-----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, SLKWteGeXzhixKOSzwm/EksR/9g+/mujyCzOI5/2aSwYmUQJuU9I9KcFtaQSzeW9 8Z7b2blwSDi0+euKnGbA+A== 0000897069-01-000258.txt : 20010330 0000897069-01-000258.hdr.sgml : 20010330 ACCESSION NUMBER: 0000897069-01-000258 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAPWORLD COM CENTRAL INDEX KEY: 0001024628 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS TRANSPORTATION EQUIPMENT [3790] IRS NUMBER: 943210624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-30300 FILM NUMBER: 1583925 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 10KSB40 1 0001.txt FORM 10-KSB ANNUAL REPORT ==================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- Form 10-KSB ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------- For the fiscal year ended December 31, 2000 Commission File Number 0-303000 ZAPWORLD.COM (Name of small business issuer in its charter) CALIFORNIA 94-3210624 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 117 Morris Street Sebastopol, CA 95472 (707) 824-4150 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) Securities registered under section 12(b) of the Exchange Act: None Securities registered under section 12(g) of the Exchange Act: Common Shares Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |X| State issuer's revenues for its most recent fiscal year: $12,443,000 The aggregate market value of the Company's voting common stock held by non-affiliates as of March 26, 2001, based on the average Bid and Ask price on that date was $7,912,100. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 6,039,817 shares of common stock as of March 26, 2001. ==================================================================== TABLE OF CONTENTS Part I Item 1. Description of Business Item 2. Description of Property Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Common Equity and Related Stockholder Matters Item 6. Management's Discussion and Analysis Item 7. Financial Statements Item 8. Changes in and Disagreements with Accountants on Accounting and Financial isclosure Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act . Item 10. Executive Compensation Item 11. Security Ownership of Certain Beneficial Owners and Management Item 12. Certain Relationships and Related Transactions Item 13. Exhibits and Reports on Form 8-K i Part I Item 1. Description of Business The information on Form 10-KSB contains forward-looking statements based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management. A. Business Development ZAPWORLD.COM (the "Company" or "ZAP") was incorporated under the laws of the State of California, on September 23, 1994, under its original name, "ZAP Power Systems". The name of the Company was changed on May 16, 1999 to reflect the company's growth and entry into larger markets. The Company has grown from a single product line to a full line of electric vehicle products. At its Sebastopol facilities, the Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, electric scooters, electric motorcycles and other personal electric transportation vehicles. The Company was established 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. The Company's objective is to leverage its proprietary technology and name recognition to serve a number of high potential markets in the electric bicycle, electric scooter, and other light electric vehicle transportation industries. Since the Company's management believed that the primary barrier to widespread use of electric vehicles was their high cost, the Company's activity and revenue was initially derived from development contracts from domestic government agencies and a foreign private entity. These contracts were set up to develop low-cost Zero Air Pollution (or ZAP) type electric vehicles. The Company continues to focus its research efforts on making electric vehicles cost effective, while developing an international distribution network for personal vehicle products. The Company is developing proprietary technologies that are important elements of the ZAP brand of personal electric vehicles. Each of these components will be marketed under the ZAP brand name. In addition to new electric vehicles, ZAP is currently focusing its development efforts on a new generation of microprocessor drive controllers. The Company intends to further expand its technological expertise through an aggressive plan of acquisitions of companies with exciting new products in the Electrical Vehicle Industry and strategic alliances with certain manufacturers. ZAP is also initiating programs in the alternate energy market. B. Business of Issuer The Company's business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, that have fundamental practical and environmental advantages over available internal combustion modes of transportation, that can be produced commercially on an economically competitive basis. In 2000, the Company continued to enhance and broaden its electric vehicle product line. The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bicycle. The system was designed to assist the rider during more difficult riding situations, rather than as a replacement for pedaling. The Company also installs the motor system on specially designed bicycles that the Company has manufactured under contract. The completed bicycles, with motor, are then sold to the customer. Additionally, the Company produces the electric scooter, known as the ZAPPY(R), which is manufactured by the Company, using parts manufactured by various subcontractors. The Company is the U.S. distributor of the Electricycle(TM) scooter that is imported from Taiwan. Additionally, the Company is a distributor of an electric motorcycle known as the Lectra(TM). The Company also has agreements to distribute the Electric Pedi-Cab, the E-Kart, an electric go-kart, and the Lepton, an Italian manufactured electric motor scooter. The Company manufactures several electric motor vehicle kits. The electric motor kit manufacturing and installation of the motor systems to the bicycles is done at its Sebastopol location. The electric motors are purchased from an 1 original equipment manufacturer (OEM) in the auto and air-conditioning industry. The Company is primarily using one company for its motors, although there are other companies that could be used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer industry for power interrupt systems. The electronic system uses standard electronic components. The Company has developed long-term purchase arrangements with its key vendors. The Company has been granted exclusive market rights in selective electric vehicle markets from Evercel Corporation in exchange for specifying the Evercel(TM) battery in an electric vehicle made by the Company. The Company has no other contractual agreements with any of its other vendors. Environmental Initiatives and Legislation Federal legislation was enacted to promote the use of alternative fuel vehicles, including 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 are electric. However, there is strong political opposition to this mandate. Other states, such as the State of Arizona, currently offer tax credits for electric vehicles. Foreign countries have also initiated either mandates or incentives for electric vehicles or are planning such programs in the future. As ZAP commercializes new transportation technology, it has been required to expend Company resources in educating legislators of the benefits of these vehicles. On January 1, 2000, a new law that was sponsored by ZAP and creates guidelines for the legalized use of light electric scooters such as the ZAPPY(R) went into effect in the State of California. In May 2000, the Company received a $67,000 grant from the California Energy Commission (CEC) for a Neighborhood Electric Vehicle (NEV) demonstration. The grant is one of only four sponsored by the CEC, funding which comes from the State's Petroleum Violation Escrow Account. The funding was used to purchase seven NEVs that will be used within the City of Sebastopol, California by City employees, rented by tourists and visitors, and for testing as a downtown shuttle service. Although many government agencies are concerned about rising global air pollution, it is expected that the Company will need to continue to expend considerable resources in the future 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 the Company's 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 competitive advantage. A series of exciting and innovative products have been developed or were under development in 2000. For some of the new introductions the Company has entered into exclusive distribution arrangements with the manufacturers. During the current year, the Company has developed or arranged for the distribution of the following Products: ZAPPY(R) JR.-Which was designed specifically for kids six to ten, it was modeled after the very popular ZAPPY adult electric scooter. The ZAPPY JR. is the only electric scooter on the market targeted to this demographic segment. It answers the demand for a safer electric scooter for younger children. With a top speed of 8MPH, a hand brake, and a molded plastic body, ZAPPY JR. is specifically designed to be a toy for kids, not for adults. ZAPPY TURBO - The new ZAPPY TURBO is an improved version of the Company's ZAPPY folding electric scooter. The ZAPPY TURBO's new electric propulsion system offers improved acceleration and hill climbing, and has a "hi-performance" mode that allows the scooter to reach speeds of 19.5 MPH. SWIMMY (TM)- Which was designed to give swimmers and snorkelers a boost in the open water or to enjoy in a pool. It's as simple as grabbing onto the handles and pulling a switch for an effortless ride through the water with a quiet electrical assist. While ZAP already manufactures a Sea Scooter for scuba divers, the strong interest in this product received thus far, indicates a demand for a swimming pool version for children and fitness swimmers. The Company's new SWIMMY water scooter was recently chosen as a finalist at the NASDAQ Sports Product of the Year, an annual competition held during the Super Show in Las Vegas which is owned and operated by the Sporting 2 Goods Manufacturers Association. The SeaScooter products were acquired in July 2000, with the acquisition of Acquatic Propulsion Technology. POWERSKI(R)- This Powerful design offers skaters a new form of transportation, exercise and pure skating fun. The two-wheeled device pulls the rider like a water skier via two flexible poles that allow a skiing motion. With a top speed of 15MPH, the POWERSKI can easily turn any paved surface into a downhill skiing environment. This device was first developed by Electric Vehicles Systems, an entity purchased by the Company in the first quarter of 2000. Lectra Motorbike - Through a recent acquisition, ZAP has one of the only electric motorcycles in production today. The LECTRA offers superior acceleration, braking and handling, and the advanced electric drive system is accurately controlled from the fingertips. Powerbike(R) - Which is primarily a mountain bike with a new and improved electric motor attached. It was designed to appeal to the low cost mass merchant. Electric Pedi-Cab - This innovative vehicle enables a regular pedi-cab to travel electronically at speeds of up to 15 MPH. The Company has signed an exclusive distributor arrangement with the manufacturer of this product. LEPTON - This electric vehicle is similar to a gas 50cc type scooter with a top speed of 30 miles per hour. The Company is the distributor for the Italian scooter company and expects sales primarily in resort and university Localities. E-Kart - This electric go-kart is especially geared to children. Parents will feel more comfortable with the battery-powered go-karts because they are easier starting, do not use fuel, and includes a speed control allowing them to limit the top speed, from 5 to 28 MPH. Also electric go-karts work well with the increasingly popular indoor tracks since they don't create any emissions or noise. Microprocessor drive controllers- The Company is working to develop a series of low cost proprietary motor controller microprocessors for all of its electric vehicles, which is believed to increase efficiency and lower costs of operation. Company funded research and development expense charged to operations in fiscal years 2000 and 1999 was $698,800 and $364,600 respectively. Sources and Availability of Raw Materials Materials, parts, supplies and services used in the Company's business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on the Company's manufacturing operations. Licenses, Patents and Trademarks The Company has a number of patents and trademarks covering its electric vehicles. The Company was issued its first United States Patent on February 13, 1996 on its electric motor power system for bicycles, tricycles, and scooters (Patent #5,491,390). On September 30, 1997, the Company was issued its second United States Patent on its electric motor system (Patent #5,671,821). On December 15, 1998, the Company was issued a third United States Patent for its ZAPPY scooter (Patent #5,848,660). On November 14, 2000, The Company was issued a design patent on its ZAPPY(R) scooter (Des. No. 433,718). ZAP also holds several trademarks: the trademark ZAP(R)was assigned to the Company on September 23, 1994, (Reg. No. 1,794,866); the ELECTRICRUIZER(R)mark was registered 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 under (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 28, 2000 (Reg No. 2,320,346). The Company also acquired two patents as the result of the emPower acquisition in December, 1999. One patent was for the powered roller skates (Patent #6,059,062) and another for the powered skateboard (Patent #6,050,357). 3 The company acquired all of the assets of Electric Vehicles Systems Inc, including the PowerSki(R), trademark (registration #2,224,640) and two U.S. Patents, (Patent #5,735,361) and (Patent #5,913,373). The Company also has a patent for the Powered Scooter (Patent #115,434). With the purchase of Aquatic Propulsion Technology Inc., on July 1, 2000, the Company acquired the following five patents: submersible marine vessel issued June 13, 1995 (Patent #5,423,278), personal submersible marine vehicle issued June 3, 1997 (Patent # 5,634,423), submersible marine vessel issued on April 19, 1994 (Patent # 5,303,666) scuba scooter issued on May 31, 1994, (Patent Des 347,418) scuba scooter issued June 6, 1995 (Patent Des 359,022). The Company also has several copyright registrations for various advertisements that it uses to promote its products. The Company has an exclusive licensing agreement with Lucas Films Licensing Division for the use of the trade name STARWARSTM and STAPTM in the classification of electric scooters. Backlog The Company has a $6.4 million backlog of orders and purchase contracts in hand for electric vehicles as of March 26, 2001. The Company expects to fill its entire backlog within the current fiscal year. Competitive Conditions The 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 companies. The major manufacturers are Honda, Suzuki, Sanyo and Yamaha. They mainly sell products to Japan and Europe. The other group of manufacturers is much smaller in size and sales volume. These manufacturers have products that sell into the U.S., European, and Asian markets. In order to penetrate the vast Asian market, the Company formed a joint venture in 2000 with Ningbo Topp Industrial Co. Ltd of China to manufacture and distribute electrical vehicles in China. There are also other manufactures, both large and small, of personal electric vehicles. The principal competitive advantages of the Company are its ownership of fundamental technology, its ability to be a low cost manufacturer through domestic and international connections, and its distribution network. In order to ensure that the Company can maintain its competitive cost advantage, plans are under way to transition nearly all of its production facilities to lower cost Taiwanese outside contract manufacturers. It is anticipated that by the end of the second quarter of 2001 this goal should be affected. Such a move will also enable the Company to concentrate on its marketing and sales efforts. The Company also currently benefits from its high name recognition in the electric vehicle industry coupled with a rapidly developing business on its Internet website ZAPWORLD.COM. The Company offers one of the broadest lines of personal electric vehicles currently available. According to published reports, the Company believes it currently holds the leading electric bicycle and scooter market position in the United States. Employees As of March 26, 2001, the Company had a total of 81 employees. This is an increase of 3 employees from 2000. The Company's performance is substantially dependent upon the services of its executive officers and other key employees, as well as on its 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 services of any of its officers or key employees, or its inability to hire and retain a sufficient number of qualified employees, will harm the Company's business. 4 Item 2. Description of Property. The chart below contains a summary of our principal facilities. Location Use Number of Square Feet - -------- --- --------------------- 117 Morris Street Office and Motor Assembly 6,500 111 Morris Street Machine Shop 3,000 7190 Keating Production 10,000 6780 Depot Office, Production, and R & D 5,000 6784 Depot Engineering 4,200 2715 Hyde Street Retail/Rental Store 8,000 984 SW 13th Court Office, Distribution and Warranty Center 3,100 All of the above buildings, except Hyde Street in San Francisco, California and 984 SW 13th Court, Pompano Beach, Florida, are located in Sebastopol, California. The Company leases all of its manufacturing, research and office facilities. All of the leases are term leases and none include options to purchase. The Company's property consists primarily of manufacturing equipment and office computer systems. It is management's opinion that the Company's insurance policies cover all insurance requirements of the landlords. The Company owns the basic tools, machinery and equipment necessary for the conduct of its production, research and development, and vehicle prototyping activities. Management believes that the above facilities are generally adequate for present operations. In the fourth quarter of 2000, the Company decided to close its retail outlet and to use the experience gained to promote franchising activities. The Hyde Street location, whose lease expires at the end of the first quarter of 2001, has been sublet to an outside third party. The Company is coordinating with various individuals to franchise several retail stores in California by the end of second quarter of 2001. Item 3. Legal Proceedings The Company is 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 the Company's ZAPPY(R) electric scooter. Upon the discovery of Mastershine's potentially infringing electric scooters, an attempt was made to negotiate a business solution. Prior to a business solution , however, Mastershine filed a lawsuit in December 2000 in federal court seeking declaratory relief. Since that time the Company has filed a cross-complaint seeking unspecified damages and equitable relief, and has filed a motion for preliminary injunction against Mastershine. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year-end December 31, 2000. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock has been listed in the NASDQ Small Cap stock exchange under the symbol "ZAPP" since May 22, 2000. From March 11, 1998 to May 22, 2000, the Company's Common Stock was listed on the NASD OTC Bulletin Board under the symbol "ZAPP". Before this there was no public market for the Company's Common Stock. As of March 26, 2001, there were 6,039,817 shares of Common Stock outstanding held by 1,911 shareholders. The following table sets forth the high and low prices of the Common Stock 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 NASDQ Small Cap Stock exchange for the third quarter of 2000 through March 26, 2001. 5 2001 2000 1999 High Low High Low High Low ---- --- ---- --- ---- --- (through 3/26/2001) First Quarter . . . . . $3.06 $1.28 $10.00 $8.00 $4.375 $3.0625 Second Quarter . . . . - - 6.00 5.4375 8.75 4.25 Third Quarter . . . . . - - 5.875 5.3125 6.875 5.00 Fourth Quarter. . . . . - - 3.25 2.50 18.25 5.00 Dividend Policy The Company has not declared or paid any cash dividends on its Common Stock and presently intends to retain its future earnings, if any, to fund the development of its business and, therefore does not anticipate paying any cash dividends in the future Recent Sales of Unregistered Securities. Since inception in 1994, the Company has 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: On June 1, 2000, pursuant to an exemption under Section 4(2) of the Act, the company granted options to purchase 200,000 shares of common stock to employees. On June 24, 2000, pursuant to an exemption under Section 4(2) of the Act, the Company granted an option to purchase 12,000 shares of common stock to a consultant and granted an option to purchase 161,300 shares of common stock to employees. We also issued 3,422 shares of common stock to discharge outstanding debts. On July 19, 2000, pursuant to an exemption under Section 4(2) of the Act, the Company issued 1,027 shares of common stock to a consultant and issued 3,400 shares of common stock to discharge an outstanding debt. On July 19, 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, the Company granted options to purchase 261,500 shares of common stock to employees. In July 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with the acquisition of Acquatic Propulsion Technology, Inc., a Bahaman corporation, the Company issued 120,000 shares of Common Stock to the shareholders of Acquatic Propulsion Technology, Inc. In July 2000, pursuant to an exemption under Section 4(2) of the Act, the Company sold 3,000 shares of Series A-1 Preferred Stock to investors for an aggregate purchase price of $3,000,000. In connection with this sale the Company issued warrants to purchase 816,666 shares of our Common Stock. On September 12, 2000, pursuant to an exemption under Section 4(2) of the Act, the Company issued 800 shares of common stock to employees. On October 6, 2000, pursuant to an exemption under Section 4(2) of the Act, the Company granted options to purchase 7,100 shares of common stock to consultants and issued 10,940 shares of common stock pursuant to a consulting agreement and a joint venture marketing agreement. On October 6, 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, the Company granted options to purchase 9,500 shares of common stock to employees. In October 2000, pursuant to an exemption under Section 4(2) of the Act and in connection with the acquisition of the assets of EMB, Inc., the Company issued 140,000 shares of Common Stock. 6 In October 2000, pursuant to an exemption under Section 4(2) of the Act, the Company sold 2,000 shares of Series A-2 Preferred Stock to investors for an aggregate purchase price of $2,000,000. In connection with this sale we issued warrants to purchase 368,323 shares of our common stock. On December 7, 2000, pursuant to an exemption under Section 4(2) of the Act, the Company granted options to purchase 12,500 shares of common stock to consultants and issued 2,300 shares of common stock to employees. On December 7, 2000, pursuant to an exemption under Section 4(2) of the Act, the Company issued 2,250 shares of common stock to consultants. Item 6. Management's Discussion and Analysis. Overview Forward-looking statements in this release are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties, including, without limitation, continued acceptance of the company's products, increased levels of competition for the products and technological changes, the company's dependence upon third party suppliers, intellectual property rights, and other risks detailed from time to time in the company's periodic reports filed with the Securities and Exchange Commission. The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, electric scooters, electric motorcycles, and other electric transportation vehicles. The Company sells its electric vehicles to retail customers, international distributors, law enforcement agencies, electric utility companies, bicycle dealerships, motorsport dealers, its dealers and mail order catalogs. Products are also available for purchase on the Company's Internet site, which is ZAPWORLD.COM. The Company sells to mail order catalogs and selected customers on various credit terms. Many of the smaller dealerships are sold a on cash on delivery basis. The Internet and retail sales are primarily paid for with a credit card or personal check before shipment of the product. The Company's overall goal is to dominate the personal electric vehicle industry market. This goal will be obtained by a strategy of distribution and acquisition while focusing on a program of "Five P's," which include Production, Product, (Market) Penetration, Personnel, and Profitability. The Company's primary growth strategy is to increase net sales by augmenting its marketing and sales force, by increasing distribution channels through mass retail organizations and wholesale distributors both domestically and overseas, by setting up and acquiring retail outlet stores that specialize in electric vehicle transportation as well as franchise stores to assist in the retail arena. Strategic alliances with leaders in the industry are also of equal importance. The Company intends to increase its production capability to meet the increasing demand for its product. The Company will continue to develop the products so that it is the low cost leader in the industry. Product improvements, new product introductions, and the expansion of the ZAP electric outlet franchise network will continue to enlarge ZAP's presence in the electric vehicle industry. The Company intends to move the majority of its production activities overseas to contract manufacturers, which will maximize cost savings and enable it to focus on sales and distribution of its products. In order to affect its plan, the Company completed the following acquisitions and strategic alliances during the year 2000: 1. Acquired Electric Vehicles Systems, Inc. which provided the Company with access to the patented technology for the Powerski(R). The Powerski is a recreational transportation product for inline skating that the Company began marketing in the second quarter of 2000. 2. Alliance with the battery developer Evercel. An agreement was signed to jointly produce a line of premium products using the best of ZAPWORLD's technology combined with EVERCEL's premium Nickel-Zinc batteries. Under the terms of the agreement, ZAPWORLD will install EVERCEL's premium performance Nickel-zinc battery in a high-end version of ZAP's LECTRA (R) electric motorcycle. 7 3. The Company signed a two year agreement with Smith and Wesson to provide bicycles manufactured by S&W with the patented ZAPWORLD .COM electric motor system. These bikes will be targeted to law enforcement agencies. 4. Acquisition of Aquatic Propulsion Technology, Inc. (APT) a Florida electric sea scooter company. Under terms of the agreement ZAPWORLD acquired all technology, assets, current operations and shares of APT in exchange for common stock of ZAPWORLD. APT holds five patents and manufactures an electric vehicle that is designed to pull a diver or swimmer through the water. Its patented design incorporates a battery powered propulsion system offering silent operation and zero emissions. By grasping the handles and squeezing on the trigger the user is pulled along the surface or even underwater. The scooter stops automatically when the trigger is released. The scooters are used for ocean diving and snokereling and as a recreational device for swimming pools and lakes. 5. The acquisition of Electric Motorbike Inc. (EMB) was completed in October, 2000. EMB first developed the LECTRA motorcycle in 1996. The LECTRA is believed to be the only production-ready electric motorcycle in the world. Under the terms of the agreement, ZAP acquired all of the assets, technology, engineering capabilities and customer contacts from EMB. 6. Co-Marketing agreement with Lucas LTD for scooters and console video game. Under the terms of the Agreement both parties have agreed to co-market the latest ZAP scooters and Lucas Learning console Game, Star Wars (R) Super Bombad Racing. 7. The Company also signed exclusive distribution agreements with the manufacturers of electric motor scooters, electric go-karts and electric pedi-cabs. As a result of the above arrangements completed in 2000, the Company feels it is well positioned to be a dominant force in the electric vehicle marketplace for the next few years. With the introduction of the new products plus the existing line, the Company believes that it can satisfy a wide range of consumer interests. Results of Operations Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net sales for the year ended December 31, 2000 were $12.4 million compared to $6.4 million in the prior year, an increase of $6 million or 93%. The Company experienced such a dramatic increase due to a vastly expanded customer base with larger retailers and distributors plus the addition of new products in 2000. Fourth quarter sales for 2000 increased $2.3 million over the fourth quarter in 1999, which can be attributable to exceptionally strong holiday sales. Internet sales were $602,800 and $259,100 in 2000 and 1999 respectively. This represented a 134% increase for 2000. A total of $1.1 million in products was sold to one customer during the year ended December 31, 2000, representing 9% of sales. In the year ended December 31, 1999, $680,000, or 11% of net sales, was sold to one customer. Gross profit. Gross profit increased as a percentage of net sales to 37% from 31% during the year ended December 31, 2000. The increase is primarily due to product mix and is also the result of the Company's emphasis to improve product margins through greater cost controls and production efficiencies. It should also be noted that the gross profit percentage in 1999 was adversely impacted as the result of a one-time sale to a large distributor at a significant discount in the third quarter of 1999. Selling. Selling expenses in 2000 were $2.2 million. This was an increase of $1million or 83% from $1.2 million in 1999. As a percentage of sales, selling expenses remained consistent at 18% for both 2000 and 1999. This increase was due to higher salaries and benefits as a result of expanding sales and marketing personnel and greater expenses for marketing and promotional items. General and administrative expenses for 2000 were $3.8 million as compared to $1.9 million in 1999, which represents an increase of $1.9 million over 1999. As a percentage of sales, the General and Administrative Expenses remained fairly consistent at 30% of sales for 2000 and 1999. The current year's increase was due to higher salaries and benefits, greater expenses for consulting and temporary labor, higher depreciation and amortization expenses as a result of the current year acquisitions, increased general and liability insurance premiums which are partially calculated on net sales for the year and finally due to higher rent expense. 8 Research and development was $698,800 in 2000 as compared to $364,600 in 1999, which represents a $334,200 or 92% increase. As a percentage of net sales, Research and Development remained consistent at 6% in 2000 and 1999. The overall increase during the year was due to higher salary expense and greater R&D activities. Other income increased $188,000 from $81,000 in 1999 to $269,000 in 2000. This increase can be attributed to $121,000 for higher interest earned on a commercial paper money market fund from the proceeds of the issuance of Preferred Stock. Also the Company received a $67,000 grant during the year from a state agency for a Neighborhood Electric Vehicle demonstration. Interest Expense was $20,700 for the year ended 2000, which represents a $246,000 decrease from $267,000 in 1999, which is the result of lower outstanding debt in 2000. Results of Operations Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net sales for the year ended December 31, 1999 were $6.4 million compared to $3.5 million in the prior year, an increase of $2.9 million or 83%. The increase in sales was due to greater acceptance of ZAP 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 was 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, was 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. Selling expenses in 1999 were $1.2 million This was an increase of $219,000 or 22 % from 1998 to 1999. Due to greater market acceptance through ZAP's distribution channels, selling expenses as a percentage of sales decreased from 28% to 18% of sales. Costs increased as a result of additional personnel being added to the sales force. General and administrative expenses for 1999 were $1.9 million. This is an increase of $965,800 or 100% 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 and development was $364,600 in 1999 as compared to $202,600 in 1998, an 80% increase. As a percentage of net sales, Research and Development remained consistent at 6% in 1999 and 1998. The Company invested in developing new electric vehicle products and tooling that were expected to lower manufacturing costs and broaden the ZAP product line in 2000. Other income increased $81,000 in 1999 over 1998. This 100% increase can be attributed to interest earned on a commercial paper money fund from the proceeds of private placement investments. Interest Expense increased $167,000, 166% in 1999 over 1998. This increase is due to higher outstanding debt in 1999. Liquidity And Capital Resources The Company used cash from operations of $3.7 million and $1.5 million during the years ended December 31, 2000 and 1999 respectively. Cash used in operations in 2000 was the result of the net loss incurred for the year of $1.9 million, offset by net non-cash expenses of $725,000, and the net change in operating assets and liabilities resulting in a further cash use of $2.5 million . Cash used in operations in 1999 was the result of the net loss incurred for the year of $1.7 million, which was offset by net non-cash expenses of $636,000, and the net change in assets and liabilities resulting in a further use of cash of $407,000. 9 Investing activities used cash of $528,000 during the year ended 2000. Investing activities used cash for the purchase of fixed assets, additional capitalized patent costs, intangibles and the purchase Electric Motorbike, Inc. In the year ended December 31, 1999, investing activities provided cash of $602,000 which was principally due to proceeds from the emPower acquisition. Financing activities provided cash of $4.5 million and $3.6 million during the years ended December 31, 2000 and 1999, respectively. In 2000, the Company received $4.5 million in proceeds from the issuance of $5 million of Convertible Preferred Stock to a small group of private investors. The stock may be converted into common stock over a three-year period at a specified price, which is contained in the Securities Purchase Agreement between ZAPWORLD.COM and Union Atlantic. A dividend is also attached to the stock at a rate of 6% per annum. The dividend is payable in common stock or cash at the discretion of the Company on June 30 each year or when the preferred stock is converted into common shares. The investors also received warrants that expire in five years to purchase an additional 1.2 million shares of common stock at an exercise price ranging from $5.43 to $5.98. In 1999, cash was provided by the sale of common stock in the amount of $1.8 million. Cash provided by the sale of stock in 1999 was partially used to extinguish notes payable to individuals of $361,900. At December 31, 2000 the Company had cash of $3.5 million as compared to $3.2 million at December 31, 1999. The Company's working capital at December 31, 2000 was $7.1 million compared to $4.5 million at December 31, 1999. The increase in cash and working capital is primarily due to financing provided by private placement investments. The Company believes existing cash and cash equivalents will be sufficient to meet its operating requirements for at least the next twelve months, however the Company may sell additional equity or debt securities to further enhance its liquidity position. In February 2001, the Company filed a request with the Securities and Exchange Commission to raise up to $12 million through the offering of 2.4 million shares of common stock at a price of $5.00 per share. The Company intends to use the proceeds for the purposes of expanding their sales force, increasing their marketing and distribution capacities, expanding domestic and international business operations, acquisitions, working capital and for general corporate purposes. The sale of additional securities could result in further dilution of the Company's stockholders percentage ownership. Seasonality and Quarterly Results The Company's business is subject to seasonality influences. Sales volume in this industry typically slows down during the winter months of November through March in the U.S. However, the Company is marketing worldwide and is not impacted by U.S. seasonality. Inflation The Company's raw materials are sourced from stable cost competitive industries. As such, the Company does not foresee any material inflationary trends for its raw material sources. However, with the low unemployment rate currently seen in Sonoma County, California, the Company expects that current wage rates will be driven up due to competitive pressures from other local manufacturing companies. Item 7. Financial Statements 10 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors ZAPWORLD.COM We have audited the accompanying consolidated balance sheet of ZAPWORLD.COM and Subsidiaries as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on 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 provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZAPWORLD.COM and Subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America. GRANT THORNTON LLP San Francisco, California March 9, 2001 F-1 ZAPWORLD.COM and Subsidiaries CONSOLIDATED BALANCE SHEET December 31,2000 (in thousands) ASSETS
CURRENT ASSETS Cash $ 3,543 Accounts receivable, net of allowance for doubtful accounts of $53,000 1,613 Inventories 2,898 Prepaid expenses and other assets 696 ----------- Total current assets 8,750 PROPERTY AND EQUIPMENT - NET 510 OTHER ASSETS Patents and trademarks, less accumulated amortization 1,432 Goodwill, less accumulated amortization 2,023 Deposits and other 112 ----------- Total other assets 3,567 ----------- Total assets $ 12,827 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 398 Accrued liabilities and customer deposits 1,167 Current maturities of long-term debt 99 Current maturities of obligations under capital leases 32 ----------- Total current liabilities 1,696 OTHER LIABILITIES Long-term debt, less current maturities 95 Obligations under capital leases, less current maturities 31 ----------- 126 COMMITMENT STOCKHOLDERS' EQUITY Preferred stock, authorized 10,000 shares of no par value; issued and outstanding 4 shares 1,812 Common stock, authorized 20,000 shares of no par value; issued and outstanding 5,816 shares 19,117 Accumulated deficit (9,664) Unearned compensation (42) ----------- 11,223 Less: notes receivable from shareholders (218) ----------- Total stockholders' equity 11,005 ----------- Total liabilities and stockholders' equity $ 12,827 =========== See accompanying notes to financial statements.
F-2 ZAPWORLD.COM and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, (in thousands, except per share amounts)
2000 1999 ---- ---- Net sales $ 12,443 $ 6,437 Cost of goods sold 7,860 4,446 Gross profit 4,583 1,991 Operating expenses Selling 2,204 1,187 General and administrative 3,824 1,945 Research and development 699 365 ---------- ---------- 6,727 3,497 ---------- ---------- Loss from operations (2,144) (1,506) Other income (expense) Interest expense (21) (267) Other income 269 81 ---------- ---------- 248 (186) ---------- ---------- Loss before income taxes (1,896) (1,692) Provision for income taxes 1 1 ---------- ---------- NET LOSS $ (1,897) $ (1,693) ========== ========== Net loss attributable to common shares Net loss $ (1,897) $ (1,693) Preferred dividend (2,649) - ---------- ---------- $ (4,546) $ (1,693) ========== ========== Net loss per common share Basic and diluted $ (0.85) $ (0.43) ========== ========== Weighted average common shares outstanding 5,362 3,928 ========== ==========
See accompanying notes to financial statements. F-3 ZAPWORLD.COM and Subsidiaries CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years ended December 31, 2000 and 1999 (in thousands)
Convertible Unearned Note Receivable Preferred Stock Common Stock Accumulated Compensation From Shares Amount Shares Amount Deficit & Services Shareholder Total ------ ------ ------ ------ ------- ---------- ----------- ----- Balance, January 1, 1999 - $ - 2,665 $ 3,811 (3,425) $ - $ - $ 386 Issuance of common stock Cash 30 178 178 Private placement, net of expense of $614 746 1,721 1,721 Acquisitions 280 2,264 2,264 Advance to retail stores & technology co.'s 58 406 406 Employee stock purchase plan 1 6 6 Repurchase of shares (2) (11) (11) Services 27 141 141 Litigation settlement 9 50 50 Conversion of Debt 165 665 665 Exercise of employee stock options 559 423 423 Exercise of non-employee stock options 571 2,000 2,000 Fair value of stock options granted to employees - 1 1 Fair value of stock options and warrants issued to non-employees - 135 135 Stock options and warrants issued for future services - 263 (127) 136 Amortization of unearned compensation 31 31 Note 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 convertible preferred stock Series A-1 preferred stock, net of 3 2,705 2,705 issuance cost of $295 Series A-2 preferred stock, net of 2 1,808 1,808 issuance cost of $192 Common Stock warrants issued with - (2,292) - 2,292 - preferred stock Beneficial conversion feature of - 2,539 2,539 preferred stock Deemed dividend from preferred stock (2,539) (2,539) Issuance of common stock Cash 3 14 14 Acquisitions 260 1,522 1,522 Advance to retail stores & technology co.'s 10 50 50 Employee stock purchase plan 1 10 10 Services 11 42 42 Employee compensation 5 27 27 Preferred stock conversion (1) (409) 250 409 - Cashless conversion of warrants 71 - Exercise of employee stock options 84 96 96 Exercise of non-employee stock options 12 63 63 Amortization of unearned compensation 54 54 Payment on notes receivable 67 67 Dividend declared on preferred stock (110) (110) Net loss (1,897) (1,897) ------ ------ ------ ------- ------- ------- ------ ------- Balance, December 31, 2000 4 $ 1812 5,816 $19,117 $(9,664) $ (42) $ (218) $ 11,005 ====== ====== ====== ======= ======= ======= ====== =======
See accompanying notes to financial statements. F-4 ZAPWORLD.COM and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands)
2000 1999 ---- ---- Cash flows from operating activities: Net loss $ (1,897) $ (1,693) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 629 124 Issuance of common stock for services rendered 42 141 Issuance of common stock for litigation settlement - 50 Issuance of stock options for services rendered - 135 Noncash charges and settlement of debt - 156 Amortization of fair value of warrants 54 31 Changes in: Receivables (1,260) (69) Inventories (1,073) (878) Prepaid expenses and other (393) 24 Deposits (18) (13) Accounts payable (545) 312 Accrued liabilities and customer deposits 799 218 --------- --------- Net cash used in operating activities (3,662) (1,462) Cash flows from investing activities: Purchase of property and equipment (239) (188) Purchase of Electric Motorbike, Inc. (100) - Purchase of American Scooter and Cycle Rental - (70) Purchase of Big Boy Bicycles - (15) Proceeds from emPower acquisition - 1,033 Purchase of intangibles (209) (66) Payment advances for acquisitions - (72) Issuance of note receivable - (20) Payments on note receivable 20 - --------- --------- Net cash provided by (used in) financing activities (528) 602 Cash flows from financing activities: Sale of preferred stock, net of preferred stock offering costs 4,513 - Sale of common stock, net of stock offering costs 14 1,813 Issuance of common stock under employee purchase plan 10 6 Proceeds from issuance of long-term debt - (362) Proceeds from exercise of stock options 159 2,423 Repurchase of common stock - (11) Advances on note receivable to shareholder - (285) Proceeds from payment of note receivable from shareholder 67 - Payments on obligations under capital leases (13) (15) Principal repayments on long-term debt (201) - --------- --------- Net cash provided by financing activities 4,549 3,569 --------- --------- NET INCREASE IN CASH 359 2,709 Cash, beginning of year 3,184 475 --------- --------- Cash, end of year $ 3,543 $ 3,184 ========= =========
See accompanying notes to financial statements. F-5 ZAPWORLD.COM STATEMENTS OF CASH FLOWS Year ended December 31, (in thousands)
2000 1999 ---- ---- Supplemental cash flow information: - ---------------------------------- Cash paid during the year for: Interest $ 21 $ 115 Income taxes 1 1 Non-cash investing and financing activities: Conversion of debt into common stock - 475 Conversion of accounts payable into common stock - 35 Equipment acquired through capital lease obligations 27 27 Notes payable used to exercise stock options - 32 Issuance of common stock upon acquisition of Electric Motorbike, Inc., and Aquatic Propulsion Technology 1,522 - Issuance of common stock upon acquisition of American Scooter and Cycle Rental, Big Boy Bicycles, and emPower Corporation - 2,264 Assets and liabilities recognized upon acquisition of Electric Motorbike, Inc. and Aquatic Propulsion Technology Inventories 100 - Property and equipment 78 - Other assets 19 - Patent 196 - Goodwill 1,991 - Accounts payable 201 - Advances from ZAPWORLD 206 - Assets and liabilities recognized upon acquisition of American Scooter and Cycle Rental, Big Boy Bicycles, and emPower Corporation Cash - 1,033 Inventories - 214 Prepaid expenses and other - 56 Property and equipment - 70 Patent - 1,155 Accounts payable - 131
See accompanying notes to financial statements. F-6 ZAPWORLD.COM and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 and 1999 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ZAPWORLD.COM ("the Company"), formerly the ZAP Power Systems, was incorporated in California in September, 1994. The Company designs, manufactures, and distributes electric bicycle power kits, electric bicycles and tricycles, and other low power electric transportation vehicles. Company products are sold directly to end-users and to distributors throughout the United States. 1. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, ZAPWORLD Stores, Inc., and emPower Corporation. All significant inter-company transactions and balances have been eliminated. 2. Revenue Recognition The Company recognizes income when products are shipped. 3. 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. 4. 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 expense 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 5. Patents and Trademarks Patents and trademarks consist of costs expended to perfect certain patents and trademarks acquired and are amortized over ten years. 6. Goodwill Goodwill consists of the excess consideration paid over net identifiable assets acquired and is amortized over ten years. F-7 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 7. Income Taxes The Company accounts for income taxes using an asset and liability approach for financial accounting and reporting purposes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. 8. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 9. Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with accounting principles generally accepted in the United States of America. 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 fair value of debt is not determinable due to the terms of the debt and no comparable market for such note. 10. Net Loss Per Common Share Net loss per common share, basic and diluted, has been computed using weighted average common shares outstanding. The potential dilutive securities of options and warrants of 2,859,000 and 1,304,000 in 2000 and 1999, respectively, and the conversion of preferred stock into common stock as described in Note I, have been excluded from the dilutive computations, as their inclusion would be anti-dilutive. 11. Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees, and complies with disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Under APB No. 25, compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the quoted market price of the Company's stock and the amount an employee must pay to acquire the stock. 12. Segment Information The Company operates in one reportable segment. The Company's chief operating decision maker is the Chief Executive Officer who reviews a single set of financial data that encompasses the Company's entire operations for purposes of making operating decisions and assessing performance. 13. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which defined derivatives, requires that all derivatives be carried at fair value and provides for hedge accounting when certain conditions are met. SFAS No. 133, as amended by SFAS No. 137, is effective for the Company in fiscal 2001. Although the Company has not fully assessed the implication of SFAS No. 133 as amended, the Company does not believe that the adoption of this statement will have a material effect on its financial condition or results of operations. F-8 NOTE B - INVENTORIES Inventories consist of the following at December 31, 2000 (thousands): Raw materials $ 1,960 Work-in-process 78 Finished goods 860 ---------- $ 2,898 ========== NOTE C - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 2000 (thousands): Machinery and equipment $ 371 Computer equipment 289 Demonstration bicycles 90 Office furniture and equipment 111 Leasehold improvements 94 Vehicle 118 ---------- 1,073 Less accumulated depreciation and amortization 563 ---------- $ 510 ========== NOTE D - DEBT Promissory note payable in monthly installments of $6,000 through June 30, 2001 and $7,000 per month through July 1, 2004. Interest accrues at 10% per year. The note is convertible into common stock at $5.00 per share and may be converted on or before December 31, 2000. At December 31, 2000, none of the note principal was converted (thousands). $ 165 Other 29 ----- 194 Less current portion 99 ----- Long-term debt $ 95 ===== Installments due on debt principal are as follows (thousands): Year ending December 31, ------------------------ 2001 $ 99 2002 89 2003 6 ------- $ 194 ======= F-9 NOTE E - PROVISION FOR INCOME TAXES 2000 1999 ---------- ----------- Current tax expense (thousands) Federal $ - $ - State 1 1 ---------- ----------- $ 1 $ 1 ========== =========== Deferred tax assets (liabilities) Tax loss carryforward $ 2,057 $ 1,820 Inventory capitalization (283) (99) Other (37) (71) ----------- ------------ 1,737 1,650 Less valuation allowance (1,737) (1,650) ----------- ------------ Net deferred tax asset $ - $ - ========== =========== The Company has available for carryforward approximately $4,549,000 and $2,660,000 of federal and state net operating losses, respectively, expiring through 2020 for federal purposes and 2010 for state purposes. 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 carryforwards 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 change in the valuation allowance at December 31, 2000 and 1999 was $87,000 and $435,000, respectively. The difference between the income tax expense at the federal statutory rate and the Company's effective tax rate is as follows: December 31, ----------- 2000 1999 ---- ---- Statutory federal income tax rate 34% 34% State income tax rate 6 6 Valuation allowance (40) (40) ---- ---- -% -% ==== ==== F-10 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 two or three year period, and expire ten years after the date of grant. Option activity under the three plans is as follows (thousands, except per share amounts):
1999 Plan 1996 Plan 1995 Plan ----------------------- ------------------------ ------------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------- ----- --------- ----- --------- ----- Outstanding at January 1, 1999 - $ - 364 $1.55 419 $0.56 Granted 481 $6.33 35 $4.06 - - Exercised (1) $5.00 (259) $1.15 (299) $0.40 Canceled (1) $5.00 (14) $3.50 (50) $1.00 --------- ----------- ----------- ----- Outstanding at December 31, 1999 479 $6.34 126 $2.85 70 $0.93 Granted 630 $5.17 - - - - Exercised (7) $5.00 (52) $1.23 (25) $1.00 Canceled (4) $5.25 - - - - --------- ----------- ---------- ------ Outstanding at December 31, 2000 1,098 $5.71 74 $3.97 45 $1.00 ========= =========== ========== ===== The weighted average fair value of options granted during the years ending December 31, 2000 and 1999 was $3.52 and $4.33, respectively.
The following information applies to options outstanding at December 31, 2000:
Plan: 1999 1996 1995 ---- ---- ---- Range of exercise prices $4.12 - $9.87 $1.00 - 5.25 $1.00 Weighted average remaining life (years) 9.15 7.07 5.50 Options exercisable 303,000 72,000 45,000 Weighted average exercise price $5.96 $3.97 $1.00
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 during 2000 and 1999. 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 (thousands, except per share amounts): 2000 1999 ------------- ------------- Net loss - as reported $ (1,897) $ (1,693) Net loss - pro forma (3,448) (2,687) Loss per share - as reported (0.85) (0.43) Loss per share - pro forma (1.14) (0.68) 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: 2000 1999 ---------- ----------- Dividends None None Expected volatility 72% 86% Risk free interest rate 6% 6% Expected life 5 years 5 years F-11 The Company granted stock options and warrants to purchase common stock to non-employees of the company. Total granted during 2000 was 1,217,000 consisting of 1,185,000 warrants to preferred shareholders and 32,000 to other non-employees. The options and warrants have exercise prices ranging from $5.93 to $5.98. Non-employee options and warrants exercisable at December 31, 2000 is 1,607,000. During 1999, the Company granted a total of 1,138,000 options and warrants to purchase common stock to non-employees consisting of 671,000 in connection with the private placement, 200,000 in connection with the emPower acquisition, 100,000 in connection with placement fees and 167,000 to other non-employees. The options and warrants have exercise prices ranging from $3.02 to $6.36. The company recorded the non-employee options and grants based on the grant date for value in accordance with SFAS No. 123. The grant date fair value of each stock option was estimated using the Black-Scholes option-pricing model. The company recorded expense including amortization of unearned compensation in the amount of $54,000 and $166,000 for the years ended December 31, 2000 and 1999, respectively. Options and warrant activity for non-employees is as follows (in thousands except per share amounts): Weighted Average ------- Outstanding at 1/1/99 126 $4.74 Granted 1,138 4.58 Exercised (571) 3.50 Forfeited (64) 4.75 --------- Outstanding at 12/31/99 629 5.51 Granted 1,217 5.55 Exercised (83) 5.45 Forfeited (121) 5.51 -------- Outstanding at 12/31/2000 1,642 $5.37 NOTE G - MAJOR CUSTOMER During 2000, one customer accounted for $1,112,000 or 9% of the Company's net sales. During 1999, one customer accounted for $680,000 or 11% of the Company's net sales. During 2000, one vendor accounted for $3,054,000 or 44% of the Company's supplies and materials. During 1999, one vendor accounted for $799,000 or 12% of the Company's supplies and materials. F-12 NOTE H - COMMITMENT The Company rents warehouse and office space under operating leases that expire through 2005. The monthly rent is adjusted annually to reflect the average percentage increase in the Consumer Price Index. An option exists to extend each lease for an additional five- year period. Rent expense under these leases were $250,000 and $125,000 in 2000 and 1999, respectively. Future minimum lease payments on the lease are as follows (thousands): Year ending December 31, 2001 $ 388 2002 338 2003 332 2004 173 2005 48 ---------- Total $ 1,279 =========== NOTE I - PREFERRED STOCK During 2000, the Company issued 3 thousand shares of Preferred Stock Series A-1 and 2 thousand shares of Preferred Stock Series A-2. Both series are immediately convertible into common stock at the lesser of the fixed price of $4.50 for the Series A-1 and $5.91 for the Series A-2 or at the variable conversion price determined as follows: (1) on or before the first anniversary date, the amount of 85% of the average of the 3 lowest closing price over the 22 trading days prior to conversion, (2) thereafter and or before the second anniversary, the amount of 80% of the average of the 3 lowest closing prices over the 22 days prior to conversion, and (3) thereafter and on or before the day prior to the third anniversary date, the amount of 70% of the average of the 3 lowest closing prices over the 45 trading days prior to conversion. Dividends are cumulative and accrue at 6% per year and payable on June 30th of each year or on conversion date. Dividends are payable in cash or in common stock at the Company's option. During the year, 920 shares of preferred stock were converted into common stock. All preferred stockholders are subject to automatic conversion to common stock three years from the date of purchase. During the year, the Company recorded a deemed dividend on preferred stock of approximately $2.5 million. This is a result of the effective conversion price of the convertible preferred stock issued during the year 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 year as a result of all preferred stock being immediately convertible at the discretion of the holder. In connection with the issuance of preferred stock, the Company granted 1,185,000 warrants to purchase common stock. The warrants are immediately exercisable and have exercise prices ranging from $5.43 to $5.98. F-13 NOTE J - ACQUISITIONS In October 2000, the Company purchased all assets of Electric Motorbike Inc. ("EMB") and assumed certain liabilities. The Company issued 140,000 shares of common stock at $5.68 and paid $100,000 in cash. The purchase price was allocated to assets acquired based on their estimated fair value. Results of operations for EMB have been included with those of the Company for the periods subsequent to the date of acquisition. Pro forma information is not presented as they are not significant. The purchase price of EMB was allocated as follows (thousands): Inventory $ 51 Goodwill 960 Advances from ZAPWORLD (63) Liabilities assumed (53) ----------- $ 895 Consideration paid (thousands): Cash $ 100 Common stock 795 ----------- $ 895 In July 2000, the Company purchased all assets of Aquatic Propulsion Technology, Inc. ("APT") and assumed certain liabilities. The Company issued 120,000 shares of common stock at $6.05 per share. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. Results of operations for APT have been included with those of the Company for periods subsequent to the date of acquisition. Pro forma information is not presented as they are not significant. The purchase price of APT was allocated as follows (thousands): Inventory $ 49 Property & equipment 78 Patents 196 Other assets 19 Goodwill 1,031 Note payable assumed (356) Advances from ZAPWORLD (143) Liabilities assumed (148) ----------- $ 726 =========== Consideration paid (thousands): Common stock $ 726 =========== F-14 Item 8 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. Part III Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act. MANAGEMENT Directors and 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 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. -11- 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. Item 10 Executive Compensation. The following tables set forth information concerning the compensation we paid for services rendered during our fiscal years ended December 31, 2000, 1999 and 1998, 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 $100,000 in total annual salary and bonus for the fiscal years ended December 31, 2000, 1999 and 1998. Summary Compensation Table
Annual Compensation Long -Term Compensation Awards Payouts ------------------------- ---------- ------------ Other Restricted Stock Annual Stock Underlying All Other Salary Bonus Compensation Award Options LTIP Compen- /SARs Payouts sation Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($) - ------------------------------ ------- ---------- --------- -------------- ------------ ------------ ---------- ------------ Gary Starr 1998 35,700 Chief Executive officer 1999 39,500 200 135,000 2000 59,600 700 John Dabels 2000 69,000 700 Former President James McGreen 1998 37,500 Former President 1999 34,000 200 35,000
The following table shows all individual grants of stock options to the Named Executive Officers (as defined above) for the fiscal year ended December 31, 2000. -12- Option/SAR Grants in Last Fiscal Year (Individual Grants)
Name Year Number of % of Total Exercise or Expiration Options Securities Underlying Options/SARs Granted to Base Price Date Granted Options/SARs Granted Employees in Fiscal Year ($/Sh) - ----------------------------------------------------------------------------------------------------------------------------- John Dabels 2000 200,000 32 4.12 04/15/01
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. Item 11 Security Ownership of Certain Beneficial Owners and Management. The following table presents information with respect to beneficial ownership of our Common Stock as of March 26, 2001 by: 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 March 26, 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 12,215,566 shares of Common Stock outstanding on a fully diluted basis as of March 26, 2001. The number of shares of Common Stock outstanding on a fully diluted basis includes 1,642,000 shares of Common Stock issuable upon the exercise of certain warrants and options to non-employees, 1,217,000 shares of Common Stock issuable upon the exercise of certain options, and 3,316,749 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. -13- Shares Beneficially Owned Name of Beneficial Owner Number Percent The Endeavour Capital Fund, S.A. 1,989,741 16.0 P.O.B. 57116 Jerusalem 91570 Israel (1) Celeste Trust Reg. 533,862 4.0 C/O Trevisa-Treuhand-Anstalt Landstrasse 8 Furstentums 9496 Balzers, Liechtenstein (2) Esquire Trade & Finance 534,657 4.0 Trident Chambers P.O. Box 146 Road Town, Tortola British Virgin Islands (3) Douglas R. Wilson (4) 1,250,357 10.0 Lee Sanella (5) 71,952 * William D. Evers (6) 76,723 * Robert E. Swanson (7) 1,250,357 10.0 Gary Starr(8) 520,117 4.0 Harry Kraatz (9) 255,000 2.0 All Executive Officers and directors as a 2,174,149 18.0 group (6 persons) * Represents beneficial ownership of less than 1%. (1) Includes 1,989,741 shares of Common Stock issuable upon the conversion of 2328 shares of Series A-1 and Series A-2 Preferred Stock. (2) Includes 516,862 shares of Common Stock issuable upon the conversion of 604 shares of Series A-1 and Series A-2 Preferred Stock. (3) Includes 519,657 shares of Common Stock issuable upon the conversion of 608 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 March 26, 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 March 26, 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 March 26, 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 March 26, 2001. Mr. Starr is our CEO and a director. (7) Includes 210,000 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of March 26, 2001. Mr. Kraatz is one of our directors. -14- Item 12 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" and the transactions described below. William D. Evers, is a member of our Board of Directors and our principal outside counsel. During our year ended December 31, 2000, Mr. Evers' law firm received $261,000 in compensation for legal services provided to us. Item 13 Exhibits and Reports on Form 8-K. Exhibits Exhibit No. Description - ---------- ----------- 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 Certificate of Amendment of Articles of Incorporation of ZAPWORLD.COM, endorsed and filed February 26, 2001 3.7 Amended Bylaws of ZAPWORLD.COM, dated June 24, 2000 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. 10.3 Plan of Reorganization for EMB, Inc. dated May 5, 2000. 10.4 Asset Purchase Agreement between ZAPWORLD.COM and American Scooter and Cycle Rentals, Inc., dated January 31, 2000. 10.5 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 10.6 Agreement and Plan of Reorganization by and among ZAPWORLD.COM and Aquatic Propulsion Technology, Inc. dated July 1, 2000. 10.7 Agreement of Merger of ZAPWORLD.COM and Aquatic Propulsion Technology, Inc. dated July 1, 2000. 10.8 Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6784 Sebastopol Ave. dated August 24, 2000. -15- 10.9 Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6780-B Depot Street dated October 16, 2000. 23.1 Consent of Grant Thornton LLP Reports on Form 8-K. We did not file any reports on Form 8-K during the last quarter of the period covered by this report. However, on January 10, 2001 we filed a Form 8-K wherein we reported that John R. Dabels resigned as president and as a member of our Board of Directors. -16- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZAPWORLD.COM (Registrant) By /s/ Gary Starr ----------------------------------- (Gary Starr, Chief Executive Officer) Date March 28, 2001 ------------------------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Gary Starr Director/CEO/CFO March 28, 2001 ----------------------- /s/ Robert E. Swanson Director/Chairman of the Board March 28, 2001 ----------------------- /s/ William D. Evers Director March 28, 2001 ----------------------- /s/ Harry Kraatz Director March 28, 2001 ----------------------- -17- 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 CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF ZAPWORLD.COM The undersigned certify that: 1. They are the president and the secretary, respectively, of Zapworld.com, a California corporation. 2. Article IV of the Articles of Incorporation of this corporation is amended to read as follows: "(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 twenty million (20,000,000). 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." 3. The foregoing amendment of Articles of Incorporation has been duly approved by the board of directors. 4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the 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 shares of Common Stock voting in favor of the amendment exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares. 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 of our own knowledge. Date: June 26, 2000 ------------------------------------ Gary Starr, President ------------------------------------ Joni Arellanes, Secretary -2- 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-10.1 9 0009.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 10 0010.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 11 0011.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 12 0012.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-10.5 13 0013.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-10.6 14 0014.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-10.7 15 0015.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-10.8 16 0016.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 /s/ Gary Starr - --------------------------------- ------------------------------------- (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-10.9 17 0017.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 /s/ Gary Starr - ------------------------------------ --------------------------------------- (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 18 0018.txt CONSENT Consent of Independent Certified Public Accountants We have issued our report dated March 9, 2001, accompanying the consolidated financial statements included in the Annual Report of Zapworld.com and subsidiaries on Form 10-KSB for the year ended December 31, 2000. We hereby consent to the incorporation by reference of said report in the Registration Statement of Zapworld.com and subsidiaries on Form S-3 (File No. 333-44014). /s/ Grant Thornton LLP San Francisco, California March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----