escrow Agent"), such deposit to constitute an escrow fund (the "Escrow Fund") to be governed by the terms set forth herein. The portion of the Escrow Amount contributed on behalf of each shareholder of Company shall be in proportion to the aggregate Parent Common Stock which such holder would otherwise be entitled under Sections 1.9(a) and (b) and shall be in the respective share amounts and percentages listed opposite each such Company's shareholder's names listed in a schedule to be executed by the Company and -43- delivered to Parent at Closing (the "Escrow Schedule"). All shares of Parent Common Stock contributed to the Escrow Fund shall not be unvested or subject to any right of repurchase, risk of forfeiture or other condition in favor of the Surviving Corporation. The Escrow Fund shall be available to compensate Parent and its affiliates (including the Surviving Corporation) for any claims, losses, liabilities, damages, deficiencies, costs and expenses, including attorneys' fees and expenses, and expenses of investigation and defense (hereinafter individually a "Loss" and collectively "Losses") incurred by Parent, its officers, directors, or affiliates (including the Surviving Corporation) directly or indirectly as a result of: (i) any inaccuracy or breach of a representation or warranty of the Company contained herein (or in any certificate, instrument, schedule or document attached to this Agreement and delivered by the Company in connection with the Merger) of the shareholders of the Company made in any instrument executed by the shareholders in connection with the transactions contemplated hereby; (ii) any failure by the Company or its shareholders to perform or comply with any covenant contained herein or in any agreement or instrument contemplated hereby; and (iii) any legal or other fees and expenses, interest, fees or penalties related thereto. Parent may not receive any shares from the Escrow Fund, however, unless and until Officer's Certificates (as defined in Section 8.2(d) below) identifying Losses, the aggregate amount of which exceed $50,000, have been delivered to the Escrow Agent as provided in paragraph (e) and such amount is determined pursuant to this Article VIII to be payable; in such case, Parent may recover shares from the Escrow Fund equal in value to all indemnified Losses in excess of the $50,000 threshold for which there is no objection or any objection had been resolved in accordance with the provisions of this Article VIII. (b) Escrow Period; Distribution upon Termination of Escrow Periods. Subject to the following requirements, the Escrow Fund shall be in existence immediately following the Effective Time and shall terminate upon the earlier of: (i) the date on which Parent has received audited financial statements together with a report thereon from Parent's independent auditors covering the combined results of Parent and Company for the first fiscal year of Parent ending after the Closing Date; or (ii) at 5:00 p.m., California time, on the Expiration Date (the "Escrow Period"); provided, however, that the Escrow Period shall not terminate with respect to such amount (or some portion thereof), that together with the aggregate amount remaining in the Escrow Fund is necessary in the reasonable judgment of Parent, subject to the objection of the Securityholder Agent and the subsequent arbitration of the matter in the manner provided in Section 8.2(f) hereof, to satisfy any unsatisfied claims concerning facts and circumstances existing prior to the termination of such Escrow Period specified in any Officer's Certificate delivered to the Escrow Agent prior to termination of such Escrow Period. As soon as all such claims have been resolved, as evidenced by written memorandum of the Securityholder Agent and Parent, the Escrow Agent shall deliver to the shareholders of the Company the remaining portion of the Escrow Fund not required to satisfy such claims. Deliveries of Escrow Amounts to the shareholders of the Company pursuant to this Section 8.2(b) shall be made in proportion to their respective original contributions to the Escrow Fund (as set forth on the Escrow Schedule). At all times during the Escrow Period, the former holders of Series B Preferred Stock and Series D Preferred Stock shall be deemed to be the record holders of their respective amounts of the Parent Common Stock comprising the Escrow Amount. -44- (c) Protection of Escrow Fund (i) The Escrow Agent shall hold and safeguard the Escrow Fund during the Escrow Period, shall treat such fund as a trust fund in accordance with the terms of this Agreement and not as the property of Parent and shall hold and dispose of the Escrow Fund only in accordance with the terms hereof. (ii) Any shares of Parent Common Stock or other equity securities issued or distributed by Parent (including shares issued upon a stock split or stock dividend) ("New Shares") in respect of Parent Common Stock in the Escrow Fund which have not been released from the Escrow Fund shall be added to the Escrow Fund and become a part thereof. New Shares issued in respect of shares of Parent Common Stock which have been released from the Escrow Fund shall not be added to the Escrow Fund but shall be distributed to the recordholders thereof. Cash dividends on Parent Common Stock shall not be added to the Escrow Fund but shall be distributed to the recordholders thereof. (iii) Each former holder of Series B Preferred Stock and Series D Preferred Stock shall be deemed the record holder of, and shall have voting, dividend, distribution and all other rights with respect to the shares of Parent Common Stock contributed to the Escrow Fund by such shareholder (and on any voting securities and other equity securities added to the Escrow Fund in respect of such shares of Parent Common Stock). (d) Claims Upon Escrow Fund (i) Upon receipt by the Escrow Agent at any time on or before the Expiration Date of a certificate signed by any officer of Parent (an "Officer's Certificate"): (A) stating that Parent has paid or properly accrued or reasonably anticipates that it will have to pay or accrue Losses; and (B) specifying in reasonable detail the individual items of Losses included in the amount so stated, the date each such item was paid or properly accrued, or the basis for such anticipated liability, and the nature of the misrepresentation, breach of warranty or covenant to which such item is related, the Escrow Agent shall, subject to the provisions of Section 8.2(e) hereof, deliver to Parent out of the Escrow Fund, as promptly as practicable, shares of Parent Common Stock held in the Escrow Fund in an amount equal to such Losses. (ii) For the purposes of determining the number of shares of Parent Common Stock to be delivered to Parent out of the Escrow Fund pursuant to Section 8.2(d)(i) hereof, the shares of Parent Common Stock shall be valued in the manner described in Section 1.9(c) of this Agreement. Parent and the Securityholder Agent shall certify such determined value in a certificate signed by both Parent and the Securityholder Agent, and shall deliver such certificate to the Escrow Agent. (e) Objections to Claims. At the time of delivery of any Officer's Certificate to the Escrow Agent, Parent shall deliver a duplicate copy of such certificate to the Securityholder Agent and for a period of thirty (30) days after such delivery, the Escrow Agent shall not deliver to Parent any Escrow Amounts pursuant to Section 8.2(d) hereof unless the Escrow Agent shall have received written authorization from the Securityholder Agent to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent -45- shall make delivery of shares of Parent Common Stock from the Escrow Fund in accordance with Section 8.2(d) hereof, provided that no such payment or delivery may be made if the Securityholder Agent shall object in a written statement to the claim made in the Officer's Certificate, and such statement shall have been delivered to the Escrow Agent prior to the expiration of such thirty (30) day period. (f) Resolution of Conflicts; Arbitration. (i) In case the Securityholder Agent shall so object in writing to any claim or claims made in any Officer's Certificate, the Securityholder Agent and Parent shall attempt in good faith to agree upon the rights of the respective parties with respect to each of such claims. If the Securityholder Agent and Parent should so agree, a memorandum setting forth such agreement shall be prepared and signed by both parties and shall be furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and distribute shares of Parent Common Stock from the Escrow Fund in accordance with the terms thereof. (ii) If no such agreement is reached within sixty (60) days after receipt of the written objection of the Securityholder Agent, either Parent or the Securityholder Agent may demand arbitration of the matter unless the amount of the damage or loss is at issue in pending litigation with a third party, in which event arbitration shall not be commenced until such amount is ascertained or both parties agree to arbitration; and in either such event the matter shall be settled by arbitration conducted by three arbitrators. Parent and the Securityholder Agent shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator, each of which arbitrators shall be independent and have at least ten years relevant experience. The arbitrators shall set a limited time period and establish procedures designed to reduce the cost and time for discovery while allowing the parties an opportunity, adequate in the sole judgment of the arbitrators, to discover relevant information from the opposing parties about the subject matter of the dispute. The arbitrators shall rule upon motions to compel or limit discovery and shall have the authority to impose sanctions, including attorneys fees and costs, to the extent as a court of competent law or equity, should the arbitrators determine that discovery was sought without substantial justification or that discovery was refused or objected to without substantial justification. The decision of a majority of the three arbitrators as to the validity and amount of any claim in such Officer's Certificate shall be binding and conclusive upon the parties to this Agreement, and notwithstanding anything in Section 8.2(e) hereof, the Escrow Agent shall be entitled to act in accordance with such decision and make or withhold payments out of the Escrow Fund in accordance therewith. Such decision shall be written and shall be supported by written findings of fact and conclusions which shall set forth the award, judgment, decree or order awarded by the arbitrators. (iii) Judgment upon any award rendered by the arbitrators may be entered in any court having jurisdiction. Any such arbitration shall be held in San Francisco, California under the rules then in effect of the Judicial Arbitration and Mediation Services, Inc. -46- (g) Securityholder Agent of the Shareholders; Power of Attorney. (i) In the event that the Merger is approved, effective upon such vote, and without further act of any shareholder, Michael Benjamin shall be appointed as agent and attorney-in-fact (the "Securityholder Agent") for each former shareholder of the Company (except such shareholders, if any, as shall have perfected their dissenters' rights under Massachusetts Law), for and on behalf of former shareholders of the Company, to give and receive notices and communications, to authorize delivery to Parent of shares of Parent Common Stock from the Escrow Fund in satisfaction of claims by Parent, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of Securityholder Agent for the accomplishment of the foregoing. Such agency may be changed by the shareholders of the Company from time to time upon not less than thirty (30) days prior written notice to Parent; provided that the Securityholder Agent may not be removed unless holders of a two-thirds interest of the Escrow Fund agree to such removal and to the identity of the substituted agent. Any vacancy in the position of Securityholder Agent may be filled by approval of the holders of a majority in interest of the Escrow Fund. No bond shall be required of the Securityholder Agent, and the Securityholder Agent shall not receive compensation for his or her services. Notices or communications to or from the Securityholder Agent shall constitute notice to or from each of the former shareholders of the Company. (ii) The Securityholder Agent shall not be liable for any act done or omitted hereunder as Securityholder Agent while acting in good faith and in the exercise of reasonable judgment. The former shareholders of the Company on whose behalf the Escrow Amount was contributed to the Escrow Fund shall jointly and severally indemnify the Securityholder Agent and hold the Securityholder Agent harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Securityholder Agent and arising out of or in connection with the acceptance or administration of the Securityholder Agent's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Securityholder Agent. (h) Actions of the Securityholder Agent. A decision, act, consent or instruction of the Securityholder Agent shall constitute a decision of all the former shareholders for whom a portion of the Escrow Amount otherwise issuable to them are deposited in the Escrow Fund and shall be final, binding and conclusive upon each of such shareholders, and the Escrow Agent and Parent may rely upon any such written decision, consent or instruction of the Securityholder Agent as being the decision, consent or instruction of each every such shareholder of the Company. The Escrow Agent and Parent are hereby relieved from any liability to any person for any acts done by them in accordance with such decision, consent or instruction of the Securityholder Agent. -47- (i) Third-Party Claims. (i) If any third party shall notify Parent or its affiliates hereto with respect to or if Parent shall become aware of any matter (hereinafter referred to as a "Third Party Claim"), which may give rise to a claim by Parent against the Escrow Fund, then Parent shall give notice to the Securityholder Agent within 30 days of Parent becoming aware of any such Third Party Claim and of facts upon which any such Third Party Claim will be based setting forth such material information with respect to the Third party Claim as is reasonably available to Parent; provided, however, that no delay or failure on the part of Parent in notifying the Securityholder Agent shall relieve the Securityholder Agent and the former Company shareholders from any obligation hereunder unless the Securityholder Agent and the former Company shareholders are thereby materially prejudiced (and then solely to the extent of such prejudice). The Securityholder Agent and the former Company shareholders shall not be liable for any attorneys fees and expenses incurred by Parent prior to Parent's giving notice to the Securityholder Agent of a Third Party Claim. The notice from Parent to the Securityholder Agent shall set forth such material information with respect to the Third Party Claim as is then reasonably available to Parent. (ii) In case any Third Party Claim is asserted against Parent or its affiliates, Parent shall notify the Securityholder Agent thereof pursuant to Section 8.2(i)(i) hereinabove, and Parent shall be entitled to assume the defense thereof, with counsel selected by Parent. (iii) In the event that Parent assumes the defense of the Third Party Claim in accordance with Section 8.2(i)(ii) above, the Securityholder Agent may retain separate counsel and participate in the defense of the Third Party Claim, but the fees and expenses of such counsel shall be at the expense of the Company shareholders independent of the Escrow Fund. (iv) In each case, Parent or its affiliates shall conduct the defense of the Third Party Claim actively and diligently, and the Securityholder Agent and the former Company shareholders will cooperate with Parent or its affiliates in the defense of that claim and will use reasonable efforts to provide full access to documents, assets, properties, books and records reasonably requested by Parent and material to the claim and will use reasonable efforts to make available all individuals reasonably requested by Parent for investigation, depositions and trial. (j) Escrow Agent's Duties. (i) The Escrow Agent shall be obligated only for the performance of such duties as are specifically set forth herein, and as set forth in any additional written escrow instructions which the Escrow Agent may receive after the date of this Agreement which are signed by an officer of Parent and the Securityholder Agent, and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow Agent while acting in good faith and in the exercise of reasonable judgment, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. -48- (ii) The Escrow Agent is hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person, excepting only orders or process of courts of law, and is hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case the Escrow Agent obeys or complies with any such order, judgment or decree of any court, the Escrow Agent shall not be liable to any of the parties hereto or to any other person by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (iii) The Escrow Agent shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver this Agreement or any documents or papers deposited or called for hereunder. (iv) The Escrow Agent shall not be liable for the expiration of any rights under any statute of limitations with respect to this Agreement or any documents deposited with the Escrow Agent. (v) In performing any duties under the Agreement, the Escrow Agent shall not be liable to any party for damages, losses, or expenses, except for gross negligence or willful misconduct on the part of the Escrow Agent. The Escrow Agent shall not incur any such liability for: (A) any act or failure to act made or omitted in good faith; or (B) any action taken or omitted in reliance upon any written instrument, including any written statement or affidavit provided for in this Agreement that the Escrow Agent shall in good faith believe to be genuine, nor will the Escrow Agent be liable or responsible for forgeries, fraud, impersonations, or determining the scope of any representative authority. In addition, the Escrow Agent may consult with the legal counsel in connection with Escrow Agent's duties under this Agreement and shall be fully protected in any act taken, suffered, or permitted by him/her in good faith in accordance with the advice of counsel. The Escrow Agent is not responsible for determining and verifying the authority of any person acting or purporting to act on behalf of any party to this Agreement. (vi) If any controversy arises between the parties to this Agreement, or with any other party, concerning the subject matter of this Agreement, its terms or conditions, the Escrow Agent will not be required to determine the controversy or to take any action regarding it. The Escrow Agent may hold all documents and shares of Parent Common Stock and may wait for settlement of any such controversy by final appropriate legal proceedings or other means as, in the Escrow Agent's discretion, the Escrow Agent may be required, despite what may be set forth elsewhere in this Agreement. In such event, the Escrow Agent will not be liable for damage. Furthermore, the Escrow Agent may at its option, file an action of interpleader requiring the parties to answer and litigate any claims and rights among themselves. The Escrow Agent is authorized to deposit with the clerk of the court all documents and shares of Parent Common Stock held in escrow, except all cost, expenses, charges and reasonable attorney fees incurred by the Escrow Agent due to the interpleader action and which the parties jointly and severally agree to pay. Upon initiating such action, the Escrow Agent shall be fully released and discharged of and from all obligations and liability imposed by the terms of this Agreement. -49- (vii) Parent and the Surviving Corporation agree jointly and severally to indemnify and hold Escrow Agent harmless against any and all losses, claims, damages, liabilities, and expenses, including reasonable costs of investigation, counsel fees, and disbursements that may be imposed on Escrow Agent or incurred by Escrow Agent in connection with the performance of its duties under this Agreement, including but not limited to any litigation arising from this Agreement or involving its subject matter. (viii) The Escrow Agent may resign at any time upon giving at least thirty (30) days written notice to the parties; provided, however, that no such resignation shall become effective until the appointment of a successor escrow agent which shall be accomplished as follows: the parties shall use their best efforts to mutually agree on a successor escrow agent within thirty (30) days after receiving such notice. If the parties fail to agree upon a successor escrow agent within such time, the Escrow Agent shall have the right to appoint a successor escrow agent authorized to do business in the state of California. The successor escrow agent shall execute and deliver an instrument accepting such appointment and it shall, without further acts, be vested with all the estates, properties, rights, powers, and duties of the predecessor escrow agent as if originally named as escrow agent. Upon such appointment of a successor escrow agent, the Escrow Agent shall be discharged from any further duties and liability under this Agreement. (k) Fees. All fees of the Escrow Agent for performance of its duties hereunder shall be paid by Parent. It is understood that the fees and usual charges agreed upon for services of the Escrow Agent shall be considered compensation for ordinary services as contemplated by this Agreement. In the event that the conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent renders any service not provided for in this Agreement, or if the parties request a substantial modification of its terms, or if any controversy arises, or if the Escrow Agent is made a party to, or intervenes in, any litigation pertaining to this escrow or its subject matter, the Escrow Agent shall be reasonably compensated for such extraordinary services and reimbursed for all costs, attorneys' fees, and expenses occasioned by such default, delay, controversy or litigation. Parent promises to pay these sums upon demand. (l) Maximum Liability and Remedies. Except for intentional fraud and willful misconduct, the rights of Parent to make claims upon the Escrow Fund in accordance with this Article VIII shall be the sole and exclusive remedy of Parent and the Surviving Corporation after the Closing with respect to any representation, warranty, covenant or agreement made by Company under this Agreement (or in any certificate, instrument, schedule, statement or document delivered in connection with the Merger) and no former shareholder, option holder, warrant holder, director, officer, employee or agent of Company shall have any personal liability to Parent or the Surviving Corporation after the Closing in connection with the Merger. -50- ARTICLE IX TERMINATION, AMENDMENT AND WAIVER 9.1 Termination. Except as provided in Section 9.2 below, this Agreement may be terminated and the Merger abandoned at any time prior to the Closing Date: (a) by mutual written consent duly authorized by the Board of Directors of the Company and Parent; (b) by either Parent or the Company if: (i) the Closing Date has not occurred by December 31, 1999 (provided that the right to terminate this Agreement under this clause 9.1(b)(i) shall not be available to any party whose willful failure to fulfill any obligation hereunder has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date and such action or failure constitutes a breach of this Agreement); (ii) there shall be a final non-appealable order of a federal or state court in effect preventing consummation of the Merger; or (iii) there shall be any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity that would make consummation of the Merger illegal; (c) by Parent, if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or the Company's ownership or operation of any portion of the business of the Company; or (ii) compel Parent or the Company to dispose of or hold separate, as a result of the Merger, any portion of the business or assets of the Company or Parent; (d) by Parent, if it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the Company and as a result of such breach the conditions set forth in Section 7.3(a) or 7.3(b), as the case may be, would not then be satisfied; provided, however, that if such breach is curable by the Company within ten (10) calendar days after written notice to the Parent through the exercise of the Company's reasonable best efforts, then for so long as the Company continues to exercise such reasonable best efforts Parent may not terminate this Agreement under this Section 9.1(d) (but no cure period shall be required for a breach which by its nature reasonably cannot be cured); (e) by the Company if, it is not in material breach of its obligations under this Agreement and there has been a breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of Parent or Merger Sub and as a result of such breach the conditions set forth in Section 7.2(a) or 7.2(b), as the case may be, would not then be satisfied; provided, however, that if such breach is curable by Parent or Merger Sub within ten (10) calendar days after written notice to the Company through the exercise of the reasonable best efforts of the Parent or Merger Sub, then for so long as the Parent or Merger Sub continues to exercise such reasonable best efforts the Company may not terminate this -51- Agreement under this Section 9.1(e) (but no cure period shall be required for a breach which by its nature reasonably cannot be cured). Where action is taken to terminate this Agreement pursuant to Section 9.1, it shall be sufficient for such action to be authorized by the Board of Directors (as applicable) of the party taking such action. 9.2 Effect of Termination. Any termination of this Agreement under Section 9.1 above will be effective immediately upon the delivery of written notice of the terminating party to the other parties hereto. In the event of the termination of this Agreement as provided in Section 9.1, this Agreement shall be of no further force or effect, except: (a) as set forth in Sections 6.4, 6.5, this Section 9.2 and Article X (general provisions, including expenses) and provisions which provide expressly that they survive termination, each of which shall survive the termination of this Agreement; and (b) nothing herein shall relieve any party from liability for any breach of this Agreement prior to its termination. 9.3 Amendment. Except as is otherwise required by applicable law, prior to the Closing, this Agreement may be amended by the parties hereto at any time by execution of an instrument in writing signed by Parent and the Company. 9.4 Extension; Waiver. At any time prior to the Effective Time, Parent and Merger Sub, on the one hand, and the Company, on the other, may, to the extent legally allowed: (a) extend the time for the performance of any of the obligations of the other party hereto; (b) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. ARTICLE X GENERAL PROVISIONS 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or mailed by registered or certified mail (return receipt requested) or at the time sent via facsimile (with acknowledgment of complete transmission) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice), provided, however, that notices sent by mail will not be deemed given until received: -52- (a) if to Parent or Merger Sub, to: Zapworld.com, Inc. 117 Morris Street Sebastopol, California 95472 Attention: Garry Starr, President Telephone:(707) 824-4150 Facsimile:(707) 824-4159 with a copy to: Evers & Hendrickson, LLP 155 Montgomery Street, 12th Floor San Francisco, California 94104 Attention: William D. Evers, Esq. Telephone:(415) 772-8100 Facsimile:(415) 772-8101 (b) if to the Company, to: EMPower Corporation 210 Broadway, Building 3 Everett, Massachusetts 02149 Attention: Michael Benjamin Telephone:(617) 387-7200 Facsimile:(617) 387-7224 with a copy to: Ropes & Gray One International Place Boston, Massachusetts 02110 Attention: Howard K. Fuguet, Esq. Telephone:(617) 951-7000 Facsimile:(617) 951-7050 (c) if to the Securityholder Agent: EMPower Corporation 210 Broadway, Building 3 Everett, Massachusetts 02149 Attention: Michael Benjamin Telephone:(617) 387-7200 -53- Facsimile:(617) 387-7224 (d)if to the Escrow Agent: The Pacific Bank 100 Montgomery Street San Francisco, California 94104 Attention: Ronald Garcia Telephone:(415) 576-2556 Facsimile:(415) 576-2556 10.2 Expenses. Each party will bear its respective expenses and legal fees incurred with respect to this Agreement, and the transactions contemplated hereby. 10.3 Interpretation. For purposes of this Agreement, the words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The word "agreement" when used herein shall be deemed in each case to mean any contract, commitment or other agreement, whether oral or written, that is legally binding. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.4 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 10.5 Entire Agreement; Assignment. This Agreement, the schedules and Exhibits hereto, and the documents and instruments and other agreements among the parties hereto referenced herein: (a) constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall not be assigned by operation of law or otherwise except as otherwise specifically provided, except that Parent and Merger Sub may assign their respective rights and delegate their respective obligations hereunder to a wholly-owned subsidiary provided that Parent remain primarily liable for its obligations hereunder. 10.6 Severability. In the event that any provision of this Agreement or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision. 10.7 Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of -54- any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. 10.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. Each of the parties hereto consents to the jurisdiction and venue of the federal and state courts for San Francisco, California for purposes of any action arising out of this Agreement, and agrees that process may be served upon them in any manner authorized by this Agreement for delivery of notices, and waives any covenants not to assert or plead any objection which they might otherwise have to such jurisdiction and such process. 10.9 Rules of Construction. The parties hereto agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting such agreement or document. 10.10 Specific Performance. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 10.11 Miscellaneous. Merge Sub hereby agrees that it may be sued in the Commonwealth of Massachusetts for any prior obligation of the Company, and any obligation thereafter incurred by Merger Sub, including the obligation created by section eighty-five of MGLA 156B, so long as any liability remains outstanding against the Company or Merger Sub in the Commonwealth of Massachusetts, and Merger Sub hereby irrevocably appoints the state secretary of the Commonwealth of Massachusetts as its agent to accept service of process in any action for the enforcement of any such obligation, including taxes, in the same manner as provided in MGLA chapter one hundred and eight-one. -55- IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Securityholder Agent (as to Article VIII only) and the Escrow Agent (as to matters set forth in Article VIII only) have caused this Agreement to be signed by their duly authorized respective officers, all as of the date first written above. EMPower Corporation Zapworld.com, Inc. a Massachusetts corporation a California corporation By: /s/ Michael Benjamin By: /s/ Gary Starr ----------------------------- ---------------------------- Michael Benjamin Gary Starr President President SECURITYHOLDER AGENTS EmPower Acquisition, Inc. a California corporation By: /s/ Michael Benjamin By: /s/ Gary Starr ----------------------------- ---------------------------- Michael Benjamin Gary Starr President -56- EX-10.10 19 0019.txt COMMERCIAL LEASE COMMERCIAL LEASE TABLE OF CONTENTS Preamble ARTICLE 1. TERM OF LEASE 1.01 Original Term 1.02 Extended Term 1.03 Holding Over 1.04 Landlord's Inability to Deliver Possession 1.05 Termination for Failure ARTICLE 2. RENT 2.01 Security Deposit 2.02 Minimum Rent 2.03 Late Charge 2.04 Rental Increase ARTICLE 3. USE OF PREMISES 3.01 Permitted Use 3.02 Insurance Hazards 3.03 Waste or Nuisance 3.04 Compliance With Laws ARTICLE 4. TAXES AND UTILITIES 4.01 Utilities 4.02 Personal Property Taxes 4.03 Real Property Taxes ARTICLE 5. ALTERATIONS AND REPAIRS 5.01 Condition of Premises 5.02 Maintenance by Landlord 5.03 Maintenance by Tenant 5.04 Maintenance of Plate Glass 5.05 Alterations and Liens 5.06 Inspection by Landlord 5.07 Surrender of Premises ARTICLE 6. INDEMNITY AND INSURANCE 6.01 Hold-Harmless Clause 6.02 Public Liability and Property Damage ARTICLE 7. SIGNS AND TRADE FIXTURES 7.01 Installation and Removal of Trade Fixtures 7.02 Unremoved Trade Fixtures 7.03 Signs ARTICLE 8. DESTRUCTION OF PREMISES 8.01 Landlord's Election to Repair or Terminate 8.02 Insurance Proceeds ARTICLE 9. CONDEMNATION 9.01 Total Condemnation ARTICLE 10. DEFAULT, ASSIGNMENT, AND TERMINATION 10.01 Prohibition Against Subletting or Assignment 10.02 Subordination 10.03 Default Defined 10.04 Termination of Lease and Recovery of Damages 10.05 Landlord's Right to Continue Lease in Effect 10.06 Landlord's Right to Relet 10.07 Landlord's Right to Cure Tenant Defaults 10.08 Cumulative Remedies 10.09 Waiver of Breach ARTICLE 11. MISCELLANEOUS 11.01 Force Majeure-Unavoidable Delays 11.02. Attorney's Fees 11.03 Notices 11.04 Binding on Heirs and Successors 11.05 Partial Invalidity 11.06 Sole and Only Agreement 11.07 Time of Essence EXHIBIT "A" LEGAL DESCRIPTION EXHIBIT "B" IMPROVEMENTS EXHIBIT "C" PARCEL MAP 2 Preamble This lease is made and entered into on January 12, 1996 by and between DANIEL O. DAVIS and ROBBIN H. DAVIS ("landlord"), and ZAP POWER SYSTEMS/ ELECTRICYCLE CORPORATION, a California Corporation ("Tenant"). It is understood by parties hereto, that Tenant has been in possession of the property since November 1, 1995 and has paid rent in full for November and December 1995. Landlord, for and in consideration of the rent to be paid by Tenant and of the covenants and provisions to be kept and performed by Tenant under this lease, hereby leases to Tenant, and Tenant agrees to lease from Landlord, the following: the real property commonly known as 117 Morris Street, Sebastopol, California, and legally described on Exhibit "A" attached hereto ("the Property"), together with the warehouse and office space and paved parking now existing thereon and all improvements now existing and to be made by Landlord and as set forth in Exhibit "B" attached hereto. The term "Premises" as used in this lease shall mean all of the Real Property, the structures known as 117 Morris Street and all of the improvements thereto. ARTICLE 1 TERM OF LEASE Original Term Section 1.01. This lease for the property described in Exhibit "A" shall be for a term of (2) years and (5) months , commencing at 12:01 A.M. on January 1, 1996 ("Commencement Date"), and ending at 12:01 A.M. on June 1, 1998 ("Original Term"), unless terminated earlier pursuant to the provisions of this lease. The Tenant understands and agrees that possession of 117 Morris Street shall be delivered by Landlord January 1, 1996 subject to the provisions this lease. Regardless of the date of Possession, the Commencement date of this lease, which encompasses all of the property in Exhibit "A", shall be January 1, 1996. Extended Term Section 1.02. In the event Tenant is not then in default under this lease, Tenant shall have the option and right to extend the Original Term of this lease for one period of (5) years commencing on expiration of the Original Term. In the event Tenant is not then in default under this lease, Tenant shall have the option and right to extend this lease for one additional period of five (5) years commencing on expiration of the first five (5) year Extended Term. If Tenant elects to extend the term of this lease, Tenant must give Landlord written notice of Tenant's election to extend at least sixty (60) days before expiration of the previous term. During the Extended Term of this lease, if any, Landlord and Tenant shall be bound by all of the obligations, covenants, and agreements of this lease except that Tenant shall have no right to further extend the term of this lease beyond or after expiration of the two five (5) year Extended Terms granted under this section. References throughout this lease to "the term of 3 this lease" shall include both the Original Term and the Extended Term, if any, unless otherwise indicated. Holding Over Section 1.03. In the event Tenant holds over and continues in possession of the Premises after expiration of the Original Term (when Tenant has not validly exercised its option to extend the term of the lease in accordance with Section 1.02) or after expiration of the Extended Term (when Tenant has validly exercised its option to extend the term of the lease in accordance with Section 1.02), Tenant's continued occupancy of the Premises shall be considered a month-to-month tenancy subject to all the terms and conditions of this lease. Landlord's Inability to Deliver Possession Section 1.04. If Landlord is for any reason unable to deliver possession of the Premises to Tenant on the dates of Possession set forth in Section 1.01 of this lease, this lease shall not be void or voidable nor shall Landlord be liable to Tenant for any loss or damage resulting from failure to deliver possession to Tenant so long as Landlord has exercised, and continues to exercise, reasonable diligence to deliver possession of the Premises to Tenant. No rent shall, however, accrue or become due from Tenant to Landlord under this lease until the actual physical possession of the Premises is delivered, or the right to actual unrestricted physical possession of the Premises under this lease is tendered by Landlord to Tenant. Furthermore, the term of this lease shall not be extended by Landlord's inability to deliver possession of the Premises to Tenant on the dates of Possession set forth in Section 1.01. Termination for Failure of Possession Section 1.05. Notwithstanding any provision of Section 1.04 of this lease, if Landlord for any reason fails to deliver actual physical possession of the Premises, or fails to tender actual unrestricted physical possession of the Premises under this lease, to Tenant within one hundred eighty (180) days after the date for Possession specified in Section 1.01 of this lease, Tenant may terminate this lease by giving Landlord written notice of its election to do so. In the event Tenant elects to so terminate this lease, this lease shall become null and void as of the date Tenant delivers its written notice of termination to Landlord, and thereafter neither party to this lease shall be under any further obligation or liability to the other because of this lease and Landlord shall return to Tenant any consideration received from Tenant pursuant to or for execution of this lease. If Tenant elects to terminate this lease in accordance with the provisions of this section, it shall give written notice of its election to terminate to Landlord not later than five (5) days after the dates specified for Possession in Section 1.01 of this lease. 4 ARTICLE 2 RENT Security Deposit Section 2.01. Tenant has, contemporaneously with the execution of this lease and in addition to the minimum cash rental for the first month of the term hereof, deposited with Landlord the sum of four thousand four hundred dollars ($4,400.00), receipt of which is hereby acknowledged by Landlord, said sum being hereinafter referred to as the "Deposit Amount". The Deposit Amount shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this lease by Tenant to be kept and performed during the term hereof, including payment of rent, repair of damages to the premises caused by Tenant, and to clean the premises upon termination. If at any time during the term of this lease any of the rent herein reserved shall be overdue and unpaid, or any other sum payable to Tenant to Landlord hereunder shall be overdue and unpaid, then Landlord may at its option (but Landlord shall not be required to), apply any portion of the Deposit Amount to the payment of any such overdue rent or other sum. In the event of the failure of Tenant to keep and perform all of the terms, covenants and conditions of this lease to be kept and performed by Tenant then, at its option, Landlord may, after terminating this lease, apply the entire Deposit Amount , or so much thereof as may be necessary, to compensate Landlord for all loss or damage sustained or suffered by Landlord due to such breach on the part of Tenant. Should the entire Deposit Amount, or any portion thereof, be applied by Landlord for the payment of overdue rent or other sums due and payable to Landlord by Tenant hereunder, then Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a sufficient amount in cash to restore said security to the original Deposit Amount; the Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this lease. If the claim of the Landlord upon the deposit is only for defaults in payment of rent, then any remaining portion of the deposit shall be returned to Tenant no later than two (2) weeks after the date the Landlord receives possession of the premises. Where the claim of Landlord upon the deposit includes amounts reasonably necessary to repair damages to the premises caused by the Tenant or to clean the premises (not to include reasonable wear and tear), then any remaining portion of the deposit shall be returned to the Tenant no later than thirty (30) days from the date the Landlord receives possession of the premises. Upon termination of the Landlord's interest in the demised premises, Landlord shall within a reasonable time, do one of the following acts, either of which shall relieve the Landlord of further liability with respect to the deposit: (1) Transfer the portion of the deposit remaining after any lawful deductions to the Landlord's successor in interest, and thereafter notify the Tenant by personal delivery or certified mail of the transfer, of any claims made against the deposit, and of the transferee's name and address. (2) Return the portion of the deposit remaining after any lawful deductions to the Tenant. 5 Minimum Rent Section 2.02. Tenant agrees to pay to Landlord a fixed minimum rental for the use and occupancy of the Premises (the "Minimum Rent"). The amount of Minimum Rent payable for each month during the Original Term shall be four thousand four hundred dollars ($4,400.00), and the amount of Minimum Rent payable for each month during the Extended Terms, if any, shall be the same. The Minimum Rent shall be payable on the first day of each and every month commencing the first day the premises are made available for possession. The rent shall be payable at the office of Landlord at 111 Morris Street, Sebastopol, California, or at any other place or places as Landlord may from time to time designate by written notice delivered to Tenant. Minimum Rent for partial calendar months occurring at the commencement and termination of the term of this lease shall be prorated accordingly. Rental Increase Section 2.03. The Minimum Rent described above shall be adjusted on every first Anniversary of the commencement date of this lease beginning on January l, 1997 (including during any extension of this lease) to reflect the average percentage increase in the Consumer Price Index or All Urban Consumers using 1977 as a base year, as compiled by the Bureau of Labor Statistics of the United States Department of Labor for the San Francisco-Oakland Metropolitan Area for the reference month closest preceding each of the adjustment dates over the same Consumer Price Index for all Urban Consumers for the base reference month immediately preceding the commencement of this lease. The Minimum Rent as adjusted on each of the this lease or any interest therein by Tenant except as provided in Section 10.01 of this lease. Adjustment dates shall be the rent payable by Tenant to Landlord monthly for the use and occupancy of the premises until the next adjustment date; provided, however, in no event shall any adjustment result in a decrease in the Minimum Rent to a sum less than the Minimum Rent payable for each month of the Original Term. Late Charges Section 2.04. Tenant acknowledges that late payment of rent may cause Landlord to incur costs and expenses, the exact amount of such costs being extremely difficult and impractical to fix. Such costs may include, but are not limited to, processing and accounting expenses, late charges that may be imposed on Landlord by terms of any loan secured by the property, costs for additional attempts to collect rent, and preparation of notices. Therefore, if any installment of rent due from Tenant is not received by Landlord within five (5) business days after the date due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the amount due as a late charge, which shall be deemed additional rent. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord may incur by reason of Tenant's late payments. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the past due amount, or prevent Landlord from exercising any other rights and remedies under this agreement, and as provided by law. 6 ARTICLE 3 USE OF PREMISES Permitted Use Section 3.01. During the term of this lease (including the Original Term and the Extended Term, if any), the Premises shall be used for the exclusive purpose of operating and conducting a solar energy and environmental equipment sales and production facility, including bicycles, scooters and other equipment for uses normally incident to that purpose, and for no other purpose. Tenant shall not use or permit the Premises to be used for any other purpose, without the prior written consent of Landlord. In conducting the business specified in this section in and on the Premises, Tenant shall sell any merchandise and render any services that are customarily sold and rendered by the operators of similar businesses. Insurance Hazards Section 3.02. Tenant shall not commit or permit the commission of any acts on the Premises nor use or permit the use of the Premises in any manner that will increase the existing rates for or cause the cancellation of any fire, liability, or other insurance policy insuring the Premises or the improvements on the Premises. Tenant shall, at its own cost and expense, comply with any and all requirements of Landlord's insurance carriers necessary for the continued maintenance at reasonable rates of fire and liability insurance policies on the Premises and the improvements on the Premises. Waste or Nuisance Section 3.03. Tenant shall not commit or permit the commission by others of any waste on the Premises; Tenant shall not maintain, commit, or permit the maintenance or commission of any nuisance as defined in Civil Code Section 3479 on the Premises; and Tenant shall not use or permit the use of the Premises for any unlawful purpose. Compliance With Laws Section 3.04. Tenant shall at Tenant's own cost and expense comply with all statutes, ordinances, regulations, and requirements of all governmental entities, both federal and state and county or municipal, [including those requiring capital improvements to the Premises,] relating to Tenant's use and occupancy of the Premises whether those statutes, ordinances, regulations, and requirements are now in force or are subsequently enacted. The judgment of any court of competent jurisdiction, or the admission by Tenant in a proceeding brought against Tenant by any government entity, that Tenant has violated any such statute, ordinance, regulation, or requirement shall be conclusive as between Landlord and Tenant and shall constitute grounds for termination of thus lease by Landlord. The Landlord shall be responsible for any. hazardous waste which is discovered on the subject premises and which is proven to have existed at the commencement of this lease. 7 ARTICLE 4 TAXES AND UTILITIES Utilities Section 4.01. Tenant shall pay for all utilities and services furnished to or used by it, including, without limitation, gas, electricity, water, telephone service, and trash collection. Tenant shall make all arrangements for such services and shall pay all connection charges, and shall hold Landlord harmless from any liability for charges for said service. Personal Property Taxes Section 4.02. Tenant shall pay before they become delinquent all taxes, assessments, and other charges leveled or imposed by any governmental entity on the furniture, trade fixtures, appliances, terms used in this section, any shelves, counters, vaults, vault doors, wall safes? partitions, fixtures, machinery, plant equipment, office equipment, television or radio antennas, and communication equipment brought on the Premises by Tenant. Real Property Taxes Section 4.03. Landlord shall pay all real property taxes and assessments leveled or assessed ARTICLE 5 ALTERATIONS AND REPAIRS Condition of Premises Section 5.01. Tenant accepts the Premises, as well as the Improvements indicated and agreed on as per plan, in their present condition or as planned to be made, and stipulates with Landlord that the Premises and Improvements are in good, clean, safe, and tenantable condition as of the date of this lease. Tenant further agrees with and represents to Landlord that the Premises have been inspected by Tenant, that it has received assurances acceptable to Tenant by means independent of Landlord or any agent of Landlord of the truth of all facts material to this lease, and that the Premises are being leased by Tenant as a result of its own inspection and investigation and not as a result of any representations made by Landlord or any agent of Landlord except those expressly set forth in this lease. Maintenance by Landlord Section 5.02. Landlord shall, at its own cost and expense, maintain in good condition and repair the structural elements of the Building , landscaping, walkways, driveways, trash enclosures, and painting and maintenance of exterior walls. For purposes of this section, "structural elements" shall mean the exterior roof, exterior walls (except show window glass), structural supports, and foundation of the Building. Landlord shall not be liable for any damages to Tenant or the property of Tenant resulting from Landlord's failure to make any repairs required by this section unless written notice of the need for those repairs has been 8 given to Landlord by Tenant and Landlord has failed for a period of 30 days after receipt of the notice, unless prevented by causes not the fault of the Landlord, to make the needed repairs. Notwithstanding anything in this section to the contrary, Tenant shall promptly reimburse Landlord for the full cost of any repairs made pursuant to this section required because of the negligence or other fault, other than normal and proper use, of Tenant or its employees or agents or subtenants, if any. Landlord and its agents shall have the right to enter the Premises at all reasonable times after giving Tenant twenty-four (24) hours notice (and at any time during an emergency) for the purpose of inspecting them or to make any repairs required to be made by Landlord under this lease. Maintenance by Tenant Section 5.03. Except as otherwise expressly provided in Section 5.02 of this lease, Tenant shall at its own cost and expense keep and maintain all portions of the Premises and all Improvements located on the Premises in good order and repair and in as safe and clean a condition as they were when received by Tenant from Landlord, reasonable wear and tear excepted. Maintenance of Plate Glass Section 5.04. Tenant shall, at its own cost and expense, repair and replace any plate glass in any show window on the Premises that is broken regardless of any cause. Furthermore, Tenant shall at Tenant's own cost and expense at all times during the term of this lease carry adequate plate glass insurance on the glass in all show windows on the Premises to perform the repair and replacement requirements of this section. Should Tenant fail to repair or replace any glass broken in a show window or fall to maintain adequate plate glass insurance on the glass in show windows on the Premises, Landlord may replace or repair the broken glass or secure that insurance and Tenant shall promptly reimburse Landlord for the cost of the repair, replacement, or insurance. In addition, Tenant shall pay Landlord interest on those costs at the rate of ten percent (10%) per year from the date the costs were incurred by Landlord to the date they are reimbursed to Landlord by Tenant. Alterations and Liens Section 5.05. Tenant shall not make or permit any other person to make any alterations to the Premises or to any Improvements on the Premises without the prior written consent of Landlord. Landlord shall not unreasonable withhold this consent. Tenant shall keep the premises free and clear from any and all liens, claims, and demands for work performed, materials furnished, or operations conducted on the Premises at the instance or request of Tenant. Furthermore, any and all alterations, additions, improvements, and fixtures, except furniture and trade fixtures, made or placed in or on the Premises by Tenant or any other person shall on expiration or earlier termination of this lease, become the property of Landlord and remain on the Premises. Landlord shall have the option, however, on expiration or termination of this lease, of requiring Tenant, at Tenant's sole cost 9 and expense, to remove any or all such alterations, additions, improvements, or fixtures from the Premises. Inspection by Landlord Section 5.06. Tenant shall permit Landlord or Landlord's agents, representatives, or employees to enter the Premises at all reasonable times after giving Tenant twenty-four (24) hours notice for the purpose of inspecting the Premises to determine whether Tenant is complying with the terms of this lease, for the purpose of doing other lawful acts that may be necessary to protect Landlord's interest in the Premises, or for the purpose of performing Landlord's duties under this lease. Surrender of Premises Section 5.07. On expiration or earlier termination of this lease, Tenant shall promptly surrender and deliver the Premises to Landlord in as good condition as they are now at the date of this lease, excluding reasonable wear and tear, and repairs required to be made by Landlord under this lease. ARTICLE 6 INDEMNITY AND INSURANCE Hold-Harmless Clause Section 6.01. Tenant agrees to protect, indemnify, and save Landlord harmless from and against any all liability to third parties resulting from Tenant's occupation and use of the Premises, specifically including, without limitation, any claim, liability, loss, or damage arising by reason of: (a) The death or injury of any person or persons, including Tenant or any person who is an employee or agent of Tenant, or by reason of the damage to or destruction of any property, including property owned by Tenant or any person who is an employee or agent of Tenant, and caused or allegedly caused by either the condition of the Premises, or some act or omission of Tenant or of some agent, contractor, employee, servant, subtenant, or concessionaire of Tenant on the Premises; (b) Any work performed on the Premises or materials furnished to the Premises at the instance or request of Tenant or any agent or employee of Tenant; and (c) Tenant's failure to perform any provision of this lease or to comply with any requirement of law or any requirement imposed on Landlord or the leased premises by any duly authorized governmental agency or political subdivision. Public Liability and Property Damage Insurance Section 6.02. Tenant shall, at Tenant's expense, maintain and keep in force during the term of this lease a policy of comprehensive public liability insurance insuring Tenant and 10 Landlord against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in an amount of not less than One Million Dollars ($1,000,000), combined single limit. If Tenant shall fail to procure and maintain said insurance Landlord may, but shall not be required to, procure and maintain the same, but at the expense of Tenant. Not more frequently than each three (3) years, if in the opinion of Landlord or its insurance broker the amount of public liability and property damage insurance coverage of the time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord, its lender or insurance broker. (a) Fire Insurance. In order that the business of Tenant may continue with as little interruption as possible, Tenant shall, during the full term of this lease and any renewals or extensions thereof, maintain at Tenant's own cost and expense an insurance policy issued by a reputable company authorized to conduct insurance business in California insuring for their full insurable value all fixtures and equipment and, to the extent possible, all merchandise that is, at any time during the term of this lease or any renewal or extension thereof, in or on said premises against damage or destruction by fire, theft, or the elements. (b) Insurance Policy Form. The bodily injury liability insurance and property damage insurance to be maintained by Tenant shall be carried in the joint names of Landlord and Tenant. Such policy shall be subject to Landlord's approval as to form and substance and shall expressly provide that the policy shall not be canceled or altered without thirty (30) days prior written notice to Landlord. Upon insurance thereof, such policy or a duplicate or a certificate thereof, shall be delivered to Landlord for retention by it. The insurance policy to be maintained by Tenant shall be issued by good and responsible insurance companies authorized to do business in the state of California. ARTICLE 7 SIGNS AND TRADE FIXTURES Installation and Removal of Trade Fixtures Section 7.01. Tenant shall have the right at any time and from time to time during the term of this lease, at Tenant's sole cost and expense, to install and affix in, to, or on the Premises any items, herein called "trade fixtures", for use in Tenant's trade or business that Tenant may, in Tenant's sole discretion, deem advisable. Any and all trade fixtures that can be removed without structural damage to the Premises or any building or improvements on the Premises shall, subject to Section 7.02 of this lease, remain the property of the Tenant and may be removed by Tenant at any time before the expiration or earlier termination of this lease, provided Tenant repairs any damage caused by the removal. Unremoved Trade Fixtures Section 7.02. Any trade fixtures described in this Article that are not removed from the Premises by Tenant within thirty (30) days after the expiration or earlier termination regardless of cause, of this lease shall be deemed abandoned by Tenant and shall automatically become the property of Landlord as owner of the real property to which they are affixed. 11 Signs Section 7.03. Tenant may erect, maintain, permit, and from time to time remove any signs at Tenant's sole cost and expense, in or about the Premises that Tenant may deem necessary or desirable, provided that any signs erected or maintained by Tenant and authorized by Landlord, and shall comply with all requirements of any governmental authority with jurisdiction. ARTICLE 8 DESTRUCTION OF PREMISES Landlord's Election to Repair or Terminate Section 8.01. Should the premises or the building on said premises be destroyed in whole or in part from any cause, Landlord may at Landlord's option either: (a) Continue this lease in full force and effect by repairing and restoring, at Landlord's own cost and expense, said premises to their former condition if that can be accomplished within ninety (90) days from the date of destruction, or (b) Terminate this lease by giving Tenant written notice of such termination. Insurance Proceeds Section 8.02. Any insurance proceeds received by Landlord because of the total or partial destruction of said premises of the building on said Premises shall be the sole property of Landlord free from any claims of Tenant, and may be used by Landlord for whatever purpose Landlord may desire. Should Landlord elect to repair and restore the premises to their former condition following partial or full destruction of said Premises or the building on said premises: (a) Tenant shall not be entitled to any damage for any loss or inconvenience sustained by Tenant as a result of the making of such repairs and restoration, unless caused by negligence of Landlord or Landlord's agents; (b) Landlord shall have full right to enter said Premises and take possession of so much of said Premises, including the whole of said Premises, as may be reasonably necessary to enable Landlord promptly and efficiently to carry out the work of repair and restoration; and (c) The rent payable by Tenant to Landlord for the part destroyed shall be abated to the extent and for the time Tenant is prevented from using that portion of the premises. 12 ARTICLE 9 CONDEMNATION Section 9.01. If title to all or any part of the Premises be taken for any public or quasi-public use under any statute or by right of eminent domain, or by private purchase in lieu thereof, Landlord may terminate this Lease as of the date that possession of said premises or part thereof, be taken. All compensation awarded or paid upon such taking, including the full fair market value of the property taken and damage for injury, if any, to the remainder, shall belong solely to and be the property of Landlord, whether such compensation be awarded or paid as compensation for diminution in value of the leasehold or to the fee; provided, however, that Landlord shall not be entitled to any award made to Tenant for loss of good will to Tenants business or for cost of removal of stock and fixtures. If by reason of such taking, a reasonable amount of the premises reasonable suitable for Tenant's continued occupancy for the uses and purposes for which the premises are leased does not remain, Tenant may terminate this lease as of the date possession of said premises or part thereof be taken. If neither party terminates this lease by reason of a partial taking, the lease shall nevertheless terminate unless the parties reach agreement as to the rent payable hereunder for the remaining portions of the premises prior to the date possession of the portion of the premises is taken. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions hereof. ARTICLE 10 DEFAULT, ASSIGNMENT, AND TERMINATION Restriction Against Subletting or Assignment Section 10.01. Tenant shall not encumber, assign, otherwise transfer this lease, any right or interest in this lease, or any right or interest in the Premises or any of the Improvements that may now or hereafter be constructed or installed on the Premises without first obtaining the express written consent of Landlord. Tenant shall not sublet the Premises or any part of the Premises or allow any other person, other than Tenant's agents, servants, and employees to occupy the Premises or any part of the Premises without the prior written consent of Landlord. A consent by Landlord to one assignment, one subletting, or one occupation of the Premises by another person shall not be deemed to be a consent to any subsequent assignment, subletting, or occupation of the Premises by another person. Any encumbrance, assignment, transfer, or subletting without the prior written consent of Landlord, whether voluntary or involuntary, by operation of law or otherwise, is void and shall, at the option of Landlord, terminate this lease. The consent of Landlord to any assignment of Tenant's interest in this lease or the subletting by Tenant of the Premises or parts of the Premises shall not be unreasonable withheld. Subordination Section 10.02. Tenant agrees that this lease shall be subordinate to any mortgages or trust deeds that are now or may hereafter be placed upon said premises and to any and all 13 advances made or to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee or beneficiary named in said mortgages or trust deed shall agree to recognize the lease of the Tenant in the event of foreclosure if the Tenant is not in default. If any mortgagee or beneficiary elects to have this lease superior to its mortgage, or deed of trust by notice to Tenant, then this lease shall be deemed superior to the lien of any such mortgage or trust deed, whether this lease is dated or recorded before or after said mortgage or trust deed. Default Defined Section 10.03. The occurrence of any of the following shall constitute a material default and breach of this lease by Tenant: (a) Any failure by Tenant to pay the rent or to make any other payment required to be made by Tenant under this lease when that failure continues for ten (10) days after written notice of the failure is given by Landlord to Tenant. (b) The abandonment or vacation of the Premises by Tenant (the absence of Tenant from or the failure by Tenant to conduct business on the Premises for a period in excess of fourteen (14) consecutive days shall constitute an abandonment or vacation for purposes of this lease.) (c) A failure by Tenant to observe and perform any other provision of this lease to be observed or performed by Tenant, when that failure continues for thirty (30) days after written notice of Tenant's failure is given by Landlord to Tenant; provided, however, that if the nature of that default is such that it cannot reasonable be cured within said thirty (30) day period, Tenant shall not be deemed to be in default if Tenant commences that cure within the said thirty (30) day period and thereafter diligently prosecutes it to completion. (d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, it is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, when possession is not restored to Tenant within thirty (30) days; or the attachment, execution, or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, when that seizure is not discharged within thirty (30) days. Termination of Lease and Recovery of Damages Section 10.04. In the event of any default by Tenant under this lease, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the right to terminate this lease and all rights of Tenant hereunder by giving written notice of the termination. No act of Landlord shall be construed as terminating this lease except written notice given by Landlord to Tenant advising Tenant that Landlord elects to terminate the lease. in the event Landlord elects to terminate this lease, Landlord may recover from Tenant: 14 (a) The worth at the time of award of any unpaid rent that had been earned at the time of termination of the lease; (b) The worth at the time of award of the amount by which the unpaid rent that would have been earned after termination of the lease until the time of award exceeds the amount of rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the term of this lease after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; and (d) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this lease. The term "rent" as used in this section shall mean the Minimum Rent, the Percentage Rent, and all other sums required to be paid by Tenant pursuant to the terms of this lease. As used in subsections (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of ten percent (10%) per year. As used in subsection c), the "worth at the time of award" is computed by discounting that amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Landlord's Right to Continue Lease in Effect Section 10.05. (a) If Tenant breaches this lease and abandons the Premises before the natural expiration of the term of this lease, Landlord may continue this lease in effect by not terminating Tenant's right to possession of the Premises, in which event Landlord shall be entitled to enforce all its rights and remedies under this lease, including the right to recover the rent specified in this lease as it becomes due under this lease. For as long as Landlord does not terminate this lease, Tenant shall have the right to assign or sublease the Premises with the Landlord's prior written consent. Landlord shall not unreasonably withhold consent. (b) No act of Landlord, including but not limited to Landlord's entry on the Premises, efforts to relet the Premises, or maintenance of the Premises, shall be construed as an election to terminate this lease unless a written notice of that intention is given to Tenant or unless the termination of this lease is decreed by a court of competent jurisdiction. Landlord's Right to Relet Section 10.06. In the event Tenant breaches this lease, Landlord may enter on and relet the Premises or any part of the Premises to a third party or third parties for any term, at any rental, and on any other terms and conditions that Landlord in its sole discretion may deem advisable, and shall have the right to make alterations and repairs to the Premises. Tenant shall be liable for all of Landlord's costs in reletting, including but not limited to remodeling costs required for the reletting. In the event Landlord relets the premises, Tenant 15 shall pay all rent due under and at the times specified in this lease, less any amount or amounts actually received by Landlord from the reletting. Landlord's Right to Cure Tenant Default Section 10.07. If Tenant breaches or fails to perform any of the covenants or provisions of this lease, Landlord may, but shall not be required to, cure Tenant's breach. Any sum expended by Landlord, with the ten maximum legal rate of interest, shall be reimbursed by Tenant to Landlord with the next due rent payment under this lease. Cumulative Remedies Section 10.08. The remedies granted to Landlord in this Article shall not be exclusive but shall be cumulative and in addition to all remedies now or hereafter allowed by law or provided in this lease. Waiver of Breach Section 10.09. The waiver by Landlord of any breach by Tenant of any of the provisions of this lease shall not constitute a continuing waiver or waiver of any subsequent breach by Tenant either of the same or another provision of this lease. ARTICLE 11 MISCELLANEOUS Force Majeure-Unavoidable Delays Section 11.01. If the performance of any act required by this lease to be performed by either Landlord or Tenant is prevented or delayed by reason of an act of God, strike, lockout, labor troubles, inability to secure materials, restrictive governmental laws or regulations, or any other cause except financial inability that is not the fault of the party required to perform the act, the time for performance of the act will be extended for a period equivalent to the period of delay, and performance of the act during the period of delay will be excused. However, nothing contained in this section shall excuse the prompt payment of rent by Tenant as required by this lease or the performance of any act rendered difficult solely because of the financial condition of the party required to perform the act. Attorney's Fees Section 11.02. If any litigation is commenced between the parties to this lease concerning the Premises, this lease, or the rights and duties of either in relation to the Premises or to this lease, the party prevailing in that litigation shall be entitled to, in addition to any other relief that may be granted in the litigation, a reasonable sum as and for it's attorney's fees in that litigation that are determined by the court in that litigation or in a separate action brought for that purpose. 16 Notices Section 11.03. Except as otherwise expressly provided by law, any and all notices or other communications required or permitted by this lease or by law to be served on or given to either party to this lease by the other party to this lease shall be in writing and shall be deemed duly served and given when personally delivered to the party to whom they are directed, or in lieu of personal service, when deposited in the United States mail, first-class postage prepaid, addressed to Tenant at 117 Morris Street, Sebastopol, California 95472 or to Landlord at 111 Morris Street, Sebastopol, California 95472. Either party, Tenant or Landlord, may change it's address for the purpose of this section by giving written notice of that change to the other party in the manner provided in this section. Binding on Heirs and Successors Section 11.04. This lease shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of Landlord and Tenant, but nothing in this section shall be construed as a consent by Landlord to any assignment of Partial Invalidity Section 11.05. If any provision of this lease is held by a court of competent jurisdiction to be either invalid, void, or unenforceable, the remaining provisions of this lease shall remain in full force and effect unimpaired by the holding. Sole and Only Agreement Section 11.06. This instrument constitutes the sole and only agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, or the lease term created under this lease, and correctly sets forth the obligations of Landlord and Tenant to each other as of its date. Any agreements or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are null and void. Time of Essence Section 11.07. Time is expressly declared to be of the essence in this lease. Executed on January 12, 1996, at Sebastopol, California. /s/ David O. Davis --------------------------------- Daniel O. Davis (Landlord) /s/ Robbin H. Davis --------------------------------- Robbin H. Davis (Landlord) /s/ James McGreen (President) --------------------------------- ZAP POWER SYSTEMS/ELECTRICYCLE CORP. (Tenant) 17 EXHIBIT "B" Improvements Landlord agrees to the following terms and conditions: (1) Offices will be cleaned and made ready for occupancy. (2) Office furniture, file cabinets, copier, and other items needed per Don Bright's walk through of Premises to become the property of ZAP Power Systems/Electricycle Corp. (3) Phone System will remain on Premises for tenants use for as long as Tenant occupies Premises. Tenant is responsible for upkeep and repair. Tenant shall take ownership of all phones. (4) Landlord to supply 8' x 20' outside area for storage container. (5) Landlord to supply one (1) double door entrance from downstairs office to warehouse, doors to be included. 18 EX-10.11 20 0020.txt LEASE EXTENSION Extension of Lease: 117 Morris Street, Sebastopol 1. Extension of Lease Agreement made by and between Daniel O. Davis and Robin H. Davis (Landlord), and ZAP Power Systems (Tenant) relative to a certain lease agreement for premises known as 117 Morris Street, and dated January 12, 1996 (Lease). 2. For good consideration, Landlord and Tenant each agree to extend the term of said Lease for a period of (3) three years commencing on June 1, 1993, terminating on June 1, 2002. The tenant has the option and right to extend this lease for one period of (3) years commencing on the expiration of the Original Term. The other conditions of this renewal option are described in the original lease, Section 1.02. 3. During the extended term, Tenant shall pay Lessor rent of $4,614.40 per month with consideration given to Rental Increases as described in the Original Lease. 4. Other terms are as follows: Lessee shall agree to continue the terms of the lease as specified in the Original Lease. Lessor agrees to install wall ventilation openings and/or ceiling ventilation fans per specifications and as agreed to by Lessee and Lessor to help with the air flow in maintaining an acceptable comfort level in the shop portion of the building. These improvement shall be completed no later than August 10, 1998. Lessor agrees to install a 10' wide paved path from the existing parking lot to the front of 111 Morris Street. This improvement shall be completed no later than August 31, 1998. 5. It is further provided that all other terms of the Lease shall continue during this extended term. This agreement shall be binding upon and shall inure to the benefit of the parties, their successors, assigns and personal representatives. Executed on July 10, 1998 at Sebastopol, California. /s/ Daniel O. Davis /s/ Robbin H. Davis - -------------------------- -------------------------- Daniel O. Davis (Landlord) Robbin H. Davis (Landlord) /s/ James McGreen - ------------------------- James McGreen, President (Tenant) EX-10.12 21 0021.txt LEASE LEASE THIS LEASE, is made AUGUST 6 1999, between PINE CREEK PROPERTIES, a California general partnership, "Landlord", whose address is P.O. Box 11218, Santa Rosa, CA 95406, and ZAPWORLD. COM "Tenant," whose address is ONE ZAP DR., 117 MORRIS ST. SEBASTOPOL, CA 951172. This Lease is made with reference to the following facts and objectives: (a) Landlord is the owner of the premises described in Paragraph 1 and Exhibit "A", which consists, generally, of APPROX. 5,000 SQ. FEET WAREHOUSE/OFFICE. (b) Tenant is willing to lease the premises from Landlord pursuant to the provisions stated in this Lease. (c) Tenant wishes to lease the premises for the purposes of MANUFACTURE AND ASSEMBLY OF ELECTRIC VEHICLES. (d) Tenant has examined the premises and is fully informed of their condition. THE PARTIES HERETO AGREE AS FOLLOWS: 1. PREMISES. Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord, upon the terms and conditions herein set forth, the real property located at 6780 DEPOT STREET, SEBASTOPOL Sonoma County, California, and more particularly described in Exhibit "A", together with the building and other improvements located on the real property ("premises"). 2. TERM. (a) The term of this lease shall commence on the 1st day of SEPTEMBER, 1999, and end on the 1st day of June, 2004, inclusive. (b) If Landlord is unable to deliver possession of the premises Tenant, by the date specified above for the commencement of the term of this Lease, neither Landlord nor its agent shall be liable for any damage caused thereby, nor shall this Lease thereby become void or voidable, and the term herein specified shall, in such case, commence upon the date of delivery of possession of the premises to Tenant and shall terminate FIVE (5) years thereafter. In such event, Tenant shall not be liable for any rent until such time as Landlord shall deliver possession of the premises to Tenant. 3. ACCEPTANCE OF PREMISES. Tenant's taking possession of the premises on commencement of the term shall constitute Tenant's acknowledgment that the premises are in good condition. 4. RENT. Tenant agrees to pay to Landlord, as rent for the premises the sum of TWO HUNDRED AND NO/100 -Dollars ($2,500.00) per month, in advance, on the first day of the term of this Lease and on the first day of each calendar month thereafter during the term. Rent for any partial month shall be prorated at the rate of 1/30th of the monthly rent per day. All installments of rent shall be paid at the address to which notices to Landlord are given, or at such other place as may be designated in writing, from time to time by Landlord, in lawful money of the United States and without deduction or offset for any cause whatsoever. In addition, Tenant agrees to pay to Landlord a late payment of ten percent (10%) of the amount due for any payment received later than the seventh day of each calendar month. 5. RENT ADJUSTMENTS. The monthly tent provided for in Paragraph 4 ("minimum monthly rent") shall be subject to adjustment at the commencement of the second year of the term and each year thereafter (the "adjustment date"), as follows: The base for computing the adjustment is the Consumer Price Index, All Urban Consumers ("All Items") for the San Francisco-Oakland Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics ("Index"), which is published for the month nearest the date of commencement of the term ("Beginning Index"). If the index published nearest the adjustment date ("Extension Index") has increased or decreased over the Beginning Index, the minimum monthly rent for the following year shall be set by multiplying the minimum monthly rent set forth in Paragraph 4, by a fraction, the numerator of which is the Extension Index and the denominator of which is the Beginning Index. In no case shall the minimum monthly rent be less than the minimum monthly rent set forth in Paragraph 4. On adjustment of the minimum monthly rent as provided in this Lease, the parties shall immediately execute an amendment to the Lease stating the new minimum monthly rent. If the index is changed so that the base year differs from that used as of the month immediately preceding the month in which the term commences, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the Index had not been discontinued or revised. 6. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with Landlord the sum of TWO THOUSAND FIVE HUNDRED AND NO/100 Dollars ($ 2500.00) as a security deposit for the performance by Tenant of the provisions of this Lease. If Tenant is in default, Landlord can use the security deposit, or any portion of it, to cure the default or to compensate Landlord for all damage sustained by Landlord resulting from Tenant's default. Tenant shall immediately, on demand pay to Landlord a sum equal to the portion of the security deposit expended or applied by Landlord as provided in this paragraph so as to maintain the security deposit in the sum initially deposited with Landlord. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the security deposit to Tenant. Landlord's obligations with respect to the security deposit are 2 those of a debtor and not a trustee. Landlord can maintain the security deposit separate and apart from Landlord's general funds or can commingle the security deposit with Landlord's general and other funds. Landlord shall not be required to pay Tenant interest on the security deposit. 7. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed against Tenant's trade fixtures or personal property installed or located in or on the premises, and that become payable during the term. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. 8. REAL PROPERTY TAXES. Landlord shall pay all real property taxes and general and special assessments ("real property taxes") levied and assessed against the premises, provided, however, that Lessee shall pay to Lessor any increase in real property tax assessed by reason of Tenant's activities or additional improvements placed upon the Premises by Lessee or at Lessee's request. 9. USE. The premises are to be used as described in the Recitals of this Lease, and for no other business or purpose without the prior written consent of Landlord. Tenant shall be responsible for any required City, County, State or Federal permits. No use shall be made or permitted to be made of the premises, nor acts done in or on about the premises, which will in any way conflict with any law, ordinance, rule or regulation affecting the occupancy or use of the premises which has been or is subsequently enacted or promulgated by any public authority, or which will increase the existing rate of insurance upon the building, or cause a cancellation of any insurance policy covering the building or any part thereof, nor shall Tenant sell, or permit to be kept, used or sold in or about the premises, any article which may be prohibited by the standard form of fire insurance policy. Tenant shall not commit, or suffer to be committed, any waste upon the premises or, any public or private nuisance, or other act of thing which may disturb the quiet enjoyment of any neighbor, commercial or residential, nor any other tenant in the building, nor use any apparatus, machinery or device in or about the premises which shall cause any substantial noise or vibration, or which shall substantially increase the amount of electricity or water, if any, agreed to be furnished or supplied under this Lease. Tenant further agrees not to connect with electric wires or water or other pipes any apparatus machinery or device without the consent of Landlord. If parking becomes an issue, Landlord shall assign specific parking spaces. 10. MAINTENANCE AND REPAIRS. Except as provided in Paragraphs 22 and 23, Tenant, at its cost, shall maintain the premises in good condition. Landlord shall be responsible for roof, walls and floor repair maintenance. Landlord shall not have any responsibility for general maintenance of the premises. Tenant waives the provisions of Civil Code Sections 1941 and 1942, with respect to Landlord's obligations for tenantability of the premises and Tenant's right to make repairs and deduct the expenses of such repairs from rent. 11. ALTERATIONS. Except as provided in Paragraph 12, Tenant shall not make any alterations to the premises without Landlord's consent. Unless otherwise provided by written agreement, all alterations shall be done either by or under the direction of Landlord, 3 but at the sole cost of Tenant, shall be the property of Landlord, and shall remain on and be surrendered with the premises on expiration or termination of the term; provided, however, that at Landlord's option, Tenant shall, at Tenant's expense, when surrendering the premises, restore the same to their original condition. If Tenant makes any alterations to the premises, as provided in this paragraph, the alterations shall not be commenced until two (2) days after has received notice from Tenant stating the date the installation of the alterations is to commence, so that Landlord can post and record an appropriate notice of non-responsibility. 12. TRADE FIXTURES. Subject to the provisions of Paragraph 11 hereof, Tenant may install and maintain its trade fixtures on the premises, provided that such fixtures, by reason of the manner in which they are affixed, do not become an integral part of the building or premises. Tenant, if not in default hereunder, may at any time or from time to time during the term hereof, or upon the expiration or termination of this Lease, alter or remove any such trade fixtures so installed by Tenant. If not so removed by Tenant on or before the expiration or termination of this Lease, Tenant, upon the request of Landlord so to do, shall thereupon remove the same. Any damage to the premises caused by any such installation, alteration or removal o such trade fixtures shall be promptly repaired at the expense of the Tenant. 13. MECHANICS' LIENS. Tenant shall pay all costs for construction done by it, or caused to be done by it, on the premises, including all required permits, as permitted by this Lease. Tenant shall keep the premises free and clear of all mechanics' liens resulting from construction done by or for Tenant. Tenant shall have the right to contest the correctness or validity of any such lien if, immediately on demand by Landlord, Tenant procures and records a lien release bond issued by a corporation authorized to issue surety bonds in California in an amount equal to one and one-half times the amount of the claim of the lien. The bond shall meet the requirements of Civil Code Section 3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit, if it recovers in the action). 14. AMERICANS WITH DISABILITIES ACT (ADA). If Tenant's use and/or personnel requirements change after the granting of initial use permit which would enact new ADA requirements, then Tenant shall at all times keep the premises in compliance with the ADA and its supporting regulations, and all similar federal, state or local laws, regulations and ordinances with respect to this new use. If Landlord's consent would be required for alterations to bring the premises into compliance, Landlord agrees not to unreasonably withhold its consent. 15. HAZARDOUS MATERIALS ACKNOWLEDGMENT ENVIRONMENTAL REPRESENTATION AND LIABILITY RELEASE. Tenant acknowledges that various materials utilized in the construction of the Property may contain materials that have been or may in the future be determined to be toxic, hazardous or undesirable and may need to be specially treated, specially handled and/or removed from the Property. Such substances may be above and below ground on the Property or may be present on or in soils, water, building 6 components or other portions of the Property in areas that may or may not be accessible or noticeable. Tenant shall use and operate the premises, at all times during the term hereof, under and in compliance with the laws of the State of California and in compliance with all applicable environmental legal requirements. For any contamination to Leased Property due to Tenant's use, Tenant assumes full responsibility for the clean-up of such toxic hazardous or undesirable material as required by current and future federal, state and local laws and regulations. Tenant acknowledges that toxic wastes, hazardous materials and undesirable substances problems can be extremely costly to correct and Tenant relieves the Landlord from all liability related thereto due to Tenant's use. Tenant therefore hereby agrees that they shall indemnify and defend and hold the Landlord harmless from any claim, liability, damage, cost or expense, including but not limited to court costs and attorneys' fees, arising out of or in any way related to toxic waste, hazardous material and/or undesirable substance affecting the Leased Property related to and caused by Tenant's use. 16. UTILITIES. Tenant shall make all arrangements for, and pay for all utilities and services furnished to or used by it including, without limitation, gas, electricity, water, sewer, telephone service, and trash collection, and for all connection charges. If for any reason, any of these utilities or services are paid for by Landlord on behalf of Tenant, then Tenant shall reimburse Landlord upon receiving notice. 17. EXCULPATION OF LANDLORD. Landlord shall not be liable to Tenant for any injury or damage that may result to any person or property in or about the premises or the building which the premises are located, from any cause whatsoever, including but not limited to injury or damage resulting from any defects in the building, including roof leaks, or any equipment located therein, or from fire, water, gas, oil, electricity or other cause or any failure in the supply of same, or from the acts or neglect of any persons. 18. INDEMNIFY AND HOLD HARMLESS. Tenant agrees to indemnify and hold Landlord harmless against all claims, and the expense of defending against such claims, for injury or damage to persons or property occurring in or about the premises or occurring outside the premises but resulting in whole or in part from the act, failure to act, negligence or other fault of Tenant or its agents, employees or invitees. 19. LIMITATION OF LANDLORD'S LIABILITY. Tenant agrees to look solely to Landlord's interest in the building for the recovery of any judgement from Landlord, it being agreed that Landlord shall never be personally liable for any such judgement. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right the Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors in interest or any other action not involving the personal liability of Landlord to respond in monetary damages from assets other than Landlord's interest in the building or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. 5 20. INSURANCE. (a) Tenant, at its cost, shall maintain public liability and property damage insurance with a combined single limit of liability of not less than $1,000,000, insuring against all liability of Tenant and its authorized representatives arising out of and in connection with Tenant's use or occupancy of the premises. All public liability insurance, and property damage insurance shall insure performance by Tenant of the indemnity provisions of Paragraph 18. Both parties shall be named as additional insureds, and the policy shall contain cross-liability endorsements. (b) Not more frequently than three (3) years, if, in the opinion of Landlord's lender or of the insurance broker retained by Landlord, the amount of public liability and property damage insurance coverage at that time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord's lender or Landlord's insurance broker. (c) Tenant, at its cost, shall maintain on all its personal property, Tenant's improvements, and alteration in, on, or about the premises, a policy of standard fire and extended coverage (Tenant shall be financially responsible for glass breakage), with vandalism and malicious mischief endorsements, to the extent of at least ninety percent (90%) of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property or the restoration of Tenant's improvements or alterations. (d) Landlord shall maintain on the building and other improvements that are a part of the premises, a policy of standard fare and extended coverage insurance with vandalism and malicious mischief endorsements, to the extent of at least ninety percent (90%) full replacement value. (e) Tenant's obligation to pay the insurance costs, shall be prorated for any partial year, at the commencement and expiration or termination of the term. (f) All insurance policies maintained by Tenant, under this paragraph, shall contain a provision requiring thirty (30) days' written notice from the insurance company to both parties and Landlord's lender, before cancellation or change in the coverage, scope, or amount of any policy. Each policy, or a certificate of the policy, together with evidence of payment of premiums, shall be deposited with the other party at the commencement of the term, and on renewal of the policy, not less than twenty (20) days before expiration of the term of the policy. 21. WAIVER OF SUBROGATION. The parties release each other, and their respective authorized representatives, from any claims for damage to any person, or to the premises and to the fixtures, personal property, Tenant's improvements and alterations of either Landlord or Tenant in or on the premises that are caused by or result from the risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against either party in 6 connection with any damage covered by any policy. Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by Lease. If any insurance policy cannot be obtained with a waiver of subrogation, or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without waiver of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of ten (10) days after receiving the notice either to place the insurance with a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation, or to agree to pay the additional premium if such policy is obtainable at additional cost, if the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved. 22. DESTRUCTION. If the whole or any part of the premises shall be destroyed by fire or other cause, or be so damaged thereby that they are untenantable and cannot be rendered tenantable within one hundred twenty (120) days from the date of such destruction or damage, or such damage or destruction is not covered by any insurance required to be maintained under Paragraph 20 this Lease may be terminated by Landlord or Tenant by written notice to the other. Within forty-five (45) days from date of such destruction or damage, Landlord shall give written notice to Tenant as to whether or not the premises will be rendered tenantable within one hundred twenty (120) days from the date of such destruction or damage and whether such damage or destruction is anticipated to be covered by the insurance required to be maintained under Paragraph 16. In case the damage or destruction be not such as to permit termination of the Lease as above provided, or neither Landlord nor Tenant elects to terminate the Lease as above provided, Landlord shall within reasonable time, render said premises tenantable, and a proportionate reduction shall be made in the rent herein reserved corresponding to the time during which and to the portion of the premises of which Tenant shall be deprived of possession. The provisions of Subdivision 2 of Section 1932 of the California Civil Code, and of Subdivision 4 of Section 1933 of that Code, shall not apply to this Lease. 23. CONDEMNATION. Should the whole or any part of the premises be condemned and taken by any competent authority for any public or quasi-public use or purpose, all awards payable on account of such condemnation and taking shall be payable to Landlord and Tenant hereby waives all interest in or claim to said awards, or any part thereof. If the whole of the premises shall be so condemned and taken, then this Lease shall terminate. If only a part of the premises is condemned and taken and the remaining portion thereof is not suitable for the purposes for which Tenant has leased said premises, this Lease shall terminate. If only a part of the premises is condemned and taken and the remaining portion thereof is suitable for the purposes for which Tenant has leased said premises, this Lease shall continue, but the rental shall be reduced in an amount proportionate to the value of the portion taken as it related to the total value of the premises. Each party waives the provisions of Code of Civil Procedure ss. 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the premises. 7 24. ASSIGNMENT AND SUBLETTING. Except as provided in Paragraph 24(d) hereof, Tenant shall not assign, mortgage or pledge this Lease, or any interest therein, and shall not sublet the premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the agents and servants of Tenant excepted) to occupy or use the premises, or any portion thereof, without the written consent of Landlord first had and obtained. A consent to one assignment, mortgage pledge, subletting, occupation or use by any other person shall not relieve the Tenant from any obligation under this Lease, and shall not be deemed to be a consent to any subsequent assignment, mortgage, pledge, subletting, occupation or use by another person. Any assignment, mortgage, subletting, occupation or use without such consent shall be void, and shall, at the option of Landlord, terminate this Lease. (a) If the Tenant desires any assignment, mortgage, pledge or subletting, occupation or use referred to in Paragraph 24, Tenant shall give written notice to the Landlord giving the name and address of the proposed assignee, mortgagee, pledgee, sublessee, occupier or user, and the price and other terms of the proposed transaction. At the same time, Tenant shall, in writing, tender by an offer to the Landlord the option to (i) reacquire the premises for the same period and under the same terms as the proposed assignment or sublease, or (ii) reacquire the premises for the same period but at a price equal to the lease rent. If the Landlord accepts the offer, it shall do so by mailing written notice of its acceptance to the Tenant within thirty (30) days after the Tenant's offer is received by the Landlord. Tenant shall be entitled to withdraw its notice of intent to assign, mortgage, pledge, sublet, occupy or use, at any time until the Landlord accepts the Tenant's offer. If only a portion of the premises would be affected by a sublease or assignment the Landlord shall have the right to re-acquire the portion affected. If the Landlord elects to reacquire under this provision the portion affected, Tenant shall be required to provide without charge reasonable and appropriate access to the portion affected and reasonable use of any common facilities. (b) If Landlord does not choose to accept the Tenant's offer under Subparagraph 24(a), but does consent to the proposed assignment, mortgage, pledge, subletting, occupation or use referred to in Paragraph 24, Landlord shall have the right to receive from the Tenant any profit realized by the Tenant from charging a higher rent that the lease rent. Such profit shall be measured by the difference between the lease rent and any rent received by the Tenant, minus the Tenant's reasonable leasing and administrative costs related to the assignment or subletting, and excess of building standards. For this purpose, "rent received by the Tenant" shall include all sums paid under the sublease of assignment, whether characterized as rent, additional rent, or any other payment or consideration in respect of use or occupancy or in reimbursement of the costs of leasehold improvements installed by the Tenant, and whether paid in a lump sum or in periodic payments. In no event shall the total sums payable to the Landlord, including the lease rent and any additional payments made by Tenant to Landlord as a result of the application of this paragraph, be less than the lease rent. (c) The provisions in Paragraphs 24(a) and (b) shall be binding on any subtenant or assignee who desires to sub-sublet or sub-assign their interest, and Landlord's actions with 8 respect to one assignment, mortgage, pledge, sublease, occupation or use shall not be deemed to limit the Landlord's options under this Lease with respect to a subsequent assignment, mortgage, pledge, sublease, occupation or use. Landlord's rights under Paragraphs 24(a) and (b) shall prevail over any inconsistent language in any sublease or assignment to which the Landlord consents and are reserved by the Landlord from the grant of the Tenant's leasehold estate. Nothing herein shall be construed to require the Landlord's consent to any assignment, mortgage, pledge, subletting, occupation or use referred to in Paragraph 24 (so long as the Landlord's consent is not unreasonably withheld). Any exercise of the Landlord's rights under Paragraphs 24(a) and (b) shall be deemed to be reasonable. Failure of any subtenant or assignee to make any payments to Tenant shall not affect the obligation of the Tenant to pay the lease rent or any other obligation under the Lease owing to the Landlord. The provisions of any sublease or assignment cannot be modified, nor may the sublease or assignment be terminated other than in accordance with its terms, without the written consent of the Landlord. (d) Tenant shall have the right, without Landlord's consent, to assign this Lease to a general or limited partnership if (1) Tenant is a general partner and owns and retains not less than 51% of the partnership following the assignment and (2) the partnership executes an agreement required by Landlord assuming Tenant's obligations. Tenant shall have the right, without Landlord's consent to assign this Lease to a corporation if (1) Tenant owns and retains at least 51% of the outstanding capital stock of the corporation and (2) the corporation executes an agreement required by Landlord assuming Tenant's obligations. 25. INSOLVENCY AND RECEIVERSHIP. Either the appointment of a receiver to take possession of all, or substantially all, of the assets of Tenant or a general assignment by Tenant for the benefit of creditors, or any action taken or suffered by Tenant under any insolvency or bankruptcy act, shall constitute a breach of this Lease by Tenant. 26. DEFAULT AND RE-ENTRY. In the event of any breach of the terms and provisions of this Lease by Tenant, or if Tenant's interest herein, or any part thereof, be assigned or transferred without the written consent of Landlord, either voluntarily or by operation of law, whether by judgement, execution, death, receivership or any other means, or if Tenant vacates or abandons the premises, which shall be conclusively presumed if Tenant leaves the premises closed or unoccupied continuously for twenty (20) days, then in any such event, Landlord, besides other rights or remedies it may have, shall have the immediate right of re-entry and may remove all persons and property from the premises and may store such property at the cost of and for the account and risk of Tenant. Should Landlord elect to re-enter as herein provided, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provide for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, re-let the premises, or any part thereof, for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and 9 conditions as Landlord, in its sole discretion, may deem advisable with the right to make alterations and repairs to the premises. Rents received by such Landlord from such re-letting shall be applied: first, to the payment of any costs and expenses of such re-letting, including a reasonable attorney's fee and any real estate commission actually paid, and any costs and expenses of such alterations and repairs; second, to the payment of any indebtedness, other than rent, due hereunder from Tenant to Landlord; third, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent or other obligations as the same may become due and payable hereunder. If rentals received from such re-letting during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord, and such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such re-letting without termination, Landlord may, at any time thereafter, elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, and thereafter seek relief pursuant to Section 1951.2 of the California Civil Code, interest shall be allowed upon unpaid rent, for the purposes of Section 1951.2(b), at ten percent (10%) per annum or the maximum rate permitted bylaw, whichever is greater. Any proof by Tenant under subparagraphs (2) or (3) of subdivision (a) of Section 1951.2 of the California Civil Code, as to the amount of rental loss that could be reasonably avoided, shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the leased premises and in the same geographic vicinity and such two real estate brokers shall select a third licensed real estate broker and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided for the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. 27. WAIVER. The waiver by Landlord of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 28. REMOVAL OF PROPERTY. Whenever Landlord shall remove any property of Tenant from the premises and store the same elsewhere for the account, and at the expense and risk, of Tenant, as provided in Paragraph 22, hereof, and Tenant shall fail to pay the cost o 10 f storing any such property after it has been stored for a period of ninety (90) days or more, Landlord may sell any or all such property at public or private sale, in such manner and at such times and places as Landlord in its sole discretion, may deem proper, without notice to or demand upon Tenant, for the payment of any part of such charges or the removal of any such property, and shall apply the proceeds of such sale; first, to the cost and expenses of such sale, including reasonable attorney's fees actually incurred; second, to the payment of the cost of or charges for storing any such property; third, to the payment of any other sums of money which may then or thereafter be due to Landlord from Tenant under any of the terms hereof; and fourth, the balance, if any, to Tenant. 29. WAIVER OF DAMAGES FOR RE-ENTRY. Tenant hereby waives all claims for damages that may be caused by Landlord's re-entering and taking possession of the premises or removing and storing the property of Tenant as herein provided, and will save Landlord harmless from loss, costs or damages occasioned thereby, and no such re-entry shall be considered or construed forcible entry. 30. SURRENDER. At the time of surrender, all improvements made by Tenant to the premises shall be in compliance with all applicable building code requirements. 31. ATTORNEY'S FEES. If either party becomes a party to any litigation concerning this Lease, the premises, the building or other improvements in which the premises are located, by reason of any act or omission of the other party or its authorized representatives, and not by any act or omission of the party that becomes a party to that litigation or any act or omission of its authorized representatives, the party that causes the other party to become involved in the litigation shall be liable to that party for reasonable attorney's fees and court costs incurred by it in the litigation. If Landlord commences an action or incurs expenses against Tenant to enforce any of the terms hereof or because of the breach by Tenant of any of the terms hereof or for the recovery of any rent due hereunder or for the unlawful detainer of such premises, Tenant shall pay to Landlord reasonable attorneys' fees and expenses, and the right to such attorneys' fees and expenses shall be deemed to have accrued from the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment. If Tenant breaches any terms of this Lease, Landlord may employ an attorney or attorneys to protect Landlord's rights hereunder, and in the event of such employment following any breach by Tenant, Tenant shall pay Landlord reasonable attorneys' fees and expenses incurred by Landlord whether or not an action is actually commenced against Tenant by reason of such breach. 32. LITIGATION AGAINST TENANT. Should Landlord, without fault on Landlord's part, be made a party to any litigation instituted by or against Tenant, or by or against any person holding under or using the premises by license of Tenant, or for the foreclosure of any lien for labor or material furnished to or for Tenant or any such other person or otherwise arising out of or resulting from any act or transaction of Tenant or of any such other person, Tenant covenants to pay to Landlord the amount of any judgment rendered against Landlord or the premises or any part thereof, and all costs and expenses, including an attorney's fees, incurred by Landlord in or in connection with such litigation. 11 33. SUBORDINATION. Tenant agrees that this Lease shall be subject and subordinate to any first mortgage, first trust deed or like encumbrance heretofore or hereafter placed upon said premises or any part thereof, except the Tenant's property or trade fixtures, and to any and all renewals, modifications, consolidations, replacements, extensions or substitutions of any first mortgage or like encumbrance. Such subordination shall be automatic, without the execution of any further subordination agreement by Tenant. If, however, a written subordination agreement is required by a mortgagee, Tenant agrees to execute, acknowledge and deliver the same and in the event of failure to do so, Landlord may, in addition to any other remedies for breach of covenant hereunder, execute, acknowledge and deliver the same as the agent of Tenant, and Tenant hereby irrevocably constitutes Landlord its attorney-in-fact for such purpose. 34. WAIVER OF REDEMPTION BY TENANT, HOLDING OVER. Tenant hereby waives for Tenant and all those claiming under Tenant, all right now or hereafter existing to redeem the leased premises after termination of Tenant's right of occupancy by order of judgment of any court or by any legal process or writ. Any holding over after the expiration of the term of this lease, with the consent of the Landlord, shall be construed to be a tenancy from month to month, and shall be under the terms and conditions specified in this lease, so far as applicable, and in such case rental shall be payable in the amount and at the time specified in Paragraph 4 hereof Any such holding over without Landlord's consent shall be a breach of this lease and Tenant shall pay to Landlord, without affecting Landlord's rights under the law or elsewhere under this lease for such a breach, as liquidated damages in the amount equal to thee (3) times the then current minimum monthly rent under Paragraph 4 hereof for each month of holding over, since Landlord and Tenant agree that fixing Landlord's actual damages if such holding over occurs would be most difficult but that such an amount is a reasonable approximation of what such actual damages would be. 35. ENTRY AND INSPECTION. Tenant will permit Landlord and its agents to enter into and upon the premises at all reasonable times for the purpose of inspecting the same, or for the purpose of protecting the interest therein of Landlord or the Owner, or to post notices of non-responsibility, or to make alterations or additions to the premises, including the erection of scaffolding, props or other mechanical devices, or to provide any service provided by Landlord to Tenant hereunder, without any rebate of rent to Tenant for any loss of occupancy or quiet enjoyment of the premises, or damage, injury or inconvenience thereby occasioned, and Tenant will permit Landlord, at any time within one hundred eighty (180) days prior to the expiration of this Lease, to bring upon the premises, for purposes of inspection or display, prospective tenants thereof. 36. SALE OR TRANSFER OF PREMISES. If Landlord sells or transfers all or any portion of the premises, Landlord, on consummation of the sale or transfer, shall be released from any liability thereafter accruing under this Lease if Landlord's successor has assumed in writing, for the benefit of Tenant, Landlord's obligations under this Lease. If any security deposit or prepaid rent has been paid by Tenant, Landlord can transfer the security deposit or prepaid rent to Landlord's successor and on such transfer Landlord shall be discharged from any further liability in reference to the security deposit or prepaid rent. 12 37. ATTORNMENT. Tenant shall attorn to any purchaser of the premises at any foreclosure sale of private sale conducted pursuant to any security instrument encumbering the premises, or to any grantee or transferee designated in any deed give in lieu to foreclosure, provided that such party shall have assumed the obligations of Landlord hereunder in writing. 38. SUCCESSORS AND ASSIGNS. Subject to the provisions hereof relating to assignment, mortgaging, pledging and subletting, this Lease is intended to and does bind the heirs, executors, administrators, successors and assigns of any and all of the parties hereto. 39. TIME. Time is of the essence of this Lease. 40. NOTICES. All notices which Landlord or Tenant may be required, or may desire, to serve on the other may be served, as an alternative to personal service, by mailing the same, postage prepaid, and addressed as listed herein. Any party may change its address for purposes of this Paragraph by giving the other parties written notice of the new address in the manner set forth above. 41. CORPORATE AUTHORITY. If either party is a corporation, that party shall deliver to the other party on execution of this Lease a certified copy of a resolution of its board of directors authorizing the offices that are authorized to execute this Lease on behalf of the corporation. 42. CALIFORNIA LAW. This lease shall be construed and interpreted in accordance with the laws of the State of California. 43. COMPLETE AGREEMENT. It is expressly agreed by the parties, as a material consideration for the execution of this Lease, that there are, and were, no verbal representation, understandings, stipulations, agreement of promises pertaining thereto, not incorporated in writing herein, and it is likewise agreed that this Lease should not be altered, waived, amended or extended otherwise than as provided herein, except by writing signed by both parties. 44. ADDENDA. Attached hereto is an addendum or addenda containing the following Paragraphs 45 which constitute a part of this Lease. In the event that any provisions of the addendum or addenda conflict with other provisions of the Lease, the provisions of the addendum or addenda shall control and supersede the other conflicting Lease provisions. 13 IN WITNESS WHEREOF Landlord and Tenant have executed this Lease the day and year first written above. "Landlord" "Tenant" PINE CREeK PROPERTIES zapworld.com /s/ Signature 8/17/99 /s/ Signature 8/13/99 --------------------- --------------------- (signature) (date) (signature) (date) - ------------------------------------ ------------------------------------ (signature) (date) (signature) (date) 14 EXHIBIT "A" ADDENDUM TO LEASE DATED: AUGUST 6, 1999 BETWEEN: PINE CREEK PROPERTIES AND ZAPWORLD.COM Paragraph 45 -- Acknowledgement of Floodplain. Tenant specifically recognizes that the premises are located in a floodplain area. Tenant acknowledges that Landlord shall not be liable to Tenant for any injury to any person or property is or about the premises or the building in which the premises are located, from any cause directly or indirectly related to flooding or any collateral effects of flooding.. Tenant understands that Landlord does not carry flood insurance for Tenant's benefit. Tenant further represents that it has had the advice of independent counsel in negotiations for and preparation of this addendum or had been advised of the right to. such advise, that Tenant has read this addendum or had It read and fully explained by counsel, arid that Tenant understands this addendum. 15 EX-10.13 22 0022.txt LEASE LEASE THIS LEASE, is made AUGUST 24, 2000, between PINE CREEK PROPERTIES, a California general partnership, "Landlord", whose address is P.O. Box 11218, Santa Rosa, CA 95406, and ZAPWORLD.COM "Tenant," whose address is 117 Morris, Sebastopol. This Lease is made with reference to the following facts and objectives: (a) Landlord is the owner of the premises described in Paragraph 1 and Exhibit "A", which consists, generally, of APPROX. 9,800 SQ. FT. WAREHOUSE (INCLUDES APPROX. 400 SQ. FT. OFFICE). (b) Tenant is willing to lease the premises from Landlord pursuant to the provisions stated in this Lease. (c) Tenant wishes to lease the premises for the purposes of WAREHOUSE. (d) Tenant has examined the premises and is fully informed of their condition. THE PARTIES HERETO AGREE AS FOLLOWS: 1. PREMISES. Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord, upon the terms and conditions herein set forth, the real property located at 6784 SEBASTOPOL AVE., SEBASTOPOL, Sonoma County, California, and more particularly described in Exhibit "A", together with the building and other improvements located on the real property ("premises"). 2. TERM. (a) The term of this lease shall be FIVE (5 years) and shall commence on the 1st day of SEPTEMBER, 2000, and end on the 31st day of AUGUST, 2005, inclusive. (b) If Landlord is unable to deliver possession of the premises Tenant, by the date specified above for the commencement of the term of this Lease, neither Landlord nor its agent shall be liable for any damage caused thereby, nor shall this Lease thereby become void or voidable, and the term herein specified shall, in such case, commence upon the date of delivery of possession of the premises to Tenant and shall terminate FIVE (5) years thereafter. In such event, Tenant shall not be liable for any rent until such time as Landlord shall deliver possession of the premises to Tenant. 3. ACCEPTANCE OF PREMISES. Tenant's taking possession of the premises on commencement of the term shall constitute Tenant's acknowledgment that the premises are in good condition. -1- 4. RENT. Tenant agrees to pay to Landlord, as rent for the premises the sum of FIVE THOUSAND EIGHT HUNDRED EIGHTY Dollars ($5,880.00) per month, in advance, on the first day of the term of this Lease and on the first day of each calendar month thereafter during the term. Rent for any partial month shall be prorated at the rate of 1/30th of the monthly rent per day. All installments of rent shall be paid at the address to which notices to Landlord are given, or at such other place as may be designated in writing, from time to time by Landlord, in lawful money of the United States and without deduction or offset for any cause whatsoever. In addition, Tenant agrees to pay to Landlord a late payment of ten percent (10%) of the amount due for any payment received later than the seventh day of each calendar month. 5. RENT ADJUSTMENTS. The monthly rent provided for in Paragraph 4 ("minimum monthly rent") shall be subject to adjustment at the commencement of the second year of the term and each year thereafter (the "adjustment date"), as follows: The base for computing the adjustment is the Consumer Price Index, All Urban Consumers ("All Items") for the San Francisco-Oakland Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics ("Index"), which is published for the month nearest the date of commencement of the term ("Beginning Index"). If the index published nearest the adjustment date ("Extension Index") has increased or decreased over the Beginning Index, the minimum monthly rent for the following year shall be set by multiplying the minimum monthly rent set forth in Paragraph 4, by a fraction, the numerator of which is the Extension Index and the denominator of which is the Beginning Index. In no case shall the minimum monthly rent be less than the minimum monthly rent set forth in Paragraph 4. On adjustment of the minimum monthly rent as provided in this Lease, the parties shall immediately execute an amendment to the Lease stating the new minimum monthly rent. If the index is changed so that the base year differs from that used as of the month immediately preceding the month in which the term commences, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the Index had not been discontinued or revised. 6. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with Landlord the sum of FIVE THOUSAND EIGHT HUNDRED Dollars ($5,800.00) as a security deposit for the performance by Tenant of the provisions of this Lease. If Tenant is in default, Landlord can use the security deposit, or any portion of it, to cure the default or to compensate Landlord for all damage sustained by Landlord resulting from Tenant's default. Tenant shall immediately, on demand pay to Landlord a sum equal to the portion of the security deposit expended or applied by Landlord as provided in this paragraph so as to maintain the security deposit in the sum initially deposited with Landlord. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the security deposit to Tenant. Landlord's obligations with respect to the security deposit are -2- those of a debtor and not a trustee. Landlord can maintain the security deposit separate and apart from Landlord's general funds or can commingle the security deposit with Landlord's general and other funds. Landlord shall not be required to pay Tenant interest on the security deposit. 7. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed against Tenant's trade fixtures or personal property installed or located in or on the premises, and that become payable during the term. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. 8. REAL PROPERTY TAXES. Landlord shall pay all real property taxes and general and special assessments ("real property taxes") levied and assessed against the premises, provided, however, that Lessee shall pay to Lessor any increase in real property tax assessed by reason of Tenant's activities or additional improvements placed upon the Premises by Lessee or at Lessee's request. 9. USE. The premises are to be used as described in the Recitals of this Lease, and for no other business or purpose without the prior written consent of Landlord. Tenant shall be responsible for any required City, County, State or Federal permits. No use shall be made or permitted to be made of the premises, nor acts done in or on about the premises, which will in any way conflict with any law, ordinance, rule or regulation affecting the occupancy or use of the premises which has been or is subsequently enacted or promulgated by any public authority, or which will increase the existing rate of insurance upon the building, or cause a cancellation of any insurance policy covering the building or any part thereof, nor shall Tenant sell, or permit to be kept, used or sold in or about the premises, any article which may be prohibited by the standard form of fire insurance policy. Tenant shall not commit, or suffer to be committed, any waste upon the premises or, any public or private nuisance, or other act of thing which may disturb the quiet enjoyment of any neighbor, commercial or residential, nor any other tenant in the building, nor use any apparatus, machinery or device in or about the premises which shall cause any substantial noise or vibration, or which shall substantially increase the amount of electricity or water, if any, agreed to be furnished or supplied under this Lease. Tenant further agrees not to connect with electric wires or water or other pipes any apparatus, machinery or device without the consent of Landlord. If parking becomes an issue, Landlord shall assign specific parking spaces. 10. MAINTENANCE AND REPAIRS. Except as provided in Paragraphs 22 and 23, Tenant, at its cost, shall maintain the premises in good condition. Landlord shall be responsible for roof, walls and floor repair maintenance. Landlord shall not have any responsibility for general maintenance of the premises. Tenant waives the provisions of Civil Code Sections 1941 and 1942, with respect to Landlord's obligations for tenantability of the premises and Tenant's right to make repairs and deduct the expenses of such repairs from rent. 11. ALTERATIONS. Except as provided in Paragraph 12, Tenant shall not make any alterations to the premises without Landlord's consent. Unless otherwise provided -3- by written agreement, all alterations shall be done either by or under the direction of Landlord, but at the sole cost of Tenant, shall be the property of Landlord, and shall remain on and be surrendered with the premises on expiration or termination of the term; provided, however, that at Landlord's option, Tenant shall, at Tenant's expense, when surrendering the premises, restore the same to their original condition. If Tenant makes any alterations to the premises, as provided in this paragraph, the alterations shall not be commenced until two (2) days after has received notice from Tenant stating the date the installation of the alterations is to commence, so that Landlord can post and record an appropriate notice of non-responsibility. 12. TRADE FIXTURES. Subject to the provisions of Paragraph 11 hereof, Tenant may install and maintain its trade fixtures on the premises, provided that such fixtures, by reason of the manner in which they are affixed, do not become an integral part of the building or premises. Tenant, if not in default hereunder, may at any time or from time to time during the term hereof, or upon the expiration or termination of this Lease, alter or remove any such trade fixtures so installed by Tenant. If not so removed by Tenant on or before the expiration or termination of this Lease, Tenant, upon the request of Landlord so to do, shall thereupon remove the same. Any damage to the premises caused by any such installation, alteration or removal of such trade fixtures shall be promptly repaired at the expense of the Tenant. 13. MECHANICS' LIENS. Tenant shall pay all costs for construction done by it, or caused to be done by it, on the premises, including all required permits, as permitted by this Lease. Tenant shall keep the premises free and clear of all mechanics' liens resulting from construction done by or for Tenant. Tenant shall have the right to contest the correctness or validity of any such lien if, immediately on demand by Landlord, Tenant procures and records a lien release bond issued by a corporation authorized to issue surety bonds in California in an amount equal to one and one-half times the amount of the claim of the lien. The bond shall meet the requirements of Civil Code Section 3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit, if it recovers in the action). 14. AMERICANS WITH DISABILITIES ACT (ADA). If Tenant's use and/or personnel requirements change after the granting of initial use permit which would enact new ADA requirements, then Tenant shall at all times keep the premises in compliance with the ADA and its supporting regulations, and all similar federal, state or local laws, regulations and ordinances with respect to this new use. If Landlord's consent would be required for alterations to bring the premises into compliance, Landlord agrees not to unreasonably withhold its consent. 15. HAZARDOUS MATERIALS ACKNOWLEDGMENT ENVIRONMENTAL REPRESENTATION AND LIABILITY RELEASE. Tenant acknowledges that various materials utilized in the construction of the Property may contain materials that have been or may in the future be determined to be toxic, hazardous or -4- undesirable and may need to be specially treated, specially handled and/or removed from the Property. Such substances may be above and below ground on the Property or may be present on or in soils, water, building components or other portions of the Property in areas that may or may not be accessible or noticeable. Tenant shall use and operate the premises, at all times during the term hereof, under and in compliance with the laws of the State of California and in compliance with all applicable environmental legal requirements. For any contamination to Leased Property due to Tenant's use, Tenant assumes full responsibility for the clean-up of such toxic hazardous or undesirable material as required by current and future federal, state and local laws and regulations. Tenant acknowledges that toxic wastes, hazardous materials and undesirable substances problems can be extremely costly to correct and Tenant relieves the Landlord from all liability related thereto due to Tenant's use. Tenant therefore hereby agrees that they shall indemnify and defend and hold the Landlord harmless from any claim, liability, damage, cost or expense, including but not limited to court costs and attorneys' fees, arising out of or in any way related to toxic waste, hazardous material and/or undesirable substance affecting the Leased Property related to and caused by Tenant's use. 16. UTILITIES. Tenant shall make all arrangements for, and pay for all utilities and services furnished to or used by it including, without limitation, gas, electricity, water, sewer, telephone service, and trash collection, and for all connection charges. If for any reason, any of these utilities or services are paid for by Landlord on behalf of Tenant, then Tenant shall reimburse Landlord upon receiving notice. 17. EXCULPATION OF LANDLORD. Landlord shall not be liable to Tenant for any injury or damage that may result to any person or property in or about the premises or the building which the premises are located, from any cause whatsoever, including but not limited to injury or damage resulting from any defects in the building, including roof leaks, or any equipment located therein, or from fire, water, gas, oil, electricity or other cause or any failure in the supply of same, or from the acts or neglect of any persons. 18. INDEMNIFY AND HOLD HARMLESS. Tenant agrees to indemnify and hold Landlord harmless against all claims, and the expense of defending against such claims, for injury or damage to persons or property occurring in or about the premises or occurring outside the premises but resulting in whole or in part from the act, failure to act, negligence or other fault of Tenant or its agents, employees or invitees. 19. LIMITATION OF LANDLORD'S LIABILITY. Tenant agrees to look solely to Landlord's interest in the building for the recovery of any judgement from Landlord, it being agreed that Landlord shall never be personally liable for any such judgement. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right the Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors in interest or any other action not involving the personal liability of Landlord to respond in monetary damages from assets other than Landlord's interest in the building or any -5- suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. 20. INSURANCE. (a) Tenant, at its cost, shall maintain public liability and property damage insurance with a combined single limit of liability of not less than $1,000,000, insuring against all liability of Tenant and its authorized representatives arising out of and in connection with Tenant's use or occupancy of the premises. All public liability insurance, and property damage insurance shall insure performance by Tenant of the indemnity provisions of Paragraph 18. Both parties shall be named as additional insureds, and the policy shall contain cross-liability endorsements. (b) Not more frequently than three (3) years, if, in the opinion of Landlord's lender or of the insurance broker retained by Landlord, the amount of public liability and property damage insurance coverage at that time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord's lender or Landlord's insurance broker. (c) Tenant, at its cost, shall maintain on all its personal property, Tenant's improvements, and alterations, in, on, or about the premises, a policy of standard fire and extended coverage insurance, with vandalism and malicious mischief endorsements, to the extent of at least ninety percent (90%) of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property or the restoration of Tenant's improvements or alterations. TENANT SHALL BE FINANCIALLY RESPONSIBLE FOR GLASS BREAKAGE. (d) Landlord shall maintain on the building and other improvements that are a part of the premises, a policy of standard fire and extended coverage insurance with vandalism and malicious mischief endorsements, to the extent of at least ninety percent (90%) full replacement value. (e) Tenant's obligation to pay the insurance costs, shall be prorated for any partial year, at the commencement and expiration or termination of the term. (f) All insurance policies maintained by Tenant, under this paragraph, shall contain a provision requiring thirty (30) days' written notice from the insurance company to both parties and Landlord's lender, before cancellation or change in the coverage, scope, or amount of any policy. Each policy, or a certificate of the policy, together with evidence of payment of premiums, shall be deposited with the other party at the commencement of the term, and on renewal of the policy, not less than twenty (20) days before expiration of the term of the policy. 21. WAIVER OF SUBROGATION. The parties release each other, and their respective authorized representatives, from any claims for damage to any person, or to the premises and to the fixtures, personal property, Tenant's improvements and alterations of either Landlord or Tenant in or on the premises that are caused by or result from the risks -6- insured against under any insurance policies carried by the parties and in force at the time of any such damage. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against either party in connection with any damage covered by any policy. Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this Lease. If any insurance policy cannot be obtained with a waiver of subrogation, or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without waiver of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of ten (10) days after receiving the notice either to place the insurance with a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation, or to agree to pay the additional premium if such policy is obtainable at additional cost. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved. 22. DESTRUCTION. If the whole or any part of the premises shall be destroyed by fire or other cause, or be so damaged thereby that they are untenantable and cannot be rendered tenantable within one hundred twenty (120) days from the date of such destruction or damage, or such damage or destruction is not covered by any insurance required to be maintained under Paragraph 20 this Lease may be terminated by Landlord or Tenant by written notice to the other. Within forty-five (45) days from date of such destruction or damage, Landlord shall give written notice to Tenant as to whether or not the premises will be rendered tenantable within one hundred twenty (120) days from the date of such destruction or damage and whether such damage or destruction is anticipated to be covered by the insurance required to be maintained under Paragraph 16. In case the damage or destruction be not such as to permit termination of the Lease as above provided, or neither Landlord nor Tenant elects to terminate the Lease as above provided, Landlord shall within reasonable time, render said premises tenantable, and a proportionate reduction shall be made in the rent herein reserved corresponding to the time during which and to the portion of the premises of which Tenant shall be deprived of possession. The provisions of Subdivision 2 of Section 1932 of the California Civil Code, and of Subdivision 4 of Section 1933 of that Code, shall not apply to this Lease. 23. CONDEMNATION. Should the whole or any part of the premises be condemned and taken by any competent authority for any public or quasi-public use or purpose, all awards payable on account of such condemnation and taking shall be payable to Landlord and Tenant hereby waives all interest in or claim to said awards, or any part thereof. If the whole of the premises shall be so condemned and taken, then this Lease shall terminate. If only a part of the premises is condemned and taken and the remaining portion thereof is not suitable for the purposes for which Tenant has leased said premises, this Lease shall terminate. If only a part of the premises is condemned and taken and the remaining portion thereof is suitable for the purposes for which Tenant has leased said premises, this Lease shall continue, -7- but the rental shall be reduced in an amount proportionate to the value of the portion taken as it related to the total value of the premises. Each party waives the provisions of Code of Civil Procedure ss.1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the premises. 24. ASSIGNMENT AND SUBLETTING. Except as provided in Paragraph 24(d) hereof, Tenant shall not assign, mortgage or pledge this Lease, or any interest therein, and shall not sublet the premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the agents and servants of Tenant excepted) to occupy or use the premises, or any portion thereof, without the written consent of Landlord first had and obtained. A consent to one assignment, mortgage pledge, subletting, occupation or use by any other person shall not relieve the Tenant from any obligation under this Lease, and shall not be deemed to be a consent to any subsequent assignment, mortgage, pledge, subletting, occupation or use by another person. Any assignment, mortgage, subletting, occupation or use without such consent shall be void, and shall, at the option of Landlord, terminate this Lease. (a) If the Tenant desires any assignment, mortgage, pledge or subletting, occupation or use referred to in Paragraph 24, Tenant shall give written notice to the Landlord giving the name and address of the proposed assignee, mortgagee, pledgee, sublessee, occupier or user, and the price and other terms of the proposed transaction. At the same time, Tenant shall, in writing, tender by an offer to the Landlord the option to (i) reacquire the premises for the same period and under the same terms as the proposed assignment or sublease, or (ii) reacquire the premises for the same period but at a price equal to the lease rent. If the Landlord accepts the offer, it shall do so by mailing written notice of its acceptance to the Tenant within thirty (30) days after the Tenant's offer is received by the Landlord. Tenant shall be entitled to withdraw its notice of intent to assign, mortgage, pledge, sublet, occupy or use, at any time until the Landlord accepts the Tenant's offer. If only a portion of the premises would be affected by a sublease or assignment the Landlord shall have the right to re-acquire the portion affected. If the Landlord elects to reacquire under this provision the portion affected, Tenant shall be required to provide without charge reasonable and appropriate access to the portion affected and reasonable use of any common facilities. (b) If Landlord does not choose to accept the Tenant's offer under Subparagraph 24(a), but does consent to the proposed assignment, mortgage, pledge, subletting, occupation or use referred to in Paragraph 24, Landlord shall have the right to receive from the Tenant any profit realized by the Tenant from charging a higher rent that the lease rent. Such profit shall be measured by the difference between the lease rent and any rent received by the Tenant, minus the Tenant's reasonable leasing and administrative costs related to the assignment or subletting, and excess of building standards. For this purpose, "rent received by the Tenant" shall include all sums paid under the sublease of assignment, whether characterized as rent, additional rent, or any other payment or consideration in respect of use or occupancy or in reimbursement of the costs of leasehold improvements installed by the Tenant, and whether paid in a lump sum or in periodic payments. In no event shall the total -8- sums payable to the Landlord, including the lease rent and any additional payments made by Tenant to Landlord as a result of the application of this paragraph, be less than the lease rent. (c) The provisions in Paragraphs 24(a) and (b) shall be binding on any subtenant or assignee who desires to sub-sublet or sub-assign their interest, and Landlord's actions with respect to one assignment, mortgage, pledge, sublease, occupation or use shall not be deemed to limit the Landlord's options under this Lease with respect to a subsequent assignment, mortgage, pledge, sublease, occupation or use. Landlord's rights under Paragraphs 24(a) and (b) shall prevail over any inconsistent language in any sublease or assignment to which the Landlord consents and are reserved by the Landlord from the grant of the Tenant's leasehold estate. Nothing herein shall be construed to require the Landlord's consent to any assignment, mortgage, pledge, subletting, occupation or use referred to in Paragraph 24 (so long as the Landlord's consent is not unreasonably withheld). Any exercise of the Landlord's rights under Paragraphs 24(a) and (b) shall be deemed to be reasonable. Failure of any subtenant or assignee to make any payments to Tenant shall not affect the obligation of the Tenant to pay the lease rent or any other obligation under the Lease owing to the Landlord. The provisions of any sublease or assignment cannot be modified, nor may the sublease or assignment be terminated other than in accordance with its terms, without the written consent of the Landlord. (d) Tenant shall have the right, without Landlord's consent, to assign this Lease to a general or limited partnership if (1) Tenant is a general partner and owns and retains not less than 51% of the partnership following the assignment and (2) the partnership executes an agreement required by Landlord assuming Tenant's obligations. Tenant shall have the right, without Landlord's consent to assign this Lease to a corporation if (1) Tenant owns and retains at least 51% of the outstanding capital stock of the corporation and (2) the corporation executes an agreement required by Landlord assuming Tenant's obligations. 25. INSOLVENCY AND RECEIVERSHIP. Either the appointment of a receiver to take possession of all, or substantially all, of the assets of Tenant or a general assignment by Tenant for the benefit of creditors, or any action taken or suffered by Tenant under any insolvency or bankruptcy act, shall constitute a breach of this Lease by Tenant. 26. DEFAULT AND RE-ENTRY. In the event of any breach of the terms and provisions of this Lease by Tenant, or if Tenant's interest herein, or any part thereof, be assigned or transferred without the written consent of Landlord, either voluntarily or by operation of law, whether by judgement, execution, death, receivership or any other means, or if Tenant vacates or abandons the premises, which shall be conclusively presumed if Tenant leaves the premises closed or unoccupied continuously for twenty (20) days, then in any such event, Landlord, besides other rights or remedies it may have, shall have the immediate right of re-entry and may remove all persons and property from the premises and may store such property at the cost of and for the account and risk of Tenant. -9- Should Landlord elect to re-enter as herein provided, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provide for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, re-let the premises, or any part thereof, for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions as Landlord, in its sole discretion, may deem advisable with the right to make alterations and repairs to the premises. Rents received by such Landlord from such re-letting shall be applied: first, to the payment of any costs and expenses of such re-letting, including a reasonable attorney's fee and any real estate commission actually paid, and any costs and expenses of such alterations and repairs; second, to the payment of any indebtedness, other than rent, due hereunder from Tenant to Landlord; third, to the payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent or other obligations as the same may become due and payable hereunder. If rentals received from such re-letting during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord, and such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such re-letting without termination, Landlord may, at any time thereafter, elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, and thereafter seek relief pursuant to Section 1951.2 of the California Civil Code, interest shall be allowed upon unpaid rent, for the purposes of Section 1951.2(b), at ten percent (10%) per annum or the maximum rate permitted by law, whichever is greater. Any proof by Tenant under subparagraphs (2) or (3) of subdivision (a) of Section 1951.2 of the California Civil Code, as to the amount of rental loss that could be reasonably avoided, shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the leased premises and in the same geographic vicinity and such two real estate brokers shall select a third licensed real estate broker and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided for the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. 27. WAIVER. The waiver by Landlord of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so -10- accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 28. REMOVAL OF PROPERTY. Whenever Landlord shall remove any property of Tenant from the premises and store the same elsewhere for the account, and at the expense and risk, of Tenant, as provided in Paragraph 22, hereof, and Tenant shall fail to pay the cost of storing any such property after it has been stored for a period of ninety (90) days or more, Landlord may sell any or all such property at public or private sale, in such manner and at such times and places as Landlord in its sole discretion, may deem proper, without notice to or demand upon Tenant, for the payment of any part of such charges or the removal of any such property, and shall apply the proceeds of such sale; first, to the cost and expenses of such sale, including reasonable attorney's fees actually incurred; second, to the payment of the cost of or charges for storing any such property; third, to the payment of any other sums of money which may then or thereafter be due to Landlord from Tenant under any of the terms hereof; and fourth, the balance, if any, to Tenant. 29. WAIVER OF DAMAGES FOR RE-ENTRY. Tenant hereby waives all claims for damages that may be caused by Landlord's re-entering and taking possession of the premises or removing and storing the property of Tenant as herein provided, and will save Landlord harmless from loss, costs or damages occasioned thereby, and no such re-entry shall be considered or construed forcible entry. 30. SURRENDER. At the time of surrender, all improvements made by Tenant to the premises shall be in compliance with all applicable building code requirements. 31. ATTORNEY'S FEES. If either party becomes a party to any litigation concerning this Lease, the premises, or the building or other improvements in which the premises are located, by reason of any act or omission of the other party or its authorized representatives, and not by any act or omission of the party that becomes a party to that litigation or any act or omission of its authorized representatives, the party that causes the other party to become involved in the litigation shall be liable to that party for reasonable attorney's fees and court costs incurred by it in the litigation. If Landlord commences an action or incurs expenses against Tenant to enforce any of the terms hereof or because of the breach by Tenant of any of the terms hereof or for the recovery of any rent due hereunder or for the unlawful detainer of such premises, Tenant shall pay to Landlord reasonable attorneys' fees and expenses, and the right to such attorneys' fees and expenses shall be deemed to have accrued from the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment. If Tenant breaches any terms of this Lease, Landlord may employ an attorney or attorneys to protect Landlord's rights hereunder, and in the event of such employment following any breach by Tenant, Tenant shall pay Landlord reasonable attorneys' fees and expenses incurred by Landlord whether or not an action is actually commenced against Tenant by reason of such breach. 32. LITIGATION AGAINST TENANT. Should Landlord, without fault on Landlord's part, be made a party to any litigation instituted by or against Tenant, or by or -11- against any person holding under or using the premises by license of Tenant, or for the foreclosure of any lien for labor or material furnished to or for Tenant or any such other person or otherwise arising out of or resulting from any act or transaction of Tenant or of any such other person, Tenant covenants to pay to Landlord the amount of any judgment rendered against Landlord or the premises or any part thereof, and all costs and expenses, including an attorney's fees, incurred by Landlord in or in connection with such litigation. 33. SUBORDINATION. Tenant agrees that this Lease shall be subject and subordinate to any first mortgage, first trust deed or like encumbrance heretofore or hereafter placed upon said premises or any part thereof, except the Tenant's property or trade fixtures, and to any and all renewals, modifications, consolidations, replacements, extensions or substitutions of any first mortgage or like encumbrance. Such subordination shall be automatic, without the execution of any further subordination agreement by Tenant. If, however, a written subordination agreement is required by a mortgagee, Tenant agrees to execute, acknowledge and deliver the same and in the event of failure to do so, Landlord may, in addition to any other remedies for breach of covenant hereunder, execute, acknowledge and deliver the same as the agent of Tenant, and Tenant hereby irrevocably constitutes Landlord its attorney-in-fact for such purpose. 34. WAIVER OF REDEMPTION BY TENANT, HOLDING OVER. Tenant hereby waives for Tenant and all those claiming under Tenant, all right now or hereafter existing to redeem the leased premises after termination of Tenant's right of occupancy by order of judgment of any court or by any legal process or writ. Any holding over after the expiration of the term of this lease, with the consent of the Landlord, shall be construed to be a tenancy from month to month, and shall be under the terms and conditions specified in this lease, so far as applicable, and in such case rental shall be payable in the amount and at the time specified in Paragraph 4 hereof. Any such holding over without Landlord's consent shall be a breach of this lease and Tenant shall pay to Landlord, without affecting Landlord's rights under the law or elsewhere under this lease for such a breach, as liquidated damages in the amount equal to three (3) times the then current minimum monthly rent under Paragraph 4 hereof for each month of holding over, since Landlord and Tenant agree that fixing Landlord's actual damages if such holding over occurs would be most difficult but that such an amount is a reasonable approximation of what such actual damages would be. 35. ENTRY AND INSPECTION. Tenant will permit Landlord and its agents to enter into and upon the premises at all reasonable times for the purpose of inspecting the same, or for the purpose of protecting the interest therein of Landlord or the Owner, or to post notices of non-responsibility, or to make alterations or additions to the premises, including the erection of scaffolding, props or other mechanical devices, or to provide any service provided by Landlord to Tenant hereunder, without any rebate of rent to Tenant for any loss of occupancy or quiet enjoyment of the premises, or damage, injury or inconvenience thereby occasioned, and Tenant will permit Landlord, at any time within one hundred eighty (180) days prior to the expiration of this Lease, to bring upon the premises, for purposes of inspection or display, prospective tenants thereof. -12- 36. SALE OR TRANSFER OF PREMISES. If Landlord sells or transfers all or any portion of the premises, Landlord, on consummation of the sale or transfer, shall be released from any liability thereafter accruing under this Lease if Landlord's successor has assumed in writing, for the benefit of Tenant, Landlord's obligations under this Lease. If any security deposit or prepaid rent has been paid by Tenant, Landlord can transfer the security deposit or prepaid rent to Landlord's successor and on such transfer Landlord shall be discharged from any further liability in reference to the security deposit or prepaid rent. 37. ATTORNMENT. Tenant shall attorn to any purchaser of the premises at any foreclosure sale of private sale conducted pursuant to any security instrument encumbering the premises, or to any grantee or transferee designated in any deed give in lieu to foreclosure, provided that such party shall have assumed the obligations of Landlord hereunder in writing. 38. SUCCESSORS AND ASSIGNS. Subject to the provisions hereof relating to assignment, mortgaging, pledging and subletting, this Lease is intended to and does bind the heirs, executors, administrators, successors and assigns of any and all of the parties hereto. 39. TIME. Time is of the essence of this Lease. 40. NOTICES. All notices which Landlord or Tenant may be required, or may desire, to serve on the other may be served, as an alternative to personal service, by mailing the same, postage prepaid, and addressed as listed herein. Any party may change its address for purposes of this Paragraph by giving the other parties written notice of the new address in the manner set forth above. 41. CORPORATE AUTHORITY. If either party is a corporation, that party shall deliver the other party on execution of this Lease a certified copy of a resolution of its board of directors authorizing the officer that are authorized to execute this Lease on behalf of the corporation. 42. CALIFORNIA LAW. This lease shall be construed and interpreted in accordance with the laws of the State of California. 43. COMPLETE AGREEMENT. It is expressly agreed by the parties, as a material consideration for the execution of this Lease, that there are, and were, no verbal representation, understandings, stipulations, agreement of promises pertaining thereto, not incorporated in writing herein, and it is likewise agreed that this Lease should not be altered, waived, amended or extended otherwise than as provided herein, except by writing signed by both parties. 44. ADDENDA. Attached hereto is an addendum or addenda containing the following Paragraphs 45 which constitute a part of this Lease. In the event that any provisions of the addendum or addenda conflict with other provisions of the Lease, the provisions of the addendum or addenda shall control and supersede the other conflicting Lease provisions. -13- 46. TENANT IMPROVEMENTS. Landlord to install black out windows and turbine fans, make rear sliding door operational, and bring bathroom up to ADA standards. Ensures zoning is acceptable for Zapp's occupancy needs and fire codes. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first written above. "Landlord" "Tenant:" PINE CREEK PROPERTIES ZAPWORLD.COM - --------------------------------- ------------------------------------- (signature) (date) (signature) (date) - --------------------------------- ------------------------------------- (signature) (date) (signature) (date) -14- E X H I B I T "A" Lease Dated August 24, 2000 Between: Pine Creek Properties and Zapworld. Com [Diagrammatic description of lease premises] -15- ADDENDUM TO LEASE DATED: AUGUST 24, 2000 BETWEEN: PINE CREEK PROPERTIES AND ZAPWORLD.COM Paragraph 45-- Acknowledgement of Floodplain. Tenant specifically recognizes that the premises are located in a floodplain area. Tenant acknowledges that Landlord shall not be liable to Tenant for any injury to any person or property in or about the premises or the building in which the premises are located, from any cause directly or indirectly related to flooding or any collateral effects of flooding. Tenant understands that Landlord does not carry flood insurance for Tenant's benefit. Tenant further represents that it has had the advice of independent counsel in negotiations for and preparation of this addendum or had been advised of the right to such advise, that Tenant has read this addendum or had it read and fully explained by counsel, and that Tenant understands this addendum. -16- EX-10.14 23 0023.txt COMMERCIAL LEASE COMMERCIAL LEASE TABLE OF CONTENTS Preamble ARTICLE 1. TERM OF LEASE 1.01 Original Term 1.02 Extended Term 1.03 Holding Over 1.04 Landlord's Inability to Deliver Possession 1.05 Termination for Failure ARTICLE 2. RENT 2.01 Security Deposit 2.02 Minimum Rent 2.03 Late Charge 2.04 Rental Increase ARTICLE 3. USE OF PREMISES 3.01 Permitted Use 3.02 Insurance Hazards 3.03 Waste or Nuisance 3.04 Compliance With Laws ARTICLE 4. TAXES AND UTILITIES 4.01 Utilities 4.02 Personal Property Taxes 4.03 Real Property Taxes ARTICLE 5. ALTERATIONS AND REPAIRS 5.01 Condition of Premises 5.02 Maintenance by Landlord 5.03 Maintenance by Tenant 5.04 Maintenance of Plate Glass 5.05 Alterations and Liens 5.06 Inspection by Landlord 5.07 Surrender of Premises ARTICLE 6. INDEMNITY AND INSURANCE 6.01 Hold-Harmless Clause 6.02 Public Liability and Property Damage ARTICLE 7. SIGNS AND TRADE FIXTURES 7.01 Installation and Removal of Trade Fixtures 7.02 Unremoved Trade Fixtures 7.03 Signs ARTICLE 8. DESTRUCTION OF PREMISES 8.01 Landlord's Election to Repair or Terminate 8.02 Insurance Proceeds ARTICLE 9. CONDEMNATION 9.01 Total Condemnation ARTICLE 10. DEFAULT, ASSIGNMENT, AND TERMINATION 10.01 Prohibition Against Subletting or Assignment 10.02 Subordination 10.03 Default Defined 10.04 Termination of Lease and Recovery of Damages 10.05 Landlord's Right to Continue Lease in Effect 10.06 Landlord's Right to Relet 10.07 Landlord's Right to Cure Tenant Defaults 10.08 Cumulative Remedies 10.09 Waiver of Breach ARTICLE 11. MISCELLANEOUS 11.01 Force Majeure-Unavoidable Delays 11.02. Attorney's Fees 11.03 Notices 11.04 Binding on Heirs and Successors 11.05 Partial Invalidity 11.06 Sole and Only Agreement 11.07 Time of Essence 2 Preamble This lease is made and entered into on June 5, 1998, by and between DANIEL O. DAVIS and ROBBIN H. DAVIS ("landlord") and ZAP POWER SYSTEMS, a California Corporation ("Tenant"). It is understood by parties hereto, that Tenant has leased and been in possession of approximately 1/2 the property since August 1, 1997 and has paid rent in full for each month to date. Landlord, for and in consideration of the rent to be paid by Tenant and of the covenants and provisions to be kept and performed by Tenant under this lease, hereby leases to Tenant, and Tenant agrees to lease from Landlord, the following: the real property commonly known as 111 Morris Street, Sebastopol, California, together with the warehouse and office space and parking space now existing thereon and all improvements now existing. The term "Premises" as used in this lease shall mean all of the Real Property, the structures known as 111 Morris Street and all of the improvements thereto. ARTICLE 1 TERM OF LEASE Original Term Section 1.01. This lease for the property shall be for a term of (3) years, commencing at 12:01 A.M. on June 1, 1998 ("Commencement Date"), and ending at 12:01 A.M. on June 1, 2001 ("Original Term"), unless terminated earlier pursuant to the provisions of this lease. The Tenant understands and agrees that possession of 111 Morris Street shall be delivered by Landlord June 1, 1998 subject to the provisions of this lease. Regardless of the date of Possession, the Commencement date of this lease shall be June 1, 1998. Extended Term Section 1.02. In the event Tenant is not then in default under this lease, Tenant shall have the option and right to extend the Original Term of this lease for one period of (3) years commencing on expiration of the Original Term. In the event Tenant is not then in default under this lease, Tenant shall have the option and right to extend this lease for one additional period of three (3) years commencing on expiration of the first three (3) year Extended Term. If Tenant elects to extend the term of this lease, Tenant must give landlord written notice of Tenant's election to extend at least sixty (60) days before expiration of the previous term. During the Extended Term of this lease, if any, Landlord and Tenant shall be bound by all of the obligations, covenants, and agreements of this lease except that Tenant shall have no right to further extend the term of this lease beyond or after expiration of the two three (3) year Extended Terms granted under this section. References throughout this lease to "the term of this lease" shall include both the Original Term and the Extended Term, if any, unless otherwise indicated. Holding Over Section 1.03. In the event Tenant holds over and continues in possession of the Premises after expiration of the Original Term (when Tenant has not validly exercised its option to extend the term of the lease in accordance with Section 1.02) or after expiration of the Extended Term (when Tenant has validly exercised its option to extend the term of the lease in accordance with Section 1.02), Tenant's continued occupancy of the Premises shall be considered a month-to-month tenancy subject to all the terms and conditions of this lease. Landlord's Inability to Deliver Possession Section 1.04. If Landlord is for any reason unable to deliver possession of the Premises to Tenant on the dates of Possession set forth in Section 1.01 of this lease, this lease shall not be void or voidable nor shall Landlord be liable to Tenant for any loss or damage resulting from failure to deliver possession to Tenant so long as Landlord has exercised, and continues to exercise, reasonable diligence to deliver possession of the Premises to Tenant. No rent shall, however, accrue or become due from Tenant to Landlord under this lease until the actual physical possession of the Premises is delivered, or the right to actual unrestricted physical possession of the Premises under this lease is tendered by Landlord to Tenant. Furthermore, the term of this lease shall not be extended by Landlord's inability to deliver possession of the Premises to Tenant on the dates of Possession set forth in Section 1.01. Termination for Failure of Possession Section 1.05. Notwithstanding any provision of Section 1.04 of this lease, if Landlord for any reason fails to deliver actual physical possession of the Premises, or fails to tender actual unrestricted physical possession of the Premises under this lease, to Tenant within one hundred eighty (180) days after the date for Possession specified in Section 1 .01 of this lease, Tenant may terminate this lease by giving Landlord written notice of its election to do so. In the event Tenant elects to so terminate this lease, this lease shall become null and void as of the date Tenant delivers its written notice of termination to Landlord, and thereafter neither party to this lease shall be under any further obligation or liability to the other because of this lease and Landlord shall return to Tenant any consideration received from Tenant pursuant to or for execution of this lease. If Tenant elects to terminate this lease in accordance with the provisions of this section, it shall give written notice of its election to terminate to Landlord not later than five (5) days after the dates specified for Possession in Section 1.01 of this lease. ARTICLE 2 RENT Section 2.01. Tenant has, contemporaneously with the execution of this lease and in addition to the minimum cash rental for the first month of the term hereof, deposited with Landlord the sum of five hundred dollars ($500.00) which constitutes the balance for the remainder of the building, receipt of which is hereby acknowledged by Landlord, said sum being hereinafter referred to as the "Deposit Amount". The Deposit Amount shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and 2 conditions of this lease by Tenant to be kept and performed during the term hereof, including payment of rent, repair of damages to the premises caused by Tenant, and to clean the premises upon termination. If at any time during the term of this lease any of the rent herein reserved shall be overdue and unpaid, or any other sum payable to Tenant to Landlord hereunder shall be overdue and unpaid, then Landlord may at its option (but Landlord shall not be required to), apply any portion of the Deposit Amount to the payment of any such overdue rent or other sum. In the event of the failure of Tenant to keep and perform all of the terms, covenants and conditions of this lease to be kept and performed by Tenant then, at its option, Landlord may, after terminating this lease, apply the entire Deposit Amount, or so much thereof as may be necessary, to compensate Landlord for all loss or damage sustained or suffered by Landlord due to such breach on the part of Tenant. Should the entire Deposit Amount, or any portion thereof, be applied by Landlord for the payment of overdue rent or other sums due and payable to Landlord by Tenant hereunder, then Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a sufficient amount in cash to restore said security to the original Deposit Amount; the Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this lease. If the claim of the Landlord upon the deposit is only for defaults in payment of rent, then any remaining portion of the deposit shall be returned to Tenant no later than two (2) weeks after the date the Landlord receives possession of the premises. Where the claim of Landlord upon the deposit includes amounts reasonably necessary to repair damages to the premises caused by the Tenant or to clean the premises (not to include reasonable wear and tear), then any remaining portion of the deposit shall be returned to the Tenant no later than thirty (30) days from the date the Landlord receives possession of the premises. Upon termination of the Landlord's interest in the demised premises, Landlord shall within a reasonable time, do one of the following acts, either of which shall relieve the Landlord of further liability with respect to the deposit: (1) Transfer the portion of the deposit remaining after any lawful deductions to the Landlord's successor in interest, and thereafter notify the Tenant by personal delivery or certified mail of the transfer, of any claims made against the deposit, and of the transferee's name and address. (2) Return the portion of the deposit remaining after any lawful deductions to the Tenant. Minimum Rent Section 2.02. Tenant agrees to pay to Landlord a fixed minimum rental for the use and occupancy of the Premises (the "Minimum Rent"). The amount of Minimum Rent payable for each month during the Original Term shall be two thousand ($2,000.00), and the amount of Minimum Rent payable for each month during the Extended Terms, if any, shall be the same. The Minimum Rent shall be payable on the first day of each and every month commencing the first day the premises are made available for possession. The rent shall be payable at the office of the Landlord at 1051 Todd Road, Santa Rosa, California, or at any other place or places as Landlord may from time to time designate by written notice delivered 3 to Tenant. Minimum Rent for partial calendar months occurring at the commencement and termination of the term of this lease shall be prorated accordingly. Rental Increase Section 2.03. The Minimum Rent described above shall be adjusted on every 1st Anniversary of the commencement date of this lease beginning on June 1, 1999 (including during any extension of this lease) to reflect the average percentage increase in the Consumer Price Index or All Urban Consumers using 1977 as a base year, as compiled by the Bureau of Labor Statistics of the United States Department of Labor for the San Francisco-Oakland Metropolitan Area for the month closest preceding each of the adjustment dates over the same Consumer Price Index for all Urban Consumers for the base reference month immediately preceding the commencement of this lease. The Minimum Rent as adjusted on each of the adjustment dates shall be the rent payable by Tenant to Landlord monthly for the use and occupancy of the premises until the next adjustment date; provided, however, in no event shall any adjustment result in a decrease in the Minimum Rent to a sum less than the Minimum Rent payable for each month of the Original Term. Late Charges Section 2.04. Tenant acknowledges that late payment of rent may cause Landlord to incur costs and expenses, the exact amount of such costs being extremely difficult and impractical to fix. Such costs may include, but are not limited to, processing and accounting expenses, late charges that may be imposed on Landlord by terms of any loan secured by the property, costs for additional attempts to collect rent, and preparation of notices. Therefore, if any installment of rent due from Tenant is not received by Landlord within five (5) business days after the date due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the amount due as a late charge, which shall be deemed additional rent. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord may incur by reason of Tenant's late payments. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the past due amount, or prevent Landlord from exercising any other rights and remedies under this agreement, and as provided by law. ARTICLE 3 USE OF PREMISES Permitted Use Section 3.01. During the term of this lease (including the Original Term and the Extended Term, if any), the Premises shall be used for the exclusive purpose of operating and conducting a solar energy and environmental equipment sales and production facility, Including bicycles, scooters and other equipment for uses normally incident to that purpose, and for no other purpose. Tenant shall not use or permit the Premises to be used for any other purpose, without the prior written consent of Landlord. In conducting the business specified in this section in and on the Premises, Tenant shall sell any merchandise and render any services that are customarily sold and rendered by the operators of similar businesses. 4 Insurance Hazards Section 3.02. Tenant shall not commit or permit the commission of any acts on the Premises nor use or permit the use of the Premises in any manner that will increase the existing rates for or cause the cancellation of any fire, liability, or other insurance policy insuring the Premises or the improvements on the Premises. Tenant shall, at its own cost and expense, comply with any and all requirements of Landlord's insurance carriers necessary for the continued maintenance at reasonable rates of fire and liability insurance policies on the Premises and the improvements on the Premises. Waste or Nuisance Section 3.03. Tenant shall not commit or permit the commission by others of any waste on the Premises; Tenant shall not maintain, commit, or permit the maintenance or commission of any nuisance as defined in Civil Code Section 3479 on the Premises; and Tenant shall not use or permit the use of the Premises for any unlawful purpose. Compliance With Laws Section 3.04. Tenant shall at Tenant's own cost and expense comply with all statutes, ordinances, regulations, and requirements of all governmental entities, both federal and state and county or municipal, [including those requiring capital improvements to the Premises,] relating to Tenant's use and occupancy of the Premises whether those statutes, ordinances, regulations, and requirements are now in force or are subsequently enacted. The judgment of any court of competent jurisdiction, or the admission by Tenant in a proceeding brought against Tenant by any government entity, that Tenant has violated any such statute, ordinance, regulation, or requirement shall be conclusive as between Landlord and Tenant and shall constitute grounds for termination of this lease by Landlord. The Landlord shall be responsible for any hazardous waste which is discovered on subject premises and which is proven to have existed at the commencement of this lease. ARTICLE 4 TAXES AND UTILITIES Utilities Section 4.01. Tenant shall pay for all utilities and services furnished to or used by it, including, without limitation, gas, electricity, water, telephone service, and trash collection. Tenant shall make all arrangement for such services and shall pay all connection charges and shall hold Landlord harmless from any liability for charges for said service. Personal Property Taxes Section 4.02. Tenant shall pay before they become delinquent all taxes, assessments, and other charges levied or imposed by any governmental entity on the furniture, trade fixtures, appliances, etc. brought on the Premises by Tenant. 5 Real Property Taxes Section 4.03. Landlord shall pay all real property taxes and assessments levied or assessed against the premises during the term of this lease. ARTICLE 5 ALTERATIONS AND REPAIRS Condition of Premises Section 5.01. Tenant accepts the Premises, as well as the Improvements indicated and agreed on as per plan, in their present condition or as planned to be made, and stipulates with Landlord that the Premises and Improvements are in good, clean, safe, and tenantable condition as of the date of this lease. Tenant further agrees with and represents to Landlord that the Premises have been inspected by Tenant, that it has received assurances acceptable to Tenant by means independent of Landlord or any agent of Landlord of the truth of all facts material to this lease, and that the Premises are being leased by Tenant as a result of its own inspection and investigation and not as a result of any representations made by Landlord or any agent of Landlord except those expressly set forth in this lease. Maintenance by Landlord Section 5.02. Landlord shall, at its own cost and expense, maintain in good condition and repair the structural elements of the Building , landscaping, walkways, driveways, trash enclosures, and painting and maintenance of exterior walls. For purposes of this section, "structural elements" shall mean the exterior roof, exterior walls (except show window glass), structural supports, and foundation of the Building. Landlord shall not be liable for any damages to Tenant or the property of Tenant resulting from Landlord's failure to make any repairs required by this section unless written notice of the need for those repairs has been given to Landlord by Tenant and Landlord has failed for a period of 30 days after receipt of the notice, unless prevented by causes not the fault of the Landlord, to make the needed repairs. Notwithstanding anything in this section to the contrary, Tenant shall promptly reimburse Landlord for the full cost of any repairs made pursuant to this section required because of the negligence or other fault, other than normal and proper use, of Tenant or its employees or agents or subtenants, if any. Landlord and its agents shall have the right to enter the Premises at all reasonable times after giving Tenant twenty-four (24) hours notice (and at any time during an emergency) for the purpose of inspecting them or to make any repairs required to be made by Landlord under this lease. Maintenance by Tenant Section 5.03. Except as otherwise expressly provided in Section 5.02 of this lease, Tenant shall at its own cost and expense keep and maintain all portions of the Premises and all Improvements located on the Premises in good order and repair and in as safe and clean a 6 condition as they were when received by Tenant from Landlord, reasonable wear and tear excepted. Maintenance of Plate Glass Section 5.04. Tenant shall, at its own cost and expense, repair and replace any plate glass in any show window on the Premises that is broken regardless of any cause. Furthermore, Tenant shall at Tenant's own cost and expense at all times during the term of this lease carry adequate plate glass insurance on the glass in all show windows on the Premises to perform the repair and replacement requirements of this section. Should Tenant fail to repair or replace any glass broken in a show window or fail to maintain adequate plate glass insurance on the glass in show windows on the Premises, Landlord may replace or repair the broken glass or secure that insurance and Tenant shall promptly reimburse Landlord for the cost of the repair, replacement, or insurance. In addition, Tenant shall pay Landlord interest on those costs at the rate of ten percent (10%) per year from the date the costs were incurred by Landlord to the date they are reimbursed to Landlord by Tenant. Alterations and Liens Section 5.05. Tenant shall not make or permit any other person to make any alterations to the Premises or to any Improvements on the Premises without the prior written consent of Landlord. Landlord shall not unreasonably withhold this consent. Tenant shall keep the premises free and clear from any and all liens, claims, and demands for work performed, materials furnished, or operations conducted on the Premises at the instance or request of Tenant. Furthermore, any and all alterations, additions, improvements, and fixtures, except furniture and trade fixtures, made or placed in or on the Premises by Tenant or any other person shall on expiration or earlier termination of this lease, become the property of Landlord and remain on the Premises. Landlord shall have the option, however, on expiration or termination of this lease, of requiring Tenant, at Tenant's sole cost and expense, to remove any or all such alterations, additions, improvements, or fixtures from the Premises. Inspection by Landlord Section 5.06. Tenant shall permit Landlord or Landlord's agents, representatives, or employees to enter the Premises at all reasonable times after giving Tenant twenty-four (24) hours notice for the purpose of inspecting the Premises to determine whether Tenant is complying with the terms of this lease, for the purpose of doing other lawful acts that may be necessary to protect Landlord's interest in the Premises, or for the purpose of performing Landlord's duties under this lease. Surrender. of Premises Section 5.07. On expiration or earlier termination of this lease, Tenant shall promptly surrender and deliver the Premises to Landlord in as good condition as they are now at the date of this lease, excluding reasonable wear and tear, and repairs required to be made by Landlord under this lease. 7 ARTICLE 6 INDEMNITY AND INSURANCE Hold-Harmless Clause Section 6.01. Tenant agrees to protect, indemnify, and save Landlord harmless from and against any and all liability to third parties resulting from Tenant's occupation and use of the Premises, specifically including, without limitation, any claim, liability, loss, or damage arising by reason of: (a) The death or injury of any person or persons, including Tenant or any person who is an employee or agent of Tenant, or by reason of the damage to or destruction of any property, including property owned by Tenant or any person who is an employee or agent of Tenant, and caused or allegedly caused by either the condition of the Premises, or some act or omission of Tenant or of some agent, contractor, employee, servant, subtenant, or concessionaire of Tenant on the Premises; (b) Any work performed on the Premises or materials furnished to the Premises at the instance or request of Tenant or any agent or employee of Tenant; and (c) Tenant's failure to perform any provision of this lease or to comply with any requirement of law or any requirement imposed on Landlord or the leased premises by any duly authorized governmental agency or political subdivision. Public Liability and Property Damage Insurance Section 6.02. Tenant shall, at Tenant's expense, maintain and keep in force during the term of this lease a policy of comprehensive public liability insurance insuring Tenant and Landlord against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in an amount of not less than One Million Dollars ($1,000,000), combined single limit. If Tenant shall fail to procure and maintain said insurance Landlord may, but shall not be required to, procure and maintain the same, but at the expense of Tenant. Not more frequently than each three (3) years, if in the opinion of Landlord or its insurance broker the amount of public liability and property damage insurance coverage of the time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord, its lender or insurance broker. (a) Fire Insurance. In order that the business of Tenant may continue with as little interruption as possible, Tenant shall, during the full term of this lease and any renewals or extensions thereof, maintain at Tenant's own cost and expense an insurance policy issued by a reputable company authorized to conduct insurance business in California insuring for their full insurable value all fixtures and equipment and, to the extent possible, all merchandise that is, at any time during the term of this lease or any renewal or extension thereof, in or on said premises against damage or destruction by fire, theft, or the elements. (b) Insurance Policy Form. The bodily injury liability insurance and property damage insurance to be maintained by Tenant shall be carried in the joint names of Landlord 8 and Tenant. Such policy shall be subject to Landlord's approval as to form and substance and shall expressly provide that the policy shall not be canceled or altered without thirty (30) days prior written notice to Landlord. Upon insurance thereof, such policy or a duplicate or a certificate thereof, shall be delivered to Landlord for retention by it. The insurance policy to be maintained by Tenant shall be issued by good and responsible insurance companies authorized to do business in the state of California. ARTICLE 7 SIGNS AND TRADE FIXTURES Installation and Removal of Trade Fixtures Section 7.01. Tenant shall have the right at any time and from time to time during the term of this lease, at Tenant's sole cost and expense, to install and affix in, to, or on the Premises any items, herein called "trade fixtures," for use in Tenant's trade or business that Tenant may, in Tenant's sole discretion, deem advisable. Any and all trade fixtures that can be removed without structural damage to the Premises or any building or improvements on the Premises shall, subject to Section 7.02 of this lease, remain the property of the Tenant and may be removed by Tenant at any time before the expiration or earlier termination of this lease, provided Tenant repairs any damage caused by the removal. Unremoved Trade Fixtures Section 7.02. Any trade fixtures described in this Article that are not removed from the Premises by Tenant within thirty (30) days after the expiration or earlier termination regardless of cause, of this lease shall be deemed abandoned by Tenant and shall automatically become the property of Landlord as owner of the real property to which they are affixed. Signs Section 7.03. Tenant may erect, maintain, permit, and from time to time remove any signs at Tenant's sole cost and expense, in or about the Premises that Tenant may deem necessary or desirable, provided that any signs erected or maintained by Tenant and authorized by Landlord, and shall comply with all requirements of any governmental authority with jurisdiction. ARTICLE 8 DESTRUCTION OF PREMISES Landlord's Election to Repair or Terminate Section 8.01. Should the premises or the building on said premises be destroyed in whole or in part from any cause, Landlord may at Landlord's option either: (a) Continue this lease in full force and effect by repairing and restoring, at Landlord's own cost and expense, said premises to their former condition if that can be accomplished within ninety (90) days from the date of destruction, or 9 (b) Terminate this lease by giving Tenant written notice of such termination. Insurance Proceeds Section 8.02. Any insurance proceeds received by Landlord because of the total or partial destruction of said premises of the building on said Premises shall be the sole property of Landlord free from any claims of Tenant, and may be used by Landlord for whatever purpose Landlord may desire. Should Landlord elect to repair and restore the premises to their former condition following partial or full destruction of said Premises or the building on said premises: (a) Tenant shall not be entitled to any damage for any loss or inconvenience sustained by Tenant as a result of the making of such repairs and restoration, unless caused by negligence of Landlord or Landlord's agents; (b) Landlord shall have full right to enter said Premises and take possession of so much of said Premises, including the whole of said Premises, as may be reasonably necessary to enable Landlord promptly and efficiently to carry out the work of repair and restoration; and (c) The rent payable by Tenant to Landlord for the part destroyed shall be abated to the extent and for the time Tenant is prevented from using that portion of the premises. ARTICLE 9 CONDEMNATION Section 9.01. If title to all or any part of the Premises be taken for any public or quasi-public use under any statute or by right of eminent domain, or by private purchase in lieu thereof, Landlord may terminate this Lease as of the date that possession of said premises or part thereof, be taken. All compensation awarded or paid upon such taking, including the full fair market value of the property taken and damage for injury, if any, to the remainder, shall belong solely to and be the property of Landlord, whether such compensation be awarded or paid as compensation for diminution in value of the leasehold or to the fee; provided, however, that Landlord shall not be entitled to any award made to Tenant for loss of good will to Tenants business or for cost of removal of stock and fixtures. If by reason of such taking, a reasonable amount of the premises reasonably suitable for Tenant's continued occupancy for the uses and purposes for which the premises are leased does not remain, Tenant may terminate this lease as of the date possession of said premises or part thereof be taken. If neither party terminates this lease by reason of a partial taking, the lease shall nevertheless terminate unless the parties reach agreement as to the rent payable hereunder for the remaining portions of the premises prior to the date possession of the portion of the premises is taken. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions hereof. 10 ARTICLE 10 DEFAULT, ASSIGNMENT, AND TERMINATION Restriction Against Subletting or Assignment Section 10.01. Tenant shall not encumber, assign, otherwise transfer this lease, any right or interest in this lease, or any right or interest in the Premises or any of the improvements that may now or hereafter be constructed or installed on the Premises without first obtaining the express written consent of Landlord. Tenant shall not sublet the Premises or any part of the Premises or allow any other person, other than Tenant's agents, servants, and employees to occupy the Premises or any part of the Premises without the prior written consent of Landlord. A consent by Landlord to one assignment, one subletting, or one occupation of the Premises by another person shall not be deemed to be a consent to any subsequent assignment, subletting, or occupation of the Premises by another person. Any encumbrance, assignment, transfer, or subletting without the prior written consent of Landlord, whether voluntary or involuntary, by operation of law or otherwise, is void and shall, at the option of Landlord, terminate this lease. The consent of Landlord to any assignment of Tenant's interest in this lease or the subletting by Tenant of the Premises or parts of the Premises shall not be unreasonably withheld. Subordination Section 10.02. Tenant agrees that this lease shall be subordinate to any mortgages or trust deeds that are now or may hereafter be placed upon said premises and to any and all advances made or to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee or beneficiary named in said mortgages or trust deed shall agree to recognize the lease of the Tenant in the event of foreclosure if the Tenant is not in default. If any mortgagee or beneficiary elects to have this lease superior to its mortgage, or deed of trust by notice to Tenant, then this lease shall be deemed superior to the lien of any such mortgage or trust deed, whether this lease is dated or recorded before or after said mortgage or trust deed. Default Defined Section 10.03. The occurrence of any of the following shall constitute a material default and breach of this lease by Tenant: (a) Any failure by Tenant to pay the rent or to make any other payment required to be made by Tenant under this lease when that failure continues for ten (10) days after written notice of the failure is given by Landlord to Tenant. (b) The abandonment or vacation of the Premises by Tenant (the absence of Tenant from or the failure by Tenant to conduct business on the Premises for a period in excess of fourteen (14) consecutive days shall constitute an abandonment or vacation for purposes of this lease.) 11 (c) A failure by Tenant to observe and perform any other provision of this lease to be observed or performed by Tenant, when that failure continues for thirty (30) days after written notice of Tenant's failure is given by Landlord to Tenant; provided, however, that if the nature of that default is such that it cannot reasonable be cured within said thirty (30) day period, Tenant shall not be deemed to be in default if Tenant commences that cure within the said thirty (30) day period and thereafter diligently prosecutes it to completion. (d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, it is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, when possession is not restored to Tenant within thirty (30) days; or the attachment, execution, or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, when that seizure is not discharged within thirty (30) days. Termination of Lease and Recovery of Damages Section 10.04. In the event of any default by Tenant under this lease, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the right to terminate this lease and all rights of Tenant hereunder by giving written notice of the termination. No act of Landlord shall be construed as terminating this lease except written notice given by Landlord to Tenant advising Tenant that Landlord elects to terminate the lease. In the event Landlord elects to terminate this lease, Landlord may recover from Tenant: (a) The worth at the time of award of any unpaid rent that had been earned at the time of termination of the lease; (b) The worth at the time of award of the amount by which the unpaid rent that would have been earned after termination of the lease until the time of award exceeds the amount of rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the term of this lease after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; and (d) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this lease. The term "rent" as used in this section shall mean the Minimum Rent, the Percentage Rent, and all other sums required to be paid by Tenant pursuant to the terms of this lease. As used in subsections (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of ten percent (10%) per year. As used in subsection (c), the "worth at the time of award" is computed by discounting that amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 12 Landlord's Right to Continue Lease in Effect Section 10.05. (a) If Tenant breaches this lease and abandons the Premises before the natural expiration of the term of this lease, Landlord may continue this lease in effect by not :terminating Tenant's right to possession of the Premises, in which event Landlord shall be entitled to enforce all its rights and remedies under this lease, including the right to recover the rent specified in this lease as it becomes due under this lease. For as long as Landlord does not terminate this lease, Tenant shall have the right to assign or sublease the Premises with the Landlord's prior written consent. Landlord shall not unreasonably withhold consent. (b) No act of Landlord, including but not limited to Landlord's entry on the Premises, efforts to relet the Premises, or maintenance of the Premises, shall be construed as an election to terminate this lease unless a written notice of that intention is given to Tenant or unless the termination of this lease is decreed by a court of competent jurisdiction. Landlord's Right to Relet Section 10.06. In the event Tenant breaches this lease, Landlord may enter on and relet the Premises or any part of the Premises to a third party or third parties for any term, at any rental, and on any other terms and conditions that Landlord in its sole discretion may deem advisable, and shall have the right to make alterations and repairs to the Premises. Tenant shall be liable for all of Landlord's costs in reletting, including but not limited to remodeling costs required for the reletting. In the event Landlord relets the premises, Tenant shall pay all rent due under and at the times specified in this lease, less any amount or amounts actually received by Landlord from the reletting. Landlord's Right to Cure Tenant Default Section 10.07. If Tenant breaches or fails to perform any of the covenants or provisions of this lease, Landlord may, but shall not be required to, cure Tenant's breach. Any sum expended by Landlord, with the ten maximum legal rate of interest, shall be reimbursed by Tenant to Landlord with the next due rent payment under this lease. Cumulative Remedies Section 10.08. The remedies granted to Landlord in this Article shall not be exclusive but shall be cumulative and in addition to all remedies now or hereafter allowed by law or provided in this lease. Waiver of Breach Section 10.09. The waiver by Landlord of any breach by Tenant of any of the provisions of this lease shall not constitute a continuing waiver or waiver of any subsequent breach by Tenant either of the same or another provision of this lease. 13 ARTICLE 11 MISCELLANEOUS Force Majeure-Unavoidable Delays Section 11.01. If the performance of any act required by this lease to be performed by either Landlord or Tenant is prevented or delayed by reason of an act of God, strike, lockout, labor troubles, inability to secure materials, restrictive governmental laws or regulations, or any other cause except financial inability that is not the fault of the party required to perform the act, the time for performance of the act will be extended for a period equivalent to the period of delay, and performance of the act during the period of delay will be excused. However, nothing contained in this section shall excuse the prompt payment of rent by Tenant as required by this lease or the performance of any act rendered difficult solely because of the financial condition of the party required to perform the act. Attorney's Fees Section 11.02. If any litigation is commenced between the parties to this lease concerning the Premises, this lease, or the rights and duties of either in relation to the Premises or to this lease, the party prevailing in that litigation shall be entitled to, in addition to any other relief that may be granted in the litigation, a reasonable sum as and for its attorney's fees in that litigation that are determined by the court in that litigation or in a separate action brought for that purpose. Notices Section 11.03. Except as otherwise expressly provided by law, any and all notices or other communications required or permitted by this lease or by law to be served on or given to either party to this lease by the other party to this lease shall be in writing and shall be deemed duly served and given when personally delivered to the party to whom they are directed, or in lieu of personal service, when deposited in the United States mail, first-class postage prepaid, addressed to Tenant at 11 7 Morris Street, Sebastopol, California 95472 or to Landlord at 111 Morris Street, Sebastopol, California 95472. Either party, Tenant or Landlord, may change its address for the purpose of this section by giving written notice of that change to the other party in the manner provided in this section. Binding on Heirs and Successors Section 11.04. This lease shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of Landlord and Tenant, but nothing in this section shall be construed as a consent by Landlord to any assignment of ???? Partial Invalidity Section 11.05. If any provision of this lease is held by a court of competent jurisdiction to be either invalid, void, or unenforceable, the remaining provisions of this lease shall remain in full force and effect unimpaired by the holding. 14 Sole and Only Agreement Section 11.06. This instrument constitutes the sole and only agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, or the lease term created under this lease, and correctly sets forth the obligations of Landlord and-Tenant to each other as of its date. Any agreements or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are null and void. Time of Essence Section 11.07. Time is expressly declared to be of the essence in this lease. Executed on 6/5/98, at Sebastopol, CA, California. /s/ Daniel O. Davis ---------------------------------------- Daniel O. Davis (Landlord) /s/ Robbin H. Davis ---------------------------------------- Robbin H. Davis (Landlord) /s/ James McGreen ---------------------------------------- ZAP POWER SYSTEMS (Tenant) by ------------------------------------ 15 EX-10.15 24 0024.txt LEASE LEASE Preamble--Parties and Leasing GEORGE R. BRAMWELL, herein called "Lessor", hereby leases to RON BASSO DBA/R. S. BASSO COMPANY, herein called "Lessee", those certain premises, herein called "said premises", in the County of Sonoma, State of California, described as 7190 Keating Avenue, Sebastopol, California, on the following terms and conditions: ARTICLE 1. TERM OF LEASE Original Term Section 1.01. This lease shall be for an initial term of five (5) years commencing on July 1, 1996, and shall have three successive options exercisable by Lessee for five (5) years each. Lessee shall be required to notify Lessor six months in advance of each successive option period whether Lessee intends to exercise the option or not. Hold Over Section 1.02. Should Lessee hold over and continue in possession of said premises after expiration of the term of this lease or any extension thereof, Lessee's continued occupancy of said premises shall be considered a month-to-month tenancy subject to all terms and conditions of this lease and the rent in effect immediately prior to the period of the hold over. Lessor's Inability to Deliver possession Section 1.03. Should Lessor for any reason be unable to deliver possession of said premises to Lessee on the date specified in Section 1.01 of this lease as the date on which the term of the lease is to commence, this lease shall not be void or voidable nor shall Lessor be liable to Lessee for any loss or damage resulting from such failure to deliver possession to Lessee so long as Lessor has exercised, and continues to exercise, reasonable diligence to deliver possession or said premises to Lessee and so long as said premises are delivered to Lessee by July 1, 1996. No rent shall, however, accrue or become due from Lessee to Lessor under this lease until the actual physical possession of said premises is delivered, or the right to actual unrestricted physical possession of said premises under this lease is tendered, by Lessor to Lessee. The term of this lease shall be extended by any inability by Lessor to deliver possession of said premises to Lessee on the date specified in Section 1.01 for commencement of the term of this lease by the actual period of Lessor's inability to deliver possession. Condition Warrants Section 1.04. Lessor warrants that the premises will be turned over with level floor, clean interior, and one demising wall having been mutually agreed upon by Lessor and Lessee. 1 Lessor also warrants that the three roll-up doors are in good repair and work properly at the time of occupancy of the Lessee. Section 1.05. Lessor agrees that, prior the lease commencement, the roof and the skylites will be replaced and shall warrant roof to be leak free. Section 1.06. Lessor shall make premises available to Lessee 30 days prior to commencement date of this lease for the purpose of making tenant improvements, and Lessee shall have the right to inspect the premises just prior to the commencement date in order to determine if Lessor has made premises acceptable as outlined in above sections. ARTICLE 2. RENT Minimum Rent Section 2.01. Lessee agrees to pay Lessor a fixed minimum rental for the use and occupancy of said promises of______________________ per month payable on the first day of each and every month, commencing July 1,1996, at the home of Lessor at 11 Castle Court, Santa Rosa, California 95401, or at such other place or places as Lessor may from time to time designate by written notice delivered to Lessee. Cost of Living Adjustments Section 2.02. Monthly rent for the space subject to the option provided for in Section 2.01 hereof shall be subject to adjustment at the commencement of the second year of the term and annually thereafter. This adjustment shall be as follows: The base for computing the adjustment is the Consumer Price Index (San Francisco Bay Area) published by the United States Department of Labor, Bureau of Labor Statistics ("Index") which is published for July 1, 1996 ("Beginning Index"). If the index published nearest each adjustment date ("Extension Index") has changed from the Beginning Index, the monthly rent shall be adjusted by multiplying the monthly rent by a fraction, the numerator of which is the Extension Index and the denominator of which is the Beginning Index. In no case shall the monthly rent be less than the monthly rent in effect commencing July 1, 1996. The maximum annual adjustment shall not exceed five percent (5%) per year. If the index is changed so that the base year differs from that used as of July 1, 1996, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government Index or computation with which it is replaced shall be used in order to obtain substantially the same result as would be obtained if the index had not been discontinued or revised. Late Payment Penalty Section 2.03. In the event that Lessee tenders any monthly payment specified in Section 2.01 and/or 2.02 above after the tenth of any month when due, Lessee agrees to pay a Two Hundred Fifty ($250.00) Dollar late penalty. 2 ARTICLE 3. USE OF PREMISES Section 3.01. Said premises shall, during the term of this lease and any extensions thereof, be used for the purpose of operating and conducting thereon and therein "workshops, storage facilities, shipping and receiving, and offices" for uses normally incident to such purpose, and for no other purpose without Lessor's written permission. Leased "premises" includes approximately 10,000 square feet of floor space with three roll-up doors, together with approximately 6,000 square feet of parking lot to park cars and trucks or other vehicles and to make deliveries to and ship products from the premises. Insurance Hazards Section 3.02. Lessee shall not commit or permit the commission of any acts on said premises nor use or permit the use of said premises in any manner that will increase the existing rates for or cause the cancellation of any fire, liability, or other insurance policy insuring said premises or the improvements on said premises. Waste or Nuisance Section 3.03. Lessee shall not commit or permit the commission by others of any waste on said premises; Lessee shall not maintain, commit, or permit the maintenance or commission of any nuisance as defined in Section 3479 of the California Civil Code on said premises; and Lessee shall not use or permit the use of said premises for any unlawful purpose. ARTICLE 4. TAXES AND UTILITIES Payment of Utility Charges Section 4.01. Lessee shall pay, and hold Lessor and the property of Lessor free and harmless from, all charges for the furnishing of gas, water, electricity, telephone service, and other public utilities to said premises during the term of this lease or any extension thereof and for the removal of garbage and rubbish from said premises during the term of this lease or any extensions thereof. Personal Property Taxes Section 4.02. Lessee shall pay before they become delinquent all taxes, assessments, or other charges levied or imposed by any governmental entity on the furniture, trade fixtures, appliances, and other personal property placed by Lessee in, on, or about said premises including, without limiting the generality of the other terms used in this section, any shelves, counters, vaults, vault doors, wall safes, partitions, fixtures, machinery, plant equipment, office equipment, television or radio antennas, or communication equipment brought on said premises by Lessee. 3 Real Property Taxes Section 4.03. All real property taxes an assessments levied or assessed against said premises by any governmental entity, including any special assessments imposed on or against said premises for the construction or improvement of public works in, on, or about said premises, shall be paid, before they become delinquent, by Lessor. ARTICLE 5. ALTERATIONS AND REPAIRS Condition of Premises Section 5.01. Lessee accepts said premises, as well as the improvements thereon and the facilities appurtenant thereto, in their present condition and stipulates with Lessor that said premises as well as the improvements thereon and the facilities appurtenant thereto are in good, clean, safe, and tenantable condition as of the date of this lease. Lessee further agrees with and represents to Lessor that said premises have been inspected by Lessee and that he has been assured by means independent of Lessor any agent of Lessor of the suitability of the premises for its intended use by Lessee and that said premises are being leased by Lessee as a result of his inspection and investigation and not as a result of any representations made by Lessor or any agent of Lessor. Maintenance by Lessor Section 5.02. Lessor shall, at his own expense, maintain in good condition and repair the exterior roof, exterior walls; provided, however, that the Lessor shall not be liable for any damage to Lessee or the property of Lessee resulting from Lessor's failure to make any repairs required by this section unless written notice of the need for such repairs has been given to Lessor by Lessee and Lessor has failed for a period of thirty (30) days after receipt of the notice, unless prevented by causes not the fault of the Lessor, to make the needed repairs; provided, further, that Lessor shall promptly be reimbursed by Lessee for the full cost of any repairs made pursuant to this section required because of the negligence or other fault, other than normal and proper use, of Lessee or his employees or agents or sublessees, if any. Maintenance by Lessee Section 5.03. Except as otherwise expressly provided in Section 5.02 of this lease, Lessee shall at his own cost and expense keep and maintain all portions of said premises as well as all improvements on said premises and all facilities appurtenant to said premises in good order and repair and in as safe and clean a condition as they were when received by Lessee from Lessor, reasonable wear and tear expected. Maintenance of Show Window Glass Section 5.04. Lessee shall, at his own cost and expense, repair and replace any glass in any show window on said premises that becomes broken regardless of cause, including show window glass that is broken by fire, by act of God, by fault of Lessor, or by fault of some employee or agent of Lessor. Furthermore, Lessee shall at his own cost and 4 expense at all times during the term of this lease carry adequate plate glass insurance on the glass in all show windows on said premises to perform the repair and replacement requirements of this section. Should Lessee fail to repair or replace any glass broken in a show window or fail to maintain adequate plate glass insurance on the glass in show windows on said premise, Lessor may replace or repair the broken glass or secure such insurance and Lessee will promptly reimburse Lessor for the cost thereof and pay Lessor interest on such costs at the rate of ten percent (10%) per annum from the date the costs were incurred by Lessor to tile date they are reimbursed to Lessor by Lessee. Alterations and Liens Section 5.05. Lessee shall not make or permit any other person to make any alterations to said premises or to any improvement thereon or facility appurtenant thereto without the written consent of Lessor first had and obtained. Lessee shall keep the premises free and clear from any and all liens, claims, and demands for work performed, materials furnished, or operations conducted on said premises at the instance or request of Lessee. Furthermore, any and all alterations, additions, improvements, and fixtures, except furniture and trade fixtures, made or placed in or on said premises by Lessee or any other person shall on expiration or sooner termination of this lease become the property of Lessor and remain on said premises provided, however, that Lessor shall have the option on expiration or sooner termination of this lease of requiring Lessee, at Lessee's sole cost and expense, to remove any or all such alterations, additions, improvements, or fixtures from said premises. Inspection by Lessor Section 5.06. Lessee shall permit Lessor or Lessor's agents, representatives, or employees to enter said premises at all reasonable times for the purpose of inspection of said premises to determine whether Lessee is complying with the terms of this lease and for the purpose of doing other lawful acts that may be necessary to protect Lessor's interest in said premises under this lease or to perform Lessor's duties under this lease. Surrender of Premises Section 5.07. On expiration or sooner termination of this lease, or any extensions or renewals of this lease, Lessee shall promptly surrender and deliver said premises to Lessor in as good condition as they are now at the date of this lease, reasonable wear and tear and repairs herein requited to be made by Lessor excepted. ARTICLE 6. INDEMNITY AND INSURANCE Hold-Harmless Clause Section 6.01. Lessee agrees to indemnify and hold Lessor and the property of Lessor, including said premises, free and harmless from any and all claims, liability, loss, damage, or expenses resulting from Lessee's occupation and use of said premises, specifically including, without limitation, any claim, liability, loss or damage arising by reason of: 5 (a) The death or injury of any person or persons including Lessee or any person -who is an employee or agent of Lessee, or by reason at, except as & result of Lessor's negligence, the damage to or destruction of any property, including property owned by Lessee or any person who is an employee or agent of Lessee, and caused or allegedly caused by either the condition of said premises, or some act or omission of Lessee or of some agent, contractor, employee, servant, sublessee, or concessionaire of Lessee on said premises; (b) Any work performed on said premises or materials furnished to said premises at tile instance or request of Lessee or any agent or employee of Lessee; and (c) Lessee's failure to perform any provisions of this lease or to comply with any requirement of law or any requirement imposed on Lessor or the leased premises by any duly authorized governmental agency or political subdivision. Liability Insurance Section 6.02. Lessee shall, at his own cost and expense, secure within ten (10) days and maintain during the entire term of this lease and any renewals or extensions of such term a broad form comprehensive coverage policy of public liability insurance issued by an insurance company acceptable to or connected with Lessee's occupation an use of said premises under this lease in amounts not less than: (a) Two Hundred Fifty Thousand ($250,000.00) Dollars for injury to or death of one person and subject to such limitation for the injury or death of one person, of not less than Five Hundred Thousand ($500,000.00) Dollars for injury to or death of two or more persons as a result -of' any- one accident or incident; and (b) One Hundred Thousand ($100,000.00) Dollars for damage to or destruction of -any property of others. Waiver of Subrogation Section 6.03. The parties release each other, and their respective authorized representatives, from any claims for damage, to any person, or to the premises and to the fixtures, personal property, Lessee's improvements and alterations of either Lessor or Lessee in or on the premises that are caused by or result from the risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all right of recovery by way of subrogation against either party in connection with any damage covered by any policy. Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this lease. If any insurance policy cannot be obtained with a waiver of subrogation, or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without waiver of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of ten (10) days after receiving the notice either to place the insurance with 6 a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation, or to agree to pay the additional premium if such policy is obtainable at additional cost. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved. Fire Insurance Section 6.04. In order that the business of Lessee and the gross sales of Lessee as defined in this lease may continue with as little interruption as possible, Lessee shall, during the full term of this lease and any renewals or extensions thereof, maintain at Lessee's own cost and expense an insurance policy issued by a reputable company authorized to conduct insurance business in California insuring for their full insurable value all fixtures and equipment and, to the extent possible, all merchandise that is, at any time during the term of this lease or any renewal or extension thereof, in or on said premises against damage or destruction by fire, theft, or the elements. ARTICLE 7. SIGNS AND TRADE FIXTURES Installation and Removal of Trade Fixtures Section 7.01. Lessee shall have the right at any time and from time to time during the term of this lease and any renewal or extension of such term, at Lessee's sole cost and expense, to install and affix in, to, or on said premises such items, herein called "trade fixtures", for use in Lessee's trade or business as Lessee may, in his sole discretion, deem advisable. Any and all such trade fixtures that can be removed without structural damage to said premises or any building or improvements on said premises shall remain the property of the Lessee and may be removed by Lessee at any time times prior to the expiration or sooner termination of this lease. ARTICLE 8. DESTRUCTION AND CONDEMNATION Partial Destruction Section 8.01. Should said premises or the building on said premises be partially destroyed by any cause not the fault of Lessee or any person in or about said premises with the consent, express or implied, of Lessee, this leash shall continue in full force and effect and Lessor, at Lessor's own cost and expense, shall promptly commence the work of repairing and restoring said premises to their prior condition providing such work can be accomplished under all applicable governmental laws and regulations within sixty (60) working days at a cost not exceeding full insured value. Total Destruction Section 8.02. Should said premises or the building on said premises be so far destroyed by any cause not the fault of Lessee or any person in or about said premises with the 7 consent, express or implied, of Lessee that they cannot be repaired or restored to their former condition within sixty (60) working days or at a cost not exceeding full insured value, Lessor or Lessee may at Lessor's or Lessee's option either: (a) Continue this lease in full force and effect by repairing and restoring, at Lessor's own cost and expense, said premises to their former condition; or (b) Terminate this lease by giving Lessee written notice of such termination. Total Condemnation Section 8.03. Should, during the term of this lease or any renewal or extension thereof, title and possession of all of said premises be taken under the taken of eminent domain by any public or quasi-public agency or entity, this lease shall terminate as of 12:01 a.m. of the date actual physical possession of said premises is taken by the agency or entity exercising the power of eminent domain and both Lessor and Lessee shall thereafter be released from all obligations, except those specified in Section 8.06 of this lease, under this lease. Termination Option for Partial Condemnation Section 8.04. Should, during the term of this lease or any renewal or extension thereof, title and possession of only a portion of said premises be taken under the power of eminent domain by any public or quasi-public agency or entity, Lessee may, at Lessee's option, terminate this lease if more than Thirty-Five percent (35%) of the ground area or more than Thirty-Five percent (35%) in value of said premises is taken under the power of eminent domain. Lessee shall exercise his option by giving written notice to Lessor within thirty (30) days after actual physical possession of the portion subject to the eminent domain power is taken by the agency or entity exercising that power. This lease shall terminate as of 12:01 a.m. of the date the notice is deemed given to Lessor by the minimum rent specified in Section 2.01 of this lease shall be reduced in the manner specified in Section 8.05 of this lease from the date of taking to the date of termination of the lease. Partial Condemnation Without Termination Section 8.05. Should Lessee fail to exercise the option described in Section 8.04 of this lease or should the portion of said premises taken under the power of eminent domain be insufficient to give rise to the option described in Section 8.04 of this lease, then, in that event: (a) This lease shall terminate as to the portion of said premises taken by eminent domain as of 12:01 a.m. of the day, herein called the "date of taking", actual physical possession of that portion of said premises is taken by the agency or entity exercising the power of eminent domain; (b) The minimum rent specified in Section 2.01 together with any adjustments specified in Section 2.02 of this lease shall, after the date of taking, be reduced by an amount that bears the same ratio to the minimum rent specified in Section 2.01. of this 8 lease as the square footage store area of the portion of said premises taken under the power of eminent domain bears to the total square footage ground area of said premises as of the date of this lease. Condemnation Award Section 8.06. Should, during the term of this lease or any renewal or extension thereof, title and possession of all or any portion of said premises be taken under the power of eminent domain by any public or quasi-public agency or entity, the portion of the compensation or damages for the taking awarded to each of the parties to this lease, Lessor and Lessee, shall belong to and be the sole property of the party Lessor or Lessee, to whom it is awarded. Lessee shall be entitled to that portion of the compensation or damages awarded for the eminent domain taking that represents (1) the reasonable value of the Lessee's rights under this lease for the unexpired term of this lease and (2) the cost or less sustained by Lessee because of the removal of Lessee's merchandise, trade fixtures, equipment, and furnishings from the portion of said premises taken by eminent domain. Arbitration of Condemnation Award Section 8.07. Should separate awards not be made to Lessor and Lessee for the taking by eminent domain of all or any portion of said premises, and should Lessor and Lessee be unable to agree on the manner the total award is to be divided between them pursuant to Section 8.06 of this lease, the proper division of the award between Lessor and Lessee shall be settled by arbitration. Each party shall appoint an arbitrator and the two arbitrators so appointed shall, within a month after both have been appointed, select a third arbitrator. The decision of any two of the three arbitrators in writing shall be binding on both Lessor and Lessee. Should no two arbitrators be able to agree within one month after appointment of the third arbitrator, the report of the arbitrator most favorable to Lessor and the report of the arbitrator most favorable to Lessee shall both be disregarded and the report of the remaining arbitrator shall be binding on both Lessor and Lessee. Should either Lessor or Lessee fail to appoint an arbitrator within twenty (20) days after receiving notice from the other to so do, the arbitrator selected by the other party shall act for both and his decision in writing shall be binding on both Lessor and Lessee. ARTICLE 9. DEFAULT, ASSIGNMENT, AND TERMINATION Subleasing or Assigning as Breach Section 9.01. Lessee shall not encumber, assign, or otherwise transfer this lease, any right or interest in this lease, or any right or interest in said premises or any of the improvements that may now or hereafter be constructed or installed on said premises without the express written consent of Lessor first had and obtained; provided that Lessor shall not unreasonably withhold much express written consent. 9 Default by Lessee Section 9.02. Should Lessee default in the performance of any of the covenants, conditions, or agreements contained in this lease, Lessee shall have breached the lease and Lessor may re-enter and retain possession of said premises in the manner provided by the laws of unlawful detainer of the State of California then in effect. Waiver of Breach Section 9.03. The waiver of either party of any breach by the other of any of the provisions of this lease shall not constitute a continuing waiver or a waiver of any subsequent breach by either party, either of the same or another provision of this lease. ARTICLE 10. SALE OF LEASED PREMISES Right of First Refusal to Purchase Leased Premises Section 10.01. Should Lessor, during the lease term (or any extension thereof) elect to sell all or any portion of the leased premises, Lessee shall have the right of first refusal to meet any bona fide offer of sale on the same terms and conditions of such offer, and on failure to meet such bona fide offer within thirty (30) days after written notice thereof from Lessor, Lessor shall be free to sell the premises or portion thereof to such third person in accordance with the terms and conditions of his offer. This right of first refusal by Lessee shall not extend to a sale of the leased premises between GEORGE AND RUBY BRAMWELL and WALTER BRAMWELL. ARTICLE 11. MISCELLANEOUS Force Majeure--Unavoidable Delays Section 11.01. Should the performance of any act required by this lease be performed by either Lessor or Lessee be prevented or delayed by reason of an act of God, strike, lockout, labor troubles, inability to secure materials, restrictive governmental laws or regulations, or any other cause, except financial inability, not the fault of the party required to perform the act, the time for performance of the act will be extended for a period equivalent to the period of delay and performance of the act during the period of delay will be excused; provided, however, that nothing contained in this section shall excuse the prompt payment of rent by Lessee as required by this lease or the performance of any act rendered difficult solely because of the financial condition of the party, Lessor or Lessee, required to perform the act. Notices Section 11.02. Except as otherwise provided by law, any and all notices or other communications acquired or permitted by this lease or by law to be served on or given to either party hereto by the other party hereto shall be in writing and shall be deemed duly served and given when personally delivered to the party to whom they are directed, or in lieu 10 of such personal service when deposited in the United States mail, first-class postage prepaid, addressed to Lessee at 7190 Keating Avenue, Sebastopol, California 95472 or to Lessor at 11 Castle Court, Santa Rosa, California 95401. Either party, Lessee or Lessor, may change his address for the purpose of this section by giving written notice of such change to the other party in the manner provided in this section. Binding on Heirs and Successors Section 11.03. This lease shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of the parties hereto, Lessor and Lessee, but nothing in this section contained shall be construed as a consent by Lessor to any assignment of this lease or any interest therein by Lessee except as provided in Article 9 of this lease. Partial Invalidity Section 11.04. Should any provision of this lease be held by a court of competent jurisdiction to be either invalid, void, or unenforceable, the remaining provisions of this lease shall remain in full force and effect unimpaired by the holding. Sole and Only Agreement Section 11.05. This instrument constitutes the sole and only agreement between Lessor and Lessee respecting said premises, the leasing of said premises to Lessee, or the lease term herein specified, and correctly sets forth the obligations of Lessor and Lessee to each other as of its date. Any agreement or representations respecting said premises or their leasing by Lessor to Lessee not expressly set forth in this instrument are null and void. Attorney's Fees Section 11.06. Should any litigation be commenced between the parties to this lease concerning said premises, this lease, or the rights and duties or either in relation thereto, the party prevailing in such litigation shall be entitled in addition to such other relief as may be granted, to a reasonable sum as and for his attorney's fees in the litigation which shall be determined by the court in such litigation or in a separate action brought for that purpose. 11 Time of Essence Section 11.07. Time is expressly declared to be the essence of this lease. Executed on __________________, 1996 at Sebastopol, Sonoma County, California. LESSEE LESSOR - ------------------------------------ ----------------------------------- RON BASSO RUBY BRAMWELL R. S. BASSO COMPANY ----------------------------------- GEORGE BRAMWELL 12 EX-10.16 25 0025.txt SUBLEASE SUBLEASE * * * * * * * * * * * * * * * This Sublease (Sublease) dated for reference purposes as of August 1, 1999 is made between Ron Basso, an individual doing business as R.S. Basso Company (Sublandlord), and ZAPWORLD.COM, a California Corporation (Subtenant). Recitals A. Sublandlord is the tenant under that certain Lease executed on May 22, 1996 between Ruby Bramwell and George Bramwell as Lessor and Ron Basso/ dba R.S. Basso Company as Lessee (Master Lease), pursuant to which Ruby Bramwell and George Bramwell (Master Landlord) leased to Sublandlord the real property located in the City of Sebastopol, County of Sonoma, State of California, described as 7190 Keating Avenue (Master Premises). B. A copy of the Master Lease is attached and incorporated in this Sublease as Exhibit A. Section 1. Sublease. Sublandlord subleases to Subtenant on the terms and conditions in this Sublease all of the Master Premises and certain other personal property as set forth herein. Section 2. Warranty by Sublandlord. Sublandlord warrants to Subtenant that the Master Lease has not been amended or modified except as expressly set forth in this Sublease; that Sublandlord is not now, and as of the commencement of the Term (defined in this Sublease) of this Sublease will not be, in default or breach of any of the provisions of the Master Lease; and that Sublandlord has no knowledge of any claim by Master Landlord that Sublandlord is in default or breach of any of the provisions of the Master Lease. Section 3. Term. (a) The term of this Sublease will commence on August 1, 1999 (Commencement Date), and shall end on June 1, 2004 (Termination Date), unless terminated sooner. Said period of time hereinafter shall be referred to as the Term. If the Term commences on a date other than the Commencement Date, Sublandlord and Subtenant will execute a memorandum setting forth the actual date of commencement of the Term. (b) Possession of the Premises (Possession) will be delivered to Subtenant on the commencement of the Term, subject to Subtenant's successful receipt of a use permit from the city of Sebastopol. Subtenant shall not be allowed to occupy the premises unless and until it provides proof of such permit to Sublandlord. If for any reason Sublandlord does not deliver Possession to Subtenant on the Commencement of the Term (other than due to Subtenant's failure to obtain a use permit), Sublandlord will not be subject to any liability for this failure, the Termination Date will not be extended by the delay, and the validity of this Sublease will not be impaired. Rent will be abated until delivery of Possession. However, if Sublandlord has not delivered Possession to Subtenant within thirty (30) business days after the Commencement Date, at any time after that and before delivery of Possession (other than due to Subtenant's failure to obtain a use permit), Subtenant may give written 1 notice to Sublandlord of Subtenant's intention to cancel this Sublease. The notice will set forth an effective date for the cancellation, which will be at least three (3) days after delivery of notice to Sublandlord. If Sublandlord delivers Possession to Subtenant on or before this effective date, this Sublease will remain in full force. If Sublandlord fails to deliver Possession to Subtenant on or before this effective date, this Sublease will be canceled. Upon cancellation, all consideration previously paid by Subtenant to Sublandlord on account of this Sublease will be returned to Subtenant, this Sublease will have no further force, and Sublandlord will have no further liability to Subtenant because of this delay or cancellation. If Sublandlord permits Subtenant to take Possession prior to the commencement of the Term, the early Possession will not advance the Termination Date and will be subject to the provisions of this Sublease, including, without limitation, the payment of rent. (c) The parties agree and acknowledge that Subtenant's ability to obtain a use permit from the city of Sebastopol is a condition precedent to the effectiveness of this lease and that this lease shall be of no further force and effect (and Sublandlord shall return to Subtenant any sums received from Subtenant) if Subtenant fails to obtain a use permit and provide it to Sublandlord within forty-five (45) days of the date this lease is signed by Sublandlord and Subtenant. Section 4. Rent. (a) Minimum Rent. Subtenant will pay to Sublandlord as rent (Rent), without deduction, setoff, notice, or demand, at the offices of Sublandlord or at any other place Sublandlord designates by notice to Subtenant, the sum of Five Thousand Dollars per month commencing on the Commencement Date. Said Rent shall be due and payable on the first day of each month. If the Term begins or ends on a day other than the first or last day of a month, the rent for the partial months will be prorated on a per diem basis. (b) Subtenant will pay an amount equal to the first month's Rent and the Security Deposit (as defined in Section 5 of this Sublease) upon execution of the Sublease. (c) Operating Costs. Sublandlord and Subtenant agree and acknowledge that the Master Lease requires Sublandlord to pay all or a portion of the expenses of operating the Master Premises including but not limited to payment of utilities under Section 4.01 of the Master Lease, payment of personal property taxes under Section 4.02 of the Master Lease, and certain maintenance costs under Sections 5.03 and 5.04 of the Master Lease (collectively, Operating Costs). Subtenant shall pay to the appropriate creditors for the benefit of Subtenant and Sublandlord as additional rent (Additional Rent) all of these Operating Costs associated with Subtenant's use and operation of the Master Premises. (d) Subtenant shall pay any increases in Rent as may be paid by Sublandlord to Master Landlord in accordance with the provisions of Section 2.02 of the Master Lease and any increases in Operating Costs after the initial term of this Sublease. Section 5. Security Deposit. Subtenant will deposit with Sublandlord on execution of this Sublease the sum of one months' Rent (determined in accordance with Section 4(a)) as security for Subtenant's faithful performance of Subtenant's obligations under this Sublease (Security Deposit). If Subtenant fails to pay rent or other charges when due under this Sublease, or fails to perform any obligations under this Sublease, Sublandlord may use any portion of the Security Deposit for the payment of any rent or other amount then due and unpaid, for the payment of any other sum for which Sublandlord may become obligated because of Subtenant's default or breach, or for any loss sustained by Sublandlord as a result of 2 Subtenant's default or breach. If Sublandlord uses any portion of the Security Deposit, Subtenant will, within ten (10) days after written demand by Sublandlord, restore the Security Deposit to the full amount originally deposited. Subtenant's failure to do so will constitute a default under this Sublease. Sublandlord will not be required to keep the Security Deposit separate from its general accounts, and will have no obligation or liability for payment of interest on the Security Deposit. If Sublandlord assigns its interest in this Sublease, Sublandlord will deliver to its assignee as much of the Security Deposit as Sublandlord then holds. Within ten (10) days after the Term has expired or Subtenant has vacated the Premises or any final adjustment pursuant to Subsection 4(b) of this Sublease has been made, whichever occurs last, and provided that Subtenant is not then in default under this Sublease, the Security Deposit, or as much as remains that has not been applied by Sublandlord, will be returned to Subtenant or to the last assignee, if any, of Subtenant's interest under this Sublease. Section 6. Insurance (a) Intentionally Omitted (b) Subtenant agrees to procure and maintain public liability insurance, including products and completed operations insurance, from a responsible insurance company authorized to do business in California, with a combined single limit of not less than One Million Dollars ($1,000,000) for injury or death to any person or damage to property and Four Million Dollars ($4,000,000) excess umbrella coverage for injury or death or property damage, for any claims, demands, or causes of action of any person arising out of accidents occurring on the Premises during the Term or arising out of Subtenant's use of the Premises. (c) Each policy of insurance shall be issued by a responsible insurance company authorized to do business in California, and shall list Master Landlord and Sublandlord and any beneficiary under any deed of trust covering the Premises, if required by the deed of trust, as their respective interests may appear, as additional insureds. Subtenant shall deliver certificates for each insurance policy to Sublandlord and Master Landlord with all relevant endorsements. Each policy of insurance shall be primary and noncontributory with any policies carried by Master Landlord and Sublandlord and, to the extent obtainable, any loss shall be payable notwithstanding any act or negligence of Master Landlord or Sublandlord that might otherwise result in forfeiture of insurance. Each insurance policy shall provide that a thirty (30) day notice of cancellation and of any material modification of coverage shall be given to all named insureds. The insurance coverage required under this Section may be carried by Subtenant under a blanket policy insuring other locations of Subtenant's business, provided that the Premises covered by this Sublease are specifically identified as included under that policy. Subtenant agrees that upon the failure to insure as provided in this Sublease, or to pay the premiums in the insurance, Sublandlord may contract for the insurance and pay the premiums, and all sums expended by Sublandlord for the insurance shall be considered additional rent under this Sublease and shall be immediately repayable by Subtenant. (d) So that the business of Subtenant may continue with as little interruption as possible, Subtenant shall, during the Term and any renewals or extensions, maintain at Subtenant's own cost and expense, an insurance policy insuring against damage or destruction by fire, theft, or the elements for their full insurable value all fixtures and equipment and, to the extent possible, all merchandise that is on the Premises at any time during the Term or any renewal or extension. (e) At all times during the Term and any extensions or renewals, Subtenant agrees to keep and maintain, or cause Subtenant's agents, contractors, or subcontractors to keep and maintain, workmen s compensation insurance and other forms of insurance as may from time to time be required 3 by law or may otherwise be necessary to protect Sublandlord and the Premises from claims of any person who may at any time work on the Premises, whether as a servant, agent, or employee of Subtenant or otherwise. This insurance shall be maintained at the expense of Subtenant or Subtenant's agents, contractors, or subcontractors and not at the expense of Sublandlord. (f) Sublandlord agrees that it will tender and turn over to Subtenant or to Subtenant's insurers the defense of any claims, demands, or suits instituted, made, or brought against Sublandlord or against Sublandlord and Subtenant jointly, within the scope of this Section. However, Sublandlord shall have the right to approve the selection of legal counsel, to the extent that selection is within Subtenant's control, which approval shall not be unreasonably withheld or delayed. In addition, Sublandlord shall retain the right at Sublandlord `s election to have Sublandlord `s own legal counsel participate as co-counsel, to the extent that claims are made that may not be covered by Subtenant's insurers. (g) Subtenant and Sublandlord each release the other and waive the entire right of recovery against the other for loss or damage arising out of or incident to the perils insured against, which perils occur in, on, or about the Premises, whether due to the negligence of Sublandlord or Subtenant or their agents, employees, contractors, or invitees. Subtenant and Sublandlord shall, upon obtaining the required policies of insurance, give notice to the insurance carriers that this mutual waiver of subrogation is in this Lease. Section 7. Assignment and Subletting. Subtenant will not assign this Sublease or further sublet all or any part of the Premises without the prior written consent of Sublandlord (and the consent of Master Landlord, if this is required under the terms of the Master Lease). All rent received by Subtenant from any of its subtenants in excess of the rent payable by Subtenant to Sublandlord under this Sublease shall be paid to Sublandlord, or any sums to be paid by an assignee to subtenant in consideration of the assignment of this sublease shall be paid to Sublandlord. If Subtenant requests Sublandlord to consent to a proposed assignment or subletting, subtenant shall pay to Sublandlord, whether or not consent is ultimately given, Sublandlord's reasonable attorneys' fees incurred in connection with each such request. Section 8. Other Provisions of Sublease. (a) Except as otherwise set forth in this Sublease, all applicable terms and conditions of the Master Lease are incorporated into and made a part of this Sublease as if Sublandlord were the landlord, Subtenant the lessee, and the Premises the Master Premises except for the following: Master Lease Sections: 1.01, 1.03, 1.04, 1.05, 1.06, 2.01, 2.03, 6.02, 6.04, 9.01, 10.01, 11.02. Subtenant assumes and agrees to perform all of the remainder of the lessee's obligations under the Master Lease during the Term to the extent that these obligations are applicable to the Premises. However, the obligation to pay rent and operating costs to Master Landlord under the Master Lease will be considered performed by Subtenant to the extent and in the amount rent and operating costs are paid to Sublandlord in accordance with Section 4 of this Sublease. Subtenant will not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublandlord will exercise due diligence in attempting to cause Master Landlord to perform its obligations under the Master Lease for the benefit of Subtenant. if the Master Lease terminates, at the option of Master Landlord, this Sublease will terminate and the parties will be relieved of any further liability or 4 obligation under this Sublease. However, if the Master Lease terminates as a result of a default or breach by Sublandlord or Subtenant under this Sublease or the Master Lease, the defaulting party will be liable to the nondefaulting party for the damage suffered as a result of the termination. Regardless, if the Master Lease gives Sublandlord any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of this right by Sublandlord will not constitute a default or breach. (b) Sublandlord shall deliver the Premises to Subtenant "AS IS" in broom-clean condition with the Premises in their existing condition, with no alterations being made by Sublandlord on the Commencement Date. (c) (i) Notwithstanding the provisions of Section 4(a)of this Sublease and subject to subsection (ii) of this subsection, Sublandlord waives Subtenant's obligation to pay Base Rent for the first month of this Sublease. Sublandlord and Subtenant agree that for purposes of this subsection, the Base Rent foregone by Sublandlord shall be equal to Five Thousand Dollars ($5,000) (the "Free Rent"). (ii) Subtenant agrees that Sublandlord's agreement to waive Base Rent as provided in subsection (i) of this Section is conditioned upon occurrence of no default on the part of Subtenant under this Sublease during the Term of this Sublease. If a default shall occur during the Term of this Sublease then the aggregate amount of the Free Rent provided to Subtenant prior to such default shall become immediately due and owing as additional rent under this Lease. (d) Subtenant shall have the right to place a sign on the Premises, in accordance with the terms and conditions of the Master Lease. (e) Sublandlord and Subtenant agree that Subtenant shall have free use of the existing telecommunications system in the Premises which is the sole property of Sublandlord. Subtenant accepts the telecommunications system "AS IS" in its existing condition. Subtenant will be responsible at its sole cost for the installation of any other telecommunications system, and the maintenance and repair of all telecommunications systems, wiring, and risers running throughout the Premises, together with all of Subtenant's telephones, telecopiers, computers, telephone switching, telephone panels and related equipment, whether provided by Sublandlord or by other vendors. Subtenant agrees to install, maintain and repair all such telecommunications equipment in a good and proper manner. Subtenant agrees to indemnify, release, defend and hold Sublandlord harmless from and against any damages, claims, or other liability resulting from Subtenant's installation, maintenance and repair of such equipment. (f) Compliance with Legal Requirements; No Waste. (i) Compliance with Legal Requirements. At Subtenant's sole cost, Subtenant will promptly comply with all laws, statutes, ordinances, rules, regulations, orders, recorded covenants and restrictions, and requirements of all municipal, state, and federal authorities now or later in force, including, but not limited to, all provisions of the Americans with Disabilities Act; the requirements of any board of fire underwriters or other similar body now or in the future constituted; and the direction or occupancy certificate issued by public officers (Legal Requirements), insofar as they relate to the condition, use, or occupancy of the Premises. However, Subtenant's compliance will not be required for: 5 (A) tenant improvements to be made pursuant to this Lease by Sublandlord, if any; and (B) work necessitated by defects in the construction of the Building. The judgment of any court of competent jurisdiction or the admission of Subtenant in any action or proceeding against Subtenant that Subtenant has violated any Legal Requirement in the condition, use, or occupancy of the Premises, will be conclusive of that fact as between Sublandlord and Subtenant. (ii) No Waste. Subtenant will not commit or allow any waste on the Premises or any nuisance or other act or thing that may disturb the quiet enjoyment of any other tenant in the building in which the Premises may be located. (g) Event of Default and Remedies A breach of the terms and conditions of this Sublease or of the Master Lease shall constitute an event of default ("Event of Default"). Upon the occurrence of an Event of Default, Sublandlord is entitled at its option to the following: (i) to reenter and take exclusive possession of the Premises; (ii) to collect immediately the present value of the unpaid rent reserved for the entire term, or to collect each installment of rent as it becomes due; (iii) to continue this Sublease in force or to terminate it at any time; (iv) to relet the Premises for any period on Subtenant's account and at Subtenant's expense, including real estate commissions actually paid, and to apply the proceeds received during the balance of Term to Subtenant's continuing obligations under this Sublease; (v) to take custody of all personal property on the Premises and to dispose of the personal property and to apply the proceeds from any sale of that property to Subtenant's obligations under this Sublease; (vi) to recover from Subtenant the damages described in Civil Code ss. 1951.2(a)(l), 1951.2(a)(2), 1951.2(a)(3), and 1951.2(a)(4), the provisions of which are expressly made a part of this Lease; (vii) to restore the Premises to the same condition as received by Subtenant, or to alter the Premises to make them suitable for reletting, all at Subtenant's expense; and (viii) to enforce by suit or otherwise all obligations of Subtenant under this Sublease and to recover from Subtenant all remedies now or later allowed by law. Any act that Sublandlord is entitled to do in exercise of Sublandlord's rights upon an Event of Default may be done at a time and in a manner deemed reasonable by Sublandlord in Sublandlord's sole discretion, and Subtenant irrevocably authorizes Sublandlord to act in all things done on Subtenant's account. 6 Section 9. Attorney Fees. If either party commences an action against the other in connection with this Sublease, the prevailing party will be entitled to recover costs of suit and reasonable attorney fees. Section 10. No Broker. Sublandlord and Subtenant each warrant that they have not dealt with any real estate broker in connection with this transaction. Sublandlord and Subtenant each agree to indemnify, defend, and hold the other harmless against any damages incurred as a result of the breach of the warranty contained in this Sublease. Section 11. Notices. All notices and demands that may be required or permitted by either party to the other will be in writing. All notices and demands by the Sublandlord to Subtenant will be sent by United States Mail, postage prepaid, addressed to the Subtenant at the Premises, and to the address in this Sublease below, or to any other place that Subtenant may from time to time designate in a notice to the Sublandlord. All notices and demands by the Subtenant to Sublandlord will be sent by United States Mail, postage prepaid, addressed to the Sublandlord at the address in this Sublease, and to any other person or place that the Sublandlord may from time to time designate in a notice to the Subtenant. To Sublandlord: Ron Basso 970 Gravenstein Highway South Sebastopol, CA 95472 To Subtenant: ZAP WORLD.COM Main Office 117 Morris Street Sebastopol, CA 95472 Section 12. Successors and Assigns. This Sublease will be binding on and inure to the benefit of the parties to it, their heirs, executors, administrators, successors in interest, and assigns. Section 13. Attornment. If the Master Lease terminates, this Sublease shall survive said termination and Subtenant will, if requested, attorn to Master Landlord and recognize Master Landlord as Sublandlord under this Sublease. However, Subtenant's obligation to attorn to Master Landlord will be conditioned on Subtenant's receipt of a nondisturbance agreement. 7 Section 14. Entry. Sublandlord reserves the right to enter the Premises on reasonable notice to Subtenant to inspect the Premises or the performance by Subtenant of the terms and conditions of this Sublease and, during the last three (3) months of the Term, to show the Premises to prospective subtenants. In an emergency, no notice will be required for entry. Section 15. Late Charge and Interest. The late payment of any Rent will cause Sublandlord to incur additional costs, including the cost to maintain in full force the Master Lease, administration and collection costs, and processing and accounting expenses. If Sublandlord has not received any installment of Rent within ten (10) days after that amount is due, Subtenant will pay five percent (5%) of the delinquent amount, which is agreed to represent a reasonable estimate of the cost incurred by Sublandlord. In addition, all delinquent amounts will bear interest from the date the amount was due until paid in full at a rate per annum (Applicable Interest Rate) equal to the greater of (a) two percent (2%) per annum plus the then federal discount rate on advances to member banks in effect at the Federal Reserve Bank of San Francisco on the 25th day of the month preceding the date of this Sublease or (b) ten percent (10%). However, in no event will the Applicable Interest Rate exceed the maximum interest rate permitted by law that may be charged under these circumstances. Sublandlord and Subtenant recognize that the damage Sublandlord will suffer in the event of Subtenant's failure to pay this amount is difficult to ascertain and that the late charge and interest are the best estimate of the damage that Sublandlord will suffer. If a late charge becomes payable for any three (3) installments or Rent within any twelve (12) month period, the Rent will automatically become payable quarterly in advance. Section 16. Entire Agreement. This Sublease sets forth all the agreements between Sublandlord and Subtenant concerning the Premises, and there are no other agreements either oral or written other than as set forth in this Sublease. Section 17. Time of Essence. Time is of the essence in this Sublease. Section 18. Governing Law. This Sublease will be governed by and construed in accordance with California law. Section 19. Advice of Counsel This Sublease has been prepared by the firm of Mclnerney & Dillon, P.C. for the benefit if its client Ron Basso. Subtenant is advised to consult with an attorney on the legal requirements of this Sublease. The parties hereto state that they have been fully advised by their respective counsel (or if no counsel has been consulted, then in reliance on their own officers and directors) as to the contents of this Sublease and each provision thereof and understand its content and effect. The parties further represent that they do not rely and have not relied upon any representation or statement made by any of the other parties with regard to the subject matter, basis or effect of this agreement, other than the express provisions contained within this agreement. 8 In Witness Whereof the parties have executed this Sublease effective as of the date first above written. Sublandlord Date Signed: 8/13/99 By: /s/ Ron Basso --------------------- ------------------------- Ron Basso ZAPWORLD.COM A California Corporation Date Signed: 8/3/99 By: /s/ Jim McGreen --------------------- ------------------------- Jim McGreen, President Date Signed: 8/13/99 By: /s/ Nancy K. Cadigan --------------------- ------------------------- Secretary 9 EXHIBITS Exhibit A--Copy of Master Lease 10 EX-10.17 26 0026.txt SUBLEASE AGREEMENT SUBLEASE AGREEMENT THIS SUBLEASE is made in San Francisco, California by and between American Scooter and Cycle Rental, Inc., a California corporation ("Sublessor") and ZAP WORLD.com, a California corporation ("Sublessee" or "ZAP"). 1. Agreement. Sublessor does hereby sublease to Sublessee, and Sublessee does hereby sublease from Sublessor, a portion of the premises located at 2715 Hyde Street in San Francisco, California, (hereinafter referred to as the "Premises") and as more particularly described in the attached Exhibit A. 2. Term. The term of this sublease shall be for the unexpired portion of Sublessor's Lease for said Premises (through April 30, 2001) as provided in the Lease between Sublessor and JB&T Properties, LLC, a California limited liability company ("Lessor") dated March 9, 1999, as amended. Said lease ("Master Lease"), as amended, is attached hereto as Exhibit B and incorporated herein by reference. 3. Rent. Sublessee hereby accepts and subleases the Premises in their present condition and agrees to pay to Sublessor monthly rent for the sublet premises in accordance with the following schedule: July 13th through July 31st: $1.00 August: $1.00 September: $1.00 October: $1.00 November: $5,950.00 December 1, 1999 through April 30, 2001: $10,500 per month Such sums shall be paid directly to Sublessor on the first day of each month throughout the term of this sublease. 4. Late Charge and Interest. If Sublessor has not received any installment of rent within five (5) days after that amount is due, Sublessee will pay five percent (5%) of the delinquent amount, which is agreed to represent a reasonable estimate of the cost incurred by Sublessor. In addition, all delinquent amounts will bear interest from the date the amount was due until paid in full at the rate of ten percent (10%) per annum. 5. Security Deposit. Sublessee will deposit with Sublessor on execution of this sublease the sum of Thirteen Thousand Dollars ($13,000) as security for Sublessee's faithful performance of Sublessee's obligations under this Sublease. If Sublessee fails to pay rent or other charges when due, or fails to perform any obligations under this Sublease, Sublessor may use any portion of the security deposit for the payment of any rent or other amount then due and unpaid, for the payment of any other sum for which Sublessor may become obligated because of Sublessee's default or breach, or for any loss sustained by Sublessor as a result of Sublessee's default or breach. If Sublessor uses any portion of the security deposit, Sublessee will, within ten (10) days after written demand by Sublessor, restore the security deposit to the full amount originally deposited. Sublessee's failure to do so will constitute a default under this Sublease. Sublessor will not be required to keep the Security Deposit separate from its general accounts, and will have no obligation or liability for payment of interest on the Security Deposit. Within ten (10) days after the Term has expired or Sublessee has vacated the Premises, whichever occurs last, and provided that Sublessee is not then in default under this Sublease, the security deposit, or as much as remains that has not been applied by Sublessor, will be returned to Sublessee. Sublessee shall have the right to apply any portion of the security deposit in payment of the last month's rent. 6. Subject to Terms of Master Lease. The parties agree that all applicable terms and conditions of the Master Lease referred to in paragraph 2 herein are incorporated into and made a part of this Sublease. Sublessee assumes and agrees to perform the lessee's obligations under the Master Lease during the Term to the extent that these obligations are applicable to the Premises. However, the obligation to pay rent and operating costs to Master Landlord under the Master Lease will be considered performed by Sublessee to the extent and in the amount rent and operating costs are paid to Sublessor in accordance with Section 3 of this Sublease. Sublessee will not commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublessor will exercise due diligence in attempting to cause Master Landlord to perform its obligations under the Master Lease for the benefit of Sublessee. 7. Use of Premises. The Premises will be used and occupied only as a ZAP administrative office, a showroom and retail outlet for ZAP products and a facility for the rental and maintenance of bicycles and ZAP products and for no other use or purpose, except as agreed to in writing by the parties. IN WITNESS WHEREOF, the parties have executed this agreement on the dates indicated below: Dated: July ___, 1999 Dated: July ___, 1999 ZAPWORLD.com American Scooter and Cycle Rental, Inc. Sublessee Sublessor By: /s/ Gary Starr By: /s/ Jeff Sears ---------------------- -------------------------- Gary Starr, President Jeff Sears, President -2- CONSENT OF LESSOR The undersigned limited liability company hereby consents to and approves the terms of the foregoing sublease between American Scooter and Cycle Rental, Inc. and ZAP WORLD.com. Dated: July ___, 1999 JB&T Properties, LLC, Lessor By: /s/ Signature --------------------------- -3- ADDENDUM TO SUBLEASE This Addendum to Sublease is made in San Francisco, California by and between American Scooter and Cycle Rental, Inc., a California corporation ("Sublessor") and ZAPWORLD.com, a California corporation ("Sublessee"). This agreement is intended to modify the monthly rental provisions of paragraph 3 of the existing sublease between the parties for the premises located at 2715 Hyde Street in San Francisco, California. 1. The parties agree that Sublessee shall pay monthly rent to Sublessor at the rate of $12,000 per month effective January 1, 2000. 2. All other terms and provisions of the Sublease shall remain the same. IN WITNESS WHEREOF, the parties have executed this agreement on the dates indicated below: Dated: March ____, 2000 Dated: April 4, 2000 ZAPWORLD.com American Scotter and Cycle Rental, Inc. Sublessee Sublessor By /s/ Gary Starr By /s/ Jeff Sears ------------------------ --------------------------- Gary Starr, CEO Jeff Sears, CEO EX-10.18 27 0027.txt LEASE LEASE THIS LEASE is made October 16, 2000, between PINE CREEK PROPERTIES, a California general partnership, "Landlord," whose address is P.O. Box 11218, Santa Rosa, CA 94056, and ZAPWORLD.COM, "Tenant," whose address is 117 Morris St., Sebastopol, CA 95472. This Lease is made with reference to the following facts and objectives: (a) Landlord is the owner of the premises described in Paragraph 1 and Exhibit "A," which consists, generally, of approximately 4,200 sq. feet warehouse/office. (b) Tenant is willing to lease the premises from Landlord pursuant to the provisions stated in this Lease. (c) Tenant wishes to lease the premises for the purposes of manufacture and assembly of electric vehicles. (d) Tenant has examined the premises and is fully informed of their condition. THE PARTIES HERETO AGREE AS FOLLOWS: 1. PREMISES. Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord, upon the terms and conditions herein set forth, the real property located at 6780-B Depot St., Sebastopol, Sonoma County, California, and more particularly described in Exhibit "A," together with the building and other improvements located on the real property ("premises"). 2. TERM. (a) The term of this Lease shall be 3 years 7 months and shall commence on the 1st day of November, 2000, and end on the 31st day of May, 2004, inclusive. (b) If Landlord is unable to deliver possession of the premises to Tenant, by the date specified above for the commencement of the term of this Lease, neither Landlord nor its agent shall be liable for any damage caused thereby, nor shall this Lease thereby become void or voidable, and the term herein specified shall, in such case, commence upon the date of delivery of possession of the premises to Tenant and shall terminate 3 years 7 months thereafter. In such event, Tenant shall not be liable for any rent until such time as Landlord shall deliver possession of the premises to Tenant. 3. ACCEPTANCE OF PREMISES. Tenant's taking possession of the premises on commencement of the term shall constitute Tenant's acknowledgement that the premises are in good condition. 4. RENT. Tenant agrees to pay to Landlord, as rent for the premises, the sum of Two Thousand One Hundred Eighty-Eight Dollars ($2,188.00) per month, in advance, on the first day of the term of this Lease and on the first day of each calendar month thereafter during the term. Rent for any partial month shall be prorated at the rate of 1/30th of the monthly rent per day. All installments of rent shall be paid at the address to which notices to Landlord are given, or at such other place as may be designated in writing, from time to time by Landlord, in lawful money of the United States and without deduction or offset for any cause whatsoever. In addition, Tenant agrees to pay to Landlord a late payment of ten percent (10%) of the amount due for any payment received later than the seventh day of each calendar month. 5. RENT ADJUSTMENTS. The monthly rent provided for in Paragraph 4 ("minimum monthly rent") shall be subject to adjustment at the commencement of the second year of the term and each year thereafter (the "adjustment date"), as follows: The base for computing the adjustment is the Consumer Price Index, All Urban Consumers ("All Items") for the San Francisco-Oakland Metropolitan Area, published by the United States Department of Labor, Bureau of Labor Statistics ("Index"), which is published for the month nearest the date of commencement of the term ("Beginning Index"). If the index published nearest the adjustment date ("Extension Index") has increased or decreased over the Beginning Index, the minimum monthly rent will be set by multiplying the minimum monthly rent set forth in Paragraph 4 by a fraction, the numerator of which is the Extension Index and the denominator of which is the Beginning Index. In no case shall the minimum monthly rent be less than the minimum monthly rent set forth in Paragraph 4. On adjustment of the minimum monthly rent as provided in this Lease, the parties shall immediately execute an amendment to the Lease stating the new minimum monthly rent. If the index is changed so that the base year differs from that used as of the month immediately preceding the month in which the term commences, the Index shall be converted in accordance with the conversion factor published by the United States Department of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised during the term, such other government index or competition with which it is replaced shall be used in order to obtain substantially the same results as would be obtained if the Index had not been discontinued or revised. ANNUAL CPI ADJUSTMENTS SHALL BE ON SEPTEMBER 1ST, BEGINNING 9/1/01. 6. SECURITY DEPOSIT. On execution of this Lease, Tenant shall deposit with Landlord the sum of One Thousand Five Hundred and no/100 Dollars ($1,500.00) as a security deposit for the performance by Tenant of the provisions of this Lease. If Tenant is in default, Landlord can use the security deposit, or any portion of it, to cure the default or to compensate Landlord for all damage sustained by Landlord resulting from Tenant's default. Tenant shall immediately, on demand pay to Landlord a sum equal to the portion of the security deposit expended or applied by Landlord as provided in this paragraph so as to maintain the security deposit in the sum initially deposited with Landlord. If Tenant is not in default at the expiration or termination of this Lease, Landlord shall return the security deposit to Tenant. Landlord's obligations with respect to the security deposit are those of a debtor and -2- not a trustee. Landlord can maintain the security deposit separate and apart from Landlord's general funds or can commingle the security deposit with Landlord's general and other funds. Landlord shall not be required to by Tenant interest on the security deposit. 7. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes, assessments, license fees, and other charges that are levied and assessed against Tenant's trade fixtures or personal property installed or located in or on the premises, and that become payable during the term. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. 8. REAL PROPERTY TAXES. Landlord shall pay all real property taxes and general and special assessments ("real property taxes") levied and assessed against the premises; provided, however, that Lessee shall pay to Lessor any increase in real property tax assessed by reason of Tenant's activities or additional improvements placed upon the Premises by Lessee or at Lessee's request. 9. USE. The premises are to be used as described in the Recitals of this Lease, and for no other business or purpose without the written consent of Landlord. Tenant shall be responsible for any required City, County, State or Federal permits. No use shall be made or permitted to be made of the premises, nor acts done in or on or about the premises, which will in any way conflict with any law, ordinance, rule or regulation affecting the occupancy or use of the premises which has been or is subsequently enacted or promulgated by any public authority, or which will increase the existing rate of insurance upon the building, or cause a cancellation of any insurance policy covering the building or any part thereof, nor shall Tenant sell, or permit to be kept, used or sold in or about the premises, any article which may be prohibited by the standard form of fire insurance policy. Tenant shall not commit, or suffer to be committed, any waste upon the premises or any public or private nuisance, or other act or thing which may disturb the quiet enjoyment of any neighbor, commercial or residential, nor any other tenant in the building, nor use any apparatus, machinery or device in or about the premises which shall cause any substantial noise or vibration, or which shall substantially increase the amount of electricity or water, if any, agreed to be furnished or supplied under this Lease. Tenant further agrees not to connect with electric wires or water or other pipes any apparatus, machinery or device without the consent of Landlord. If parking becomes an issue, Landlord shall assign specific parking spaces. 10. MAINTENANCE AND REPAIRS. Except as provided in Paragraphs 22 and 23, Tenant, at its cost, shall maintain the premises in good condition. Landlord shall be responsible for roof, walls and floor repair maintenance. Landlord shall not have any responsibility for general maintenance of the premises. Tenant waives the provisions of Civil Code Sections 1941 and 1942, with respect to Landlord's obligations for tenantability of the premises and Tenant's right to make repairs and deduct the expenses of such repairs from rent. 11. ALTERATIONS. Except as provided in Paragraph 12, Tenant shall not make any alterations to the premises without Landlord's consent. Unless otherwise provided by written agreement, all alterations shall be done either by or under the direction of Landlord, but at the sole cost of Tenant, shall be the property of Landlord, and shall remain on and be -3- surrendered with the premises on expiration or termination of the term; provided, however, that at Landlord's option, Tenant shall, at Tenant's expense, when surrendering the premises, restore the same to their original condition. If Tenant makes any alterations to the premises, as provided in this paragraph, the alterations shall not be commenced until two (2) days after Landlord has received notice from Tenant stating the date the installation of the alterations is to commence, so that Landlord can post and record an appropriate notice of non-responsibility. 12. TRADE FIXTURES. Subject to the provisions of Paragraph 11 hereof, Tenant may install and maintain its trade fixtures on the premises, provided that such fixtures, by reason of the manner in which they are affixed, do not become an integral part of the building or premises. Tenant, if not in default hereunder, may at any time or from time to time during the term hereof, or upon the expiration or termination of this Lease, alter or remove any such trade fixtures so installed by Tenant. If not so removed by Tenant on or before the expiration or termination of this Lease, Tenant, upon the request of Landlord so to do, shall thereupon remove the same. Any damage to the premises caused by any such installations, alteration or removal of such trade fixtures shall be promptly repaired at the expense of the Tenant. 13. MECHANICS' LIENS. Tenant shall pay all costs for construction done by it, or caused to be done by it, on the premises, including all required permits, as permitted by this Lease. Tenant shall keep the premises free and clear of all mechanics' liens resulting from construction done by or for Tenant. Tenant shall have the right to contest the correctness or validity of any such lien if, immediately on demand by Landlord, Tenant procures and records a lien release bond issued by a corporation authorized to issue surety bonds in California in an amount equal to one and one-half times the amount of the claim of the lien. The bond shall meet the requirements of Civil Code Section 3143 and shall provide for the payment of any sum that the claimant may recover on the claim (together with costs of suit, if it recovers in the action). 14. AMERICANS WITH DISABILITIES ACT (ADA). If Tenant's use and/or personnel requirements change after the granting of the initial use permit which would enact new ADA requirements, then Tenant shall at all times keep the premises in compliance with the ADA and its supporting regulations, and all similar federal, state or local laws, regulations and ordinances with respect to this new use. If Landlord's consent would be required for alterations to bring the premises into compliance, Landlord agrees not to unreasonably withhold its consent. 15. HAZARDOUS MATERIALS ACKNOWLEDGEMENT, ENVIRONMENT REPRESENTATION AND LIABILITY RELEASE. Tenant acknowledges that various materials utilized in the construction of the Property may contain materials that have been or may in the future be determined to be toxic, hazardous or undesirable and may need to be specially treated, specially handled and/or removed from the Property. Such substances may be above and below ground on the Property or may be present on or in soils, water, building -4- components or other portions of the Property in areas that may or may not be accessible or noticeable. Tenant shall use and operate the premises, at all times during the term hereof, under and in compliance with the laws of the State of California and in compliance with all applicable environmental legal requirements. For any contamination to Leased Property due to Tenant's use, Tenant assumes full responsibility for the clean-up of such toxic, hazardous or undesirable materials as required by current and future federal, state and local laws and regulations. Tenant acknowledges that toxic wastes, hazardous materials and undesirable substances problems can be extremely costly to correct and Tenant relieves Landlord from all liability related thereto due to Tenant's use. Tenant therefore hereby agrees that they shall indemnify and defend and hold Landlord harmless from any claim, liability, damage, cost or expense, including, but not limited to, court costs and attorneys' fees, arising out of or in any way related to toxic waste, hazardous material and/or undesirable substance affecting the Leased Property related to and caused by Tenant's use. 16. UTILITIES. Tenant shall make all arrangements for, and pay for all utilities and services furnished to or used by it including, without limitation, gas, electricity, water, sewer, telephone service, and trash collection, and for all connection charges. If for any reason any of these utilities or services are paid for by Landlord on behalf of Tenant, then Tenant shall reimburse Landlord upon receiving notice. 17. EXCULPATION OF LANDLORD. Landlord shall not be liable to Tenant for any injury or damage that may result to any person or property in or about the premises or the building which the premises are located, from any cause whatsoever, including, but not limited to, injury or damage resulting from any defects in the building, including roof leaks, or any equipment located therein, or from fire, water, gas, oil, electricity or other cause or any failure in the supply of same, or from the acts or neglect of any persons. 18. INDEMNITY AND HOLD HARMLESS. Tenant agrees to indemnify and hold Landlord harmless against all claims, and the expense of defending against such claims, for injury or damage to persons or property occurring in or about the premises or occurring outside the premises but resulting in whole or in part from the act, failure to act, negligence or other fault of Tenant or its agents, employees or invitees. 19. LIMITATION OF LANDLORD'S LIABILITY. Tenant agrees to look solely to Landlord's interest in the building for the recovery of any judgment from Landlord, it being agreed that Landlord shall never be personally liable for any such judgment. The provision contained in the foregoing sentence is not intended to, and shall not, limit any right the Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors in interest or any other action not involving the personal liability of Landlord to respond in monetary damages from assets other than Landlord's interest in the building or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Landlord. -5- 20. INSURANCE. (a) Tenant, at its cost, shall maintain public liability and property damage insurance with a combined single limit of liability of not less than $1,000,000, insuring against all liability of Tenant and its authorized representatives arising out of and in connection with Tenant's use or occupancy of the premises. All public liability insurance and property damage insurance shall insure performance by Tenant of the indemnity provisions of Paragraph 18. Both parties shall be named as additional insureds, and the policy shall contain cross-liability endorsements. (b) Not more frequently than three (3) years, if, in the opinion of Landlord's lender or of the insurance broker retained by Landlord, the amount of public liability and property damage insurance coverage at that time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord's lender or Landlord's insurance broker. (c) Tenant, at its cost, shall maintain on all its personal property, Tenant's improvements and alterations in, on or about the premises, a policy of standard fire and extended coverage insurance with vandalism and malicious mischief endorsements, to the extent of at least ninety percent (90%) of their full replacement value. The proceeds from any such policy shall be used by Tenant for the replacement of personal property or the restoration of Tenant's improvements or alterations. TENANT SHALL BE FINANCIAL RESPONSIBLE FOR GLASS BREAKAGE. (d) Landlord shall maintain on the building and other improvements that are a part of the premises, a policy of standard fire and extended coverage insurance with vandalism and malicious mischief endorsements, to the extent of at least ninety percent (90%) full replacement value. (e) Tenant's obligation to pay the insurance costs shall be prorated for any partial year, at the commencement and expiration or termination of the term. (f) All insurance policies maintained by Tenant, under this paragraph, shall contain a provision requiring thirty (30) days' written notice from the insurance company to both parties and Landlord's lender, before cancellation or change in the coverage, scope or amount of any policy. Each policy, or a certificate of the policy, together with evidence of payment of premiums, shall be deposited with the other party at the commencement of the term, and on renewal of the policy, not less than twenty (20) days before expiration of the term of the policy. 21. WAIVER OF SUBROGATION. The parties release each other, and their respective authorized representatives, from any claims for damage to any person, or to the premises and to the fixtures, personal property, Tenant's improvements and alterations of either Landlord or Tenant in or on the premises that are caused by or result from the risks insured against under any insurance policies carried by the parties and in force at the time of any such damage. -6- Each party shall cause each insurance policy obtained by it to provide that the insurance company waives all rights of recovery by way of subrogation against either party in connection with any damage covered by any policy. Neither party shall be liable to the other for any damage caused by fire or any of the risks insured against under any insurance policy required by this Lease. If any insurance policy cannot be obtained with a waiver of subrogation, or is obtainable only by the payment of an additional premium charge above that charged by insurance companies issuing policies without waiver of subrogation, the party undertaking to obtain the insurance shall notify the other party of this fact. The other party shall have a period of ten (10) days after receiving the notice either to place the insurance with a company that is reasonably satisfactory to the other party and that will carry the insurance with a waiver of subrogation, or to agree to pay the additional premium if such policy is obtainable at additional cost. If the insurance cannot be obtained or the party in whose favor a waiver of subrogation is desired refuses to pay the additional premium charged, the other party is relieved of the obligation to obtain a waiver of subrogation rights with respect to the particular insurance involved. 22. DESTRUCTION. If the whole or any part of the premises shall be destroyed by fire or other cause, or be so damaged thereby that they are untenantable and cannot be rendered tenantable within one hundred twenty (120) days from the date of such destruction or damage, or such damage or destruction is not covered by any insurance required to be maintained under Paragraph 20 this Lease may be terminated by Landlord or Tenant by written notice to the other. Within forty-five (45) days from date of such destruction or damage, Landlord shall give written notice to Tenant as to whether or not the premises will be rendered tenantable within one hundred twenty (120) days from the date of such destruction or damage and whether such damage or destruction is anticipated to be covered by the insurance required to be maintained under Paragraph 16. In case the damage or destruction be not such as to permit termination of the Lease as above provided, or neither Landlord nor Tenant elects to terminate the Lease as above provided, Landlord shall, within reasonable time, render said premises tenantable, and a proportionate reduction shall be made in the rent herein reserved corresponding to the time during which and to the portion of the premises of which Tenant shall be deprived of possession. The provisions of Subdivision 2 of Section 1932 of the California Civil Code, and of Subdivision 4 of Section 1933 of that Code, shall not apply to this Lease. 23. CONDEMNATION. Should the whole or any part of the premises be condemned and taken by any competent authority for any public or quasi-public use or purpose, all awards payable on account of such condemnation and taking shall be payable to Landlord, and Tenant hereby waives all interest in or claim to said awards, or any part thereof. If the whole of the premises shall be so condemned and taken, then this Lease shall terminate. If only a part of the premises is condemned and taken and the remaining portion thereof is suitable for the purposes for which Tenant has leased said premises, this Lease shall continue, but the rental shall be reduced in an amount proportionate to the value of the portion taken as it related to the total value of the premises. Each party waives the provisions of Code of Civil Procedure ss. 1265.130 allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the premises. -7- 24. ASSIGNMENT AND SUBLETTING. Except as provided in Paragraph 24(d) hereof, Tenant shall not assign, mortgage or pledge this Lease, or any interest therein, and shall not sublet the premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the agents and servants of Tenant excepted) to occupy or use the premises, or any portion thereof, without the written consent of Landlord first had and obtained. A consent to one assignment, mortgage pledge, subletting, occupation or use by any other person shall not relieve the Tenant from any obligation under this Lease, and shall not be deemed to be a consent to any subsequent assignment, mortgage, pledge, subletting, occupation or use by another person. Any assignment, mortgage, subletting, occupation or use without such consent shall be void, and shall, at the option of Landlord, terminate this Lease. (a) If the Tenant desires any assignment, mortgage, pledge or subletting, occupation or use referred to in Paragraph 24, Tenant shall give written notice to the Landlord giving the name and address of the proposed assignee, mortgagee, pledgee, sublesee, occupier or user, and the price and other terms of the proposed transaction. At the same time, Tenant shall, in writing, tender by an offer to the Landlord the option to (i) reacquire the premises for the same period and under the same terms as the proposed assignment or sublease, or (ii) reacquire the premises for the same period but at a price equal to the lease rent. If the Landlord accepts the offer, it shall do so by mailing written notice of its acceptance to Tenant within thirty (30) days after Tenant's offer is received by Landlord. Tenant shall be entitled to withdraw its notice of intent to assign, mortgage, pledge, sublet, occupy or use, at any time until Landlord accepts Tenant's offer. If only a portion of the premises would be affected by a sublease or assignment Landlord shall have the right to reacquire the portion affected. If Landlord elects to reacquire under this provision the portion affected, Tenant shall be required to provide without charge reasonable and appropriate access to the portion affected and reasonable use of any common facilities. (b) If Landlord does not choose to accept Tenant's offer under Subparagraph 24(a), but does consent to the proposed assignment, mortgage, pledge, subletting, occupation or use referred to in Paragraph 24, Landlord shall have the right to receive from Tenant any profit realized by Tenant from charging a higher rent than the lease rent. Such profit shall be measured by the difference between the lease rent and any rent received by Tenant, minus Tenant's reasonable leasing and administrative costs related to the assignment or subletting, and excess of building standards. For this purpose, "rent received by Tenant" shall include all sums paid under the sublease of assignment, whether characterized as rent, additional rent, or any other payment or consideration in respect of use or occupancy or in reimbursement of the costs of leasehold improvements installed by Tenant, and whether paid in a lump sum or in periodic payments. In no event shall the total sums payable to Landlord, including the lease rent and any additional payments made by Tenant to Landlord as a result of the application of this paragraph, be less than the lease rent. (c) The provisions in Paragraphs 24(a) and (b) shall be binding on any subtenant or assignee who desires to sub-sublet or sub-assign their interest, and Landlord's -8- actions with respect to one assignment, mortgage, pledge, sublease, occupation or use shall not be deemed to limit Landlord's options under this Lease with respect to a subsequent assignment, mortgage, pledge, sublease, occupation or use. Landlord's rights under Paragraphs 24(a) and (b) shall prevail over any inconsistent language in any sublease or assignment to which Landlord consents and are reserved by Landlord from the grant of Tenant's leasehold estate. Nothing herein shall be construed to require Landlord's consent to any assignment, mortgage, pledge, subletting, occupation or use referred to in Paragraph 24 (so long as Landlord's consent is not unreasonably withheld). Any exercise of Landlord's rights under Paragraphs 24(a) and (b) shall be deemed to be reasonable. Failure of any subtenant or assigns to make any payments to Tenant shall not affect the obligation of Tenant to pay the lease rent or any other obligation under the Lease owing to Landlord. The provisions of any sublease or assignment cannot be modified, nor may the sublease or assignment be terminated other than in accordance with its terms, without the written consent of Landlord. (d) Tenant shall have the right, without Landlord's consent, to assign this Lease to a general or limited partnership if (1) Tenant is a general partner and owns and retains not less than 51% of the partnership following the assignment and (2) the partnership executes an agreement required by Landlord assuming Tenant's obligations. Tenant shall have the right, without Landlord's consent to assign this Lease to a corporation if (1) Tenant owns and retains at least 51% of the outstanding capital stock of the corporation and (2) the corporation executes an agreement required by Landlord assuming Tenant's obligations. 25. INSOLVENCY AND RECEIVERSHIP. Either the appointment of a receiver to take possession of all, or substantially all, of the assets of Tenant or a general assignment by Tenant for the benefit of creditors, or any action taken or suffered by Tenant under any insolvency or bankruptcy act, shall constitute a breach of this Lease by Tenant. 26. DEFAULT AND RE-ENTRY. In the event of any breach of the terms and provisions of this Lease by Tenant or if Tenant's interest herein, or any part thereof, be assigned or transferred without the written consent of Landlord, either voluntarily or by operation of law, whether by judgment, execution, death, receivership or any other means, or if Tenant vacates or abandons the premises, which shall be conclusively presumed if Tenant leaves the premises closed or unoccupied continuously for twenty (20) days, then in any such event, Landlord, besides other rights or remedies it may have, shall have the immediate right of re-entry and may remove all persons and property from the premises and may store such property at the cost of and for the account and risk of Tenant. Should Landlord elect to re-enter as herein provided, or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time, without terminating this Lease, re-let the premises, or any part thereof, for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and -9- conditions as Landlord, in its sole discretion, may deem advisable with the right to make alterations and repairs to the premises. Rents received by such Landlord from such re-letting shall be applied: first, to the payment of any costs and expenses of such re-letting, including reasonable attorneys' fees and any real estate commission actually paid, and any costs and expenses of such alterations and repairs; second, to the payment of any indebtedness, other than rent, due hereunder from Tenant to Landlord; third, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent or other obligations as the same may become due and payable hereunder. If rentals received from such re-letting during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord, and such deficiency shall be calculated and paid monthly. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such re-letting without termination, Landlord may, at any time thereafter, elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, and thereafter seek relief pursuant to Section 1951.2 of the California Civil Code, interest shall be allowed upon unpaid rent, for the purposes of Section 1951.2(b), at ten percent (10%) per annum or the maximum rate permitted by law, whichever is greater. Any proof by Tenant under subparagraphs (2) or (3) of subdivision (a) of Section 1951.2 of the California Civil Code, as to the amount of rental loss that could be reasonably avoided, shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the leased premises and in the same geographic vicinity and such two real estate brokers shall select a third licensed real estate broker and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided for the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. 27. WAIVER. The waiver by Landlord of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. 28. REMOVAL OF PROPERTY. Whenever Landlord shall remove any property of Tenant from the premises and store the same elsewhere for the account, and at the expense and risk, of Tenant, as provided in Paragraph 22 hereof, and Tenant shall fail to pay the cost -10- of storing any such property after it has been stored for a period of ninety (90) days or more, Landlord may sell any or all such property at public or private sale, in such manner and at such times and places as Landlord, in its sole discretion, may deem proper, without notice to or demand upon Tenant, for the payment of any part of such charges or the removal of any such property, and shall apply the proceeds of such sale: first, to the cost and expenses of such sale, including reasonable attorneys' fees actually incurred; second, to the payment of the cost of or charges for storing any such property; third, to the payment of any other sums of money which may then or thereafter be due to Landlord from Tenant under any of the terms hereof; and fourth, the balance, if any, to Tenant. 29. WAIVER OF DAMAGES FOR RE-ENTRY. Tenant hereby waives all claims for damages that may be caused by Landlord's re-entering and taking possession of the premises or removing and storing the property of Tenant as herein provided, and will save Landlord harmless from loss, costs or damages occasioned thereby, and no such re-entry shall be considered or construed forcible entry. 30. SURRENDER. At the time of surrender, all improvements made by Tenant to the premises shall be in compliance with all applicable building code requirements. 31. ATTORNEYS' FEES. If either party becomes a party to any litigation concerning this Lease, the premises, or the building or other improvements in which the premises are located, by reason of any act or omission of the other party or its authorized representatives, and not by any act or omission of the party that becomes a party to that litigation or any act or omission of its authorized representatives, the party that causes the other party to become involved in the litigation shall be liable to the party for reasonable attorneys' fees and court costs incurred by it in the litigation. If Landlord commences an action or incurs expenses against Tenant to enforce any of the terms hereof or because of the breach by Tenant of any of the terms hereof or for the recovery of any rent due hereunder or for the unlawful detainer of such premises, Tenant shall pay to Landlord reasonable attorneys' fees and expenses, and the right to such attorneys' fees and expenses shall be deemed to have accrued from the commencement of such action and shall be enforceable whether or not such action is prosecuted to judgment. If Tenant breaches any terms of this Lease, Landlord may employ an attorney or attorneys to protect Landlord's rights hereunder, and in the event of such employment following any breach by Tenant, Tenant shall pay Landlord reasonable attorneys' fees and expenses incurred by Landlord whether or not an action is actually commenced against Tenant by reason of such breach. 32. LITIGATION AGAINST TENANT. Should Landlord, without fault on Landlord's part, be made a party to any litigation instituted by or against Tenant, or by or against any person holding under or using the premises by license of Tenant, or for the foreclosure of any lien for labor or material furnished to or for Tenant or any such other person or otherwise arising out of or resulting from any act or transaction of Tenant or of any such other person, Tenant covenants to pay to Landlord the amount of any judgment rendered against Landlord or the premises or any part thereof, and all costs and expenses, including any attorneys' fees, incurred by Landlord in or in connection with such litigation. -11- 33. SUBORDINATION. Tenant agrees that this Lease shall be subject and subordinate to any first mortgage, first trust deed or like encumbrance heretofore or hereafter placed upon said premises or any part thereof, except the Tenant's property or trade fixtures, and to any and all renewals, modifications, consolidations, replacements, extensions or substitutions of any first mortgage or like encumbrance. Such subordination shall be automatic, without the execution of any further subordination agreement by Tenant. If, however, a written subordination agreement is required by a mortgagee, Tenant agrees to execute, acknowledge and deliver the same and in the event of failure to do so, Landlord may, in addition to any other remedies for breach of covenant hereunder, execute, acknowledge and deliver the same as the agent of Tenant, and Tenant hereby irrevocably constitutes Landlord its attorney-in-fact for such purpose. 34. WAIVER OF REDEMPTION BY TENANT, HOLDING OVER. Tenant hereby waives for Tenant and all those claiming under Tenant, all right now or hereafter existing to redeem the leased premises after termination of Tenant's right of occupancy by order of judgment of any court or by any legal process or writ. Any holding over after the expiration of the term of this lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, and shall be under the terms and conditions specified in this Lease, so far as applicable, and in such case rental shall be payable in the amount and at the times specified in Paragraph 4 hereof. Any such holding over without Landlord's consent shall be a breach of this Lease and Tenant shall pay to Landlord, without affecting Landlord's rights under the law or elsewhere under this Lease for such a breach, as liquidated damages in the amount equal to three (3) times the then current minimum monthly rent under Paragraph 4 hereof for each month of holding over, since Landlord and Tenant agree that fixing Landlord's actual damages if such holding over occurs would be most difficult but that such an amount is a reasonable approximation of what such actual damages would be. 35. ENTRY AND INSPECTION. Tenant will permit Landlord and its agents to enter into and upon the premises at all reasonable times for the purpose of inspecting the same, or for the purpose of protecting the interest therein of Landlord or the Owner, or to post notices of non-responsibility, or to make alterations or additions to the premises, including the erection of scaffolding, props or other mechanical devices, or to provide any service provided by Landlord to Tenant hereunder, without any rebate of rent to Tenant for loss of occupancy or quiet enjoyment of the premises, or damage, injury or inconvenience thereby occasioned, and Tenant will permit Landlord, at any time within one hundred eighty (180) days prior to the expiration of this Lease, to bring upon the premises, for the purposes of inspection or display, prospective tenants thereof. 36. SALE OR TRANSFER OF PREMISES. If Landlord sells or transfers all or any portion of the premises, Landlord, on consummation of the sale or transfer, shall be released from any liability thereafter accruing under this Lease if Landlord's successor has assumed in writing, for the benefit of Tenant, Landlord's obligations under this Lease. If any security deposit or prepaid rent has been paid by Tenant, Landlord can transfer the security deposit or prepaid rent to Landlord's successor and on such transfer Landlord shall be discharged from any further liability in reference to the security deposit or prepaid rent. -12- 37. ATTORNMENT. Tenant shall attorn to any purchaser of the premises at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the premises, or to any grantee or transferee designated in any deed given in lieu of foreclosure, provided that such party shall have assumed the obligations of Landlord hereunder in writing. 38. SUCCESSORS AND ASSIGNS. Subject to the provisions hereof relating to assignment, mortgaging, pledging and subletting, this Lease is intended to and does bind the heirs, executors, administrators, successors and assigns of any and all of the parties hereto. 39. TIME. Time is of the essence of this Lease. 40. NOTICES. All notices which Landlord or Tenant may be required, or may desire, to serve on the other may be served, as an alternative to personal service, by mailing the same, postage prepaid, and addressed as listed herein. Any party may change its address for purposes of this paragraph by giving the other parties written notice of the new address in the manner set forth above. 41. CORPORATE AUTHORITY. If either party is a corporation, that party shall deliver to the other party on execution of this Lease a certified copy of a resolution of its board of directors authorizing the execution of this Lease. 42. CALIFORNIA LAW. This Lease shall be construed and interpreted in accordance with the laws of the State of California. 43. COMPLETE AGREEMENT. It is expressly agreed by the parties, as a material consideration for the execution of this Lease, that there are, and were, no verbal representations, understandings, stipulations, agreement of promises pertaining thereto, not incorporated in writing herein, and it is likewise agreed that this Lease should not be altered, waived, amended or extended otherwise than as provided herein, except by writing signed by both parties. 44. ADDENDA. Attached hereto is an addendum or addenda containing the following Paragraph 45 which constitutes a part of this Lease. In the event that any provisions of the addendum or addenda conflict with other provisions of the Lease, the provisions of the addendum or addenda shall control and supersede the other conflicting Lease provisions. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and year first written above. "Landlord" "Tenant" PINE CREEK PROPERTIES ZAPWORLD.COM - ------------------------------------ --------------------------------------- (signature) (date) (signature) (date) - ------------------------------------ --------------------------------------- (signature) (date) (signature) (date) -13- ADDENDUM TO LEASE DATED: October 16, 2000 between: pine creek properties and zapworld.com Paragraph 45 -- Acknowledgement of Floodplain. Tenant specifically recognizes that the premises are located in a floodplain area. Tenant acknowledges that Landlord shall not be liable to Tenant for any injury to any person or property in or about the premises or the building in which the premises are located, from any cause directly or indirectly related to flooding or any collateral effects of flooding. Tenant understands that Landlord does not carry flood insurance for Tenant's benefit. Tenant further represents that it has had the advice of independent counsel in negotiations for and preparation of this addendum or had been advised of the right to such advice, that Tenant has read this addendum or had it read and fully explained by counsel, and that Tenant understands this addendum. INITIAL _____ _____ EX-23.1 28 0028.txt CONSENT BRUSSELS FOLEY & LARDNER ORLANDO CHICAGO SACRAMENTO DENVER ATTORNEYS AT LAW SAN DIEGO DETROIT SAN FRANCISCO JACKSONVILLE ONE MARITIME PLAZA, SIXTH FLOOR TALLAHASSEE LOS ANGELES SAN FRANCISCO, CALIFORNIA 94111-3404 TAMPA MADISON TELEPHONE: (415) 434-4484 WASHINGTON, D.C. MILWAUKEE FACSIMILE: (415) 434-4507 WEST PALM BEACH WRITER'S DIRECT LINE 415-438-6453 EMAIL ADDRESS CLIENT/MATTER NUMBER wevers@foleylaw.com 059284/0112 February 9, 2001 Mr. Gary Starr, Chief Executive Officer ZAPWORLD.COM 117 Morris Street Sebastopol, California 95472 Re: Zapworld.com Dear Mr. Starr: This law firm consents to the incorporation of its name and its opinion letter regarding the legality of the securities being cleared for registration with the Securities and Exchange Commission into the Form SB-2 Registration Statement filed on February 12, 2001. Sincerely, FOLEY & LARDNER /s/ William D. Evers --------------------------- By: William D. Evers, Partner EX-23.2 29 0029.txt CONSENT INDEPENDENT AUDITORS' CONSENT We have issued our report dated March 1, 2000, accompanying the financial statements as of and for the years ended December 31, 1999 and 1998 of Zapworld.com contained in the Registration Statement. We consent to the use of the aforementioned reports in the Registration Statement and to the use of our name as it appears under the caption "Experts." GRANT THORNTON LLP San Francisco, California February 9, 2001 -----END PRIVACY-ENHANCED MESSAGE-----