0000897069-01-500465.txt : 20011009 0000897069-01-500465.hdr.sgml : 20011009 ACCESSION NUMBER: 0000897069-01-500465 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20011003 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAPWORLD COM CENTRAL INDEX KEY: 0001024628 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 943210624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-55478 FILM NUMBER: 1751335 BUSINESS ADDRESS: STREET 1: 117 MORRIS ST CITY: SEBASTOBOL STATE: CA ZIP: 95472 BUSINESS PHONE: 7078244150 MAIL ADDRESS: STREET 1: 117 MORRIS ST CITY: STBASTOPOL STATE: CA ZIP: 95472 FORMER COMPANY: FORMER CONFORMED NAME: ZAP POWER SYSTEMS INC DATE OF NAME CHANGE: 19970319 SB-2/A 1 slp94.txt SB-2 PRE-EFFECTIVE AMENDMENT NO. 3 As filed with the Securities and Exchange Commission on October 3, 2001 Registration No. 333-55478 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- PRE-EFFECTIVE AMENDMENT NUMBER 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------- ZAP (Exact name of registrant as specified in its charter) California 94-3210624 (State of incorporation) (I.R.S. Employer Identification No.) 117 Morris Street Sebastopol, California 95472 (Address of registrant's principal executive offices) ------------------------------------------- Gary Starr Chief Executive Officer ZAP 117 Morris Street Sebastopol, California 95472 (707) 824-4150 (Name, address, and telephone number of agent for service) ------------------------------------------- With a copy to: William D. Evers Foley & Lardner 1 Maritime Plaza, Sixth Floor San Francisco, CA 94111-3404 (415) 434-4484 Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. ---------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is a post-effective amendment filed pursuant to Rule 462(d) of the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ------------------------------ CALCULATION OF REGISTRATION FEE
================================ ================ ====================== ====================== ==================== Title of each Amount Proposed maximum Proposed maximum class of securities to be offering price aggregate offering Amount of to be registered registered per unit price Registration fee -------------------------------- ---------------- ---------------------- ---------------------- -------------------- Series B Convertible Preferred 4,800,000 $ 1.00 $ 4,800,000 Stock, $1.00 par value $ 4,400.00(1) ================================ ================ ====================== ====================== Common Stock, no par value(2) 6,400,000 $ 2.00 $ 12,800,000 ================================ ================ ====================== ====================== ==================== Common Stock, no par value(3) 480,000 $ 1.65 $ 792,000 $ 198.00(4) ================================ ================ ====================== ====================== ==================== (1) The Registration Fee has been calculated by multiplying the maximum conversion price of the Series B Convertible Preferred Stock by the total number of shares of Series B Preferred Stock in this offering and multiplying that number by .00025. This $ 4,400 filing fee was previously paid. (2) Consists of shares issuable upon the conversion of Series B Preferred Stock. (3) Consists of shares purchasable upon the exercise of warrants issuable to the underwriters up to an amount equal to 10% of the number of shares sold by the underwriters. (4) The registration fee has been calculated by multiplying the maximum exercise price of the warrants by .00025. This $ 198.00 registration fee has previously been paid.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ ABOUT THIS PROSPECTUS You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of capital stock. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. ZAP, a California corporation, is referred to herein by use of the pronouns "we," "our," and "us." See the section of this prospectus entitled "Risk Factors" for a discussion of certain factors that you should consider before investing in our securities offered in this prospectus. Certain statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis," and "Description of Business" and elsewhere in this prospectus are forward-looking statements. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in the prospectus that are not historical facts. When used in this prospectus, the words "expects," "anticipates," "intends," "plans," "believes," "seeks" and "estimates" and similar expressions are generally intended to identify forward-looking statements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under the "Risk Factors" section of this document. All trademarks and trade names appearing in this prospectus are the property of their respective holder. The information in this prospectus is not complete and may be changed. These shares may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. [LOGO] ZAP(R) 4,800,000 shares of Series B Convertible Preferred Stock We are offering 4,800,000 shares of ZAP(R) Series B Convertible Preferred Stock at a price of $1.00 per share. The shares of Series B Convertible Preferred Stock are convertible into shares of Common Stock at any time at the option of the holder and automatically upon the occurrence of certain conditions. See the section of this document entitled "Description of Securities" for a more detailed explanation. This price may not reflect the market price of our shares after this offering. This is a best-efforts offering. Alexander, Wescott & Co., Inc. and Hyperion Partners Corp., whom we have engaged to sell the shares, are not obligated to purchase any shares at any time. The shares may also be sold through our executive officers, who will not receive commissions, where permitted under state securities laws. There are no escrow arrangements pertaining to this offering and there is no minimum amount we are required to raise in this offering before we may have access to funds received from investors. However, the funds will be held in an account at American Stock Transfer & Trust Company until we have satisfied conditions of closing, from time to time. ---------------------- ZAP(R)OFFERING Per Share Total Public Offering Price $ 1.00 $ 4,800,000 Underwriting Discounts and Commissions $ 0.10 $ 480,000 Proceeds Before Expenses $ 0.75 $ 4,320,000 The proceeds before expenses are calculated before deducting estimated expenses of $100,000, including registration fees, legal and accounting fees, and other offering costs, but excluding the underwriters' unaccountable expense allowance equal to 3% of the gross proceeds of the this offering. Shares of our Common Stock, into which shares of the Series B Preferred Stock are convertible, are currently traded on the NASDAQ SmallCap Market under the trading symbol "ZAPP." On September 19, 2001, the last reported sale price of our Common Stock was $0.55 per share. This offering will terminate on the date 12 months from the effective date, or such earlier date as this offering is terminated. Investing in our securities involves risks. You should invest in our securities only if you can afford to lose your entire investment. Consider carefully the "Risk Factors" Section beginning on page 5 of this prospectus. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the prospectus. Any representation to the contrary is a criminal offense. --------------------------- Alexander, Wescott & Co., Inc. Hyperion Partners Corp. This prospectus is dated October 3, 2001. NOTICE TO CALIFORNIA INVESTORS ONLY: THE SHARES OF THE COMPANY'S CAPITAL STOCK IN THIS OFFERING MAY BE PURCHASED IN CALIFORNIA ONLY BY THOSE CALIFORNIA INVESTORS WHO INDICATE IN WRITING THAT SUCH INVESTOR EITHER HAS (i) A LIQUID NET WORTH OF NOT LESS THAN $75,000 AND A GROSS ANNUAL INCOME OF NOT LESS THAN $50,000; OR (ii) A LIQUID NET WORTH OF $150,000. IN BOTH INSTANCES NET WORTH IS CALCULATED EXCLUSIVE OF HOME, HOME FURNISHINGS, AND AUTOMOBILES AND IN EITHER CASE, THE INVESTMENT IN THE SHARES DOES NOT EXCEED 10% OF THE INVESTOR'S NET WORTH. CALIFORNIA INVESTORS WHOSE INVESTMENT IN THE COMPANY'S SHARES IS $2,500 OR LESS ARE NOT SUBJECT TO THE ABOVE SUITABILITY REQUIREMENTS. CALIFORNIA INVESTORS SUBJECT TO THE SUITABILITY REQUIREMENTS MUST COMPLETE THE SUBSCRIPTION AGREEMENT ATTACHED AS EXHIBIT A TO THIS PROSPECTUS AS A CONDITION TO THEIR INVESTMENT IN THE SHARES. TABLE OF CONTENTS Page PROSPECTUS SUMMARY............................................................1 The Offering..............................................................2 SUMMARY FINANCIAL INFORMATION.................................................3 RISK FACTORS..................................................................5 Risks Related to Our Business.............................................5 We have a history of losses, and we might not achieve or maintain profitability.......................... ....................5 Our continuation as a going concern is directly dependent upon our ability to increase sales and receive additional financing..............5 We will require substantial additional capital in the short term to remain a going concern............... ...............................5 A substantial portion of our growth in the past three years has come through acquisitions and we may not be able to identify, complete and integrate future acquisitions, which could adversely affect our future growth.......................................................6 We face intense competition which could cause us to lose market share.....6 Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity...................................7 We cannot assure you that growth in the electric vehicle industry will continue; our business may suffer if growth in the electric vehicle industry ceases or if we are unable to maintain the pace of industry demands........................................................7 We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position......7 We will need to increase our research and development spending, which will substantially increase our costs and could adversely affect our cash flow.............................................. ............7 The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business...............8 Product liability or other claims could have a material adverse effect on our business................... .....................................8 The implementation of a product distribution network presents many risks..8 Failure to manage our growth effectively could adversely affect our business............................. ..............................9 The loss of certain key personnel could significantly harm our business...9 -i- Changes in the law may have a negative impact upon our business...........9 International expansion may cause problems for us........................10 We may not be able to protect our internet address.......................10 Our success is heavily dependent on protecting our intellectual property rights......................... ..............................10 We may be exposed to liability for infringing intellectual property rights of other companies........... ..................................11 Risks Related to this Offering...........................................11 The market price for our Common Stock is below the offering price for this Series B Convertible Preferred Stock, which could render us unable to sell shares in this offering.................................11 The price of our Series B Convertible Preferred Stock is likely to be volatile and subject to wide price fluctuations........................11 This is a best-efforts offering, and we may not raise enough capital from the sale of our Series B Convertible Preferred Stock to adequately fund our planned method of growth and expansion.............12 Sales of a substantial amount of our capital stock after this offering could cause our stock price to fall....................................12 We may not have enough authorized shares of common stock.................12 Due to the current price of our Common Stock, we may be delisted from the NASDAQ SmallCap Market.............................................12 Holders of the Series A-1 and Series A-2 Convertible Preferred Stock enjoy liquidation rights that are senior to the liquidation rights of investors in this offering..........................................12 You will experience substantial dilution when the holders of the Series A-1 and Series A-2 Convertible Preferred Stock convert their shares into Common Stock .....................................................13 There is no minimum conversion price at which the Series A-1 and Series Preferred Shareholders may convert ....................................13 FORWARD-LOOKING STATEMENTS...................................................13 USE OF PROCEEDS..............................................................14 DIVIDEND POLICY..............................................................16 MARKET FOR REGISTRANT'S COMMON STOCK EQUITY AND RELATED STOCKHOLDER MATTERS..................................................................16 -ii- MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................17 Overview.................................................................17 Distribution.............................................................18 Mergers and Acquisitions.................................................18 Partnerships or Strategic Alliances......................................19 Results of Operations....................................................20 Year Ended December 31, 2000, Compared to Year Ended December 31, 1999...21 Liquidity And Capital Resources..........................................22 Six Months Ended June 30, 2001, Compared to Six Months Ended June 30, 2000....................................................23 DESCRIPTION OF BUSINESS......................................................26 Principal products or services and their markets.........................26 New Product Development..................................................26 Distribution.............................................................29 Internet and Dealership Network..........................................29 Environmental Initiatives and Legislation................................30 Research and Product Development.........................................31 Sources and Availability of Raw Material.................................32 Licenses, Patents and Trademarks.........................................32 Backlog..................................................................32 Competitive Conditions...................................................32 Employees................................................................33 Development of Business..................................................33 DESCRIPTION OF PROPERTY......................................................34 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................34 EXECUTIVE COMPENSATION.......................................................36 Compensation of Directors................................................36 -iii- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................36 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............37 DESCRIPTION OF SECURITIES....................................................39 General..................................................................39 Common Stock.............................................................39 Preferred Stock..........................................................39 Series A-1 and Series A-2 Convertible Preferred Stock....................39 Rights, Privileges, and Preferences......................................40 Series B Convertible Preferred Stock.....................................41 Rights, Privileges, and Preferences......................................41 Transfer Agent and Registrar.............................................42 Warrants.................................................................42 Stock Options............................................................42 PLAN OF DISTRIBUTION.........................................................45 LEGAL PROCEEDINGS............................................................46 INTEREST OF NAMED EXPERTS AND COUNSEL........................................47 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..........................................................47 LEGAL MATTERS................................................................47 EXPERTS .....................................................................48 ADDITIONAL INFORMATION.......................................................48 -iv- PROSPECTUS SUMMARY The following summary highlights information contained elsewhere in this prospectus and should be read together with the more detailed information regarding our company, the securities being sold in this offering, our financial statements, and the notes to those financial statements appearing elsewhere in this prospectus. ZAP(R) Our company, ZAP(R), was incorporated in California in 1994 under the name "ZAP Power Systems." We design, assemble, manufacture and distribute electric vehicles, including electric scooters, electric bicycle power kits, electric bicycles, electric motorcycles, electric wheelchairs, and electric water scooters, and other personal electric and non-electric transportation vehicles. Our principal offices are located at 117 Morris Street, Sebastopol, California 95472, our telephone number is (707) 824-4150, and our Internet address is http://www.zapworld.com. The information on our Web site does not constitute part of this prospectus. -1- The Offering Type of security................................Series B Convertible Preferred Stock(1) Series B Convertible Preferred Stock registered by Company ....................4,800,000 shares Series B Convertible Preferred Stock offered for sale in this offering ........4,800,000 shares Series B Convertible Preferred Stock to be outstanding after this offering (2) ........................4,800,000 shares Use of proceeds.................................We plan to use the proceeds of this offering to expand our sales force, increase our marketing and distribution capacities, expand our domestic and international business operations, pursue acquisitions, increase working capital, and for general corporate purposes. See the section of this document entitled "Use of Proceeds" for a more detailed explanation. This is a best-efforts offering. Our underwriters are not obligated to purchase any shares at any time. While the underwriters have agreed to use their best efforts to sell on our behalf all of the securities offered, there can be no assurance that all of the shares offered will be sold. In addition, the shares may also be sold through our executive officers who will not receive commissions and who will be registered as sales representatives where required under state securities laws. There is no minimum number of shares that must be sold. Funds from this offering will be deposited in an account with American Stock Transfer & Trust Company and will be available to us from time to time as partial closings take place. This offering will begin as of the effective date of this prospectus and continue for 12 months or until such earlier date as we may terminate this offering. (1) The Series B Convertible Preferred Stock is convertible, at the option of the holder into shares of our Common Stock, at any time. Further, the Series B Convertible Preferred Stock shall be converted automatically into shares of Common Stock on the day immediately following the 30th consecutive trading day on which the closing price for our Common Stock is equal to or exceeds the amount of $2.00 per share. Following the Series A-1 and Series A-2 Preferred Stock cumulative dividend, Series B Preferred Stockholders shall be entitled to receive a dividend for 8% of the Series B stated value. In the event of our liquidation, dissolution or winding up, and following the Series A-1 and Series A-2 Preferred Stock Liquidation Preferences, the Series B Preferred Stockholders shall be entitled to receive, ratable with any other series of Preferred Stock based on the respective cost per share of each other series, the amount of $1.00 per share, along with future participation rights. The number of shares of Common Stock that a Series B Stockholder is entitled to receive upon conversion is determined by dividing the Series B Issue Price by the Variable Conversion Price, which shall be an amount equal to 90% of the closing prices on the 5 trading days immediately preceding the conversion date, or $0.75, whichever is greater. (2) Assumes that all shares we are offering will be sold. -2- SUMMARY FINANCIAL INFORMATION The summary financial data for the twelve months ended December 31, 2000 and 1999, and the six months ended June 30, 2001 and 2000, have been derived from the Financial Statements and Notes to Financial Statements. The selected financial data should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this prospectus. Summary Financial Data (in thousands, except per share amounts) Year ended December 31, Six Months Six Months ended ended June 30, June 30, (unaudited) (unaudited) -------- -------- -------- -------- 2000 1999 2001 2000 -------- -------- -------- -------- Net Sales $ 12,443 $ 6,437 $ 2,953 $ 4,180 Cost of Goods Sold 7,860 4,446 2,918 2,658 -------- -------- -------- -------- Gross Profit 4,583 1,991 35 1,522 Operating Expenses 6,727 3,497 3,302 2,554 -------- -------- -------- -------- Operating Loss (2,144) (1,506) (3,267) (1,032) Other Income 269 81 60 77 Interest Expense (21) (267) (30) (5) -------- -------- -------- -------- Loss before provision for (1,896) (1,692) (3,237) (960) taxes Provision for Income taxes 1 1 -- -- -------- -------- -------- -------- Net Loss $ (1,897) $ (1,693) $ (3,237) $ (960) ======== ======== ======== ======== Net Loss attributable to Common shares Net Loss $ (1,897) $ (1,693) $ (3,237) $ (960) Preferred Dividend (2,649) -- (105) -- -------- -------- -------- -------- (4,546) (1,693) (3,342) (960) -------- -------- -------- -------- Net loss per Common share: basic and diluted $ (0.85) $ (0.43) $ (0.54) $ (0.19) ======== ======== ======== ======== -3- December 31 June 30 June 30 Balance Sheet Data: 2000 1999 2001 2000 Working Capital $ 7,054 $ 4,450 $ 3,994 $ 3,854 Total Assets $12,827 $ 7,727 $ 9,475 $ 6,917 Long-term Debt, less $ 126 $ 38 $ 1,623 $ 37 current portion Stockholders' Equity $11,005 $ 6,554 $ 6,195 $ 5,826 -4- RISK FACTORS You should carefully consider the risks described below before making a decision to buy our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business could be harmed. In that case, the trading price of our Common Stock, into which the Series B Convertible Preferred Stock is convertible, could decline, and you might lose all or part of your investment. You should refer to the other information set forth in this prospectus, including our financial statements and the related notes, for more information. Risks Related to Our Business We have a history of losses, and we might not achieve or maintain profitability. Since we began operation in 1994, we have not generated a profit from operations during any fiscal year. To date, we have concentrated primarily on increasing our revenues and expanding our market share through acquisitions rather than on maximizing profits. As a result, although we experienced revenue growth from fiscal year 1999 to fiscal year 2000, we incurred net losses of $1,693,000 and $1,897,000 for the years ended December 31, 1999 and 2000, respectively. Further, we incurred net losses of $3,237,000 for the six months ended June 30, 2001. As a consequence, we can give no assurance that we will be able to operate profitably in the future. Because we will ultimately need to operate profitably or sell our operations, our failure to generate profits from operations could harm our ability to continue operations in the long term. Our continuation as a going concern is directly dependent upon our ability to increase sales and receive additional financing. Our continuation as a going concern is directly dependent upon our ability to market our products and increase our sales and to realize additional funds from our current financing. If additional funding is not realized or if we are unable to commercially market our products, we could experience a further need for cash during the remainder of fiscal 2001. In that event, we could experience further losses and may be forced to curtail operations or postpone product development and acquisition plans. Sales of our products for the period ended June 30, 2001 are significantly decreased as compared to the period ended June 30, 2000, which led to a decrease in employees and management concerns about future operation. Accordingly, if we continue to exhibit slow sales, it may be difficult for us to remain a going concern. In light of the possibility that sales of our products could decrease further, we intend to focus our resources on increasing our sales and marketing efforts. We will require substantial additional capital in the short term to remain a going concern. We will require substantial short-term outside investment on a continuing basis to finance our current operations and capital expenditures. Our revenues for the foreseeable -5- future may not be sufficient to attain profitability. In the seven years since we began operations, we have not generated enough revenue to exceed our expenditures. We expect to continue to experience losses from operations while we develop new products and expand into new markets. In view of this fact, our ability to meet our future financing requirements, and the success of our future operations, cannot be determined at this time. If we do not obtain short-term financing, we may not be able to continue as a viable concern. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock. We may not be able to obtain additional capital to fund our operations when needed. Since our inception, we have financed our operations primarily through private and public offerings of our equity securities. Our planned expenditures are based primarily on our internal estimates of our future sales and ability to raise additional financing. If revenues or additional financing do not meet our expectations in any given period of time, the adverse impact on our finances will be magnified by our inability to adjust spending quickly enough to compensate for revenue or financing shortfalls. Failure to achieve profitable operations may require us to seek additional financing when none is available or on extremely unfavorable terms. A substantial portion of our growth in the past three years has come through acquisitions and we may not be able to identify, complete and integrate future acquisitions, which could adversely affect our future growth. Our growth strategy is based in part upon acquiring other businesses with strategic value to us. It is possible that we may not be able to identify suitable acquisition candidates, obtain financing for future acquisitions or complete future acquisitions. In addition, if any future acquisitions are completed, we may not be able to integrate the acquired businesses or operate them profitably. Additionally, the diversion of management attention, as well as any other difficulties which may be encountered in the continuing integration processes, could have an adverse impact on our financial condition, profitability and cash flows. We face intense competition which could cause us to lose market share. Some of our competitors are large manufacturers, including Honda, Suzuki, Sanyo and Yamaha, who have significant financial resources, established market positions, longstanding relationships with customers, and significantly greater name recognition, technical, marketing, sales, manufacturing, distribution and other resources than we do. These factors may make it difficult for us to compete with these businesses in the production and sale of our products. Many smaller manufacturers sell electric bicycles to key segments of our market in the United States, Europe and Asia. We also compete against the makers of electric scooters as well as non-motorized scooters and bicycles. Although we believe we have a competitive advantage from our name recognition in the electric vehicle industry and ownership of fundamental technology, the market for the sale of these products is subject to rapid change and ease of entry by new competitors. We cannot be certain that we will be able to meet changes in the marketplace and remain competitive. -6- Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity. The electric vehicle industry is in its infancy and has experienced substantial growth and change in the last few years. To date, demand for and interest in electric vehicles has been sporadic. As a result, growth in the electric vehicle industry depends on many factors, including: o continued development of product technology; o the environmental consciousness of customers; o the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines; o widespread electricity shortages and the resultant increase in electricity prices, especially in our primary market, California, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline; and o future regulation and legislation requiring increased use of nonpolluting vehicles. We cannot assure you that growth in the electric vehicle industry will continue; our business may suffer if growth in the electric vehicle industry ceases or if we are unable to maintain the pace of industry demands. In the last several years, there has been increased demand for our electric vehicles and products. One of our principal challenges is to continue to develop and market products which keep pace with the rapid changes in the market. If we are unable to introduce new products and increase our current market share, we will likely be unable to continue to as a going concern. We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position. Our current products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology. However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or create necessary technology. As a result, our potential inability to adapt and develop the necessary technology may harm our competitive position. We will need to increase our research and development spending, which will substantially increase our costs and could adversely affect our cash flow. To keep pace with technological changes and developments in the market for electric vehicles, we have substantially increased spending on research and development. Our research and development costs in 2000 were $699,000, as compared to $365,000 in 1999, a 92% increase. Because we plan to develop new electric vehicle products and tooling that will -7- broaden our product line in 2001, we expect to incur increased research and development costs in 2001. If we are unable to raise sufficient funds in the future to meet our research and development costs, we could suffer a materially adverse effect on our business, results of operations and financial condition. In addition, in order to capitalize on our significant investment in research and development, we must be able to successfully bring developed products to market and such products must be accepted in the marketplace. The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business. We rely on a small group of suppliers to provide us with components for our products, some of whom are located outside of the United States. If these suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from our suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products. A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion. Product liability or other claims could have a material adverse effect on our business. As producers of products sold to the general public, we face the risk of product liability claims and unfavorable publicity if the use of our products causes injury or has other adverse effects. Although we have product liability insurance for risks of up to $6,000,000, that insurance may be inadequate to cover all potential product claims. In addition, we may not be able to maintain this insurance indefinitely or be able to avoid product liability exposure. The implementation of a product distribution network presents many risks. One of our primary goals in effectuating this offering is to increase the capacity of our product distribution network. Unfortunately, dealers are often hesitant to provide their own financing to contribute to this network. As a result, we have had to, and we anticipate that we will continue to have to, provide financing for dealers who would like to participate as our regional distribution centers. Consistent with this reality, we are considering a plan to establish ZAP Financial Services(TM), a finance center for our dealers and retail customers. The further expansion of our product distribution network will require a significant capital investment and will require extensive amounts of time from our management. A capital investment such as this presents many risks, foremost among them being that we may not realize a significant return on our investment if the network is not profitable. Our inability to collect receivables from our dealers could cause us to suffer losses. Lastly, the amount of time that our management will need to devote to this project may divert them from performing other functions necessary to assure the success of our plans. -8- Failure to manage our growth effectively could adversely affect our business. We plan to increase sales and expand our operations substantially during the next several years through internally generated growth and the acquisition of businesses and products. To manage our growth, we believe we must continue to implement and improve our operational, manufacturing, and research and development departments. We may not have adequately evaluated the costs and risks associated with this expansion, and our systems, procedures, and controls may not be adequate to support our operations. In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a profitable basis. The success of our future operating activities will also depend upon our ability to expand our support system to meet the demands of our growing business. Any failure by our management to effectively anticipate, implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations. We cannot assure you that we will be able to successfully operate acquired businesses, become profitable in the future or effectively manage any other change. An inability to successfully operate recently acquired businesses and manage existing business would harm our operations. The loss of certain key personnel could significantly harm our business. Our Chief Executive Officer, Gary Starr, has temporarily taken a leave of absence. While he maintains contact with us, and actively continues his duties as a member of the board of directors, he is not presently in charge of our day-to-day activities. Harry R. Kraatz, a member of the board of directors and a specialist in advising and consulting businesses in turnaround situations, has taken charge over our day-to-day activities in Mr. Starr's absence. Accordingly, our business is especially dependent on the services of Mr. Starr and Mr. Kraatz, as well as our other executive officers and key employees. Our ability to retain and motivate other officers and key employees in Mr. Starr's absence is a key factor in our goal to increase sales and decrease expenses. Notwithstanding this fact, a prolonged absence by Mr. Starr could have a detrimental effect on our business because competition for qualified personnel with the requisite knowledge of and experience in the electric vehicle industry is intense. Accordingly, the permanent loss of the services of any of our officers or key employees, or our inability to retain a sufficient number of qualified employees, could significantly harm our business. Changes in the law may have a negative impact upon our business. While our products are subject to substantial regulation under federal, state and local laws, we believe that our products are materially in compliance with all laws governing their manufacture, sale and use. However, to the extent the laws change, or if we introduce new products in the future, some or all of our products may not comply with applicable federal, state or local laws. Further, certain federal, state and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state and local regulation in the future. Compliance with this regulation could be burdensome, time consuming, and expensive. -9- International expansion may cause problems for us. We intend to shift our manufacturing overseas. Assuming we accomplish this shift, we may encounter many of the risks associated with international business. These risks include, but are not limited to, language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing agreements, and greater exposure of our intellectual property to markets where a high probability of unlawful appropriation may occur. A failure to successfully mitigate any of these potential risks could damage our business. We may not be able to protect our internet address. We currently hold the internet address http://www.zapworld.com, a portal through which we sell our products. We may not be able to prevent third parties from acquiring internet addresses that are confusingly similar to our address, which could adversely affect our business. Governmental agencies and their designees generally regulate the acquisition and maintenance of internet addresses. However, the regulation of internet addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business. Our success is heavily dependent on protecting our intellectual property rights. We rely on a combination of patent, copyright, trademark and trade secret protections to protect our proprietary technology. Our success will, in part, depend on our ability to obtain trademarks and patents. We hold several patents registered with the United States Patent and Trademark Office. These registrations include both design patents and utility patents. In addition, we have recently submitted provisional patents which may or may not be afforded the limited protection associated with provisional patents. We have also registered numerous trademarks with the United States Patent and Trademark Office, and have several pending at this time. We cannot assure you that the trademarks and patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted under those registrations will provide competitive advantages to us. For example, at the present time one of our patents covering various aspects of our electric bicycle is being reexamined by the United States Patent and Trademark Office to determine if one or more of its claims are invalid. If that proceeding results in an adverse ruling, the patent will be declared invalid. If this occurs, it could severely and adversely affect our ability to prevent competitors from copying and using key elements of our technology in developing and marketing their own electric bicycles. Additionally, we recently settled a dispute with a company that was selling an electric scooter in the United States which infringed one or more of our patents, trademarks, and/or copyrights. We also rely on trade secrets and new technologies to maintain our competitive position. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. -10- We may be exposed to liability for infringing intellectual property rights of other companies. Our success will, in part, depend on our ability to operate without infringing the proprietary rights of others. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party. Risks Related to this Offering The market price for our Common Stock is below the offering price for this Series B Convertible Preferred Stock, which could render us unable to sell shares in this offering. We are offering to sell shares of Series B Convertible Preferred Stock at the price on the cover page of this prospectus, whereas the market price for our Common Stock, which is the underlying stock into which the Series B Preferred Stock is convertible on a share-for-share basis, is currently lower than the stated offering price of our Common Stock. Moreover, our Common Stock has experienced considerable volatility in price, and if the market price continues to be below the offering price, prospective investors may choose to purchase shares of our Common Stock on the open market rather than shares of Series B Convertible Preferred Stock from this offering. If this happens, the amount of financing we receive from this offering could be significantly reduced, and we may be unable to raise any funds from this offering. The price of our Series B Convertible Preferred Stock is likely to be volatile and subject to wide price fluctuations. Historically, the market price of our Common Stock has been, and will likely continue to be, subject to wide price fluctuations. Because the Series B Preferred Stock is convertible into shares of our Common Stock, the underlying value of your Series B Preferred Stock is similarly volatile and subject to wide price fluctuations. If our revenue does not grow or grows more slowly than we anticipate, or if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, or some other event adversely affects us, the market price underlying your Series B Convertible Preferred Stock could decline. In addition, if the stock market in general experiences a loss in investor confidence or otherwise fails, the market price of our Common Stock could fall for reasons unrelated to our business, results of operations and financial condition. Consequently, investors might be unable to resell their shares at or above the offering price. In the past, companies that have experienced volatility in the market price of their stock have been the subjects of securities class-action litigation. If we were to become the subject of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. -11- This is a best-efforts offering, and we may not raise enough capital from the sale of our Series B Convertible Preferred Stock to adequately fund our planned method of growth and expansion. The underwriters, Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. are not obligated to purchase any number or dollar amount of shares at any time. While the underwriters have separately agreed to use their best efforts to sell on our behalf all of the Series B Convertible Preferred Stock offered, there can be no assurance that all of the shares offered will be sold. Our inability to obtain adequate financing may impede our growth and thus negatively affect the return on your investment in our securities. Sales of a substantial amount of our capital stock after this offering could cause our stock price to fall. Sales of a substantial number of shares of our capital stock in this offering and thereafter could cause our stock price to fall, which could impair our ability to raise capital through the sale of additional stock. We may not have enough authorized shares of common stock. If our shareholders do not approve an amendment to the articles of incorporation increasing the number of authorized shares of common stock, we may not be able to fully subscribe this offering. We currently have 18,788,596 fully diluted shares of common stock outstanding, including the conversion of warrants, options, and preferred stock. We are offering 6,400,000 shares of fully diluted common stock pursuant to this offering. If our shareholders do not approve an amendment to the articles of incorporation increasing the number of authorized shares of common stock, we may be limited to selling only 910,830 shares of Series B Convertible Preferred Stock pursuant to this offering. We have not yet scheduled a shareholder meeting in order to amend the articles of incorporation; however, we plan to do so in the near future. Due to the current price of our Common Stock, we may be delisted from the NASDAQ SmallCap Market. Our stock may be delisted by the NASDAQ SmallCap Market if the price of our stock remains under $1.00 per share for a successive ninety-day period. To date, the price of our common stock has been under $1.00 for twenty-four consecutive days. If we are delisted, it could have a materially adverse effect on the market for and the price of our stock. Holders of the Series A-1 and Series A-2 Convertible Preferred Stock enjoy liquidation rights that are senior to the liquidation rights of investors in this offering. Holders of the Series A-1 and Series A-2 Convertible Preferred Stock enjoy liquidation rights that are senior to the liquidation rights of investors in this offering. These investors have a right to receive an amount equal to the stated value of their shares ($1,000), plus any accrued and unpaid dividends that they are entitled to receive, out of any assets liquidated in the event of our dissolution. Nonetheless, holders of Series B Convertible Preferred Stock will -12- enjoy dividend and liquidation rights senior to holders of Common Stock, and on a pari passu basis with respect to future holders of any new series of Preferred Stock. You will experience substantial dilution when the holders of the Series A-1 and Series A-2 Convertible Preferred Stock convert their shares into Common Stock. You will suffer substantial dilution upon the conversion of shares of Series A-1 and Series A-2 Preferred Stock. 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) following the first anniversary date and before the second anniversary date, the amount of 80% of the average of the three lowest closing prices over the 22 days prior to conversion, and (2) thereafter and before the day prior to the third anniversary date, the amount of 70% of the average of the three lowest closing prices over the 45 trading days prior to conversion. All shares of Series A-1 and Series A-2 Preferred Stock are subject to automatic conversion into Common Stock three years from the date of purchase. At the current variable conversion price, holders of Series A-1 and Series A-2 Preferred Stock could convert their shares into 6,380,504 shares of Common Stock. There is no minimum conversion price at which the Series A-1 and Series Preferred Shareholders may convert. As of September 19, 2001, there were 861 shares of Series A-1 Preferred Stock outstanding and 1,670 shares of Series A-2 Preferred Stock outstanding. At the current variable conversion price, holders of Series A-1 and Series A-2 Preferred Stock could convert their shares into 6,380,504 shares of Common Stock. Because there is no minimum conversion price, if the current market price of our Common Stock decreases, the variable conversion price will also decrease, thereby increasing the number of shares of Common Stock into which the Series A-1 and Series A-2 Preferred Stock will convert. FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or our future performance. You are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date of this prospectus. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect," "plan," or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating these statements, prospective investors should carefully review various risks and uncertainties identified in the Risk Factors section beginning on page 5 of this prospectus, as well as the matters set forth in our annual report on Form 10-KSB for the year ended December 31, 2000, our quarterly report on Form 10-QSB for the six months ended June 30, 2001, and our other SEC filings. These risks and uncertainties could cause our actual results to differ materially from those indicated in the forward-looking statements. We are under no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments. -13- USE OF PROCEEDS If the entire offering is sold, the net proceeds from the sale of the securities we are offering, after deducting possible expenses and underwriting fees, are estimated to be approximately $4,220,000. We are estimating that the entire offering will be sold using two underwriters at a combined cost of 10.00% for their fees, or $480,000, plus $100,000 of other expenses. The net proceeds have been calculated using an aggregated maximum offering price of $4,800,000 and then deducting $580,000 in expenses. There is no guarantee that we will receive any proceeds from this offering. The following table presents how we intend to use the proceeds of 100% of the offering, minus expenses and underwriting fees. If we do not raise the maximum amount of financing in this offering we plan to use the proceeds of this offering according to the percentages listed below. Moreover, if we are unable to amend our Articles of Incorporation to increase the number of authorized shares of Common Stock, we plan to use the proceeds of this offering, up to the sale of 910,830 shares of Series B Preferred Stock, according to the percentages listed below. However, we retain the right, in our sole discretion, to change the manner in which we allocate the proceeds received in this offering. We expect to use the net proceeds over a 12-month period in approximately the following amounts and percentages: -------------------------------------------------------------------------------- Net Proceeds: $ 4,800,000 Percentage -------------------------------------------------------------------------------- Overseas Factory $ 399,560 8.33% Product Distribution $ 800,330 16.67% Product Engineering $ 399,560 8.33% Product Marketing $ 1,120,490 23.34% Acquisitions $ 999,730 20.83% Working Capital $ 500,330 10.42% Expenses: Underwriting Fees $ 480,000 10.00% Legal & Accounting Fees $ 90,000 1.88% Miscellaneous $ 10,000 0.20% -------------------------------------------------------------------------------- Totals: $ 4,800,000 100.00% The above listed use of proceeds represents our best estimate of the allocation of the net proceeds of this offering based upon the current status of our business operations, our current plans and current economic conditions. Future events, including the problems, delays, expenses and complications frequently encountered by emerging companies, as well as changes in regulatory, political and competitive conditions affecting our business and the success or lack thereof of our marketing efforts, may make shifts in the allocation of funds necessary or desirable. The following represent the use of our proceeds: o Overseas Factory: The Taiwanese government is currently providing a 30-60% rebate to purchasers of electric scooters. Last year, approximately 800,000 scooters were sold in Taiwan, and approximately 5,000 of these were electric. However, -14- most of the participants in this industry are small businesses. We are currently contracting with factories in Taiwan for the manufacture of bicycle and scooter parts. We anticipate completing agreements to fully manufacture electric scooters and motorcycles in Taiwan to be able to tap into this market and supply low-cost units for international distribution. We estimate required proceeds for the establishment of a factory of our own in Taiwan to be $399,560. o Product Distribution: One of our primary goals is to expand upon and dominate the Electric Vehicle distribution network. Unfortunately, dealers are often hesitant to provide their own financing to contribute to this network. As a solution, we are contemplating a strategy that would allow us to provide financing for our dealers who would like to participate as regional distribution centers for ZAP(R). We anticipate that we will need $800,330 to implement this strategy. o Product Engineering: Capital improvement, such as new molds, jigs, and assembly systems, will provide efficiency, improve uniformity, and lower costs. New products, such as an electric wheelchair retrofit, and new models of the Zappy(R) electric scooter, as well as other personal electric vehicles, including water scooters, are being developed. We estimate that the proceeds necessary for these capital improvements and new products to be $399,560. o Product Marketing: Our marketing strategy is based on a superior product, consistent quality and the delivery of a unique name and image. However, we also recognize that competition is imminent as the market for Electric Vehicles becomes more mature. Consequently, marketing support, through tradeshows, printed materials, and conventional media support packages, including radio, television, and billboard advertising, needs to be implemented to ensure our success in retaining market leadership, promoting our dealer network, and attempting to guarantee that our ZAP(R)products are the preeminent Electric Vehicle brand name in the industry. Lobbying efforts are also required to continue our forward-progress in establishing governmental incentives for our Electric Vehicle product line. In addition, we plan to develop and air two infomercials highlighting our products. We estimate the necessary proceeds to implement this marketing campaign to be $1,120,490. o Acquisitions: We anticipate that we will be acquiring other companies that either complement our product line, increase the capability and scope of our distribution networks, or provide us product advantages over our competitors. One such possibility concerns our recent negotiations with PowerQwest, Inc., an Atlanta-based company that manufactures and sells electric garden tools. While we have not yet entered into a definitive agreement with PowerQwest, we are hopeful that the acquisition will be effected prior to the close of 2001. We anticipate the requisite proceeds for the PowerQwest deal, as well as any others, to be $999,730. o Working Capital: We will require $500,330 for working capital in order to grow our business through infrastructure and management resources called for by our program for expansion. -15- DIVIDEND POLICY Holders of our Series A-1 and Series A-2 Preferred Stock are entitled to receive 6% cumulative dividends of the stated value of the Series A-1 and Series A-2 Preferred Stock, payable in cash or stock (at our option). Dividends are payable upon June 30 of each year and accrue if not paid. Following payment in full of the Series A-1 Preferred Stock cumulative dividend and the Series A-2 Preferred Stock cumulative dividend, holders of Series B Preferred Stock are entitled to receive a dividend, payable in cash or stock (at our convenience) at a rate of 8% per annum of the stated value of the Series B Preferred Stock. Dividends are payable upon June 30 of each year and accrue if not paid. No dividends or other distributions shall be paid with respect to the Common Stock until the entire amount of the Series A-1, Series A-2, and Series B Dividend Preferences shall have been declared and paid. We do not intend to declare or pay any cash dividends in the foreseeable future on our Common Stock. We presently intend to retain all other future earnings, if any, to fund the development of our business. Cash dividends, if any, that may be paid in the future to holders of Common Stock will be payable when, as and if declared by our Board of Directors, based upon our Board's assessment of our financial condition, our earnings, our need for funds and other factors including any applicable laws. MARKET FOR REGISTRANT'S COMMON STOCK EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock has been listed in the NASDAQ Small Cap stock exchange under the symbol "ZAPP" since May 22, 2000. From March 11, 1998 to May 22, 2000, our Common Stock was listed on the OTC Bulletin Board under the same symbol. Prior to March 11, 1998, there was no public market for our Common Stock. As of September 11, 2001, there were 7,400,080 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 NASDAQ Small Cap Stock exchange for the third quarter of 2000 through September 4, 2001. 2001 2000 1999 High Low High Low High Low ---- --- ---- --- ---- --- (through 9/4/01) First Quarter 3.06 1.12 $10.00 $8.00 $4.37 $3.06 Second Quarter 2.55 0.90 6.00 5.43 8.75 4.25 Third Quarter 1.75 0.51 5.87 5.31 6.88 5.00 Fourth Quarter - - 3.25 2.50 18.25 5.00 -16- MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included later in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the "Risk Factors" section or other parts of this prospectus. Overview We design, assemble, manufacture and distribute electric vehicles, including electric scooters, electric bicycles, electric wheelchairs, and electric water scooters, as well as other personal electric and non-electric transportation vehicles. We also manufacture several types of electric motor kits and install motor systems to bicycles and scooters at our Sebastopol, California facilities. We plan to become a profitable electric transportation company and utilize our technology and products while improving the environment. Our initial objective is to establish ourselves as the dominant manufacturer and market leader of personal electric and other Zero Air Pollution(R) vehicles. To achieve this objective, we plan to: o improve our existing products and develop new products by forming manufacturing alliances with offshore partners to assure low-cost production; o expand our existing distribution system; o strengthen existing marketing efforts; and o form partnerships with or acquire companies that offer services or products we consider crucial to our success in the electric vehicle industry. The achievement of our objectives is highly dependent on many factors, including: o our ability to maintain the quality of and improve our existing products; o our ability to produce attractive new products, either on our own or with companies that we form partnerships with or that we acquire; and o our ability to raise the necessary capital to develop and produce new products, as well as strengthen and expand our distribution network. In order to augment these goals, we have obtained the services of Harry R. Kraatz, a member of our board of directors and a specialist in conducting work-outs for turnaround companies. Mr. Kraatz has taken over our day-to-day operations with the immediate goals of decreasing costs and forging new streams of product distribution. Mr. Kraatz was hired as a result of the temporary leave-of-absence of Mr. Gary Starr, our Chief Executive Officer. While Mr. Starr maintains contact with us, and actively continues his duties as a member of -17- the board of directors, he is not presently in charge of our day-to-day activities. We anticipate that Mr. Starr will return to his full-time duties as Chief Executive Officer in the near future. Distribution We sell our electric vehicles to retail customers, international distributors, law enforcement agencies, electric utility companies, bicycle dealerships, motorsport dealers, auto dealers, sporting goods stores, specialty dealers and foreign distributors. In addition, we sell our electric vehicles through mail order catalogs and to selected customers on various credit terms and on a cash-only delivery basis. We also sell our electric vehicles through the internet. Part of our growth strategy is to increase net sales by increasing distribution channels through our Web site, http://www.zapworld.com, retail organizations, and domestic and overseas wholesale distributors. In addition, we plan to set up ZAP outlet and specialty stores to assist in the retail sales arena. In July 1999, we created two wholly-owned subsidiaries, Zapworld Stores, Inc. and Zapworld Outlets, Inc., to oversee acquired and franchise stores, respectively. As a result, we have opened several distribution stores in California and Montreal that market our products. We are encouraged by their progress and anticipate future growth in these stores, as well as new stores that we intend to open. As these stores progress, we are considering the creation of a traditional distribution network, with small- to medium-sized retail outlets supplied by regional distributors. In order to further this process, we are also evaluating the creation of a distribution system similar to that of an automobile dealership. In addition to this traditional method, we plan to expand the scope of our internet selling and marketing efforts. Mergers and Acquisitions In order to enter new markets, we implemented a plan to increase product diversity via mergers and acquisitions. Other positive effects resulting from this expansion plan include increased sales support, as well as increased technological resources and manpower to aid in new product development. Our merger and acquisition activities are summarized below. On October 6, 2000, we completed our purchase of Electric Motorbike, Inc. We issued 140,000 shares of our Common Stock and $100,000 in cash as the final purchase price. On June 24, 2000, our shareholders approved our acquisition by merger of Aquatic Propulsion Technology, Inc., a Bahaman corporation which sells electric water scooters. We acquired all of Aquatic Propulsion Technology, Inc.'s technology rights, including 5 patents on electric sea scooters, as well as all of Aquatic Propulsion Technology, Inc.'s assets and current operations in exchange for 120,000 shares of our Common Stock, and the assumption of Aquatic Propulsion Technology, Inc.'s liabilities of approximately $500,000. The contractual acquisition was completed as of July 1, 2000, and the merger documents were filed with the California Secretary of State as of August 8, 2000. In order to access new markets, we also acquired two rental/retail operations in 1999: Big Boy Bikes, a bicycle rental business in Key West, Florida, and American Scooter and Rental, a bicycle rental business in San Francisco, California. We created a wholly-owned -18- subsidiary, Zapworld Stores, Inc., to operate these operations. Zapworld Stores, Inc. accounted for 5%, or $316,000, of our total revenues during 1999, with a gross profit margin of 34%, but a net loss after all expenses. The lease for the Key West store expired in February 2000, and at that time all the assets for that store were sold. In October 2000, we ceased operating our store in San Francisco, California. EmPower, Inc., a design and manufacturing business of proprietary electric scooters, was acquired in December 1999 to provide new technologies and broaden product lines. We acquired Electric Vehicle Systems, Inc., an electric vehicle development business, in February 2000. This acquisition brought us into a new product area, the patented Powerski(R). Finally, ZAP of Santa Cruz, a bicycle rental business in Santa Cruz, California, was acquired in March 2000. In 1999 and in the early part of 2000, we held discussions with Global Electric MotorCars, LLC, the largest manufacturer of Neighborhood Electric Vehicles, regarding a potential merger between our company and Global Electric MotorCars, LLC. While both companies have mutually agreed to terminate further merger discussions, we did enter into a distribution agreement with Global Electric MotorCars, LLC, to sell its GEM(TM) Neighborhood Electric Vehicle at select Zapworld locations. In addition, we continue to discuss strategic alliances with other potential manufacturers of Neighborhood Electric Vehicles. In addition to the mergers and acquisitions effected above, we are in negotiations for a possible merger with PowerQwest, Inc., an Atlanta-based company that manufactures and sells electric garden tools. As the negotiations now stand, we have until December 31, 2001 in order to conduct our due diligence and effect the merger. In addition, we intend to offer PowerQwest a bridge loan in the amount of $750,000, which shall only be subject to repayment if the merger is not effected. Under the merger terms, PowerQwest will receive 40% of our capital stock on a diluted basis, in exchange for which we will receive 100% of PowerQwest stock. Our strategy is to continue to develop products with the goal of being the low-cost leader in the industry. Product improvements, new product introductions, and the development of the Zap Electric Vehicle Outlet(R) franchise network continue to fortify our presence in the electric vehicle industry. Partnerships or Strategic Alliances Our growth plan for the future includes strengthening our production facilities and distribution channels through forming partnerships or strategic alliances with businesses, factories or manufacturers in related industries. On August 9, 2000, we entered into an agreement with a manufacturer located in the People's Republic of China to work toward establishing production facilities that would allow full assembly of the Zappy(R) in China. Our initial plan is to sell these Zappy(R) products within China, but we may also transport these Zappy(R) products to the United States or other parts of the world for distribution. -19- On September 1, 2000, we received an order for approximately 15,000 Zappy(R) scooters and bicycle power-systems from Oxygen SpA of Italy. However, in June 2001, due to Oxygen SpA's cash deficiencies, we agreed to the return of approximately 2,000 units of the remaining product. Provided Oxygen SpA can resolve its cash-shortage problems, we would like to have Oxygen SpA serve as our exclusive distributor in Italy and other select European countries. We plan to grow our business by forming exclusive alliances with leading developers of electric vehicle technologies, structuring joint ventures with strong manufacturing partners around the world, creating alliances with governmental and private entities that support the electric vehicle industry, acquiring other electric vehicle companies, setting up various electric vehicle distribution networks through possible franchising and creating additional electric vehicle superstores, otherwise known as Zap Electric Vehicle Outlets(R). We are also considering a plan to establish ZAP Financial Services(TM), a finance company for our dealers and retail customers. At the present time, there are no bankruptcy, receivership or similar proceedings against our company. In addition, we are not presently participating in any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets that is not within the ordinary course of our business. Results of Operations The following table sets forth, as a percentage of net sales, certain items included in our Income Statements for the periods indicated. For further information please see the section of this document entitled "Financial Statements."
Year ended Year ended Six Months ended Six Months ended December 31, 2000 December 31, 1999 June 30, 2001 June 30, 2000 ----------------- ----------------- ------------- ------------- Statements of Operations Data: Net sales......................... 100% 100.0% 100% 100% Cost of Sales..................... (63.2) (69.1) (98.8) (63.6) Gross profit...................... 36.8 30.9 1.2 36.4 Operating expenses................ 54.1 54.3 111.8 61.1 Loss from operations.............. (17.2) (23.4) (110.6) (24.7) Other income (expenses) 2.0 (2.9) 1.0 1.7 Loss before income taxes.......... (15.2) (26.3) (109.6) (23.0) Provision for income taxes........ 0.0 0.0 0.0 0.0 Net Loss.......................... (15.2) (26.3) (109.6) (23.0)
-20- 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%. We 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 133% 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 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 our 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 and marketing expenses in 2000 were $2.2 million. This was an increase of $1 million or 83% from $1.2 million in 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. As a percentage of sales, selling expenses remained consistent at 18% for both 2000 and 1999. 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. As a percentage of sales, the General and Administrative Expenses remained fairly consistent at 30% of sales for 2000 and 1999. The increase in 2000 was due to higher salaries and benefits, greater expenses for consulting and temporary labor, higher depreciation and amortization expenses as a result of acquisitions, increased general and liability insurance premiums which are partially calculated on net sales for the year and finally due to higher rent expense. 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. We also 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 $246,300 decrease from $267,000 in 1999, which is the result of lower outstanding debt in 2000. -21- Liquidity And Capital Resources We 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 $637,000, and the net change in assets and liabilities resulting in a further use of cash of $407,000. Investing activities used cash of $528,000 during the year ended December 31, 2000. Investing activities used cash for the purchase of fixed assets, additional capitalized patent costs, intangibles and the purchase of 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, we received $4.5 million in proceeds from the issuance of $5 million of Series A-1 and Series A-2 Convertible Preferred Stock to a small group of private investors. The Series A-1 and Series A-2 Convertible Preferred Stock may be converted into Common Stock over a three-year period at a specified or variable price, which is contained in the Securities Purchase Agreement with Union Atlantic. See section entitled "Exhibits" for more information. 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 our discretion on June 30 each year or when the Series A-1 and Series A-2 Preferred Stock is converted into Common Stock. The private 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, we had cash of $3.5 million as compared to $3.2 million at December 31, 1999. Our 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. We believe existing cash and cash equivalents will be sufficient to meet our operating requirements for at least the next six months, however we may sell additional equity or debt securities to further enhance our liquidity position. Seasonality Our 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, we are marketing worldwide, which mitigates the impact of U.S. seasonality. -22- Inflation Our raw materials are sourced from stable, cost competitive industries. As such, we do not foresee any material inflationary trends for our raw material sources. However, with the low unemployment rate currently seen in Sonoma County, California, we expect that current wage rates will be driven up due to competitive pressures from other local manufacturing companies. However, with our recent focus on outsourcing our manufacturing requirements to overseas facilities, we anticipate that our reliance on domestic production will decrease. Six Months Ended June 30, 2001, Compared to Six Months Ended June 30, 2000 Net sales for the six months ended June 30, 2001 were $3.0 million compared with $4.2 million in the six months ended June 30, 2000, a decrease of $1.2 million or 29%. The decrease in sales is primarily attributable to decreased demand for our products and a large number of sales returns from customers due to the poor worldwide economy. Gross profit dollars decreased in the first six months of 2001 to $35,000 from $1.5 million in the first half of 2000. As a percentage of sales, gross profit decreased to 1.2% in the first half of 2001 compared with 36% in the first six months of 2000. The decrease in gross margin percentage can be attributed to intense competition in the marketplace where sales were made at low margins in order to move the products. Selling expenses for the six months ended June 30, 2001 were $732,000 as compared to $748,000 for the six months ended June 30, 2000. This was a decrease of $16,000 or 2.1% from 2000 to 2001. The decrease was primarily due to fewer salaries for sales personnel. As a percentage of sales, selling expenses increased from 17% of sales to 25% of sales. General and administrative expenses for the six months ended June 30, 2001 were $2.2 million. This is an increase of $715,000 or 48% from 2000. As a percentage of sales, general and administrative expense increased to 75% from 36% of net sales. Expense increases during the first six months of 2001 as compared to the first six months of 2000 were due to higher salaries and benefits, greater depreciation and amortization due to business acquisitions in the later half of 2000, and higher legal and professional fees due to the necessary enforcement of our patent and copyright rights in the first quarter of 2001. Research and development expenses increased $49,000 or 16% in the first six months of 2001 as compared to the first six months of 2000. As a percentage of net sales, research and development increased to 12% of sales in the first six months of 2001 as compared to 7% of sales in the first six months of 2000. Increased personnel and facilities costs incurred primarily in the first quarter to accommodate new product development and improve existing products led to higher costs in the first six months of 2001. Interest income decreased $17,000 in the first six months of 2001 as compared to the first six months of 2000 due to lower available cash balances. Other expense increased $25,000 from the first six months of 2000 to the first six months of 2001 primarily due to higher interest expense for the period. -23- Liquidity and Capital Resources In the first six months of 2001, net cash used by us for operating activities was $2.2 million. In the first quarter of 2000, we used cash from operations of $766,000. Cash used in the first half of 2001 consisted of the net loss incurred for the period of $3.2 million offset by net non-cash expenses of $445,000 and the net change in operating assets and liabilities provided cash of $582,000. Cash used in operations in the first six months of 2000 consisted of the net loss incurred for the period of $960,000, offset by net non-cash expenses of $196,000, and the net change in operating assets and liabilities resulting in a use of cash of $2,000. Investing activities used cash of $122,000 and $411,000 during the first six months ended June 30, 2001 and 2000, respectively. The uses of cash were for the purchase of fixed assets and patents, and the acquisition of additional technology. Financing activities used cash of $2,000 and provided funds of $192,000 during the first six months ended June 30, 2001 and 2000, respectively. In both years, cash in financing activities resulted from the sales of common stock, $5,000 and $217,000 for the first six months ended June 30, 2001 and 2000, respectively, offset by principal payments on outstanding debt. During 2000, we issued 3,000 shares of Series A-1 Preferred Stock Series and 2,000 shares of Series A-2 Preferred Stock. 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 three lowest closing prices over the 22 trading days prior to conversion, (2) thereafter and before the second anniversary, the amount of 80% of the average of the three lowest closing prices over the 22 days prior to conversion, and (3) thereafter and before the day prior to the third anniversary date, the amount of 70% of the average of the three lowest closing prices over the 45 trading days prior to conversion. As of June 30, 2001, there were 861 shares of Series A-1 Preferred Stock outstanding and 1,670 shares of Series A-2 Preferred Stock outstanding. Dividends are cumulative and accrue at 6% per year and are payable on June 30th of each year or on conversion date. Dividends are payable in cash or in common stock at our option. All shares of Series A-1 and Series A-2 Preferred Stock are subject to automatic conversion into common stock three years from the date of purchase. In March of 2001, the board of directors voted to temporarily discontinue honoring the conversions, as we believed that the conversion price for the Series A-1 Convertible Preferred Stock was intended to be the fixed $4.50 per share (without the alternative variable conversion price). As a result, a dispute arose between the representatives of the Series A-1 Convertible Preferred Stockholders, Ridgewood ZAP LLC, and us, which was settled on June 28, 2001. See "Legal Proceedings" section. On June 30, 2001, we had cash and cash equivalents of $1.2 million as compared to $2.2 million on June 30, 2000. On June 30, 2001, we had working capital of $3.9 million as compared to working capital of $3.8 million on June 30, 2000. The decrease in cash in the first six months of 2001 from the first six months of 2000 are mostly due to the losses incurred by us during the period. We, at present, do not have a credit facility in place with a bank or other financial institution. -24- We may not be able to meet our future cash requirements for the rest of the current fiscal year unless new financing is obtained. If we do not obtain short-term financing, we may not be able to continue as a viable concern. Some options now being pursued by us for financing are additional equity contributions and/or short-term loans with existing and outside investors. Toward this end, we have held discussions with various parties, but no formal agreements have been reached to date. Although we believe that we will be able to obtain financing to meet future cash requirements, there can be no assurances that we will be successful. In addition to the above working capital needs, our other capital needs are to fund our growth strategy, which includes increasing our shopping mall presence, improving and increasing distribution channels, establishing company owned and franchised ZAP stores, introducing new products, improving existing product lines, and developing a strong corporate infrastructure. Seasonality and Quarterly Results Our business is subject to seasonal influences. Sales volumes in the bicycle industry typically slow down during the winter months, November to March, in the U.S. As we are marketing worldwide, we are not fully subject to the dictates of U.S. seasonality. Inflation Our raw materials are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our raw material sources. -25- DESCRIPTION OF BUSINESS We incorporated under the laws of the State of California, on September 23, 1994, as "ZAP Power Systems." On May 16, 1999, we changed our name to "Zapworld.com" in order to increase our visibility in the world of electronic commerce. We subsequently changed our name to ZAP on June 18, 2001 in order to reflect our growth and entry into larger, more traditional markets. We have grown from offering a single product line to providing a full line of electric vehicle products. At our Sebastopol, California facilities, we design, assemble, manufacture and distribute electric vehicles, including electric scooters, electric wheelchairs, electric water scooters, bicycle power kits, electric bicycles and tricycles, electric motorcycles and other personal electric and non-electric transportation vehicles. As noted, we are closing most of our domestic manufacturing operations, as we have obtained lower-cost overseas arrangements. Principal products or services and their markets We look to develop and commercialize electric vehicles and electric vehicle power systems that have underlying practical and environmental advantages over available internal combustion modes of transportation. We further aim to develop electric vehicles and electric vehicle power systems that can be produced on an economically-competitive basis. In addition to broadening our electric vehicle product line, we are now ready to take aim at the electric wheelchair market and at the electric water scooter market, in addition to our expansion into: New Product Development o Lepton(TM) The Lepton is similar to a gas 50cc type scooter (e.g., the "Moped" overseas in Europe and, to lesser extent, in America). With a top speed of approximately 30 miles per hour. We are the domestic distributor for the Italian scooter manufacturer and expect sales primarily in resort and university locales. o E-Bike Chopper(TM) The E-Bike Chopper(TM) is a lower priced Lectra(TM) with a styling similar to the "chopper" style motor bikes. o PowerSki(R) The Powerski(R) is an electric motor device designed to pull an in-line skater, skateboard, or roller skater along the road or pathway. This device was developed by Electric Vehicles Systems, a company we purchased in the first quarter of 2000. -26- o Swimmy(TM) We expect to unveil our new Swimmy(TM) Water Scooter in the near future. This water-borne electric propulsion device is designed to assist or pull swimmers and snorkelers, providing a fun boost up to 2.5 MPH on the surface or underneath water. We already manufacture a Sea Scooter(TM) for scuba divers, but believe there will be a strong demand for a swimming pool version that children and fitness swimmers can use. o Electric Pedi-Cab(TM) We distribute the Electric Pedi-Cab(TM), which can be pedaled like a regular ped-cab and has the ability to travel electrically at speeds up to 15 miles per hour. o Micro-processor drive controllers We are working to develop a series of low cost micro-processor drive controllers for all of our electric vehicles, which we believe will increase efficiency and lower costs. o Zappy-Turbo(TM) We introduced our new Zappy-Turbo(TM) at the Long Beach Action Sports Retail (ASR) Expo in February 2001. The Zappy-Turbo(TM) is a turbo-charged Zappy(R) with a new electric propulsion system that offers an improved acceleration and hill climbing and has a high performance mode that allows the scooter to reach speeds of 19.5 miles per hour. o ZapAdapt(TM) We developed the ZapAdapt(TM), which is an electric assist for wheelchairs. The motor device attaches to manual wheelchairs, providing an affordable, convenient means of power-assist without buying a fully powered wheelchair. o Powerbike(R) The Powerbike(R) is primarily a mountain bike, with a new and improved electric motor attached, designed to appeal to the low cost mass merchant. Our Principal Products o Electric Scooters The Zappy(R) is a stand-up, portable, lightweight scooter featuring a 12-volt battery with a built-in charger and a collapsible frame. -27- Its patented design includes a unique folding mechanism and proprietary circuitry which increases the efficiency and range of the vehicle. Zappy Mobility(TM) is a low-cost electric scooter with a seat designed for the aging baby boomer market. The Zappy(R) accounts for over 70% of our sales. All Zappy(R) scooters are produced at our Sebastopol, California assembly plant. In an attempt to diversify the risk of the production of the Zappy(R), we are working with our foreign partners in Taiwan and China to expand production of the Zappy(R) and other new products. On August 30, 2000, our sourcing engineer moved to Taiwan to assist in establishing a production facility and implementing quality control measures. We presently rely on a single supplier to provide 80% of the materials for the Zappy(R). o Power Assist Retrofit Kits This product enables bicyclists to ride their existing bicycles more often by providing additional power to overcome hills or headwinds. We currently offer a number of different power assist retrofit kits. These kits include dual or single motors, a sealed maintenance-free battery, a one or two-speed controller and an automatic battery charger. The ZPS-2 power system is designed for mountain, road and cruiser type bicycles. The ZPS-T is designed for tricycles. A motor kit may have up to 62 unique parts. The electric motor kit manufacturing, and installation of the motor systems to bicycles and scooters, is done at our Sebastopol, California location. Since 1994, the electric motors used for the electric motor kit, our Zappy(R) scooter and our electric bicycle products have been produced by an original equipment manufacturer ("OEM") in the automobile and air-conditioning industry. We have recently entered into an agreement with a manufacturer in China to manufacture motors that meet the specifications of our products. We own the proprietary rights to the mold for the motors that will be produced by this manufacturer. Motors produced by this Chinese manufacturer will come at a reduced price and have improved performance over the motors made by the OEM described above. The Chinese manufacturer will serve as a primary source of our motors, and the OEM will continue to serve as a proven secondary source for our motors. We have a contractual relationship with a provider of law enforcement bicycles pursuant to which we agreed to purchase at least 200 bicycles in exchange for specific exclusive distribution -28- and pricing rights. The law enforcement bicycle producer has agreed to purchase at least 100 of our power kits in exchange for specific exclusive distribution and pricing rights. o Bicycles Our bicycles incorporate our patented power system technology. The ElectriCruizer(R) is a cruiser style bicycle that has upright comfort style handle bars and six manual gears. The Zap Powerbike(R) is a mountain bike with 18 manual gears. The ZapTrike(TM) is a three-wheeled trike which contains a larger battery and a carry basket. The Zap PatrolBike(TM) is a suspension mountain bike with built-in lights and siren. o Neighborhood Electric Vehicle Recently, the U.S. Department of Transportation classified a new type of car. This vehicle is known as the Neighborhood Electric Vehicle, or NEV. This vehicle must be electric and have a top speed of 25 miles per hour and meet minimum safety standards. We are exploring other manufacturing and distribution arrangements for the Neighborhood Electric Vehicles at this time. o Electric Motorcycle -- Lectra(TM) The Lectra(TM) is believed to be the only production ready electric motorcycle in the world. Zapworld completed the acquisition of the Electric Motorbike, Inc. in October 2000. Under the terms of the agreement, we acquired all assets, technology, engineering capabilities and customer contracts from Electric Motorbike, Inc. Distribution Internet and Dealership Network Our Web site has become known world-wide as the ultimate portal for personal electric vehicles. It has been very effective in drawing new retail, wholesale and international customers. We distribute our products through a network of over 350 distributors, dealers, and specialty stores worldwide. -29- We sell our electric vehicles to retail customers, international distributors, law enforcement agencies, electric utility companies, bicycle dealerships, motorsport dealers, and through franchisees and mail order catalogs. Our sales to mail order catalogs and selected customers are on various credit terms, with many sales to smaller dealerships being on a cash delivery basis only. In July 1999, we created two wholly-owned subsidiaries, Zapworld Stores, Inc. and Zapworld Outlets, Inc., to oversee acquired and franchise stores, respectively. As a result, we have opened several distribution stores in California and Montreal that market our products. We are encouraged by their progress and anticipate future growth in these stores, as well as new stores that we intend to open. As these stores progress, we are considering the creation of a traditional distribution network, with small- to medium-sized retail outlets supplied by regional distributors. In order to further this process, we are also evaluating the creation of a distribution system similar to that of an automobile dealership. In addition to this traditional method, we plan to expand the scope of our internet selling and marketing efforts. In March 2001, we opened a ZAPPYLAND(TM) store in Newport Beach, California. This store is a joint venture between Donner Corporation and ZAP(R). We also intend to open additional franchise outlets in areas that do not have existing stores. To accomplish this, we have received qualification to franchise in California, Florida and Texas, and we plan to seek qualification to franchise in additional states. We are the U.S. distributor of the Lepton(TM) scooter that is imported from Italy. We also have agreements to distribute the Electric Pedi-Cab, the E-Kart, the Golfcycle, and other electric vehicles. We recently signed a distribution contract for exclusive distribution rights in South Korea for the Zappy(R), Zappy, Jr.(TM) and Powerbike(R). The contract is estimated to be worth sales of at least $500,000 for 2001. It also includes a two-year extension option. We have been granted exclusive market rights in selective electric vehicle markets from Evercel, Inc., in exchange for specifying that company's battery in a specific electric vehicle we make. We have no other contractual agreements with any of our other vendors. Environmental Initiatives and Legislation Federal legislation has been enacted to promote the use of alternative fuel vehicles, including electric vehicles. The U.S. Energy Policy Act of 1992 provides that federal, state and public utility fleets must begin to purchase alternative fuel vehicles with major acceleration of these purchases to begin in 2000. Neighborhood Electric Vehicles qualify for this tax credit which is in place through the year 2005. The Department of Energy Clean Cities Organization has pledged to purchase 1 million alternative fuel vehicles by the year 2010. There is also a 10% federal tax credit, to a maximum of $4,000, available to purchasers of qualified electric vehicles. Several states have also adopted legislation that sets mandates for the introduction of electric vehicles. In 2003, the State of California will require that 4% of the cars offered for sale be electric. However, there is strong interest group opposition to this mandate. To -30- combat this interest group opposition, many states currently offer tax credits for electric vehicles. The State of Arizona gives a state tax credit of up to $5,000 for electric vehicles that meet Federal Motor Vehicle Safety Standards. Neighborhood Electric Vehicles are one of the few Low Speed Vehicles that currently meet these standards. New York, Connecticut and other states in the northeastern United States have similar directives. In addition, a $3,000 state electric vehicle tax credit bill has recently been passed in California. In support of these laws, utility companies have set up over 500 free public charging stations in the state of California. High-profile retailers such as WalMart, Denny's, Costco, and Raley's have agreed to participate in the program to promote the use of electric vehicles. Other incentives such as free charging and parking in the State of Hawaii are now in place. Honda and Toyota have begun to offer hybrid electric vehicles through specific auto dealers in select markets. Our Management believes that these expensive high-profile electric vehicles will assist the market for low-cost electric vehicles. Foreign governments have also taken measures to promote the use of electric vehicles. The People's Republic of China, where we presently manufacture the Zappy(R) and the Kick(TM), gives buyers of electric scooters a rebate equivalent to 30-60% of the cost. Taiwan is considering the implementation of a Zero Emission Vehicle scooter mandate. Japan, Thailand, and Costa Rica have agreed to provide low duties on any electric vehicle sub-components. China has recently banned the licensing of new gas powered bicycles in the cities of Shanghai and Beijing. France has agreed to provide rebates of the additional cost of electric vehicles over conventional vehicles and is providing free parking to electric vehicles in Paris. Austria is providing a $150 rebate towards the purchase of electric bicycles. As we commercialize new transportation technology, we have been required to expend resources in educating legislators of the benefits of these vehicles. On January 1, 2000, a law we sponsored that creates guidelines for the legalized use of light electric scooters, such as our Zappy(R), went into effect in the State of California. Although many government agencies are concerned about rising global air pollution, we expect that we will need to continue to expend considerable resources in the governmental process, and there cannot be assurance that the current favorable governmental climate for these zero emission vehicles will remain in the future. Research and Product Development The nature of our business has required and will continue to require expenditures for research and product development. The development and introduction of new products are essential to establishing and maintaining a competitive advantage. Research and development expense charged to our operations in fiscal years 2000 and 1999 was $699,000 and $365,000 respectively, and $360,000 for the six months ended June 30, 2001. -31- Sources and Availability of Raw Material Materials, parts, supplies and services used in our business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on our manufacturing operations. Licenses, Patents and Trademarks We have a number of patents and trademarks covering our electric vehicles. We were issued our first United States Patent on February 13, 1996, on our electric motor power system for bicycles, tricycles, and scooters (Pat. No. 5,491,390). On September 30,1997, we were issued our second United States Patent on our electric motor system (Pat. No. 5,671,821). On December 15, 1998, we were issued a utility patent for our ZAPPY(R) scooter (Pat. No. 5,848,660). On November 14, 2000, we were issued a design patent on our Zappy(R)scooter (Des. No. 433,718). We also hold several trademarks: the trademark Zap(R)was assigned to our company on September 23, 1994 (Reg. No. 1,794,866); the trademark ElectriCruizer(R)was registered with the United States Patent and Trademark Office on April 2, 1999 (Reg. No. 2,248,753); the Zappy(R)mark was registered on March 21, 2000 (Reg. No. 2,330,894); the PowerBike(R)mark was registered on June 1, 1999 (Reg. No. 2,248,753); the trademark Zapworld.com(R) was registered on July 25, 2000 (Reg. No. 2,371,240); the trademark Zap Electric Vehicle Outlet(R)was registered on March 28, 2000 (Reg. No. 2,335,090); and the mark Zero Air Pollution(R)was registered on February 22, 2000 (Reg. No. 2,320,346). We also acquired various pending patent applications and trademark rights from emPower, Inc. when we acquired this company on December 30, 1999. We acquired all of the assets of Electric Vehicles Systems, Inc., including the trademark PowerSki(R)(Reg. No. 2,224,640) and two U.S. Patents, (Patent No. 5,735,361 and Patent No. 5,913,373). This transaction was finalized on February 29, 2000. In addition to the patents and trademarks listed above, we have several applications pending before the United States Patent and Trademark Office. We also have several copyright registrations for various advertisements that we use to promote our products. Backlog We have a $946,000 backlog of orders and purchase contracts in hand for electric vehicles as of September 4, 2001. We expect to fill our entire backlog within the current fiscal year. Competitive Conditions Competition to develop and market electric vehicles has increased during the last year and is expected to continue to increase. The electric bicycle industry has four (4) major manufacturers and a large group of small manufacturers. The major manufacturers are Honda, Suzuki, Sanyo and Yamaha. They primarily sell products to Japan and Europe. The other group of manufacturers is much smaller in size and sales volume. These manufacturers have products they sell in the U.S., European, and Asian markets. There are also manufacturers of other personal electric vehicles. Our principal competitive advantages are our ownership of fundamental technology, our ability to be a low cost manufacturer through domestic and -32- international connections, and our distribution network. We also currently benefit from our high name recognition in the electric vehicle industry coupled with a rapidly developing business on our internet site, http://www.zapworld.com. We offer one of the broadest lines of personal electric vehicles currently available. According to published reports, we believe that we currently hold the leading electric bicycle and scooter market position in the United States. Employees As of September 1, 2001, we had a total of 35 full-time employees. This is a decrease of 65 employees from the beginning of 2001. As we shift manufacturing overseas, we plan to have further decreases in the number of employees. We consider our relationship with our employees to be good. None of our employees are represented by a collective bargaining unit, and we have never had a work stoppage. We believe that our future success will depend in part on our continuing ability to retain and motivate highly qualified personnel, and upon the continued service of our key technical personnel and senior management. Development of Business We have grown from a single product line to a full line of electric vehicle products, and currently develop, manufacture, and market low-speed electric vehicles in over 60 countries. We have established a system to develop low cost electric vehicles to provide alternative modes of transportation as a means of providing relief from the emissions associated with gas powered vehicles and to become a leader in the emerging light electric vehicle industry. Since our founding, management has believed that the primary barrier to widespread use of electric vehicles was their high cost. To offset these high costs, our activity and revenue was initially derived from development contracts with domestic government agencies, such as the California Energy Commission, EPA, EPRI and a foreign private entity. These contracts were set up to develop low cost, Zero Air Pollution(R) (or "ZAP(R)") electric vehicles. We continue to focus our research efforts on making electric vehicles cost effective, while developing an international distribution network for personal vehicle products. We are developing proprietary technologies that are important elements of our brand of personal electric vehicles. Each of these components will be marketed under the ZAP(R) brand name. Our objective is to leverage our proprietary technology and name recognition to serve a number of potential markets in the electric bicycle, electric scooter and other light electric vehicle transportation industries. In addition to new electric vehicles, we are currently focusing our development efforts on a new generation of microprocessor drive controllers. In following our plan to increase sales and expand operations substantially through internally generated growth and the acquisition of businesses and products which we view strategically advantageous, we have acquired or merged with a number of companies during the past three years. In 2000, we acquired ZAP of Santa Cruz, a bicycle rental business in Santa Cruz, California, and Electric Vehicle Systems, Inc., an electric vehicle development business in California. We acquired emPower, Inc., in December 1999. Also, in 2000, we acquired Aquatic Propulsion Technology, Inc., a Bahaman corporation that operated in Florida. From this acquisition, we received technology that allows us to develop water-borne electric propulsion devices. -33- DESCRIPTION OF PROPERTY A summary of our principal facilities are as follows:
Location Use Square Feet Lease Expiration Minimum Monthly Date Rental 117 Morris St. Office & Motor Assembly 6,500 June 2002 $4,400 7190 Keating Production 10,000 June 2004 $5,000 6780 Depot Office, Production, R&D 5,000 June 2004 $2,500 6780-B Depot Engineering 4,200 May 2004 $2,188 6784 Sebastopol Warehouse 9,800 August 2005 $5,880 984 SW 13th Court Office, Distribution 3,100 July 2002 $2,200
All of the above buildings, except the store at 984 SW 13th Court, Pompano Beach, Florida, are located in Sebastopol, California. We lease all of our manufacturing, research, and office facilities. All of the leases are term leases, and none of these leases include options to purchase. Our property consists primarily of manufacturing equipment and office computer systems. It is management's opinion that our insurance policies cover all insurance requirements of the landlords. We own the basic tools, machinery and equipment necessary for the conduct of our production, research and development, and vehicle prototyping activities. Management believes that the above facilities are generally adequate for present operations. We are coordinating with various individuals to franchise several retail stores in California by the beginning of the fourth quarter of 2001. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS MANAGEMENT Name Age Position Gary Starr 45 Director, Chief Executive Officer William R. Hartman 53 Chief Financial Officer William Evers 74 Director Lee S. Sannella, M.D. 85 Director Harry R. Kraatz 51 Director, Interim Chief Executive Officer Andrew Hutchins 40 Vice President Operations 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. William R. Hartman was appointed Chief Financial Officer in March 2001. He has been engaged as our financial consultant since January 2001. He has over 15 years of CFO or Controller experience in various industries. While in a previous position as Division Controller for Sega of America he obtained extensive experience in the consumer products -34- manufacturing and distribution business. Prior to his engagement at ZAP, Mr. Hartman had been providing financial and accounting consulting services to various Internet start-ups in the San Francisco Bay area. Mr. Hartman is a Certified Public Accountant in the State of California with a Masters in Accounting Degree from the State University of New York. He also had previous public accounting experience as an audit manager with Price Waterhouse Coopers in San Francisco. 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. 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 January 1986, Mr. Kraatz has been the sole officer and director of The Embarcadero Group II, a company that specializes in franchise management, financial consulting, and workout consulting, located in San Francisco, California. Through The Embarcadero Group II, Mr. Kraatz has provided consulting services to numerous finance and franchising companies including Montgomery Medical Ventures, Commonwealth Associates, Westminster Capital and World Wide Wireless Communications, Inc. In addition to serving as a director for our company, and managing The Embarcadero Group II, Mr. Kraatz has: served as chief executive officer for Finet Holdings Corporation (NASD: FNET); he was retained by Montgomery Securities to restructure William & Clarissa, Inc. (NASD: WMCL), where he was responsible for the liquidation of $8 million in inventory and management of the out-of-court reorganization; he served as vice-chairman of the board, chief executive officer, and president of ACA JOE International (NASD: ACAJ), where he was appointed by that company's secured lenders to reorganize pursuant to Chapter 11, including the sale of 115 franchises in 33 states; he served as vice-chairman of the board of Commercial Bank of San Francisco (NASD: CBSF), where he managed the litigation and merger and acquisition teams; and he served as director and president of Swensen's Ice Cream Company (NASD: SWEN), where he was responsible for the sale of 353 franchises in 44 states in 14 countries. Mr. Kraatz received his 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 -35- Business Economics and Communication Studies from the University of California at Santa Barbara. 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. 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 and 1999 39,500 200 135,000 President 2000 59,600 700
Compensation of Directors Our directors do not currently receive any cash compensation for service on our board of directors. However, our directors may be reimbursed for expenses they incur by attending board meetings. In June 2000, Harry Kraatz was granted an option to purchase 100,000 shares of common stock at an exercise price of $5.25 per share. The shares underlying this option vest over a five-year period. Moreover, Mr. Kraatz is being compensated for his services under the terms of his Consulting Agreement. This compensation does not depend on, nor is it derived from, his role as one of our directors. 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 -36- will have an interest, other than as described under "Management," "Interest of Named Experts and Counsel" and the transactions described below. William D. Evers, is a member of our Board of Directors and our principal outside counsel. During 2000, Mr. Evers' law firm received $261,000 in compensation for legal services provided to us. Additionally, Mr. Evers was granted stock options to acquire 75,000 shares with an exercise price ranging from $3.02 to $6.50 per share. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table presents information with respect to beneficial ownership of our Common Stock as of September 19, 2001, and as adjusted to reflect the sale of the shares offered by this prospectus 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 ZAP, 117 Morris Street, Sebastopol, California 95472. The table includes all shares of Common Stock issuable within 60 days of September 19, 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 18,788,596 shares of Common Stock outstanding on a fully diluted basis as of September 19, 2001. The number of shares of Common Stock outstanding on a fully diluted basis includes 7,400,080 shares of Common Stock outstanding, 1,678,012 shares of Common Stock issuable upon the exercise of certain warrants and options granted to non-employees, 688,400 shares of Common Stock issuable upon the exercise of certain options granted to employees, 2,161,600 shares reserved under our 1995, 1996, and 1999 stock option plans, 480,000 shares of Common Stock issuable upon the exercise of certain warrants issuable to the underwriters and as much as 6,380,504 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 at the current variable conversion price.(1) Assuming that all presently outstanding shares of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock are converted into Common Stock as of September 19, 2001, based upon the average variable conversion price over the week prior to such date of $0.38 for the Series A-1 Preferred Stock and $0.40 for the Series A-2 Preferred -37- Stock, the total number of shares issuable upon conversion of those shares would be 6,380,504. (1) The holders of Series A-1 and Series A-2 Preferred Stock may convert their shares at their option subject to a formulaic Conversion Price set forth in the Certificate of Determination of Rights and Preferences of Series A-1 and Series A-2 Preferred stockholders. Such formula divides each Series A-1 and Series A-2 Preferred Stockholder's Stated Value, which is $1,000 per share, by the formula conversion price, which is determined from time to time according to the time at which the Series A-1 and Series A-2 Preferred Stockholder converts. In addition, all Series A-1 and Series A-2 Preferred Stockholders are subject to automatic conversion three years from the date of purchasing the Series A-1 and Series A-2 Preferred Stock. The number of shares of Common Stock that Series A-1 and Series A-2 Preferred Stockholders receive upon automatic conversion results from the division of the stated value of $1,000 by the formula conversion price.
Shares Beneficially Owned Prior to Shares Beneficially Owned After Offering Offering Name of Beneficial Owner Number Percent Number Percent The Endeavour Capital Fund, S.A. 4,880,672 26.0 4,880,672 20.6 P.O.B. 57116 Jerusalem 91570 Israel (1) Ridgewood ZAP, LLC (2) 625,239 3.3 625,239 2.6 Lee Sanella (3) 71,952 * 71,952 * William D. Evers (4) 77,029 * 77,029 * Gary Starr(5) 520,117 2.7 520,117 2.2 Harry Kraatz (6) 255,000 1.3 255,000 1.0 All Executive Officers and directors as a 924,098 4.9 924,098 3.9 group (4 persons) * Represents beneficial ownership of less than 1%. (1) Includes 4,880,672 shares of Common Stock issuable upon the conversion of 1,861 shares of Series A-1 and Series A-2 Preferred Stock as of September 19, 2001. (2) These shares are held by Ridgewood ZAP, LLC and include 100,000 shares of Common Stock issued upon the exercise of warrants by Ridgewood ZAP, LLC. Subject to the terms of the Settlement Agreement between ZAP, Ridgewood ZAP, LLC and the Series A-1 and Series A-2 Preferred Stockholders, as further discussed in the "Legal Proceedings" section, ZAP re-purchased 625,118 shares of stock held by Ridgewood ZAP, LLC under a promissory note, and the Series A-1 and Series A-2 shareholders will purchase the remainder over a period to begin October 1, 2001, until such time as Ridgewood ZAP, LLC no longer retains an equity interest in ZAP. (3) Mr. Sanella is one of our directors. (4) Includes 75,000 shares of Common Stock issuable upon the exercise of options exercisable as to 25,000 shares within 60 days of May 17, 2001, and as to 50,000 shares, exercisable until April 2, 2002. Mr. Evers is one of our directors. (5) Includes 135,000 shares of Common Stock issuable upon the exercise of incentive stock options exercisable within 60 days of May 17, 2001. Mr. Starr is our CEO and a director. (6) Includes 210,000 shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of May 17, 2001. Mr. Kraatz is one of our directors.
-38- DESCRIPTION OF SECURITIES General Our Amended Articles of Incorporation authorize the issuance of up to 20,000,000 shares of Common Stock, and up to 10,000,000 shares of Preferred Stock, the rights and preferences of which may be established from time to time by our board of directors. As of September 11, 2001, 7,400,080 shares of our Common Stock, 861 shares of our Series A-1 Preferred Stock and 1,670 shares of our Series A-2 Preferred Stock were outstanding. There are currently no outstanding shares of Series B Convertible Preferred Stock. As of September 11, 2001, we have of record 1,911 holders of our Common Stock and 4 holders of Series A-1 and Series A-2 Preferred Stock. Common Stock Each holder of Common Stock is entitled to one vote for each share on all matters to be voted upon by the stockholders and there are no cumulative voting rights. Subject to preferences to which holders of Preferred Stock may be entitled, holders of Common Stock will be entitled to receive ratably any dividends that may be declared from time to time by our Board of Directors out of funds legally available for that purpose. In the event of our liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in our assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of our Common Stock are fully paid and nonassessable. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock. Preferred Stock Our Board of Directors has the authority, subject to any limitations prescribed by law, without stockholder approval, from time to time to issue up to an aggregate of 10,000,000 shares of Preferred Stock, in one or more series, each series to have rights and preferences, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as may be determined by our Board of Directors. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. Series A-1 and Series A-2 Convertible Preferred Stock As of the date of this prospectus, we have authorized and designated 3,330 shares of Series A-1 Convertible Preferred Stock and 2,220 shares of Series A-2 Convertible Preferred Stock. As of September 11, 2001, there were 861 shares of Series A-1 Convertible Preferred Stock outstanding and 1,670 shares of Series A-2 Convertible Preferred Stock outstanding. -39- The Series A-1 and Series A-2 Convertible Preferred Shares have a par value of $1,000 per share and a stated value of $1,000 per share. Rights, Privileges, and Preferences Holders of the Series A-1 and A-2 Convertible Preferred Stock are entitled to receive a dividend, payable in cash or stock (at our convenience) at a rate of 6% per annum of the stated value of the Preferred Stock. Dividends are payable upon June 30 of each year and accrue if not paid. The liquidation preference on the Series A-1 and Series A-2 Preferred Stock is equal to the stated value per share. This payment shall be prior to any payment we make to the holders of our Series B Convertible Preferred Stock and the holders of our Common Stock, or any other shares of stock which are junior to the Series A-1 and A-2 Preferred Stock. Each holder of Series A-1 and Series A-2 Convertible Preferred Stock may convert that holder's shares into common stock at any time. The number of shares of common stock that each holder of Series A-1 or Series A-2 Convertible Preferred Stock is entitled to receive is determined by dividing the stated value of the Series A-1 and A-2 Convertible Preferred Stock, which is presently $1,000 by the conversion price for those shares. The conversion price for the Series A-1 Convertible Preferred Stock is the lesser of $4.50 per share or the variable conversion price for those shares. The conversion price for the Series A-2 Convertible Preferred Stock is the lesser of $5.50 per share or the variable conversion price for those shares. The variable conversion price means an amount equal to the following: o if shares of Series A-1 or Series A-2 Convertible Preferred Stock are converted within one year of the sale of those shares, 85% of the average of the three lowest closing bid prices over the 22 trading days prior to the day the shares are converted; o if shares of Series A-1 or Series A-2 Convertible Preferred Stock are converted between one and two years after those shares were sold, 80% of the average of the three lowest closing bid prices over the 22 trading days prior to the day the shares are converted; and o if Series A-1 or Series A-2 Convertible Preferred Stock are converted between two and three years after they were initially issued, 70% of the average of the three lowest closing bid prices over the 45 days prior to the day the shares are converted. If any shares of Series A-1 or Series A-2 Convertible Preferred Stock have not been converted prior to the third year anniversary of the sale of those shares, then those shares shall be automatically converted into common stock on that date. Assuming that all presently outstanding shares of Series A-1 Convertible Preferred Stock and Series A-2 Convertible Preferred Stock are converted into Common Stock as of September 19, 2001, based upon the average variable conversion price over the week prior to such date of $0.38 for the Series A-1 Preferred Stock and $0.40 for the Series A-2 Preferred Stock, the total number of shares issuable upon conversion of those shares would be 6,380,504. -40- Series B Convertible Preferred Stock We have authorized and designated 4,800,000 shares of Series B Convertible Preferred Stock for the purpose of selling those shares pursuant to this offering. Other than the Series A-1 and Series A-2 Convertible Preferred Stock, no other series of Preferred Stock has been designated. As of the date of this prospectus, there are no shares of Series B Convertible Preferred Stock outstanding. The Series B Convertible Preferred Shares have a par value of $1.00 per share and a stated value of $1.00 per share. Rights, Privileges, and Preferences Following payment in full of the Series A-1 Preferred Stock cumulative dividend and the Series A-2 Preferred Stock cumulative dividend, holders of the Series B Preferred Stock are entitled to receive a dividend, payable in cash or stock (at our convenience) at a rate of 8% per annum of the stated value of the Series B Preferred Stock. Dividends are payable upon June 30 of each year (the "Series B Dividend Preference"). No dividends or other distributions shall be paid with respect to the Common Stock until the entire amount of the Series B Dividend Preference shall have been declared and paid. In the event of our liquidation, dissolution or winding up, either voluntary or involuntary, and following payment in full of the Series A-1 Preferred Stock Liquidation Preference and the Series A-2 Preferred Stock Liquidation Preference, the holders of Series B Preferred Stock shall be entitled to receive, on a ratable basis out of our assets available for distribution to shareholders, prior to and in preference to any distribution of any of the assets of the Company to the holders of Common Stock, and ratable with any other series of Preferred Stock (other than the Series A-1 Preferred Stock and the Series A-2 Preferred Stock) based on the respective cost per share of each other series, the amount of $1.00 per share (the "Series B Liquidation Preference"). Following payment in full of the Series B Liquidation Preference and the liquidation preferences (the cost of the shares) of any other series of Preferred Stock, the holders of the Series B Preferred Stock shall participate with any other series of Preferred Stock then outstanding and the Common Stock on a pro rata per share basis in all additional distributions made upon liquidation, with each share of Series B Preferred Stock and the other shares of Preferred Stock being deemed to equal that number of shares of Common Stock into which that share of Preferred Stock could be converted as of the date of the distribution; provided, however, that the Series A-1 Preferred Stock and the Series A-2 Preferred Stock shall not participate in any additional distributions. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, into fully paid and nonassessable shares of Common Stock at any time after the date of issuance. In addition, each share of Series B Preferred Stock shall be converted automatically into shares of Common Stock on the day immediately following the thirtieth (30th) consecutive trading day subsequent to the commencement of this offering on which the closing price for our Common Stock was equal to or exceeded the amount of $2.00 per share. The number of shares of Common Stock that each holder of Series B Convertible Stock is entitled to receive upon conversion is determined by dividing the Original Series B Preferred Stock Issue Price by the Conversion Price at the time in effect for the series. The "Original Series B Issue Price" shall be $1.00 per share. The "Conversion Price" per share for shares of Series B Preferred Stock shall be the greater of $0.75 per share or the Variable Conversion Price for those shares. -41- The "Variable Conversion Price" means an amount equal to 90% of the closing prices on the 5 trading days immediately preceding the day we receive notice of conversion; provided, however, that the Variable Conversion Price shall not exceed the amount of $2.00 per share. Transfer Agent and Registrar The transfer agent and registrar for our Common Stock and Preferred Stock is Computershare Trust Company. Warrants As of September 27, 2001, we have issued warrants and stock options to non-employees to purchase 1,678,012 shares of our Common Stock. The holders of the warrants may pay for the shares in cash or through the use of a net exercise procedure without the payment of cash by surrendering shares otherwise purchasable upon exercise of the warrant with a fair market value equal to the exercise price for the shares they are purchasing. The exercise price is subject to adjustments if we declare a stock split or dividend of our Common Stock. The warrants are presently exercisable and have a term of five years. Pursuant to our Underwriting Agreement with Alexander, Wescott & Co., Inc. and Hyperion Partners Corp., the underwriters are entitled to receive warrants to purchase shares of Series B Convertible Preferred Stock in an amount equal to 10% of the number of shares that each underwriter sells. The exercise price shall be 165% of the offering price of the shares offered in this offering. The term of the warrants shall be for three years from the date of effectiveness of the prospectus. Stock Options 1999 Stock Option Plan Our board of directors adopted, and our shareholders approved, a 1999 Stock Incentive Plan reserving 1,500,000 shares of Common Stock for issuance. The Plan provides for the grant of incentive stock options, as defined in Section 422 of the Internal Revenue Code, to our officers and employees, and nonstatutory stock options to employees, directors and consultants. It may be administered by the board of directors or delegated to a committee. The exercise price of incentive stock options granted under the 1999 Stock Option Plan must be at least equal to the fair market value of our common stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value on the date of grant. Nonstatutory stock options granted to a person who at the time the option is granted does not hold more than 10% of the voting power of all classes of our stock will have an exercise price of no less than 85% of the fair market value of the stock on the date of grant. Options granted to our employees will become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered will become exercisable annually. No option will be exercisable prior to one year from the date it is granted unless the board specifically determines otherwise. In no event will any option be exercisable after the expiration of 10 years from the date it is granted, and no Incentive Stock Option granted to a -42- holder of more than 10% of the voting power of all classes of our stock will be exercisable after the expiration of 5 years from the date it is granted. If an optionee's status as an employee with us terminates for any reason, other than death or disability, then the optionee may exercise Incentive Stock Options in the three-month period following such cessation. The three-month period is extended to 12-months for termination due to death or disability. In the event of a merger or consolidation in which we are not the surviving entity, or a sale of all or substantially all of our assets or capital stock, if the surviving entity does not tender to the optionees stock options or capital stock of substantially the same economic benefit as the optionees' unexercised options, then the board may grant to the optionees the right to exercise any unexpired options for a period of thirty days. The 1999 Stock Option Plan will terminate in 2009, unless sooner terminated by the board of directors. 1996 Stock Option Plan Our board of directors adopted, and our shareholders approved, a 1996 Stock Incentive Plan reserving 600,000 shares of Common Stock for issuance. The Plan provides for the grant of incentive stock options, as defined in Section 422 of the Internal Revenue Code, to our officers and employees, and nonstatutory stock options to employees, directors and consultants. It may be administered by the board of directors or delegated to a committee. The exercise price of incentive stock options granted under the 1996 Stock Option Plan must be at least equal to the fair market value of our Common Stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value on the date of grant. Nonstatutory stock options granted to a person who at the time the option is granted does not hold more than 10% of the voting power of all classes of our stock will have an exercise price of no less than 85% of the fair market value of the stock on the date of grant. Options granted to our employees will become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered will become exercisable annually. No option will be exercisable prior to one year from the date it is granted unless the board specifically determines otherwise. In no event will any option be exercisable after the expiration of 10 years from the date it is granted, and no Incentive Stock Option granted to a holder of more than 10% of the voting power of all classes of our stock will be exercisable after the expiration of 5 years from the date it is granted. If an optionee's status as an employee with us terminates for any reason, other than death or disability, then the optionee may exercise Incentive Stock Options in the three-month period following such cessation. The three-month period is extended to 12-months for termination due to death or disability. In the event of a merger or consolidation in which we are not the surviving entity, or a sale of all or substantially all of our assets or capital stock, if the surviving entity does not tender to the optionees stock options or capital stock of substantially the same economic benefit as the optionees' unexercised options, then the board -43- may grant to the optionees the right to exercise any unexpired options for a period of thirty days. The 1996 Stock Option Plan will terminate in 2006, unless sooner terminated by the board of directors. 1995 Stock Option Plan Our board of directors adopted, and our shareholders approved, a 1995 Stock Incentive Plan reserving 750,000 shares of Common Stock for issuance. The Plan provides for the grant of incentive stock options, as defined in Section 422 of the Internal Revenue Code, to our officers and employees. It may be administered by the board of directors or delegated to a committee. The exercise price of incentive stock options granted under the 1995 Stock Option Plan must be at least equal to the fair market value of our Common Stock on the date of grant. However, for any employee holding more than 10% of the voting power of all classes of our stock, the exercise price will be no less than 110% of the fair market value on the date of grant. Options granted to our employees will become exercisable over a period of no longer than 5 years, and no less than 20% of the shares covered will become exercisable annually. No option will be exercisable prior to one year from the date it is granted unless the board specifically determines otherwise. In no event will any option be exercisable after the expiration of 10 years from the date it is granted, and no Incentive Stock Option granted to a holder of more than 10% of the voting power of all classes of our stock will be exercisable after the expiration of 5 years from the date it is granted. If an optionee's status as an employee with us terminates for any reason, other than death or disability, then the optionee may exercise Incentive Stock Options in the three-month period following such cessation. The three-month period is extended to 12-months for termination due to death or disability. In the event of a merger or consolidation in which we are not the surviving entity, or a sale of all or substantially all of our assets or capital stock, if the surviving entity does not tender to the optionees stock options or capital stock of substantially the same economic benefit as the optionees' unexercised options, then the board may grant to the optionees the right to exercise any unexpired options for a period of thirty days. The 1995 Stock Option Plan will terminate in 2005, unless sooner terminated by the board of directors. -44- PLAN OF DISTRIBUTION We have entered into an underwriting agreement with Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. providing for the sale of this offering. The principal offices of Alexander, Wescott & Co., Inc. are located at The Trump Building, 40 Wall Street, 31st Floor, New York, New York, 10005, and its telephone number is (800) 713-3768. The principal offices of Hyperion Partners Corp. are located at 1215 Hightower Trail, Suite B220, Atlanta, Georgia 30350, and its telephone number is (770) 992-6900. Alexander, Wescott & Co., Inc. and Hyperion Partners Corp., as the underwriters, may engage other broker-dealer members of the NASD to participate as selected placement agents in this offering of our capital stock. This is a best-efforts offering. The underwriters are not obligated to purchase any number or dollar amount of shares at any time. These agents have agreed to use their best-efforts to sell on our behalf all of the securities offered by this prospectus. However, there can be no assurance that all of the shares offered will be sold. Accordingly, investors will bear the risk that we will accept subscriptions for less than the full amount of shares being offered and then be unable to successfully complete all of the anticipated uses of the proceeds of this offering. If fewer than the full amount of shares being offered are sold, our business, financial condition, and results of operations could be adversely affected. There are no escrow arrangements pertaining to this offering and there is no minimum amount we are required to raise in this offering before we may have access to funds received from investors. However, the funds will be held in an account at American Stock Transfer & Trust Company until we have satisfied conditions of closing, from time to time. We propose to offer our securities to the public at the public offering price set forth on the cover of this prospectus, and will pay Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. commissions in an amount equal to 10% of the aggregate purchase price of the securities sold. Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. are also entitled to receive warrants to purchase shares of our Series B Convertible Preferred Stock based on the number of shares sold by each underwriter. Specifically, the underwriters are entitled to receive warrants in an amount equal to 10% of the number shares that each underwriter sells, up to an aggregate of 480,000. The exercise price shall be 165% of the offering price of the shares offered in this offering, or $1.65. The term of the warrants shall be for three years from the date of effectiveness of this prospectus. Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. may allow all or any part of such commissions to any selected placement agent. We have also agreed to pay Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. a non-accountable expense allowance equal to, in the aggregate, 3% of the gross proceeds of this offering. We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. The underwriters do not intend to conduct any transaction for the purpose of stabilizing, maintaining, or otherwise affecting the market price of our shares. We may also sell through our executive officers who will not receive commissions and who will be registered as sales representatives where required under state securities laws. We may also appoint other broker-dealers to assist in the sale of shares in the offering. We will determine, in our sole discretion, to accept or reject subscriptions within five days following their receipt. Funds of an investor whose subscription is rejected will be promptly returned directly to such person without interest or deduction. No subscription may -45- be withdrawn, revoked or terminated by the purchaser. We reserve the right to refuse to sell our securities to any person at any time. LEGAL PROCEEDINGS On September 28, 2001, we were notified by the Lashman Family Partnership, which holds a security interest on the intellectual property rights to ZAP products selling under the name Sea Scooter, that we are in default on our Promissory Note issued to them in connection with our acquisition of Aquatic Propulsion Technologies, Inc. We were further notified that the Lashman Family Partnership has foreclosed on the patents and, henceforth, we will be infringing the patents should we continue to manufacture and market the Sea Scooter brand. We dispute the accuracy of the default, intend to negotiate a settlement with the Lashman Family Partnership, and are simultaneously looking for a buyer of the Promissory Note and the intellectual assets. On September 6, 2001, we were served with a complaint from Hampel Technologies, Inc. for the collection of a book account in the amount of $49,324.16. We intend to file a timely answer denying the allegations set forth therein with the County of Sonoma Superior Court. On August 8, 2001, we were served with a complaint from Northern California Collection Service Inc. for the collection of a book account in the amount of $63,000. We filed an answer offering a general denial to each allegation on September 10, 2001 with the County of Sacramento Superior Court. We recently settled a lawsuit with Master Shine USA, Inc., and its related affiliates and subsidiaries ("Master Shine"), over alleged copyright, patent, and trademark infringement regarding Master Shine's importation and sale of electric scooters that are substantially similar to our Zappy(R) electric scooter. We recently settled a lawsuit brought by James McGreen, our former president, whereby we have agreed to pay the remaining monies owed to Mr. McGreen over a period of five months. In addition to receiving the monies owed to him, Mr. McGreen will also receive 5,000 stock options, which can be exercised into shares of our common stock. We recently settled a dispute with the holders of our Series A-1 and Series A-2 Preferred Stock that stemmed from our disagreement as to the proper conversion price of the Series A-1 and Series A-2 Preferred Stock into shares of our Common Stock. Because of this dispute, we did not honor any conversion requests received by the Preferred Stockholders between March and June of 2000. Pursuant to the settlement agreement, we have agreed to resume honoring the conversion requests of the Series A-1 and Series A-2 Preferred Stockholders. Additionally, as a condition of our settlement, we have agreed, in conjunction with the Series A-1 and Series A-2 Preferred Stockholders, to purchase the entire number of outstanding shares held by our largest shareholder, Ridgewood ZAP, LLC, for a total purchase price of $3,000,000. The terms of that purchase call for us to purchase one-half of Ridgewood ZAP, LLC's total number of shares, or 625,178 shares, for an adjustable purchase price of $1,500,000. The Series A-1 and Series A-2 Preferred Stockholders are obligated to purchase the remaining half of Ridgewood ZAP, LLC's total number of shares, or 625,179 shares. The adjustable purchase price for the Series A-1 and Series A-2 Preferred Stockholders shall be determined, along with other factors, according to the lowest closing bid price of our Common Stock, as reported on the NASDAQ SmallCap Market. If the Series A-1 and Series A-2 Preferred Stockholders purchase from Ridgewood ZAP, LLC the total number of shares which they are obligated to purchase, for an amount less than $1,500,000, then we shall be liable to Ridgewood ZAP, LLC for the shortfall. Such shortfall shall be amortized at the rate of $100,000 per month beginning on the first month following the realization of that shortfall. As a further condition to the settlement agreement, Mr. Douglas Wilson and Mr. Robert Swanson have resigned from our board of directors. -46- INTEREST OF NAMED EXPERTS AND COUNSEL Since our inception in 1994, other than as described below, we have neither hired any experts or counsel on a contingent basis nor will any expert or counsel receive a direct or indirect interest in our business. Further, no expert or counsel, except as described below, was or is a promoter, underwriter, voting trustee, director, officer or employee of our company. As explained further in the section of this document entitled "Certain Relationships and Related Transactions," William D. Evers, Esq., who provides legal services to our company via the firm of Foley & Lardner, of which he is a partner, has been one of our directors since 1999. In 1999 and 2000, Mr. Evers was granted options to purchase up to and including 75,000 shares of our Common Stock at an exercise price ranging from $3.02 to $6.50 per share. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Our Amended Bylaws and Amended Articles of Incorporation provide that we shall indemnify our directors and officers, and may indemnify our other employees and agents, to the fullest extent permitted by California law. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be afforded to our directors, officers and controlling persons pursuant to our Amended Bylaws and Amended Articles of Incorporation, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. LEGAL MATTERS We are represented by Foley & Lardner, and the validity of the shares of capital stock offered in this prospectus will be passed upon for us by Foley & Lardner, One Maritime Plaza, Sixth Floor, San Francisco, California 94111-3404. Snow Becker Krauss P.C., 605 Third Avenue, New York, New York 10158-0125, is counsel for the underwriters, EXPERTS Our financial statements as of and for the years ended December 31, 2000 and 1999 appearing in this prospectus have been audited by Grant Thornton LLP, independent certified public accountants. The financial statements are included in reliance upon the authority of that firm as an expert in accounting and auditing. ADDITIONAL INFORMATION A registration statement on Form SB-2, including amendments, relating to the shares offered has been filed with the Securities and Exchange Commission, Office of Small Business Policy, Washington, D.C. This prospectus does not contain all the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements -47- made in this prospectus as to the contents of any contract or other document are not necessarily complete, and, in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each statement about those contracts and other documents is qualified in all respects by that reference. The registration statement and exhibits and schedules, as well as other reports and other information required to be filed with the Securities and Exchange Commission in accordance with the reporting requirements of the Securities Exchange Act of 1934, can be inspected without charge and copied, at proscribed rates, at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0300. In addition, the Securities and Exchange Commission maintains a Web site on the internet at http://www.sec.gov that contains reports, proxy and information statements and other documents filed electronically with the Securities and Exchange Commission, including the registration statement. We furnish our shareholders with annual reports containing financial statements audited by our independent accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. -48- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors of 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) CURRENT ASSETS Cash $ 3,543 Accounts receivable, net of allowance for doubtful accounts of $53 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 issuance cost of $295 3 2,705 2,705 Series A-2 preferred stock, net of issuance cost of $192 2 1,808 1,808 Common Stock warrants issued with preferred stock - (2,292) - 2,292 - Beneficial conversion feature of preferred stock - 2,539 2,539 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 $ 1,812 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 and Subsidiaries 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 ZAP 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 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 yrs. 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 F-8 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. 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) ------ ------ -% -% ========= ======= 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): F-10
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 common 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 common share - as reported (0.85) (0.43) Loss per common share - pro forma (1.14) (0.68) F-11 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 The Company granted stock options and warrants to purchase common stock to non-employees of the company. Total granted during 2000 was 1,437,000 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 $5.43 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 three 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 commitment 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 the above 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 ZAP (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 ZAP (143) Liabilities assumed (148) ------------- $ 726 =========== Consideration paid (thousands): Common stock $ 726 ============ F-14 ZAPWORLD.COM UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 2001 CONSOLIDATED BALANCE SHEET (In thousands) June 30, 2001 -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 1,209 Accounts receivable, net of allowance for doubtful accounts of $53 816 Inventories 3,303 Prepaid expenses and other assets 323 -------- Total current assets 5,651 PROPERTY AND EQUIPMENT, net of accumulated depreciation of $600 522 OTHER ASSETS Patents & Trademarks, net of accumulated amortization of $218 1,437 Goodwill, net of accumulated amortization of $224 1,791 Deposits and other 74 -------- Total other assets 3,302 -------- Total assets $ 9,475 ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 820 Accrued liabilities and other expenses 701 Current maturities of long-term debt 99 Current maturities of obligations under capital leases 37 -------- Total current liabilities 1,657 OTHER LIABILITIES Long-Term Debt, less current maturities 1,593 Obligations under capital leases, less current maturities 30 -------- Total other liabilities 1,623 -------- Total liabilities 3,280 STOCKHOLDERS' EQUITY Preferred stock, authorized 10,000 shares; 4 shares issued and outstanding 1,124 Common stock, authorized 20,000 shares of no par value stock; 6,040 issued and outstanding 18,309 Accumulated deficit (13,005) Unearned compensation (15) -------- 6,413 Less: notes receivable from stockholders' (218) -------- Total stockholders' equity 6,195 -------- Total liabilities and stockholders' equity $ 9,475 ======== See accompanying notes to consolidated financial statements F-15 ZAPWORLD.COM CONSOLIDATED STATEMENTS OF OPERATIONS (Thousands, except share amounts) Quarter ended Six Months ended June 30, June 30, 2001 2000 2001 2000 ---- ---- ---- ---- NET SALES $ 940 $ 2,283 $ 2,953 $ 4,180 COST OF GOODS SOLD 1,376 1,475 2,918 2,658 ------ ------- ------- ------- GROSS PROFIT (LOSS) (436) 808 35 1,522 OPERATING EXPENSES Selling and marketing 306 347 732 748 General and administrative 1,078 815 2,210 1,495 Research and development 141 166 360 311 ------- ------- ------- ------- 1,525 1,328 3,302 2,554 ------- ------- ------- ------- LOSS FROM OPERATIONS (1,961) (520) (3,267) (1,032) ------- ------- ------- ------- OTHER INCOME (EXPENSE) Interest income 23 40 60 77 Other expense (15) (3) (30) (5) ------- ------- ------- ------- 8 43 30 72 ------- ------- ------- ------- NET LOSS $(1,953) $ (477) $(3,237) $ (960) ======= ======= ======= ======= Net loss attributable to common shares Net loss $(1,953) $ (477) $(3,237) $ (960) Preferred Dividend (48) -- (105) -- ------- ------- ------- ------- $(2,001) $ (477) $(3,342) $ (960) ======= ======= ======= ======= NET LOSS PER COMMON SHARE BASIC AND DILUTED $ (0.31) $ (0.09) $ (0.54) $ (0.19) ======= ======= ======= ======= WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 6,374 5,224 6,170 5,187 ======= ======= ======= ======= See accompany notes to consolidated financial statements F-16 ZAPWORLD.COM CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months ended June 30, 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(3,237) ($ 960) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 341 151 Allowance for doubtful accounts 77 18 Amortization of the fair market value of warrants 27 27 Changes in: Receivables 720 (396) Inventories (405) 369 Prepaid expenses and other 410 (489) assets Advances to retail stores & technology companies -- 560 Prepaid expenses and other assets 410 (489) Accounts payable 422 (363) Accrued liabilities and other expenses (565) 317 ------- ------- Net cash used for operating activities (2,210) (766) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (105) (111) Payment advance for acquisition -- (20) Purchase of ASCR - Barbary Coast -- (118) Purchase of Patents and intangibles (17) (20) ------- ------- Net cash used for investing activities (122) (411) CASH FLOWS FROM FINANCING ACTIVITIES Sale of common stock, net of stock offering costs 5 217 Advances on notes receivable to shareholders -- (12) Principal repayments on note payable (3) (8) Payments on obligations under capital leases (4) (5) ------- ------- Net cash provided by (used for) financing activities (2) 192 ------- ------- NET DECREASE IN CASH (2,334) (985) CASH, beginning of period 3,543 3,184 ------- ------- CASH, end of period $ 1,209 $ 2,199 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the quarter for interest $ 27 $ 2 Non-cash investing and financing activities: On June 28, 2001, we repurchased $1,500,000 of common stock in exchange for a promissory note for $1,500,000. See accompanying notes to consolidated financial statements. F-17 ZAPWORLD.COM NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS Basis of Presentation On June 18, 2001, the Company changed its name from Zapworld.com to ZAP. The June 30, 2001 second quarter financial statements included herein have been prepared by the Company, without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although management believes the disclosures are adequate to make the information presented not misleading. The results of operations for any interim period are not necessarily indicative of results for a full year. These statements should be read in conjunction with the December 31, 2000 year end financial statements and related notes included above. The financial statements presented herein, for the six months ended June 30, 2001 and 2000 reflect, in the opinion of management, all material adjustments consisting only of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flow for the interim periods. The net loss per common share is based on the weighted average number of common shares outstanding in each period. Potential dilutive securities associated with stock options, warrants and conversion of preferred stock have been excluded from the weighted average shares outstanding since the effect of these securities would be anti-dilutive. Principles Of Consolidation The accounts of the Company and its consolidated subsidiaries are included in the consolidated financial statements after elimination of significant inter-company accounts and transactions. Common Stock The Company's Common Stock has been listed in the NASDAQ 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 OTC Bulletin Board under the stock symbol "ZAPP". Future Cash Requirements The Company may not be able to meet its future cash requirements for the rest of the current fiscal year unless new financing is obtained. If it cannot obtain short-term financing, the Company may not be able to continue as a viable concern. Some options now being pursued by the Company are additional equity contributions and/or short-term loans with existing and outside investors. F-18 ZAP SUBSCRIPTION AGREEMENT (For California Investors Only) California investors who are purchasing more than $2,500 of the Company's shares (the "Shares") in this offering must meet certain minimum suitability requirements as a condition to registration of the Shares under the California Corporate Securities Law of 1968. This Subscription Agreement, as executed by the investor, will serve to declare investor's qualification to purchase the Shares pursuant to the minimum suitability requirements. I hereby represent and warrant that I have a liquid net worth of not less than $75,000 (exclusive of home, home furnishings and automobiles) and a $50,000 gross annual income or $150,000 liquid net worth (exclusive of home, home furnishings and automobiles), and in either case my investment in the Shares will not exceed 10% of my net worth. Name of Investor(s): ----------------------------------------------------------- Signature of Investor(s): ------------------------------------------------------ Signature of Joint Investor (if any): Date: -------------------------------------------------------------------------- Resident Address: -------------------------------------------------------------------------------- (Street) (City) (State) (Zip Code) -49- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. Indemnification of Directors and Officers Our Amended Bylaws provide that we may indemnify any director, officer, agent or employee against all expenses and liabilities, including counsel fees, reasonably incurred by or imposed upon such persons in connection with any proceeding to which any such persons may become involved by reason of such persons being or having been a director, officer, employee or agent of our company. Moreover, our Amended Bylaws provide that we shall have the right to purchase and maintain insurance on behalf of any such persons whether or not we would have the power to indemnify such person against the liability insured against. Our Amended Articles of Incorporation provide that we may indemnify our directors and officers to the fullest extent permissible under California law. In accordance with these Articles of Incorporation, the liability of our directors for monetary damages is eliminated to the fullest extent permissible under California law. Item 25. Other Expenses of Issuance and Distribution The following table sets forth all expenses payable in connection with the sale of the our capital stock being offered in this SB-2 Registration Statement. All the amounts shown are estimates except for the registration fee. Registration fee.....................................$ 4,598 Printing and engraving expenses......................$ 3,402 Legal fees and expenses..............................$ 62,000 Accounting Fees and Expenses.........................$ 30,000 Total................................................$ 100,000 Item 26. Recent Sales of Unregistered Securities Since our inception in 1994, we have issued or sold unregistered securities in the amounts, at the times, for the consideration and pursuant to the exemptions from registration provided by the Securities Act of 1933, as amended (the "Act"), as follows: In 1998, pursuant to an exemption under Rule 701 of Regulation D promulgated under the Act and in connection with our 1996 Stock Option Plan, we granted options to purchase 20,000 shares of our Common Stock to employees. In 1998, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1996 Stock Option Plan we granted options to purchase 82,800 shares of our Common Stock to non-employees. In 1998, pursuant to an exemption under Section 4(2) of the Act and in connection with the issuance of $800,000 in notes payable, we issued a warrant to purchase 20,000 shares of -50- our Common Stock. This warrant is exercisable at a price of $4.00 per share until September 2001. In 1998, pursuant to an exemption under Section 4(2) of the Act, we issued 15,000 shares of our Common Stock to employees for an aggregate price of $15,000. In 1998, pursuant to an exemption under Section 4(2) of the Act and in connection with the conversion of $14,317 of debt to equity, we issued 2,727 shares of our Common Stock. In 1998, pursuant to an exemption under Section 4(2) of the Act, we issued 25,136 shares of our Common Stock for payment of current and future services. On December 30, 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the outstanding Common Stock of emPower, Inc., a Massachusetts corporation, we issued 265,676 shares of our Common Stock and a warrant to purchase 200,000 shares of our Common Stock, exercisable until December 30, 2002, to the shareholders of emPower, Inc. In September 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the assets of Big Boy Bicycles, a Florida corporation, we issued 1000 shares of our Common Stock to the shareholders of Big Boy Bicycles. In July 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the assets of American Scooter and Cycle Rental, a California corporation, we issued 12,924 shares of our Common Stock to the shareholders of American Scooter and Cycle Rental. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with the settlement of litigation, we issued 8,666 shares of our Common Stock to Transmag, Inc. In 1999, pursuant to an exemption under Rule 701 of Regulation D promulgated under the Act and in connection with our 1996 Stock Option Plan, we granted options to purchase 35,000 shares of our Common Stock to employees. In 1999, pursuant to an exemption under Rule 701 of Regulation D promulgated under the Act and in connection with our 1999 Stock Option Plan, we granted options to purchase 481,000 shares of our Common Stock to employees. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1999 and 1996 Stock Option Plans we granted options to purchase 1,138,429 shares of our Common Stock to non-employees. In 1999, pursuant to an exemption under Section 4(2) of the Act, we sold 29,833 shares of our Common Stock to purchasers for an aggregate price of $177,900. -51- In 1999, pursuant to an exemption under Section 4(2) of the Act, we sold 746,119 shares of our Common Stock to purchasers for an aggregate price of $1,720,600. In 1999, pursuant to an exemption under Section 4(2) of the Act, we issued 27,479 shares of our Common Stock for payment of current and future services. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our 1999 Employee Common Stock Purchase Plan, we sold 6,588 shares of our Common Stock to employees for an aggregate price of $5,600. In 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with the conversion of $664,700 of debt to equity, we issued 165,111 shares of our Common Stock. In 1999, pursuant to an exemption provided by Rule 701 of Regulation D promulgated under the Act and in connection with the exercise of employee stock options, we issued 559,086 shares of our Common Stock to employees for an aggregate price of $423,400. In December 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the outstanding Common Stock of Zap of Santa Cruz, Inc., a California corporation, we issued 8,803 shares of our Common Stock to the shareholders of Zap of Santa Cruz, Inc. In December 1999, pursuant to an exemption under Section 4(2) of the Act and in connection with our acquisition of the outstanding Common Stock of Electric Vehicle Systems, Inc., a California corporation, we issued 25,000 shares of our Common Stock to the shareholders of Electric Vehicle Systems, Inc. On June 1, 2000, pursuant to an exemption under Section 4(2) of the Act, we 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, we 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, we 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, we 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, we -52- 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, we 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 we 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, we issued 800 shares of common stock to employees. On October 6, 2000, pursuant to an exemption under Section 4(2) of the Act, we 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, we 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., we issued 140,000 shares of Common Stock. In October 2000, pursuant to an exemption under Section 4(2) of the Act, we 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, we 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, we issued 2,250 shares of common stock to consultants. On March 27, 2001, 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, we granted options to purchase 220,000 shares of common stock to four (4) employees. -53- Item 27. Exhibits Exhibit Number Document 1.1 Underwriting Agreement between ZAP, Alexander, Wescott & Co., Inc. and Hyperion Partners Corp., dated October 2, 2001. 1.2 Selling Group Agreement between Alexander, Wescott & Co., Inc., Hyperion Partners Corp., and Selected Dealers. 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 Amendment of Articles of Incorporation of ZAPWORLD.COM, endorsed and filed June 18, 2001. 3.6 * 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. 3.7 Certificate of Determination of Rights and Preferences of the Series B Convertible Preferred Stock, endorsed and filed June 26, 2001. 3.8 Amended and Restated Certificate of Determination of the Rights, Preferences, Privileges of the Series B Convertible Preferred Stock, filed on October 2, 2001. 3.9 * Bylaws of ZAP Power Systems, dated September 26, 1994. 3.10 * Amended Bylaws of ZAPWORLD.COM, dated June 24, 2000. 5.1 Opinion of Foley & Lardner. 10.1 * Agreement and Plan of Reorganization By and Among ZAPWORLD.COM and ZAP OF SANTA CRUZ, INC. dated January 20, 2000. 10.2 * Agreement of Merger of ZAPWORLD.COM and ZAP OF SANTA CRUZ, INC. dated January 20, 2000. -54- 10.3 * Plan of Reorganization for EMB, Inc. dated May 5, 2000. 10.4 * Agreement between ZAPWORLD.COM and American Scooter & Cycles Rental, Inc. dated July 12, 1999. 10.5 * Asset Purchase Agreement between ZAPWORLD.COM and American Scooter and Cycle Rentals, Inc. dated January 31, 2000. 10.6 * Stock Purchase Agreement and Plan of Reorganization between ZAPWORLD.COM, Barbary Coast Pedi Cab Leasing Corporation, and Jeff Sears and Helena Sears as Trustees of the Jeff Sears and Helena Sears Revocable Trust dated January 31, 2000. 10.7 * Agreement and Plan of Reorganization by and among ZAPWORLD.COM and Aquatic Propulsion Technology, Inc. dated July 1, 2000. 10.8 * Agreement of Merger of ZAPWORLD.COM and Aquatic Propulsion Technology, Inc. dated July 1, 2000. 10.9 * Agreement and Plan of Reorganization by and among ZAPWORLD.COM, emPower Acquisition, Inc. and EMPower Corporation dated December 17, 1999. 10.10 * Lease Agreement between ZAP Power Systems and Daniel O. Davis and Robin H. Davis for premises known as 117 Morris Street dated January 12, 1996. 10.11 * Extension of Lease Between ZAP Power Systems and Daniel O. Davis and Robin H. Davis for premises known as 117 Morris Street dated July 10, 1998. 10.12 * Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6780 Depot Street dated August 6, 1999. 10.13 * Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6784 Sebastopol Ave. dated August 24, 2000. 10.14 * Lease Agreement Between ZAP POWER SYSTEMS and Daniel O. Davis and Robbin H. Davis for 111 Morris Street dated June 5, 1998. 10.15 * Lease Agreement Between ZAPWORLD.COM and Ron Basso DBA/R. S. Basso Company for 7190 Keating Avenue dated July 1, 1996. 10.16 * Sublease Agreement Between ZAPWORLD.COM and Ron Basso, an individual doing business as R.S. Basso Company for 7190 Keating Avenue dated August 1, 1999. -55- 10.17 * Sublease Agreement Between ZAPWORLD.COM and American Scooter and Cycle Rental, Inc. for 2715 Hyde Street, San Francisco, CA dated July 13, 1999, plus addendum thereto dated April 4, 2000. 10.18 * Lease Agreement Between ZAPWORLD.COM and Pine Creek Properties for 6780-B Depot Street dated October 16, 2000. 10.19 Settlement Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the Shareholders dated June 27, 2001. 23.1 Consent of Grant Thornton LLP. 23.2 Consent of Foley & Lardner. * Filed with Pre-effective Amendment Number 1 to Form SB-2 registration statement filed with the Securities and Exchange Commission on May 3, 2001. -56- Item 28. Undertakings a) The Registrant hereby undertakes that it will: 1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. 2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the bona fide offering. 3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the Offering. -57- SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the city of Sebastopol, state of California, on October 2, 2001. ZAP By: /s/ Gary Starr ---------------------------------- Gary Starr Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the dates stated. Signature Title Date /s/ Gary Starr Chief Executive Officer October 2, 2001 ------------------------ and Director Gary Starr /s/ William R. Hartman Chief Financial Officer October 2, 2001 ------------------------ William R. Hartman /s/ William D. Evers Director October 2, 2001 ------------------------ William D. Evers /s/ Harry R. Kraatz Director October 2, 2001 ------------------------ Harry R. Kraatz /s/ Lee Sannella Director October 2, 2001 ------------------------ Lee Sannella -58- EX-1.1 3 slp94g.txt UNDERWRITING AGREEMENT UP TO 4,800,000 SHARES ZAP SERIES B PREFERRED STOCK UNDERWRITING AGREEMENT New York, New York October 2, 2001 Alexander, Wescott & Co., Inc. 40 Wall Street, 31st Floor New York, NY 10005 Hyperion Partners Corp. 1215 Hightower Trail Suite B220 Atlanta, GA 30350 Dear Sirs: SECTION 1. Introduction. ZAP (the "Company"), a California corporation, has authorized capital consisting of 20,000,000 shares of common stock (the "Common Stock") and 10,000,000 shares of preferred stock (the "Preferred Stock"). As of the date hereof, 7,400,080 shares and only 7,400,080 shares of Common Stock (not including shares of Common Stock issuable after the conversion of 861 shares of Series A-1 Preferred Stock and 1,670 shares of Series A-2 Preferred Stock) are issued and outstanding. The Company proposes to issue and sell up to 4,800,000 shares of Series B Preferred Stock (the "Shares") at a price of $1.00 per share (the "Offering"), which Shares may be convertible into an aggregate of up to 6,400,000 shares of Common Stock (at the floor price of the greater of $0.75 or an amount equal to 90% of the closing prices on the five (5) trading days immediately preceding the day that notice of conversion is received by the Company; provided, however, that the conversion price shall not exceed the amount of $2.00 per share). The Company wishes to confirm your engagement as agents of the Company in connection with the issuance and sale of the Shares. Except as to sales by the Company to prospective investors listed on Schedule A attached, the agency shall be on an exclusive basis. Each of you is referred to in the balance of this Agreement as an "Underwriter" and collectively as the "Underwriters." The Company agrees with the Underwriters as follows: SECTION 2. Representations, Warranties and Agreements of the Company. The Company represents and warrants to, and agrees with, the Underwriters that: 1 (a) The Company has filed a registration statement on Form SB-2 (No. 333-55478), including a prospectus, pursuant to the Securities Act of 1933, as amended (the "Act"), relating to the sale of the Shares with the Securities and Exchange Commission (the "Commission"). Such registration statement is proposed to be amended by pre-effective amendment or post-effective amendment. For purposes of this Agreement, "Effective Time" means, in the case of the preceding sentence, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. "Effective Date" means the date of the Effective Time. If the Effective Time is prior to the execution and delivery of this Agreement: no other document relating to such registration statement has been filed with the Commission; and no proceeding for the purpose of suspending such effectiveness has been initiated or threatened or, to the knowledge of the Company, is contemplated by the Commission. Such registration statement as amended at the Effective Time, including all material incorporated by reference therein and all exhibits thereto and including all information (if any) contained in a prospectus subsequently filed with the Commission and deemed to be part of the registration statement at the Effective Time pursuant to Rule 430A under the Act, is hereinafter referred to as the "Registration Statement," and the prospectus, in the form first filed pursuant to Rule 424(b) under the Act ("Rule 424(b)") or, if no such filing is required, as included in the Registration Statement, including all material incorporated by reference in such prospectus, is hereinafter referred to as the "Prospectus." (b) If the Effective Time is prior to the execution and delivery of this Agreement: (i) on the Effective Date, the Registration Statement conformed, on the date of this Agreement, the Registration Statement conforms, and at the time of filing of any Prospectus pursuant to Rule 424(b), the Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the rules and regulations of the Commission thereunder (the "Rules and Regulations"); (ii) on the Effective Date, neither the Registration Statement nor the Prospectus included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) any amendment to the Registration Statement, as of its date and as of its effective date, did not and will not include any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (iv) the Prospectus on the date of this Agreement, as of its date, as of the date of any amendment or supplement thereto, and as amended or supplemented at each Closing Date (as defined in Section 3), does not and will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If the Effective Time is subsequent to the execution and delivery of this Agreement: (i) on the Effective Date, the Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, and neither the Registration Statement nor the Prospectus will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any amendment to the Registration Statement, as of its date and as of its effective date, will not include any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not 2 misleading; and (iii) the Prospectus, as of its date, as of the date of any amendment or supplement thereto, and as amended or supplemented at each Closing Date, will not contain any untrue statement of any material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties do not apply to statements or omissions in the Registration Statement or any amendment thereto or the Prospectus, as amended or supplemented, if applicable, based upon the information furnished in writing to the Company by either Underwriter. (c) The financial statements included in the Registration Statement and Prospectus present fairly the financial position of the Company as of the dates indicated and the results of its operations and the statements of its cash flows for the periods specified; such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved, except as indicated therein; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. (d) Since the respective dates as of which information is given in the Registration Statement and in the Prospectus, except as otherwise stated therein, (i) there has been no material adverse change in the condition, financial or otherwise, earnings, business or prospects of the Company considered as a whole, whether or not arising in the ordinary course of business, and (ii) there have been no material transactions entered into by the Company other than those in the ordinary course of business. (e) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California with power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and Prospectus and is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where failure to so qualify will not materially affect the business, properties or financial condition of the Company. The Company has no directly or indirectly held active subsidiary. The Company has all power, authority, authorizations, approvals, consents, orders, licenses, certificates and permits needed to enter into, deliver and perform this Agreement and to issue and sell the Shares. (f) The Company is not (i) in violation of its Articles of Incorporation or bylaws, as the case may be, or other organizational documents, or (ii) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any material contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or by which it or its properties may be bound, except in the case of (ii) above, where such default would not, individually or in the aggregate, result in a material adverse change in (A) the condition, financial or otherwise, earnings, business or prospects of the Company taken as a whole, or (B) the ability of the Company to enter into, perform and effect the transactions contemplated hereby; no consent, approval, authorization, order, 3 registration, filing or qualification of or with any court or governmental authority or agency is required for the issue and sale of the Shares as contemplated herein or the consummation by the Company of the transactions contemplated by this Agreement, except such as may be required under the Act and the Rules and Regulations or state securities or Blue Sky laws in connection with the distribution of the Shares by the Underwriters; and the issue and sale of the Shares as contemplated herein, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company is a party or by which it may be bound or to which any of the property or assets of the Company is subject, nor will any such action result in any violation of the provisions of the charter or code of regulation of the Company or any law, administrative regulation or administrative or court decree or order applicable to the Company. (g) The Company possesses all certificates, authorities or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct the business now operated by it, and the Company has not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, earnings, business or prospects of the Company considered as a whole. (h) Except as set forth in the Prospectus, as amended or supplemented, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, contemplated or threatened against the Company, which might result in any material adverse change in the condition, financial or otherwise, earnings, business or prospects of the Company considered as a whole, or might materially and adversely affect the properties or assets thereof or might adversely affect the lawful issuance and offering of the Shares in the manner contemplated by the Prospectus; and there are no material contracts or other documents which are required to be described in the Registration Statement or the Prospectus or filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been so described or have not been so filed. (i) The Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it, in each case free and clear of all liens, encumbrances and defects except (i) such as are referred to in the Prospectus, or (ii) such as do not materially and adversely affect the value of such property to the Company, and do not materially interfere with the use made and proposed to be made of such property by the Company; and any real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made by the Company. 4 (j) The Company has an authorized capitalization as set forth in the Prospectus, and 7,400,080 shares and only 7,400,080 shares of Common Stock (not including shares of Common Stock issuable after the conversion of 861 shares of Series A-1 Preferred Stock and 1,670 shares of Series A-2 Preferred Stock) are issued and outstanding, and no other capital stock of the Company will be outstanding prior to the issuance of the Shares. The Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and will conform to the description of them contained in the Prospectus. The issuance and sale of all the Shares is not subject to preemptive or other similar rights or to restrictions on transfer (other than those imposed by the Act, the Rules and Regulations or state securities or Blue Sky laws). There are no outstanding options, warrants or other rights calling for the issuance of, and no binding commitment to issue, any share of stock of the Company or any security convertible into or exchangeable for stock of the Company, except for stock options, warrants and Underwriter Warrants (as defined below) described in the Registration Statement (the "Stock Options") and Series A-1 and Series A-2 Preferred Stock described in the Registration Statement. The Common Stock, the Preferred Stock, the Shares and the Stock Options conform to all statements in relation thereto contained in the Registration Statement and the Prospectus. (k) This Agreement has been duly authorized, executed and delivered by the Company and is the legal, valid and binding agreement and obligation of the Company, except (i) as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting enforcement of creditors rights or by general equity principles, including requirements of reasonableness and good faith in the exercise of rights and remedies, whether applied by a court of equity or a court of law in an action at law or in equity, or by the discretionary nature of specific performance, injunctive relief, and other equitable remedies, including the appointment of a receiver and (ii) with respect to provisions relating to indemnification and contribution, to the extent they are held by a court of competent jurisdiction to be void or unenforceable as against public policy or limited by applicable laws or the policies embodied in them. (l) Neither the Company nor any of its officers, directors or holders of five percent or more of any class of its capital stock or any of their respective affiliates is a member of, or is associated or affiliated with a member of, the National Association of Securities Dealers, Inc. ("NASD"). (m) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities under the Registration Statement. (n) Grant Thornton LLP, who has certified certain financial statements of the Company, is an independent public accountant as required by the Act and the Rules and Regulations. 5 (o) Neither the Company nor, to the Company's knowledge, any director, officer, agent, employee or other person associated with the Company, acting on behalf of the Company, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment. (p) Neither the Company nor any of its affiliates has taken, and they will not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Shares in order to facilitate the sale or resale of any of the Shares as contemplated by the Rules and Regulations. (q) No transaction has occurred between or among the Company and any of its officers, directors, organizers or any affiliate or affiliates of any such officer, director, organizer or shareholder, that is required to be described in and is not described in the Prospectus. (r) The Company is not and will not, upon completion of the Offering, be an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. (s) The Company has obtained from all of its officers and directors listed in the Prospectus their written agreement ("Holdback Agreement") that for a period of 180 days after the termination of the Offering ("Holdback Period") they will not offer to sell, transfer, contract to sell or grant any option for the sale of or otherwise dispose of, directly or indirectly, any shares of Common Stock or Preferred Stock of the Company (or any securities convertible into or exercisable for such shares of Common Stock or Preferred Stock), except for (A) the exercise of Stock Options under the terms of the option plans and agreements pursuant to which the Stock Options were issued (including, as available, by means of "cashless exercise"); (B) gifts of Common Stock or Preferred Stock (or other securities) to a donee or donees who agree in writing to be bound by their donor's Holdback Agreement; (C) any stock transferred by Ridgewood Capital by way of settlement of the Series A-1 and Series A-2 Preferred Stock conversion controversy; and (D) the Holdback Period for Common Stock or Preferred Stock held by trusts or estates on the death of an executive office or director of the Company shall be the lesser of 90 days or the expiration of the Holdback Period. (t) Each Warrant to Purchase Preferred Stock of the Company (each, an "Underwriter Warrant") in the form of Exhibit A has been duly authorized, executed, and delivered by the Company and is the legal, valid, and binding obligation of the Company. The Company has the full power and authority to enter into and perform its obligations under the Underwriter Warrants. Each share of Preferred Stock issuable upon exercise of an Underwriter Warrant shall have been duly and validly authorized and issued and, upon receipt by the Company of payment therefor in accordance with the terms of the Warrant Agreement 6 as set forth in Exhibit A attached hereto, will be fully paid and nonassessable, will not be subject to preemptive rights or other similar rights or to restrictions on transfer (other than those imposed by the Act, the rules and regulations or state securities or Blue Sky Laws), and will conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. (u) At or prior to the Effective Date, the Underwriters shall have received a "blue sky" memorandum of Foley & Lardner, counsel for the Company, addressed to the Underwriters and in form and scope reasonably satisfactory to the Underwriters, concerning compliance with the blue sky or securities laws of the states listed in Exhibit B attached to this Agreement. (v) The Company will use its best efforts to obtain the consent of its shareholders to an amendment to its Certificate of Incorporation to authorize the issuance of Common Stock in an amount sufficient to issue all Common Stock contemplated to be issued pursuant to this offering or otherwise issuable by the Company. SECTION 3. Engagement of the Underwriters and Closing. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the parties have agreed as follows: (a) The Company shall and does hereby engage the Underwriters as the Company's agents to sell for the Company's account up to 4,800,000 Shares; provided, however, that the Underwriters will not sell more than 910,830 Shares until such time as the Company authorizes the Underwriters to do so. This engagement is exclusive, provided, however that the Company may sell shares to the parties identified on Schedule A below and such sales will not be subject to the commission payments provided for in subsection (e) below. (b) Each Underwriter severally agrees to use its best-efforts as agent, promptly after the Effective Time, to offer and obtain purchase subscriptions for all of the Shares subject to the terms, provisions and conditions set forth below. There is no assurance that any or all of the Shares to be offered by the Company will be sold, and no Underwriter is under any obligation to purchase or take down any of the Shares on its own behalf or on behalf of others. (c) At each closing described in subparagraph (e) hereto, the Underwriters shall pay the proceeds obtained from investors in this Offering, less commissions and the unaccountable expense allowance, to the Company on the date of each closing by wire transfer to the Company's account, held at Cal Fed, 328 No. Main Street, Sebastopol, California 95472, Telephone No.: (800) 843-2265, Account No.: 021-007212-0, or otherwise as the Company may direct in writing. (d) The Underwriter may effect sales of Shares through dealers selected by the Underwriter and pay such dealers out of the fees received by the Underwriter whatever compensation the Underwriter may determine. 7 (e) Subject to the satisfaction of the conditions set forth in this Agreement, the first closing date shall be thirty (30) days following the original Effective Date (the "First Closing Date"). Each closing described herein (a "Closing") shall take place at the offices of Snow Becker Krauss P.C., 605 Third Avenue, New York, NY 10158. The first closing shall be no later than two (2) business days following the First Closing Date (the "First Closing") unless otherwise agreed to in writing by the Parties. At the First Closing, the Company shall pay each Underwriter a financing fee equal to $0.10 for each Share subscribed through such Underwriter in the Offering during the 30-day period and an unaccountable expense allowance of $.03 per Share issued with respect to such Closing. At or prior to the First Closing, the Company shall deliver certificates representing all of the Shares sold prior to the First Closing Date. Following the First Closing Date, and upon the Underwriters' acceptance of subscriber checks totaling Two Hundred Fifty Thousand Dollars ($250,000.00), with such total to be determined after excluding all monies received from subscribers between the Effective Date and the First Closing Date, there shall be designated a second closing date (the "Second Closing Date"), whereupon the Company shall pay each Underwriter a financing fee equal to $0.10 for each Shares subscribed through such Underwriter in the Offering during the time period between the First Closing Date and the Second Closing Date and the unaccountable expense allowance of $.03 per Share issued at such Closing. The second actual closing shall take place no later than two (2) business days following the Second Closing Date (the "Second Closing"). At or prior to the Second Closing, the Company shall deliver certificates representing all of the Shares sold between the First Closing Date and the Second Closing Date. For purposes of determining the date of future closings, there shall be designated subsequent closing dates (each a "Subsequent Closing Date") only after the Underwriters have accepted subscriber checks totaling Two Hundred Fifty Thousand Dollars ($250,000.00), with such total to be determined after excluding all monies received from subscribers prior to the previous closings. There shall be an actual subsequent closing (each a "Subsequent Closing") that shall take place not later than two (2) business days following the Subsequent Closing Date, whereupon the Company shall pay each Underwriter a financing fee equal to $0.10 for each Share subscribed through such Underwriter in the Offering during the time period between the previous closing date and the Subsequent Closing Date and the unaccountable expense allowance of $.03 per Share issued at such Closing. At or prior to each Subsequent Closing, the Company shall deliver certificates representing all of the Shares sold during the applicable period. Subject to the satisfaction of the conditions set forth in Section 6 of this Agreement, on the 180th business day following the Effective Date (the "Final Closing Date"), there shall be an actual final closing (the "Final Closing") that shall take place not later than two (2) business days following the Final Closing Date. At the Final Closing, the Company shall pay each Underwriter a financing fee equal to $0.10 for each Share subscribed through such Underwriter in the Offering during the time period between the previous closing date and the Final Closing Date and the unaccountable expense allowance of $.03 per Share issued at such Closing. At or prior to the Final Closing, the Company shall deliver certificates representing all of the Shares sold during the applicable period. At each Closing, the Company shall also deliver to each Underwriter as additional compensation for its services in selling the Shares an Underwriter Warrant duly executed by the Company's authorized officers. The underwriters' warrants will be based on ten percent (10%) of the number of 8 shares sold (e.g. 100 shares sold, 10 warrants granted). The exercise price shall be 165% of the offering price of the Series B Preferred Stock. The term of the warrants shall be for three (3) years from the Effective Time. It is understood and agreed that the $0.10 per Share transaction fee, unaccountable expense allowance and Underwriter Warrant shall represent the Underwriters' entire compensation and commission, inclusive of any financial arrangements that the Underwriter may make with dealers as contemplated by subsection (d) above for the Underwriter's services in selling the Shares. (f) Subject to the criteria identified in Section 10(b) below, it is expressly agreed that the Company may terminate this engagement at any time upon giving thirty (30) working days written notice of termination. Any sales of securities made by the Underwriters prior to the termination notice shall be subject to the commissions and warrants as agreed, even if the closing of such sales occurs after the termination date. SECTION 4. Offering by the Underwriters. After the Effective Time and until the close of business on the day preceding the date of the Final Closing (the "Termination Date"), the Underwriters will, as Company's agents, offer the Shares for sale to the public on the terms and conditions as set forth in the Prospectus. SECTION 5. Covenants of the Company. The Company covenants and agrees with the Underwriters that: (a) The Company will advise the Underwriters promptly of any proposal to amend or supplement the Registration Statement as filed, or the related Prospectus, prior to each Closing Date, and will not effect such amendment or supplement without the Underwriters' consent which will not be unreasonably withheld; the Company will also advise the Underwriters promptly of the effectiveness of the Registration Statement (if the Effective Time is subsequent to the execution and delivery of this Agreement), of any amendment or supplement to the Registration Statement or the Prospectus, and of receipt of notification of the institution by the Commission of any stop order proceedings in respect of the Registration Statement or of any order preventing or suspending the use of any prospectus relating to the Shares, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, or of any request by the Commission to amend or supplement the Registration Statement or Prospectus or for additional information and will use its best efforts to prevent the issuance of any such stop order or of any order preventing or suspending the use of any prospectus relating to the Shares or suspending any such qualification and to obtain as soon as possible its lifting, if issued. (b) If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then amended or supplemented would, in the judgment of either Underwriter, include an untrue statement of a material fact, or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend or supplement the Prospectus to comply with the Act, or any other law, the 9 Company promptly will prepare and file with the Commission an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance and will notify the Underwriters and, upon either Underwriter's request prepare and furnish without charge to the Underwriters and to any dealer in securities as many copies as the Underwriters may from time to time reasonably request, of an amended Prospectus or a supplement to the Prospectus complying with Section 8(a) of the Act which will correct such statement or omission or effect such compliance. (c) The Company will deliver to each Underwriter as many signed and conformed copies of the Registration Statement (as originally filed) and of each amendment thereto (including exhibits filed therewith and documents incorporated therein by reference) as such Underwriter may reasonably request and will also deliver to the Underwriters a conformed copy of the Registration Statement and each amendment thereto (including documents incorporated therein by reference). (d) The Company will take such action as either Underwriter may reasonably request to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions of the United States as either Underwriter may designate, and will maintain such qualifications in effect for as long as may be required for the distribution of the Shares. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (e) During the period of three years hereafter, the Company will furnish to the Underwriters as soon as practicable after the end of each fiscal year, a copy of its annual report to shareholders for such year, and the Company will furnish to the Underwriters (i) as soon as available, a copy of each report or definitive proxy statement of the Company filed with the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or mailed to shareholders, and (ii) from time to time, such other information concerning the Company as either Underwriter may reasonably request. (f) The Company, during the period when the Prospectus relating to the Shares is required to be delivered under the Act, will file promptly all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act. (g) The Company currently has, and will continue to use its best efforts to maintain, the listing of its Common Stock, which represent the stock underlying the Shares if converted, on the NASDAQ SmallCap Market. SECTION 6. Conditions to Transfer of Funds. The Underwriters' consent to the transfer of funds to the Company upon each Underwriter's receipt of such funds from investors, will be subject to the accuracy of the representations and warranties on the part of the Company herein as of the date hereof and as of such date of transfer with the same force and effect as if made as of that date, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: 10 (a) If the Effective Time is not prior to the execution and delivery of this Agreement, the Effective Time shall have occurred not later than 5:00 p.m., Eastern Time, on the date of this Agreement, or such later time or date as shall have been consented to by the Underwriters. Prior to the First Closing, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened, or to the knowledge of the Company or the Underwriters, shall be contemplated by the Commission; and the Company shall have complied with all requests for additional information on the part of the Commission to your reasonable satisfaction. (b) Neither Underwriter shall have advised the Company that the Registration Statement or Prospectus, or any amendment or supplement thereto, contains any untrue statement of fact or omits to state any fact which, you concluded, is material and in the case of an omission is required to be stated therein or is necessary to make the statements therein not misleading. (c) The Underwriters shall have received a favorable opinion of Foley & Lardner, counsel for the Company, dated the First Closing Date, to the effect that: (i) The Company has been duly incorporated and validly exists as a corporation in good standing under the laws of the State of California and is qualified to do business in California. (ii) The Company has full corporate power and authority and all material authorizations, approvals, orders, licenses, certificates and permits necessary to own its properties and to conduct its business as described in the Registration Statement and Prospectus, except for such authorizations, approvals, orders, licenses, certificates and permits as are not material to the ownership of its properties or conduct of its businesses. (iii) The Company has authorized capital stock as set forth in the Prospectus and, on the Effective Date had 7,400,080 shares and only 7,400,080 shares of Common Stock (not including shares of Common Stock issuable after the conversion of 861 shares of Series A-1 Preferred Stock and 1,670 shares of Series A-2 Preferred Stock) issued and outstanding, and no other capital stock of the Company issued or outstanding; the Shares have been duly and validly authorized and issued and upon receipt by the Company of payment therefor in accordance with the terms of this Agreement will be fully paid and nonassessable and are not and will not be subject to preemptive rights or other similar rights or to restrictions on transfer (other than those imposed by the Act, the rules and regulations or state securities or Blue Sky Laws); the Shares and the other capital stock and Stock Options of the Company and the Underwriter Warrants conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. (iv) This Agreement has been duly authorized, executed and delivered by the Company and is the legal, valid and binding agreement and obligation of the Company, 11 except (A) as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting enforcement of creditors rights or by general equity principles, including requirements of reasonableness and good faith in the exercise of rights and remedies, whether applied by a court of equity or a court of law in an action at law or in equity, or by the discretionary nature of specific performance, injunctive relief, and other equitable remedies, including the appointment of a receiver and (B) with respect to provisions relating to indemnification and contribution, to the extent they are held by a court of competent jurisdiction to be void or unenforceable as against public policy or limited by applicable laws or the policies embodied in them. (v) The certificates evidencing the Shares are in the form approved by the Board of Directors of the Company, comply with the bylaws and Articles of Incorporation of the Company and comply as to form and in all other material respects with applicable legal requirements. (vi) The Registration Statement is effective under the Act and no stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued under the Act or proceedings therefor initiated or threatened or are pending or contemplated by the Commission. (vii) Statements set forth in the Registration Statement and Prospectus, insofar as they are descriptions of corporate documents, stock option plans, contracts, agreements or descriptions of laws, regulations or regulatory requirements, or refer to compliance with laws or to statements of laws or legal conclusions, are correct in all material respects. (viii) No consent, approval, authorization, order, filing, registration or qualification of or with any court or governmental authority or agency is required for the issue and sale of the Shares or the consummation of the transactions contemplated by this Agreement, except such as may be required and have been obtained under the Act and the Rules and Regulations and such as may be required under state securities or Blue Sky laws in connection with the sale of the Shares by the Underwriters; and, the issue and sale of the Shares, the execution and delivery of this Agreement and the consummation of the transactions contemplated herein will not conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, any material contract filed with the Registration Statement in response to paragraphs (4) and (10) of Item 601(b) of Regulation S-B promulgated under the Act and the Exchange Act ("Regulation S-B") or other instrument to which the Company is a party or by which it or any of them may be bound or to which any of the property or assets of the Company is subject, that is disclosed or referred to in the Prospectus or which is actually known by such counsel, nor will such action result in any violation of, the provisions of the Articles of Incorporation or bylaws of the Company, or any California 12 corporate law, or administrative regulation or, to the actual knowledge of such counsel, any administrative or court decree or order applicable to the Company. (ix) To the actual knowledge of such counsel, (A) there is no governmental action or proceeding and no litigation pending against the Company which would adversely affect the lawful issuance and offering of the Shares or that is required to be described in the Registration Statement or Prospectus and is not so described, and (B) there are no material contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required. (x) The Registration Statement, as of its date or as of its effective date, and the Prospectus, as of the Effective Date and as of its date (other than the financial statements and related schedules and other financial and statistical data included therein, as to which no opinion need be expressed) complies as to form in all material respects with the requirements of the Act and the Rules and Regulations. In rendering the foregoing opinion, such counsel may rely upon certificates of public officials (as to matters of fact and law) and officers of the Company (as to matters of fact), and include qualifications in its opinion as are reasonably acceptable to the Underwriters. Copies of all such certificates shall be furnished to counsel to the Underwriters on such Closing Date. In addition, such counsel shall state that they have participated in conferences with officers of the Company and representatives of the Underwriters at which the contents of the Registration Statement and Prospectus and related matters were discussed and although such counsel did not independently verify the accuracy or completeness of the statements made in the Registration Statement and Prospectus and does not assume any responsibility for the accuracy or completeness of the statements in the Registration Statement and Prospectus, on the basis of the foregoing, nothing has come to the attention of such counsel that would lead them to believe that the Registration Statement or Prospectus, as amended or supplemented, if amended or supplemented, contains any untrue statement of a material fact or omits a material fact required to be stated therein or necessary to make the statements therein not misleading; except that such statement may exclude financial statements, financial data, and statistical information included in the Registration Statement and Prospectus. (d) The Underwriters shall have received from the President or any Vice President and a principal financial or accounting officer of the Company a certificate, dated such Closing Date, in which such officers, to the best of their knowledge and after reasonable investigation, shall state that there has not been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) any material adverse change in the condition, financial or otherwise, earnings, business or prospects of the Company considered as a whole, whether or not arising in the ordinary course of business, or (ii) any material transactions entered into by the Company other than those in the ordinary course of business, except in the case of clause (i) and clause (ii) as set forth in or contemplated by the Prospectus; the representations and warranties of the Company contained in Section 2 are true and correct with 13 the same force and effect as though made on and as of such Closing Date and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened or are contemplated by the Commission. (e) The Underwriters shall have received from Grant Thornton, LLP, independent public accountants, letters, dated on each such Closing Date, addressed to the Underwriters, in a form as is reasonably acceptable to the Underwriters. (f) At such Closing Date, counsel for the Underwriters shall have been furnished with such other documents and opinions as they may reasonably require. (g) The Company's Common Stock, which represents the stock underlying the Shares if converted, is currently listed on the NASDAQ Small Cap Market. (h) The Underwriters shall have received from each director and executive officer of the Company a written agreement to the effect set forth in Section 2(s). (i) At each Closing, the Underwriters shall have received a "blue sky" memorandum of Foley & Lardner, counsel for the Company, addressed to the Underwriters and in form and scope reasonably satisfactory to the Underwriters, concerning compliance with the blue sky or securities laws of the states listed in Exhibit B attached to this Agreement. (j) No order suspending the sale of the Shares prior to such Closing Date, in any jurisdiction listed in Exhibit C, shall have been issued on such Closing Date, and no proceedings for that purpose shall have been instituted or, to either Underwriter's knowledge or that of the Company shall be contemplated. (k) The NASD, upon review of the terms of the public offering of the Shares, shall not have objected to either Underwriter's participation in the same. If any condition to be fulfilled prior to or at such Closing Date is not so fulfilled, either Underwriter may terminate this Agreement or, if such Underwriter so elects, waive any such condition, which has not been fulfilled, or extend the time of its fulfillment. SECTION 7. Payment of Expenses. The Company will pay all costs, expenses, fees, disbursements and taxes incident to (i) the preparation by the Company, printing, filing and distribution of the Registration Statement (including financial statements and exhibits), the Prospectus; and all amendments and supplements to any of them prior to or during the period specified in Section 5(b), (ii) the preparation, printing (including word processing and duplication costs) and delivery of this Agreement (other than the fees of Snow Becker Krauss P.C.), Preliminary and Supplemental Blue Sky Memoranda, and all other agreements, memoranda, correspondence and other documents printed and delivered in connection with the offering of the Shares, (iii) the registration with the Commission, and the issuance by the Company, of the Shares, (iv) the registration or qualification of the Shares for offer and sale 14 under the securities or Blue Sky laws of the several states (including the reasonable fees and disbursements of the counsel relating to such registration or qualification), (v) filings and clearance with the NASD in connection with the offering, (vi) fees and expenses, if any, incurred in connection with the inclusion of the Shares on the NASDAQ Small Cap Market, (vii) the fees and expenses of the Registrar and Transfer Agent for the Shares, and (viii) the performance by the Company of its other obligations under this Agreement, and all other costs and expenses incident to the performance of its obligations hereunder in this Section 7. The Company shall also reimburse the Underwriters at each Closing expenses incurred by such Underwriter in connection with the performance of its services hereunder, not to exceed three percent (3.00%) of the aggregate amount of funds raised by both Underwriters or Two Hundred Eighty-eight Thousand Dollars ($288,000.00), whichever is the lesser amount. Generally, these expenses will represent travel, document procurement and delivery and related matters, but will also include the fees and expenses of the Underwriters' attorneys and other professional advisors should their advice be required, but in any event, the Underwriters need not account therefor. If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 10(a) hereof, the Company shall not then be under any liability to the Underwriters except as provided in Sections 7 and 8 hereof, but, if for any other reason the Shares are not delivered by or on behalf of the Company as provided herein, the Company shall reimburse the Underwriters for all of its out-of-pocket expenses reasonably incurred in connection with marketing and preparing for the purchase, sale and delivery of the Shares, including the reasonable fees and disbursements of counsel for the Underwriters but the Company shall then be under no further liability to the Underwriters except as provided in Sections 7 and 8 hereof. SECTION 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls each Underwriter within the meaning of the Act or the Exchange Act, from and against any and all losses, claims, damages and liabilities (or actions in respect thereof) (including, without limiting the foregoing, the reasonable legal and other expenses incurred in connection with investigating or defending any action, suit or proceeding or any claim asserted, as such expenses are incurred) arising out of or based on any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, are caused by any such untrue statement or omission or alleged untrue statement or omission based upon the information furnished to the Company in writing by the Underwriter in the Prospectus concerning the terms of the offering by the Underwriter; provided, however, that the Company shall not be liable to the Underwriter under this subsection (a) for any such loss, claim, damage or liability arising from the Prospectus to the extent that such loss, claim, damage or liability results from the fact that such Underwriter sold Shares to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented, in any case where (i) such delivery of the Prospectus as then amended or supplemented to such person is required by the Act, (ii) the 15 Company has previously furnished sufficient copies thereof to the Underwriter at such time as is sufficient to permit such delivery prior to such confirmation, and (iii) the loss, claim, damage or liability of the Underwriter results from an untrue statement or omission of a material fact contained in the Prospectus which was corrected in the Prospectus as amended or supplemented, excluding documents incorporated therein by reference. This indemnity agreement will be in addition to any liability, which the Company may otherwise have. (b) Each Underwriter severally agrees to indemnify and hold harmless the Company, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act from and against any and all losses, claims, damages and liabilities (or actions in respect thereof) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to the information furnished to the Company by such Underwriter set forth in writing. This indemnity agreement will be in addition to any liability, which the Underwriters may otherwise have. (c) In case any action or proceeding (including any governmental or regulatory investigation or proceeding) shall be instituted involving any person in respect of which indemnity may be sought pursuant to any of the two preceding paragraphs, such person (hereinafter called the indemnified party) shall promptly notify the person against whom such indemnity may be sought (hereinafter called the indemnifying party) in writing; provided, however, the omission to so notify the indemnifying party shall relieve the indemnifying party from liability under the two preceding paragraphs only to the extent prejudiced thereby. The indemnifying party, upon request of the indemnified party, shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others that the indemnifying party may designate and shall pay the fees and disbursements of such counsel related to such proceeding. In any such action or proceeding any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for an Underwriter and all persons, if any, who control an Underwriter within the meaning of the Act or the Exchange Act, and (ii) the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for an Underwriter and 16 such control persons of an Underwriter, the Underwriter shall designate such firm in writing. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, the Company shall designate such firm in writing. The Company shall not, without the prior written consent of any indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any such indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. (d) If the indemnification provided for in this Section 8 is insufficient or unavailable to an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities and expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and an Underwriter on the other from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or if the indemnified party shall have failed to the prejudice of the indemnifying party to give the notice required by Section 8(c), in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and an Underwriter on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and an Underwriter on the other shall be deemed to be in the same proportions as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total commissions received by an Underwriter. The relative fault of the Company on the one hand and an Underwriter on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to in the immediately preceding paragraph shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of Section 8(d), in no event shall any Underwriter be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 17 12(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. SECTION 9. Representations Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in the Agreement, or contained in certificates of officers of the Company submitted pursuant hereto, including indemnity and contribution agreements, shall remain operative and in full force and effect, regardless of any termination of this Agreement, or any investigation, or any statement as to the results thereof, made by or on behalf of any Underwriter or any person controlling any Underwriter or by or on behalf of the Company, its officers or directors or controlling persons and shall survive acceptance of and payment for Shares hereunder. If this Agreement is terminated pursuant to Section 10 or if for any reason the sale of Shares by the Underwriters is not consummated, the Company shall remain responsible for the reasonable expenses to be paid or reimbursed by it pursuant to Section 7 and the respective obligations of the Company and the Underwriters pursuant to Section 8 shall remain in effect. SECTION 10. Termination. (a) By the Underwriters. This Agreement may be terminated for any reason at any time prior to the delivery and payment of the Shares on any Closing Date, by the Underwriters upon the giving of written notice of such termination to the Company, if prior to such time (i) there has been, since the respective dates as of which information is given in the Registration Statement and the Prospectus, (A) any material adverse change in the condition, financial or otherwise, earnings, business or prospects of the Company considered as a whole, whether or not arising in the ordinary course of business or as described in the Prospectus, or (B) any material transaction entered into by the Company other than in the ordinary course of business, (ii) there has occurred any outbreak or escalation of hostilities or other calamity or crisis or material change in existing national or international financial, political, economic or securities market conditions, the effect of which is such as to make it, in the judgment of either Underwriter, impracticable or inadvisable to market the Shares in the manner contemplated in the Prospectus or Subscriptions for purchase of the Shares, or (iii) trading generally on the NASDAQ National Market or the New York Stock Exchange has been suspended, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of said exchanges or by order of the Commission or any other governmental authority. This Agreement may also be terminated as provided in Section 6. In the event of any such termination, the provisions of Sections 7 through 14 shall remain in effect. (b) By the Company. This Agreement may not be terminated by the Company so long as, (i) the Underwriters continue to use their best efforts to sell the Shares, (ii) the Underwriters have obtained subscriptions for at least 500,000 Shares and (iii) sixty (60) days have not transpired from the date of this Agreement. Following the expiration of sixty (60) days from the date of this Agreement, the Company may terminate the Agreement in the event that the Underwriters have not obtained subscriptions for at least 500,000 Shares in such sixty 18 (60) days, or for an additional 250,000 Shares in each thirty (30) day period thereafter. Notwithstanding the foregoing, the Company shall pay the Underwriters the compensation provided for in this Agreement with respect to any subscriptions obtained by them. Subject to the criteria above, and notwithstanding anything in this Agreement to the contrary, the Company may terminate this Agreement by providing thirty (30) days written notice to the Underwriters at the addresses set forth in Section 11 below. SECTION 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Underwriters c/o Alexander, Wescott & Co., Inc., 40 Wall Street, 31st Floor, New York, New York 10005, facsimile transmission no. 212-742-9074, and c/o Hyperion Partners Corp, 1215 Hightower Trail, Ste B220, Atlanta, Georgia, 30350, facsimile transmission no. (770) 992 -6800, and notices to the Company shall be directed to it at 117 Morris Street, Sebastopol, California 95472, facsimile transmission no. (415) 824-4159, attention of the Secretary with a copy to the Chief Financial Officer. SECTION 12. Parties. This Agreement shall inure to the benefit of and be binding upon the Company, its directors and officers who signed the Registration Statement, each Underwriter, any controlling persons referred to herein and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person, firm or corporation any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. No purchaser of Shares from any Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 13. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without application to its principles of conflicts of laws. SECTION 14. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [The remainder of this page is intentionally left blank.] 19 If the foregoing is in accordance with your understanding of our agreement, please sign this Agreement and return to us ten counterparts hereof. Very truly yours, ZAP By: ------------------------------------ Name: Gary Starr Title: Chief Executive Officer Confirmed and Accepted, as of the date first above written: ALEXANDER, WESCOTT & CO., INC. By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- HYPERION PARTNERS CORP By: ------------------------------------- Name: ----------------------------------- Title: ---------------------------------- 20 Exhibit A Underwriters' Warrant Agreement 21 Exhibit B Blue Sky States States: The Company will blue sky all 50 states. 22 Schedule A Exclusive List of Investors to be Contacted by Company Name: 1. Madeline Sone 2. All board members of ZAP 23 EXHIBIT A UNDERWRITERS' WARRANT AGREEMENT Underwriter's WARRANT AGREEMENT dated as of October 2, 2001 by and between ZAP (the "Company") and Alexander, Wescott & Co., Inc. and Hyperion Partners Corp. (the "Underwriter"). Preliminary Statement The Underwriter has agreed, pursuant to an underwriting agreement (the "Underwriting Agreement") dated October 2, 2001, between the Underwriter and the Company, to act as the Underwriter in connection with the Company's proposed public offering of 4,800,000 shares of the Company's convertible Series B Preferred Stock (the "Preferred Stock"), at an initial public offering price of $1.00 per share (the "Public Offering"). The Company proposes to issue to the Underwriter at the closing of the Public Offering as part of the Underwriter's compensation in connection therewith, warrants (the "Underwriter's Warrants") to purchase up to 480,000 shares of Preferred Stock at the rate of one warrant to purchase one share of Preferred Stock for each ten (10) shares of Preferred Stock sold by the Underwriter in the Public Offering. NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter to the Company of Ten Dollars ($10.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Holders (as defined in Section 3 below) are hereby granted the right to purchase, at any time from ______________, 2001 until 5:00 p.m., New York City time, on _____________, 2004 an aggregate of __________ shares of Preferred Stock, at an initial purchase price of $1.65 per share (subject to adjustment as provided in Section 6 hereof) (165% of the Public Offering price of the Preferred Stock), subject to the terms and conditions of this Agreement. 2. Warrant Certificates. The warrant certificates (the "Underwriter's Warrant Certificates") to be delivered pursuant to this Agreement shall be in the form set forth in 2 Exhibit A attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Underwriter's Warrants. The Underwriter's Warrants are exercisable during the term set forth in Section 1 hereof and the Purchase Price (as hereinafter defined) is payable by certified or cashier's check or money order payable in lawful money of the United States. Upon surrender of an Underwriter's Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Purchase Price for the Preferred Stock issuable upon exercise thereof (and such other amounts, if any, arising pursuant to Section 4 hereof) at the Company's principal office (presently located at 117 Morris Street, Sebastopol, California 95472). The Purchase Price may also be paid by delivery of shares of Preferred Stock having a Market Price (as hereunder defined) equal to the Purchase Price or surrender for cancellation of the unexercised portion of this Warrant in payment of the Purchase Price in accordance with the formula set forth below, or any combination of the foregoing methods of payment. The number of shares of Preferred Stock which may be purchased upon surrender for cancellation of the unexercised portion of this Warrant in payment of the Purchase Price shall be determined as follows: W(MP-WP) S = --------------------- WP where S = the number of shares of Preferred Stock W = the unexercised portion of this Warrant surrendered in payment of the Purchase Price MP = the Market Price WP = the Purchase Price As used herein, the phrase "Market Price" at any date shall be deemed to be the average of the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three 3 trading days, in either case as officially reported by the principal securities exchange on which the Preferred Stock is listed or admitted to trading or as reported by the Nasdaq Stock Market ("Nasdaq"), or, if the Preferred Stock is not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market, but is quoted on the Nasdaq SmallCap Market or the NASD's Electronic Bulletin Board, the closing bid quotation as reported by Nasdaq, the National Quotation Bureau, Incorporated or a similar organization, or if the Preferred Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it for the day immediately preceding such issuance or sale, the day of such issuance or sale and the day immediately after such issuance or sale. If the Preferred Stock is listed or admitted to trading on a national securities exchange and also quoted on the Nasdaq National Market, the Market Price shall be determined as hereinabove provided by reference to the prices reported on the Nasdaq National Market; provided that if the Preferred Stock is listed or admitted to trading on the New York Stock Exchange, the Market Price shall be determined as hereinabove provided by reference to the prices reported by such exchange." In the event the Preferred Stock is converted to Common Stock, the foregoing shall apply to such Common Stock giving effect to such conversion in an equitable manner to provide for the issuance of equivalent values upon exercise. The registered holder of an Underwriter's Warrant Certificate ("Holders" or "Holders") shall be entitled to receive a certificate or certificates for the Preferred Stock so purchased. The purchase rights represented by each Underwriter's Warrant Certificate are exercisable at the option of the Holders thereof, in whole or in part, as to the whole number of shares of Preferred Stock purchasable therewith (but not as to fractions thereof). In the case of the purchase of less than all the shares of Preferred Stock purchasable upon the exercise of the 4 Underwriter's Warrants represented by an Underwriter's Warrant Certificate, the Company shall cancel the Underwriter's Warrant Certificate represented thereby upon the surrender thereof and shall execute and deliver a new Underwriter's Warrant Certificate of like tenor for the number of Underwriter's Warrants which have not been exercised. 4. Issuance of Certificates. Upon the exercise of the Underwriter's Warrants and payment of the Purchase Price therefor, the issuance of certificates representing the shares of Preferred Stock issuable upon exercise thereof, shall be made forthwith (and in any event within five (5) business days thereafter) without further charge to the Holder thereof, and such certificates shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Underwriter's Warrant Certificates and the certificates representing the shares of Preferred Stock (and such other securities, property or rights as may be represented by certificates) issuable upon exercise thereof shall be executed on behalf of the Company by the manual or facsimile signature of the then Chairman or Vice Chairman of the Board of Directors, Chief Executive Officer, President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the then Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the Company. Underwriter's Warrant Certificates shall be dated the date of issuance thereof by the Company upon initial issuance, transfer or exchange, or in lieu of mutilated, lost, stolen or destroyed Underwriter's Warrant Certificates. 5. Restriction On Transfer of Underwriter's Warrants. The Holder of an Underwriter' s Warrant Certificate (and its Permitted Transferees, as defined below), by its 5 acceptance thereof, covenants and agrees that the Underwriter's Warrants are being acquired as an investment and not with a view to the distribution thereof; that the Underwriter's Warrants may be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, to any person (a "Permitted Transferee"), provided such transfer, assignment, hypothecation or other disposition is made in accordance with the provisions of the Securities Act of 1933, as amended (the "Act"); and provided, further, that until ____________, 2002 [one year following the effective date of the Public Offering] only officers and partners of the Underwriter, or any selling group member in the Public Offering and their respective officers and partners, shall be Permitted Transferees. 6. Purchase Price. The initial purchase price of the Units issuable upon exercise of the Underwriters' Warrants shall be $1.65 per Unit [165% of the Public Offering Price]. 7. Registration Rights. (a) Registration Under the Securities Act of 1933. The Underwriter's Warrants have not been registered under the Act. The Underwriter's Warrant Certificates shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933 (the "Act"), and may not be offered for sale or sold except pursuant to (i) an effective registration statement under the Act, or (ii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel to the issuer, that an exemption from registration under such Act is available. (b) Demand Registration. (i) At any time commencing one (1) year and expiring five (5) years after the effective date of the Company's Registration Statement relating to the Public Offering (the "Effective Date"), the Holders of a majority (as hereinafter defined) of the shares of Preferred Stock purchased and purchasable upon exercise of the Underwriter's Warrants shall have the right, exercisable by written notice to the Company, to have 6 the Company prepare and file with the Securities and Exchange Commission (the "Commission"), solely on one (1) occasion, a registration statement on Form SB-2 (or other appropriate form), and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Holders, in order to comply with the provisions of the Securities Act, so as to permit a public offering and sale for a period of nine (9) months of the shares of Preferred Stock purchased or purchasable by such Holders and any other Holders of the Underwriter's Warrants upon exercise of the Underwriter's Warrants (such shares of Preferred Stock being hereinafter referred to as the "Registrable Securities"). The Holders of the Underwriter's Warrants may demand registration without exercising the Underwriter's Warrants. The Company covenants and agrees to give written notice of any registration request under this Section 7(b) to all other registered Holders of the Underwriter's Warrants and the Registrable Securities within ten (10) days from the date of the receipt of any such registration request and upon the written request of any Holder within fifteen (15) days after receipt of such notice to include in such registration statement, the Registrable Securities of such Holder. As used herein, the term "Majority" in reference to the Holders of the Underwriter's Warrants shall mean in excess of fifty percent (50%) of the shares of Preferred Stock issued or issuable upon exercise of the Underwriter's Warrants that (i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith, or (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. (c) Piggyback Registration. If, at any time within the period commencing one (1) year and expiring seven (7) years after the Effective Date, the Company should file a registration statement with the Commission under the Securities Act (other than in connection with a merger or other business combination transaction or pursuant to Form S-8) it will give written notice by registered mail, at least thirty (30) calendar days prior to the filing of each such registration statement, to the Underwriter and to all other Holders of the Registrable 7 Securities. If the Holders of the Registrable Securities notify the Company within ten (10) calendar days after receipt of any such notice of its or their desire to include any Registrable Securities in such proposed registration statement, the Company shall afford the Holders of the Registrable Securities the opportunity to have such Registrable Securities included in such registration statement; provided, however, that in the event a registration statement is filed pursuant to the Registration Rights Agreement between the Company and the holders of the Series A-1 and Series A-2 Preferred Stock dated June 23, 2000, the Holders may not include such Registrable Securities therein. Notwithstanding the provisions of this Section 7(c) and the provisions of Section 7(d), the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7(c) (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file the registration statement as to which it gave notice to the holders of the Registrable Securities, or to withdraw the same after the filing but prior to the effective date thereof. (d) Covenants of the Company With Respect to Registration. In connection with any registration under Sections 7(b) and 7(c) hereof, the Company covenants and agrees as follows: (1) The Company shall use its best-efforts to file a registration statement within forty-five (45) calendar days of receipt of any demand therefor pursuant to section 7(b); provided, however, that the Company shall not be required to produce audited or unaudited financial statements for any period prior to the date such financial statements are required to be filed in a report on Form 10-KSB or Form 10-QSB, as the case may be. The Company shall use its best-efforts to have any registration statement declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Registrable Securities such number of prospectuses as shall reasonably be requested. (2) The Company shall pay all costs (excluding fees and expenses of Holders' counsel and any underwriting discounts or selling fees, expenses or commissions), fees and expenses in connection with any registration statement filed pursuant to Sections 7(b) 8 and 7(c) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. If the Company shall fail to comply with the provisions of Section 7(d), the Company shall, in addition to any other equitable or other relief available to the Holders, be liable for any or all incidental and special damages and damages due to loss of profit sustained by the Holders requesting registration of their Registrable Securities. (3) The Company will take all necessary action which may be required to qualify or register the Registrable Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holders, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (4) The Company shall indemnify the Holders of the Registrable Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement, but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 8 of the Underwriting Agreement, and the Holders shall indemnify the Company to the same extent and with the same effect as the provisions pursuant to which the Underwriter have agreed to indemnify the Company contained in Section 8 of the Underwriting Agreement. (5) The Holders of the Registrable Securities to be sold pursuant to a registration statement, and their successors and assigns, shall indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning 9 of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 8 of the Underwriting Agreement pursuant to which the Underwriter have agreed to indemnify the Company. (6) Nothing contained in this Agreement shall be construed as requiring the Holders to exercise their Underwriter's Warrants (or the Warrants purchasable upon exercise thereof) prior to the initial filing of any registration statement or the effectiveness thereof. (7) The Company shall not be entitled to include any securities other than the Registrable Securities in any registration statement filed pursuant to Section 7(b) hereof without the prior written consent of the Holders of a Majority of the Registrable Securities. (8) The Company shall furnish to a designated Underwriter of the Holders participating in the offering and to each Underwriter, if any, a signed counterpart, addressed to such Holder or Underwriter of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and if such registration relates to an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration relates to an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement (the "Accountants"), in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' "cold comfort" letter, with respect to events subsequent to the date of such financial statements, as are 10 customarily covered in opinions of issuer's counsel and in "cold comfort" letters, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in "cold comfort" letters delivered to Underwriter in underwritten public offerings of securities. (9) The Company shall as soon as practicable after the effective date of the registration statement make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Securities Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (10) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence described below and any managing Underwriter copies of all correspondence between the Commission and the Company, its counsel or Accountants with respect to the registration statement and permit each Holder and Underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and accountants, all to such reasonable extent and at such reasonable times and as often as any such Holder shall reasonably request. (11) The Company shall use its best-efforts to enter into an underwriting agreement with the managing underwriter selected for such underwriting by Holders holding a Majority of the Registrable Securities requested to be included in such underwriting; provided, however, that (i) such managing underwriter shall be reasonably acceptable to the Company, except that in connection with an offering for which the Holders have piggyback rights, the Company shall have the sole right to select the managing underwriter, and (ii) the Holders shall be responsible for any selling fees or commissions in connection with such underwriting. Such underwriting agreement shall be satisfactory in form and substance to the Company, a Majority of such Holders and such managing underwriter, and shall contain such 11 representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriter shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriter except as they may relate to such Holders and their intended methods of distribution. (e) Further Registrations. The Company will cooperate with the Holders of the Registrable Securities in preparing and signing any registration statement, in addition to the registration statements discussed above, required in order to sell or transfer the Underwriter's Securities and will supply all information required therefor, but such additional registration statement expenses or offering statement expenses will be prorated between the Company and the Holders of the Registrable Securities according to the aggregate sales price of the securities being issued. The provisions of Section 7(d) shall apply to any such registration statement. (f) In connection with any offering involving an underwriting of shares of the Company's capital stock under this Section 7, the Company shall not be required to include any of the Holders' Registrable Securities in such underwriting unless such Holders accept the terms of the underwriting (including any lock-up periods applicable to unregistered shares) as agreed upon between the Company and the underwriters so selected, and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company. If the total amount of Registrable Securities requested by the Holders, including other securities to be registered by additional holders of the Company's capital stock, to be included in such offering exceeds the amount of securities to be sold, other than by the Company, that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such Registrable Securities, and other securities, which the underwriters 12 determine in their sole discretion will not jeopardize the success of the offering. The securities so included shall be apportioned, to the extent determined by the underwriters to be compatible with the offering, to Holders selling Registrable Securities, and holders of other securities, pro rata according to the total amount of securities entitled to be included therein owned by each Holder of Registrable Securities and each holder of other securities. For purposes of the preceding sentence concerning apportionment, for any Holder of Registrable Securities which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "Holder," and any pro-rata reduction with respect to such "Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Holder" as defined in this sentence. 8. Exchange and Replacement of Warrant Certificates. Each Underwriter's Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holders at the principal executive office of the Company, for a new Underwriter's Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of shares of Preferred Stock in such denominations as shall be designated by the Holders thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Underwriter's Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Underwriter's Warrant Certificates, if mutilated, the Company will make and deliver a new Underwriter's Warrant Certificate of like tenor, in lieu thereof. 9. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Underwriter's Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional 13 interests; provided, however, that if a Holder exercises all Underwriter's Warrants held of record by such Holder, the fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock. 10. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Preferred Stock, solely for the purpose of issuance upon the exercise of the Underwriter's Warrants, such number of shares of Preferred Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of Underwriter's Warrants and payment of the Purchase Price therefor, all the shares of Preferred Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. The Company further covenants and agrees that as long as the Underwriter's Warrants shall be outstanding, the Company shall use its best-efforts to cause the Preferred Stock to be listed (subject to official notice of issuance) on all securities exchanges on which the Preferred Stock and Common Stock issued in the Public Offering may then be listed or quoted. 11. Adjustment of Purchase Price and Number of Shares. (a) Subdivision and Combination. In case of the Company shall at any time subdivide or combine its outstanding shares of capital stock of whatever nature, the Purchase Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. (b) Adjustment in Number of Shares. Upon each adjustment of the Purchase Price pursuant to the provisions of this Article 11, the number of Shares issuable upon the exercise of each Warrant shall be adjusted to the nearest full Share by multiplying a number equal to the Purchase Price in effect immediately prior to such adjustment by the number of Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Purchase Price. 14 (c) Reclassification, Consolidation, Merger, etc. In case of any reclassification or change of the outstanding shares of capital stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of capital stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holder shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holder were the owner of the shares of Preferred Stock or the Common Stock issuable upon conversion thereof underlying the Warrants immediately prior to any such events at a price equal to the product of (x) the number of shares issuable upon exercise of the Warrants and (y) the Purchase Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holder had exercised the Warrants. (d) No Adjustment of Purchase Price in Certain Cases. Notwithstanding anything herein to the contrary, no adjustment of the Purchase Price shall be made: (i) Upon the issuance or sale of the Warrants, or the shares of Preferred Stock issuable upon the exercise of the Warrants; (ii) Upon the issuance or sale of shares of Preferred Stock issued by the Company in the public offering of its Shares being purchased concurrently herewith; (iii) Upon (i) the issuance of options pursuant to the Company's employee stock option plan in effect on the date hereof or the sale by the Company of any shares of capital stock pursuant to the exercise of any such options, or (ii) the sale by the 15 Company of any shares of capital stock pursuant to the exercise of any options or warrants previously issued and outstanding on the date hereof. (iv) If the amount of said adjustment shall be less than two cents ($0.02) per share, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least two cents ($0.02) per Share. (e) Dividends and Other Distributions with Respect to Outstanding Securities. In the event that the Company shall at any time prior to the exercise of all Warrants declare a dividend (other than a dividend consisting solely of shares of capital stock or a cash dividend or distribution payable out of current or retained earnings) or otherwise distribute to its shareholders any monies, assets, property, rights, evidences of indebtedness, securities (other than shares of capital stock), whether issued by the Company or by another person or entity, or any other thing of value, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Preferred Stock other securities receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same monies, property, assets, rights, evidences of indebtedness, securities or any other thing of value that they would have been entitled to receive at the time of such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Subsection 11(e). (f) Subscription Rights for Shares of Capital Stock or Other Securities. In the case that the Company or an affiliate of the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights to subscribe for shares of capital stock or any other securities of the Company or of such affiliate to all the shareholders of the Company, the Holders of the unexercised Warrants shall be entitled, in addition to the shares of Preferred Stock or other securities receivable upon the exercise of the Warrants, to receive such rights at the time such rights are distributed to the other shareholders of the Company. 16 12. Notices to Underwriter's Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Underwriter's Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of capital stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its capital stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or 17 exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holders of the Underwriter's Warrants, to the address of such Holders as shown on the books of the Company; or (b) If to the Company to the address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holders. 14. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this Agreement without the approval of any Holders of Underwriter's Warrant Certificates (other than the Underwriter) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem shall not adversely affect the interests of the Holders of Underwriter's Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Underwriter, the Holders and their respective successors and assigns hereunder. 16. Termination. This Agreement shall terminate at the close of business on __________________, 2008. Notwithstanding the foregoing, the indemnification provisions of Section 7 shall survive such termination until the close of business on the expiration of any applicable statute of limitations. 17. Governing Law: Submission to Jurisdiction. This Agreement and each Underwriter's Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance 18 with the laws of said state without giving effect to the rules of said state governing the conflicts of laws. The Company, the Underwriter and the Holders hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company, the Underwriter and the Holders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon any of the Company, the Underwriter and the Holders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 12 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. 18. Entire Agreement; Modification. This Agreement (including the Underwriting Agreement, to the extent portions thereof are referred to herein) contains the entire understanding between the parties hereto with respect to the subject matter hereof and thereof. Subject to Section 14, this Agreement may not be modified or amended except by a writing duly signed by the Company and the Holders of a majority of the Registrable Securities. 19. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. 20. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered Holders of the Underwriter's Warrant Certificates or Registrable Securities any legal 19 or equitable right, remedy or claim under this Agreement, and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other Holders of the Underwriter' s Warrant Certificates or Registrable Securities. 22. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 23. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Underwriter and their respective successors and assigns and the Holders from time to time of the Underwriters' Warrant Certificates. 24. Miscellaneous. In the event the Preferred Stock is converted to Common Stock, all of the terms of this Agreement shall be applicable to such Common Stock as though the Preferred Stock issuable upon exercise of this Warrant has been issued, and the Purchase Price and the number of shares issuable shall be calculated in an equitable manner so as to assure the issuance of equivalent values with respect to all of the provisions in this Agreement. 20 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. ZAP By: --------------------------------------- Name: Gary Starr Title: Chief Executive Officer ALEXANDER, WESCOTT & CO., INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- HYPERION PARTNERS CORP By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 21 EXHIBIT A ZAP WARRANT CERTIFICATE THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE COMMENCING __________________, 2001 THROUGH 5:00 P.M., NEW YORK CITY TIME ON _____________, 2006 No. UW-1 ______Warrants This Warrant Certificate certifies that ___________________________, or registered assigns, is the registered holder of _______ Warrants to purchase initially, at any time from __________________, 2001 until 5:00 p.m., New York City time on __________________ (the "Expiration Date"), _______ fully paid and non-assessable shares of Preferred Stock (the "Preferred Stock"), of ZAP, a California corporation (the "Company") at a purchase price of $_____ per share (the "Stock Purchase Price") of the Company upon the surrender of this Warrant Certificate and payment of the applicable Purchase Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of _____________, 2001 (the "Warrant Agreement") between the Company and ____________________________(the "Underwriter"). No Warrant may be exercised after 5:00 p.m., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement between the Company and the 22 Underwriter, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events the respective Purchase Prices and the type and/or number of the Company's securities issuable upon the exercise of this Warrant, may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Purchase Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange as provided herein, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 23 IN WITNESS WHEREOF, the undersigned has executed this certificate this 2nd day of October, 2001. ZAP By: /s/ Gary Starr ------------------------------- Gary Starr Chief Executive Officer ATTEST By: /s/ Joni Arellanes ----------------------- Name: Joni Arellanes Title: Secretary 24 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED hereby sells, assigns and transfers unto (Please print name and address of transferee) This Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint his or its attorney-in-fact to transfer the within Warrant Certificate on the books of ZAP, with full power of substitution. Dated: Signature: __________________________________ (Signature must conform in all respects to the name of holder as specified on the face of the Warrant Certificate.) --------------------------------- (Insert Social Security or Other Identifying Number of Holder) 25 FORM OF ELECTION TO PURCHASE The undersigned hereby irrevocably elects to exercise the right represented by this Warrant Certificate to purchase: ___________shares of Preferred Stock and herewith tenders in payment for such securities a certified or cashier's check or money order payable to the order of ZAP in the amount of $ , all in accordance with the terms hereof. The undersigned requests that certificates for such securities be registered in the name of whose address is and that such certificates be delivered to ____________ whose address is _________________ _______________________________________________________________. Dated: -------------------------------- (Signature must conform in all respects to the name of holder as specified on the face of the Warrant Certificate.) -------------------------------- (Insert Social Security or Other Identifying Number of Holder) 26 EX-1.2 4 slp94i.txt SELLING GROUP AGREEMENT ZAP SERIES B PREFERRED STOCK 4,800,000 Shares SELLING GROUP AGREEMENT October __, 2001 Dear Sirs: Alexander, Wescott & Co., Inc. and Hyperion Partners Corp., the underwriters (the "Underwriters") are the Underwriters named in the Prospectus, dated October 2, 2001. The Underwriters agreed to sell as agent for ZAP (the "Company"), subject to the terms and conditions set forth in the Underwriting Agreement referred to in the Prospectus, an aggregate of up to 4,800,000 shares of Series B Preferred Stock (the "Shares") of the Company. The Shares and the terms upon which they are to be offered for sale by the Underwriters are more particularly described in the Prospectus. 1.1. The Shares are to be offered to the public by the Underwriters at a price of $1.00 per Share (herein called the "Public Offering Price") and in accordance with the terms of the offering set forth in the Prospectus. 1.2. The Company, through the Underwriters as agents for the Company, is offering, subject to the terms and conditions hereof, a portion of the Shares for sale through certain dealers which are members of the National Association of Securities Dealers, Inc. and which agree to comply with the provisions of Section 24 of Article III of the Rules of Fair Practice of such Association and to foreign dealers or institutions ineligible for membership in said Association which agree (a) not to resell Shares (i) to purchasers located in, or to persons who are nationals of, the United States of America or (ii) when there is a public demand for the Shares to persons specified as those to whom members of said Association participating in a distribution may not sell and (b) to comply, as though such foreign dealer or institution were a member of such Association, with Sections 8, 24, 25 (to the extent applicable to foreign nonmember brokers or dealers) and Section 36 of such Rules (such dealers and institutions agreeing to purchase Shares hereunder being hereinafter referred to as "Selected Dealers") at the Public Offering Price less a selling concession of ___% ($.___) per Share, payable as hereinafter provided. Selected Dealers may not reallow any further discounts on sales to other broker/dealers. 1.3. If you desire to sell any of the Shares, your application should reach us promptly by telephone or facsimile at the office of the undersigneds, and we will use our best efforts to fill the same. We reserve the right to reject all subscriptions in whole or in part, to make allotments and to close the subscription books at any time without notice. The Shares allotted will be confirmed, subject to the terms and conditions of this Agreement. 1.4. The privilege of selling the Shares is extended to you by the Underwriters only if they may lawfully sell the Shares to dealers in your state. 1.5. Any of the Shares sold you under the terms of this Agreement may be immediately offered to the public in accordance with the terms of the offering set forth herein and in the final Prospectus, subject to the laws of the various states. Neither you nor any other person is or has been authorized to give any information or to make any representations in connection with the sale of Shares other than as contained in the Prospectus. 1.6. This Agreement will terminate when we shall have determined that the public offering of the Shares has been completed and upon telegraphic notice to you of such termination. 1.7. On becoming a Selected Dealer and in offering and selling the Shares, you agree to comply with all applicable requirements of the Securities Act of 1933, the Securities Exchange Act of 1934 and the NASD Rules of Fair Practice. 1.8. Upon application, you will be informed as to the jurisdictions in which we have been advised that the Shares have been qualified for sale under the respective Shares or blue sky laws of such jurisdictions, but we assume no obligation or responsibility as to the right of any Selected Dealer to sell the Shares in any jurisdiction or as to any sale therein. 1.9. Additional copies of the Prospectus will be supplied to you in reasonable quantities upon request. 1.10. It is expected that public advertisement of the Shares will be made on termination of the Public Offering. Twenty-four hours after such advertisement shall have appeared but not before, you will be free to advertise at your own expense, over your own name, subject to any restrictions of local laws, but your advertisement must conform in all respects to the requirements of the Securities Act of 1933, and we will not be under any obligation or liability in respect of your advertisement. 1.11. No Selected Dealer is authorized to act as our agent or to make any representation as to the existence of an agency relationship otherwise to act on our behalf in offering or selling the Shares to the public or otherwise. 1.12. We shall not be under any liability for or in respect of the value, validity or form of the certificates for the Shares, or delivery of such certificates, or the performance by anyone of any agreement on his part, or the qualification of the Shares for sale under the laws of any jurisdiction, or for or in respect of any matter connected with this Agreement, except for lack of good faith and for obligations expressly assumed by us in this Agreement. The foregoing provisions shall be deemed a waiver of any liability imposed under the Securities Act of 1933. 2 1.13. Payment for the Shares sold by you hereunder is to be made at the Public Offering Price, for which shall be made in the regular way as described in the Prospectus, or as we may advise, payable to the order of Alexander Wescott & Co., Inc. and Hyperion Partners Corp., or as we shall specify for deposit in a special account at American Stock Transfer & Trust Company, New York, NY. 1.14. Notice to us should be addressed to us at the offices of the undersigneds at the addresses indicated. Notices to you shall be deemed to have been duly given if telefaxed or mailed to you at the address to which this letter is addressed. 1.15. If you desire to sell any of the Shares, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter enclosed herewith even though you have previously advised us thereof by telephone or facsimile. Dated: ________ __, 2001 ALEXANDER, WESCOTT & CO., INC. By: ______________________________ Name: ____________________________ Title: _____________________________ OR HYPERION PARTNERS CORP. By: ______________________________ Name: Paul Mannion Title: _____________________________ Accepted and agreed as to ________ shares of Series B Preferred Stock this ____ day of _________ 2001. By: _________________________ 3 EX-3.5 5 slp94a.txt CERTIFICATE OF AMENDMENT OF ARTICLES OF INC. 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 I of the Articles of Incorporation of this corporation is amended to read as follows: "The name of this corporation is ZAP" 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 6,111,179. 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 entitled to vote. 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 16, 2001 /s/ Gary Starr ------------------------------------ Gary Starr, President /s/ Joni Arellanes ------------------------------------ Joni Arellanes, Secretary EX-3.7 6 slp94b.txt CERTIFICATE OF DETERMINATION OF RIGHTS CERTIFICATE OF DETERMINATION OF RIGHTS, PREFERENCES AND PRIVILEGES OF THE SERIES B CONVERTIBLE PREFERRED STOCK OF ZAP Gary Starr and Joni Arellanes hereby certify that: (a) They are the Chief Executive Officer and the Secretary, respectively, of ZAP, a California corporation (the "Company"). (b) The Company is authorized to issue Ten Million (10,000,000) shares of Preferred Stock. The number of shares being authorized in the series of Preferred Stock designated as "Series B Convertible Preferred Stock, Par Value $2.50" is Four Million Eight Hundred Thousand (4,800,000). There are no shares of said Series B Preferred Stock outstanding as of the date of this Certificate of Determination. (c) Pursuant to authority given by said Company's Articles of Incorporation, the Board of Directors of the Company on May 22, 2001 duly adopted the following recitals and resolutions: "WHEREAS, the Articles of Incorporation of the Company authorize the issuance of Ten Million (10,000,000) shares of Preferred Stock, issuable from time to time in one or more series; and, WHEREAS, the Board of Directors of the Company is authorized by the Articles of Incorporation to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series and to determine the designation thereof; and WHEREAS, it is the desire of the Board of Directors of this Company, pursuant to its authority as aforesaid, to fix the rights, preferences, privileges and restrictions relating to a series of said Preferred Stock and the number of shares constituting and the designation of such series; NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the designation of, the number of shares constituting, and 1A the rights, preferences, privileges and restrictions relating to a series of Preferred Stock as follows: 1. Designation. The designation of such series of Preferred Stock is "Series B Convertible Preferred Stock, Par Value $2.50" (hereinafter referred to as the "Series B Preferred Stock"). 2. Number of Shares in Series. The number of shares constituting the Series B Preferred Stock shall be Four Million Eight Hundred Thousand (4,800,000). 3. Dividends. Following payment in full of the Series A-1 Preferred Stock cumulative dividend and the Series A-2 Preferred Stock cumulative dividend, and prior to any distributions of dividends to the holders of Common Stock, the holders of outstanding Series B Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets at the time legally available therefor, dividends on the same per share basis as the Common Stock (the "Series B Dividend Preference"). No dividends or other distributions shall be paid with respect to the Common Stock until the entire amount of the Series B Dividend Preference shall have been declared and paid or set apart during the year in which such dividend or other distribution to the Common Stock is paid or proposed to be paid. 3.1. No Obligation to Pay Dividends. Other than the Series A-1 Preferred Stock cumulative dividend and the Series A-2 Preferred Stock cumulative dividend, the Board of Directors of the Company is under no obligation to pay dividends or make other distributions. The Series B Dividend Preference shall be operative only at such time as the Board of Directors may decide to pay, declare or set aside for payment any dividends on any shares of Common Stock. 3.2. Dividends Non-Cumulative. The dividends with respect to the Series B Preferred Stock shall be non-cumulative and no right shall accrue to the holders of the Series B Preferred Stock by reason of the fact that the Company may fail to declare or pay dividends or make other distributions. 3.3. Definition of "Distribution". For purposes of this Section 3, unless the context otherwise requires, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than solely in Common Stock, or the purchase or redemption of shares of the Company for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Company. The foregoing notwithstanding, "distribution" shall not include: (i) the repurchase of Common Stock held by 2A employees, officers, directors or consultants of the Company upon the termination of their employment or services, under rights of first refusal or rights to prevent or limit the transfer of such shares, all pursuant to terms of agreements providing for such repurchase; or (ii) a distribution of assets of the Company upon liquidation as provided in Section 4. 4. Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Company, either voluntary or involuntary, and following payment in full of the Series A-1 Preferred Stock Liquidation Preference and the Series A-2 Preferred Stock Liquidation Preference, the holders of Series B Preferred Stock shall be entitled to receive, on a ratable basis out of the assets available for distribution to shareholders, prior to and in preference to any distribution of any of the assets of the Company to the holders of Common Stock, and ratable with any other series of Preferred Stock (other than the Series A-1 Preferred Stock and the Series A-2 Preferred Stock) based on the respective cost per share of each other series, the amount of $2.50 per share (the "Series B Liquidation Preference"). Following payment in full of the Series B Liquidation Preference and the liquidation preferences (the cost of the shares) of any other series of Preferred Stock, the holders of the Series B Preferred Stock shall participate with any other series of Preferred Stock then outstanding and the Common Stock on a pro rata per share basis in all additional distributions made upon liquidation, with each share of Series B Preferred Stock and the other shares of Preferred Stock being deemed to equal that number of shares of Common Stock into which that share of Preferred Stock could be converted as of the date of the distribution; provided, however, that the Series A-1 Preferred Stock and the Series A-2 Preferred Stock shall not participate in such additional distributions. 5. Merger; Sale of Assets. Except as provided below, any acquisition of the Company shall be considered a liquidation and the holders of the Series B Preferred Stock shall receive at the close of such transaction cash, securities or other property. Whenever the consideration is payable in securities or property other than cash, the value shall be the fair market value of such securities or other property as determined in good faith by, and in the reasonable judgment of, the Board of Directors without regard to acounting treatment. For the purpose of this Section 5, an acquisition shall consist of the following transactions: 5.1. Merger. A merger, consolidation or other form of reorganization in which outstanding shares of the Company are exchanged for securities, cash or other consideration issued by another corporation, its subsidiary or another business entity, except when: (i) the sole purpose of the reorganization is to reincorporate the Company in another jurisdiction; or (ii) if the securities to be received by the holders of Series B Preferred Stock possess the same rights, 3A preferences, privileges and restrictions as the stock which they held prior to the reorganization; and 5.2. Sale of Assets. A sale of all or substantially all assets of the Company; provided, however, that a lease, pledge, mortgage or the granting of a security interest in all or substantially all of the assets of the Company shall not be considered an acquisition for the purposes of this Section 5. 6. Conversion of Shares The Series B Preferred Stock shall be convertible into shares of Common Stock of the Company under the following circumstances: 6.1. Option of Holder. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance. 6.2. Automatic Conversion. Each share of Series B Preferred Stock shall be converted automatically into shares of Common Stock on the day immediately following the thirtieth (30th) consecutive trading day on which the closing price of the Company's Common Stock was equal to or exceeded the amount of $5.00 per share. For purposes of this Certificate of Determination, the "closing price" shall mean the closing price of the Company's Common Stock on the principal trading market as reported by Bloomberg LP or a comparable reporting service of national reputation. 7. Manner of Conversion 7.1. Conversion at Option of Holder.. Before any holder of Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock pursuant to Section 6.1, that shareholder must surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Series B Preferred Stock, and give written notice by mail, postage prepaid, to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series B Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 4A 7.2. Automatic Conversion If conversion takes place pursuant to Section 6.2, all outstanding shares of the Series B Preferred Stock will, on the day immediately following the thirtieth (30th) consecutive trading day on which the closing price for the Company's Common Stock was equal to or exceeded the amount of $5.00 per share, be deemed to have been converted to Common Stock regardless of whether the holders of the Series B Preferred Stock tender their Series B Preferred Stock share certificates for cancellation. 8. Number of Shares Issuable Upon Conversion Each share of Series B Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series B Preferred Stock Issue Price by the Conversion Price at the time in effect for such series. The "Original Series B Issue Price" shall be $2.50 per share. The "Conversion Price" per share for shares of Series B Preferred Stock shall be the greater of $1.50 per share or the Variable Conversion Price for those shares. The "Variable Conversion Price" means an amount equal to 90% of the average closing price on the five (5) trading days immediately preceding the day on which the Company receives notice of conversion; provided, however, that the Variable Conversion Price shall not exceed the amount of $5.00 per share. The Conversion Price shall be adjusted from time to time in the manner set forth in Section 9. 9. Conversion Price Adjustments of Series A Preferred Stock The Conversion Price shall be subject to adjustment from time to time as follows: 9.1. Definition - Additional Stock "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 9.6) by the Company after the issuance date for the Series B Preferred Stock other than: (i) shares of Common Stock, net of repurchases, issued or issuable to employees, directors, consultants or advisors under stock option, warrants and restricted stock purchase agreements and such other number of shares of Common Stock as may be fixed by the Board of Directors of the Company, issuable or issued to employees, directors, consultants or advisors of the Company directly or pursuant to stock option or restricted stock purchase plans approved by the stockholders and directors of the Company, or (ii) Common Stock issued upon conversion of any series of Preferred Stock. 9.2. Method of Adjustment If the Company shall issue any Additional Stock without consideration or for a consideration per share less than the Conversion Price for the Series A Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section 9) be adjusted to a price determined by multiplying such Conversion Price by a fraction: 5A (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (for purposes of this calculation only, including in the number of shares of Common Stock outstanding the number of shares of Common Stock presently issuable upon the conversion of all outstanding shares of Preferred Stock at the Conversion Prices in effect immediately prior to such issuance) plus the number of shares of Common Stock which the aggregate consideration received by the Company for the shares of such Additional Stock so issued would purchase at the Conversion Price in effect prior to such issuance, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (for purposes of this calculation only, including in the number of shares of Common Stock outstanding the number of shares of Common Stock presently issuable upon the conversion of all outstanding shares of Preferred Stock at the Conversion Prices for such shares in effect immediately prior to such issuance) plus the number of such shares of Additional Stock so issued. 9.3. Minor Adjustments No adjustment of the Conversion Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three years from the date of the event giving rise to the adjustment being carried forward. Except to the extent provided for in Sections 9.6.4 and 9.7, no adjustment of such Conversion Price for the Series B Preferred Stock pursuant to this Section 9 shall have the effect of increasing the Conversion Price for the Series B Preferred Stock above the Conversion Price for that series in effect immediately prior to such adjustment. 9.4. Payments in Cash In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. 9.5. Payments Other than in Cash In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as reasonably determined by the Board of Directors irrespective of any accounting treatment. 6A 9.6. Options and Convertible Securities In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply: 9.6.1. Option Issuance. The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 9.4 and 9.5), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the Common Stock covered thereby. 9.6.2. Convertible Securities Issuance The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights. 9.6.3. Change in Number of Shares Issuable In the event of any change in the number of shares of Common Stock deliverable or any increase in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series B Preferred Stock obtained with respect to the adjustment which was made upon the issuance of such options, rights or securities, and any subsequent adjustments based thereon, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 7A 9.6.4. Expiration Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series B Preferred Stock obtained with respect to the adjustment which was made upon the issuance of such options, rights or securities or options or rights related to such securities, and any subsequent adjustments based thereon, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities; provided, however, that this section shall not have any effect on any conversion of Series B Preferred Stock prior to such expiration or termination. 9.7. Stock Splits, Subdivisions In the event the Company should at any time or from time to time after the issuance date for the Series B Preferred Stock fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the number of shares of outstanding Common Stock. 9.8. Reverse Splits, Combinations If the number of shares of Common Stock outstanding at any time after the issuance date for the Series B Preferred Stock is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series B Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the outstanding shares of Common Stock. 9.9. Other Distributions If the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company 8A or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 9.6, then, in each such case for the purpose of this Section 9.9, the holders of the outstanding Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Company into which their shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution. 9.10. Recapitalizations If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Certificate of Determination), provision shall be made so that the holders of the outstanding Series B Preferred Stock shall thereafter be entitled to receive upon conversion of their Series B Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, as though they were holders of the number of shares of Common Stock into which their shares could be converted on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 9 with respect to the rights of the holders of the outstanding Series B Preferred Stock after the recapitalization so that the provisions of this Section 9 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. 10. No Fractional Shares. No fractional shares shall be issued upon conversion of the Series B Preferred Stock. In lieu of any fractional share to which the holder would otherwise be entitled, the Company shall make a cash payment equal to the current fair market value of such fractional interest, as determined in good faith by the Board of Directors, which determination shall be conclusive and binding. 11. Reservation of Stock Issuable Upon Conversion The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series B Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock, in addition to such other remedies as shall be available to the holders of such Series B Preferred Stock, the Company shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 9A 12. Voting Rights. Except as otherwise required by law, and except as specifically set forth elsewhere in this Certificate of Determination, the shares of Series B Preferred Stock shall be voted equally with the shares of the Company's Common Stock, and not as a separate class, on all matters submitted to the Company's shareholders for their approval or consent. Each share of Series B Preferred Stock will have a number of votes equal to the number of shares of Common Stock into which that share could be converted on the date of the vote or consent. 13. Protective Provisions. The approval of a majority of the outstanding shares of the Series B Preferred Stock, voting as a separate class, shall be necessary before the following actions may be taken: (a) any amendment to the Company's Articles of Incorporation which adversely affects the rights, preferences or privileges of the Series B Preferred Stock; and (b) the creation of a new class or series of stock which has rights, preferences or privileges superior to those of the Series B Preferred Stock. 14. Notices. Any notice required hereunder to be given to the holders of shares of Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder at the address shown on the Company's records, or given by such holder to the Company for the purpose of notice. RESOLVED FURTHER, that the Chief Executive Officer and the Secretary of the Company be, and they hereby are, authorized and directed to execute, acknowledge, file and record a Certificate of Determination with the California Secretary of State in accordance with the provisions of California law." [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK] 10A We declare under penalty of perjury under the laws of the State of California that the information set forth in this Certificate of Determination is true and correct of our own knowledge. Date: May 22, 2001 /s/ Gary Starr ----------------------------- Gary Starr Chief Executive Officer /s/ Joni Arellanes ----------------------------- Joni Arellanes Secretary [SIGNATURE PAGE TO THE CERTIFICATE OF DETERMINATION] 11A EX-3.8 7 slp94h.txt CERTIFICATE OF AMENDMENT OF DETERMINATION AMENDED AND RESTATED CERTIFICATE OF DETERMINATION OF THE RIGHTS, PREFERENCES AND PRIVILEGES OF THE SERIES B CONVERTIBLE PREFERRED STOCK, $1.00 PAR VALUE OF ZAP I. The Certificate of Determination of the Rights, Preferences, and Privileges of the Series B Convertible Preferred Stock, $1.00 Par Value, of the Company is hereby amended and restated as follows: (a) Gary Starr and Joni Arellanes hereby certify that they are the duly elected and acting Chief Executive Officer and Secretary, respectively, of ZAP, a California corporation (the "Company"). (b) The Company is authorized to issue Ten Million (10,000,000) shares of Preferred Stock. The number of shares being authorized in the series of Preferred Stock designated as "Series B Convertible Preferred Stock, Par Value $1.00" is Four Million Eight Hundred Thousand (4,800,000). There are no shares of said Series B Preferred Stock outstanding as of the date of this Amended and Restated Certificate of Determination. (c) Pursuant to authority given by said Company's Articles of Incorporation, the Board of Directors of the Company on September 28, 2001 duly adopted the following recitals and resolutions: "WHEREAS, the Articles of Incorporation of the Company authorize the issuance of Ten Million (10,000,000) shares of Preferred Stock, issuable from time to time in one or more series; and, WHEREAS, the Board of Directors of the Company is authorized by the Articles of Incorporation to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares constituting any such series and to determine the designation thereof; and WHEREAS, it is the desire of the Board of Directors of this Company, pursuant to its authority as aforesaid, to fix the rights, preferences, privileges and restrictions relating to a series of said Preferred Stock and the number of shares constituting and the designation of such series; -1A- NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the designation of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to a series of Preferred Stock as follows: 1. Designation. The designation of such series of Preferred Stock is "Series B Convertible Preferred Stock, Par Value $1.00" (hereinafter referred to as the "Series B Preferred Stock"). 2. Number of Shares in Series. The number of shares constituting the Series B Preferred Stock shall be Four Million Eight Hundred Thousand (4,800,000), none of which are outstanding. 3. Dividends. Following payment in full of the Series A-1 Preferred Stock cumulative dividend and the Series A-2 Preferred Stock cumulative dividend, and prior to any distributions of dividends to the holders of Common Stock, the holders of outstanding Series B Preferred Stock shall be entitled to receive a dividend at a rate of 8% per annum of the stated value of the Series B Preferred Stock (the "Series B Dividend Preference"). Dividends are payable upon June 30 of each year. The dividend shall be payable in cash or in Common Stock at the Company's option. No dividends or other distributions shall be paid with respect to the Common Stock until the entire amount of the Series B Dividend Preference shall have been declared and paid. 3.1. Definition of "Distribution". For purposes of this Section 3, unless the context otherwise requires, "distribution" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, payable other than solely in Common Stock, or the purchase or redemption of shares of the Company for cash or property, including any such transfer, purchase or redemption by a subsidiary of the Company. The foregoing notwithstanding, "distribution" shall not include: (i) the repurchase of Common Stock held by employees, officers, directors or consultants of the Company upon the termination of their employment or services, under rights of first refusal or rights to prevent or limit the transfer of such shares, all pursuant to terms of agreements providing for such repurchase; or (ii) a distribution of assets of the Company upon liquidation as provided for in Section 4. 4. Liquidation Preference. In the event of the liquidation, dissolution or winding up of the Company, either voluntary or involuntary, and following payment in full of the Series A-1 Preferred Stock Liquidation Preference and the Series A-2 Preferred Stock Liquidation Preference, the holders of Series B Preferred Stock shall be entitled to receive, on a ratable basis out of the assets available for distribution to shareholders, prior to and in preference to any distribution of any of the assets of -2A- the Company to the holders of Common Stock, and ratable with any other series of Preferred Stock (other than the Series A-1 Preferred Stock and the Series A-2 Preferred Stock) based on the respective cost per share of each other series, the amount of $1.00 per share (the "Series B Liquidation Preference"). Following payment in full of the Series B Liquidation Preference and the liquidation preferences (the cost of the shares) of any other series of Preferred Stock, the holders of the Series B Preferred Stock shall participate with any other series of Preferred Stock then outstanding and the Common Stock on a pro rata per share basis in all additional distributions made upon liquidation, with each share of Series B Preferred Stock and the other shares of Preferred Stock being deemed to equal that number of shares of Common Stock into which that share of Preferred Stock could be converted as of the date of the distribution; provided, however, that the Series A-1 Preferred Stock and the Series A-2 Preferred Stock shall not participate in such additional distributions. 5. Merger; Sale of Assets. Except as provided below, any acquisition of the Company shall be considered a liquidation and the holders of the Series B Preferred Stock shall receive at the close of such transaction cash, securities or other property. Whenever the consideration is payable in securities or property other than cash, the value shall be the fair market value of such securities or other property as determined in good faith by, and in the reasonable judgment of, the Board of Directors without regard to acounting treatment. For the purpose of this Section 5, an acquisition shall consist of the following transactions: 5.1. Merger. A merger, consolidation or other form of reorganization in which outstanding shares of the Company are exchanged for securities, cash or other consideration issued by another corporation, its subsidiary or another business entity, except when: (i) the sole purpose of the reorganization is to reincorporate the Company in another jurisdiction; or (ii) if the securities to be received by the holders of Series B Preferred Stock possess the same rights, preferences, privileges and restrictions as the stock which they held prior to the reorganization; and 5.2. Sale of Assets. A sale of all or substantially all assets of the Company; provided, however, that a lease, pledge, mortgage or the granting of a security interest in all or substantially all of the assets of the Company shall not be considered an acquisition for the purposes of this Section 5. 6. Conversion of Shares The Series B Preferred Stock shall be convertible into shares of Common Stock of the Company under the following circumstances: 6.1. Option of Holder. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance. -3A- 6.2. Automatic Conversion. Each share of Series B Preferred Stock shall be converted automatically into shares of Common Stock on the day immediately following the thirtieth (30th) consecutive trading day on which the closing price of the Company's Common Stock was equal to or exceeded the amount of $2.00 per share. For purposes of this Certificate of Determination, the "closing price" shall mean the closing price of the Company's Common Stock on the principal trading market as reported by Bloomberg LP or a comparable reporting service of national reputation. 7. Manner of Conversion 7.1. Conversion at Option of Holder.. Before any holder of Series B Preferred Stock shall be entitled to convert the same into shares of Common Stock pursuant to Section 6.1, that shareholder must surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or of any transfer agent for the Series B Preferred Stock, and give written notice by mail, postage prepaid, to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series B Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 7.2. Automatic Conversion If conversion takes place pursuant to Section 6.2, all outstanding shares of the Series B Preferred Stock will, on the day immediately following the thirtieth (30th) consecutive trading day on which the closing price for the Company's Common Stock was equal to or exceeded the amount of $2.00 per share, be deemed to have been converted to Common Stock regardless of whether the holders of the Series B Preferred Stock tender their Series B Preferred Stock share certificates for cancellation. 8. Number of Shares Issuable Upon Conversion Each share of Series B Preferred Stock shall be convertible into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series B Preferred Stock Issue Price by the Conversion Price at the time in effect for such series. The "Original Series B Issue Price" shall be $1.00 per share. The "Conversion Price" per share for shares of Series B Preferred Stock shall be the greater of $0.75 per -4A- share or the Variable Conversion Price for those shares. The "Variable Conversion Price" means an amount equal to 90% of the average closing price on the five (5) trading days immediately preceding the day on which the Company receives notice of conversion; provided, however, that the Variable Conversion Price shall not exceed the amount of $2.00 per share. The Conversion Price shall be adjusted from time to time in the manner set forth in Section 9. 9. Conversion Price Adjustments of Series A Preferred Stock The Conversion Price shall be subject to adjustment from time to time as follows: 9.1. Definition - Additional Stock "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to Section 9.6) by the Company after the issuance date for the Series B Preferred Stock other than: (i) shares of Common Stock, net of repurchases, issued or issuable to employees, directors, consultants or advisors under stock option, warrants and restricted stock purchase agreements and such other number of shares of Common Stock as may be fixed by the Board of Directors of the Company, issuable or issued to employees, directors, consultants or advisors of the Company directly or pursuant to stock option or restricted stock purchase plans approved by the stockholders and directors of the Company, or (ii) Common Stock issued upon conversion of any series of Preferred Stock. 9.2. Method of Adjustment If the Company shall issue any Additional Stock without consideration or for a consideration per share less than the Conversion Price for the Series A Preferred Stock in effect immediately prior to the issuance of such Additional Stock, the Conversion Price in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this Section 9) be adjusted to a price determined by multiplying such Conversion Price by a fraction: (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (for purposes of this calculation only, including in the number of shares of Common Stock outstanding the number of shares of Common Stock presently issuable upon the conversion of all outstanding shares of Preferred Stock at the Conversion Prices in effect immediately prior to such issuance) plus the number of shares of Common Stock which the aggregate consideration received by the Company for the shares of such Additional Stock so issued would purchase at the Conversion Price in effect prior to such issuance, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (for purposes of -5A- this calculation only, including in the number of shares of Common Stock outstanding the number of shares of Common Stock presently issuable upon the conversion of all outstanding shares of Preferred Stock at the Conversion Prices for such shares in effect immediately prior to such issuance) plus the number of such shares of Additional Stock so issued. 9.3. Minor Adjustments No adjustment of the Conversion Price shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three years from the date of the event giving rise to the adjustment being carried forward. Except to the extent provided for in Sections 9.6.4 and 9.7, no adjustment of such Conversion Price for the Series B Preferred Stock pursuant to this Section 9 shall have the effect of increasing the Conversion Price for the Series B Preferred Stock above the Conversion Price for that series in effect immediately prior to such adjustment. 9.4. Payments in Cash In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof. 9.5. Payments Other than in Cash In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as reasonably determined by the Board of Directors irrespective of any accounting treatment. 9.6. Options and Convertible Securities In the case of the issuance of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply: 9.6.1. Option Issuance. The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 9.4 and 9.5), if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price -6A- provided in such options or rights for the Common Stock covered thereby. 9.6.2. Convertible Securities Issuance The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights. 9.6.3. Change in Number of Shares Issuable In the event of any change in the number of shares of Common Stock deliverable or any increase in the consideration payable to the Company upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series B Preferred Stock obtained with respect to the adjustment which was made upon the issuance of such options, rights or securities, and any subsequent adjustments based thereon, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 9.6.4. Expiration Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series B Preferred Stock obtained with respect to the adjustment which was made upon the issuance of such options, rights or securities or options or rights related to such securities, and any subsequent adjustments based thereon, shall be recomputed to reflect the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities; provided, however, that this -7A- section shall not have any effect on any conversion of Series B Preferred Stock prior to such expiration or termination. 9.7. Stock Splits, Subdivisions In the event the Company should at any time or from time to time after the issuance date for the Series B Preferred Stock fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series B Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the number of shares of outstanding Common Stock. 9.8. Reverse Splits, Combinations If the number of shares of Common Stock outstanding at any time after the issuance date for the Series B Preferred Stock is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series B Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the outstanding shares of Common Stock. 9.9. Other Distributions If the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 9.6, then, in each such case for the purpose of this Section 9.9, the holders of the outstanding Series B Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Company into which their shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution. 9.10. Recapitalizations If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or -8A- merger or sale of assets transaction provided for elsewhere in this Certificate of Determination), provision shall be made so that the holders of the outstanding Series B Preferred Stock shall thereafter be entitled to receive upon conversion of their Series B Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, as though they were holders of the number of shares of Common Stock into which their shares could be converted on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 9 with respect to the rights of the holders of the outstanding Series B Preferred Stock after the recapitalization so that the provisions of this Section 9 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. 10. No Fractional Shares. No fractional shares shall be issued upon conversion of the Series B Preferred Stock. In lieu of any fractional share to which the holder would otherwise be entitled, the Company shall make a cash payment equal to the current fair market value of such fractional interest, as determined in good faith by the Board of Directors, which determination shall be conclusive and binding. 11. Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of Series B Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series B Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series B Preferred Stock, in addition to such other remedies as shall be available to the holders of such Series B Preferred Stock, the Company shall take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 12. Voting Rights. Except as otherwise required by law, and except as specifically set forth elsewhere in this Amended and Restated Certificate of Determination, the shares of Series B Preferred Stock shall be voted equally with the shares of the Company's Common Stock, and not as a separate class, on all matters submitted to the Company's shareholders for their approval or consent. Each share of Series B Preferred Stock will have a number of votes equal to the number of shares of Common Stock into which that share could be converted on the date of the vote or consent. 13. Protective Provisions. So long as shares of Series B Preferred Stock are outstanding, the Company shall not without first obtaining the approval of the -9A- holders of at least a majority of the outstanding Series B Preferred Stock voting separately as a series (i) change the number of the authorized number of shares of Series B Preferred Stock; (ii) effect a dissolution, liquidation or winding-up of the Company; (iii) change the number of members of the Board of Directors; (iv) effect any merger of the company if (a) the Company is not the surviving entity or (b) the Company is the surviving entity, but the shareholders of the Company prior to the merger hold less than 50% of the outstanding shares following the merger; (v) effect the sale of substantially all the assets of the Company, other than in connection with any financing of the Company if the Company will continue to conduct ordinary business operations thereafter; or (vi) authorize or issue any class or series of which has rights, preferences or privileges which are greater than those of the Series B Preferred Stock ("Senior Stock"). For the purposes of this Certificate of Determination, "Senior Stock" shall be a class or series of Preferred Stock which: (a) entitles the holders of that class or series to a preference as to nonliquidating distributions of equal priority to the Series B Dividend Preference if the annual amount of that preference is in excess of 10% of the price at which any shares of that class or series were issued; or (c) entitles the holders of that class or series to a liquidation preference of equal or greater priority to Series A Liquidation Preference if the amount of that preference exceeds 100% of the price at which any shares of that class or series were issued plus declared and unpaid dividends with respect to that class or series. 14. Notices. Any notice required hereunder to be given to the holders of shares of Series B Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder at the address shown on the Company's records, or given by such holder to the Company for the purpose of notice. RESOLVED FURTHER, that the Chief Executive Officer and the Secretary of the Company be, and they hereby are, authorized and directed to execute, acknowledge, file and record a Certificate of Determination with the California Secretary of State in accordance with the provisions of California law. -10A- III. The number of shares being authorized in the series of Preferred Stock designated as "Series B Convertible Preferred Stock, Par Value $1.00" is Four Million Eight Hundred Thousand (4,800,000), of which none are outstanding. No shareholder approval is required. IV. The board of directors of the Company has voted unanimously to approve this Amended and Restated Certificate of Determination of the Right, Preferences, and Privileges of the Series B Convertible Preferred Stock, $1.00 Par Value. [THE REMAINDER OF THIS PAGE WAS INTENTIONALLY LEFT BLANK] -11A- We declare under penalty of perjury under the laws of the State of California that the information set forth in this Certificate of Determination is true and correct of our own knowledge. Dated: September 28, 2001 ----------------------------- Gary Starr Chief Executive Officer ----------------------------- Joni Arellanes Secretary [SIGNATURE PAGE TO THE AMENDMENT OF THE CERTIFICATE OF DETERMINATION - SERIES B] -12A- EX-5.1 8 slp94d.txt OPINION OF FOLEY & LARDNER BRUSSELS FOLEY & LARDNER ORLANDO CHICAGO SACRAMENTO DENVER ATTORNEYS AT LAW SAN DIEGO DETROIT SAN FRANCISCO JACKSONVILLE ONE MARITIME PLAZA, SIXTH FLOOR TALLAHASSEE LOS ANGELES SAN FRANCISCO, CALIFORNIA 94111-3404 TAMPA MADISON TELEPHONE: (415) 434-4484 WASHINGTON, D.C. MILWAUKEE FACSIMILE: (415) 434-4507 WEST PALM BEACH CLIENT/MATTER NUMBER 059284-0141 September 28, 2001 ZAP 117 Morris Street Sebastopol, California 95472 Re: ZAP Gentlemen: We have acted as counsel to ZAP (the "Company"), in connection with the registration of shares of ZAP Series B Convertible Preferred Stock (the "Shares") as described in the Company's Registration Statement on Form SB-2 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended. We have reviewed such documents and have made such inquiries as we have deemed necessary and appropriate to render the opinion set forth herein. We have assumed that all documents that have been submitted to us as originals are true and correct and those documents submitted to us, as copies conform to the originals of those documents. The Shares are duly authorized, validly issued, fully paid and non-assessable. We are not providing an opinion as to any other statements contained in the Form SB-2 Registration Statement, nor as to matters that occur after the date thereof. We consent to the filing of this opinion as an exhibit to the Form SB-2 Registration Statement. Sincerely, /s/ FOLEY & LARDNER EX-10.19 9 slp94c.txt SETTLEMENT AGREEMENT SETTLEMENT AGREEMENT ------------------------------------------------------- THIS SETTLEMENT AGREEMENT (the "Agreement"), is made and entered into as of June 27, 2001, by and between Zapworld.com, a California corporation ("ZAP"), Ridgewood Zap, LLC, a Delaware limited liability company ("Ridgewood"), and certain specified holders of ZAP Series A Preferred Stock (the holders are listed on the signature page hereof and referred to herein as "Shareholders"); with reference to the following facts: RECITALS A. Ridgewood currently owns 1,250,237 shares of ZAP common stock. These shares represent more than 10% of the outstanding shares of ZAP. Ridgewood represents that it has held these shares for more than two (2) years. B. ZAP, Ridgewood, and the Shareholders are engaged in a dispute concerning the agreed-upon terms of conversion of those certain shares of Series A-1 and Series A-2 Convertible Preferred Stock issued and sold by ZAP to the Shareholders pursuant to the Transaction Agreements (as that term is defined in the June 2000 Securities Purchase Agreement relating to the sale of the Series A-1 and Series A-2 Convertible Preferred Stock). The Series A-1 and the Series A-2 Convertible Preferred Stock are sometimes referred to as the "Preferred Stock." C. The purpose of this Settlement Agreement is to provide the terms on which such dispute shall be resolved and to confirm the terms of the Transaction Agreements. AGREEMENT NOW THEREFORE, in consideration of the above-referenced facts and the mutual covenants set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Recitals and Representations. All of the above recitals and representations are true and correct, and each of them is incorporated by this reference into the Agreement. 2. Purchase of Ridgewood's Shares. ZAP will purchase from Ridgewood Six Hundred Twenty-five Thousand One Hundred Eighteen (625,118) shares of ZAP common 1 stock. Immediately following such purchase, Ridgewood will hold less than ten percent (10%) of the then outstanding shares of ZAP. (a) Terms of Purchase. The purchase price for such shares shall be One Million Five Hundred Thousand Dollars ($1,500,000). (b) The Note. Payment shall be reflected by a six percent (6%) promissory note (the "Note"). Interest shall be payable semi-annually. Principal shall be due as follows: the first installment of Five Hundred Thousand Dollars ($500,000) shall be paid to Ridgewood no later than twelve (12) months following the date of execution of this Agreement; the second installment of Five Hundred Thousand Dollars ($500,000) shall be paid to Ridgewood no later than eighteen (18) months from the date of execution of this Agreement; and the final installment of Five Hundred Thousand Dollars ($500,000) shall be paid to Ridgewood no later than twenty-four (24) months following the date of execution of this Agreement. The amount of the Note may be reduced or increased as provided in Section 4(f) below. 3. Resignations of Robert Swanson and Douglas Wilson. Ridgewood shall cause its designees, Mr. Robert Swanson and Mr. Douglas Wilson to resign any and all positions each of them holds as an officer and/or director of ZAP immediately upon the issuance of the Note. The date on which both (i) Ridgewood has less than 10% of the outstanding ZAP shares and (ii) Swanson and Wilson are no longer officers and/or directors of ZAP is referred to as the "Ridgewood Date." The "Clearance Date" is the first day of the first calendar month which is at least 3 months after the Ridgewood Date." 4. Remaining Shares. (a) Purchase. On the terms provided herein, beginning on the Clearance Date, each of the Shareholders hereby agrees to purchase from Ridgewood, and Ridgewood shall sell to the Shareholders, on the terms described below, a number of shares of ZAP common stock equal to (x) the remaining balance of Ridgewood's Six Hundred Twenty-five Thousand One Hundred Nineteen (625,119) shares of common stock (the "Remaining Shares"), multiplied by (y) the percentage set forth next to such Shareholder's name on the signature page hereof (the "Shareholder's Percentage"). Each Shareholder shall be obligated to purchase from Ridgewood such number of shares (the "Allocated Remaining Shares"), and no Shareholder shall purchase from Ridgewood more than such Shareholder's Allocated Remaining Shares. 2 (b) Escrow. The Remaining Shares together with appropriate executed transfer documentation to enable the stock to be transferred to the Shareholders as they are purchased shall be placed in escrow with Krieger & Prager, LLP (the "Escrow Agent"). At the request of the Escrow Agent, Ridgewood will provide additional executed transfer documentation for such purpose. Except as provided in this Agreement, Ridgewood covenants not to sell any of the Remaining Shares without the Shareholders' prior written consent in each instance. (c) Purchase Schedule. Beginning on the Clearance Date and continuing as long as the Shareholder's obligation to purchase the Allocated Remaining Shares remains in effect, each Shareholder shall purchase all or a portion of the Allocated Remaining Shares each month. Such purchases shall be effected subject to the following procedures and standards: (i) The aggregate purchase price to be paid by each Shareholder for purchases of all or a portion of each Shareholder's Allocated Remaining Shares in each month (the "Cash Purchase Price") shall be equal to the greater of (x) One Hundred Thousand Dollars ($100,000) multiplied by the Shareholder's Percentage or (y) one-half (1/2) of the Stated Value of the Preferred Stock converted by such Shareholder in the prior calendar month./1 Each calendar month is an independent unit; that is, after the month preceding the Clearance Date, the next period will commence on the Clearance Date, and the period after that will begin on first day of the following month. (ii) Each Shareholder shall deposit the Shareholders' Cash Purchase Price in cleared funds in an account designated by the Escrow Agent no later than the first business day of the relevant month. --------------- 1 Example (for each Shareholder): If during the month period ending on the date immediately before the Clearance Date, the Shareholder converted Preferred Stock having a Stated Value of Four Hundred Thousand Dollars ($400,000) multiplied by the Shareholder's Percentage, then during the month starting on the Clearance Date, the Cash Purchase Price shall be shall be Two Hundred Thousand Dollars ($200,000) multiplied by the Shareholder's Percentage, not One Hundred Thousand Dollars ($100,000) multiplied by the Shareholder's Percentage. If the total amount converted during that prior month is not more than Two Hundred Thousand Dollars ($200,000) multiplied by the Shareholder's Percentage, then the Cash Purchase Price purchase in the next month shall remain at One Hundred Thousand Dollars ($100,000) multiplied by the Shareholder's Percentage. In no event shall the Cash Purchase Price in any one calendar month amount be less than One Hundred Thousand Dollars ($100,000) multiplied by the Shareholder's Percentage, unless the Per Share Price (defined below) multiplied by the balance of the Allocated Remaining Shares being acquired by such Shareholder is less than such amount. 3 (iii) The twenty day trading period starting with the first trading day of each month (the "First Day") is referred to as the "Computation Period." The closing of each month's purchase shall occur on the first business day after the last day of the Computation Period. (iv) The purchase price per share (the "Per Share Price") shall be ninety-one percent (91%) of the lowest Closing Bid Price (as defined below) of ZAP common stock during the Computation Period; provided, however, that if the lowest Closing Bid Price of ZAP common stock during the Computation Period should be Twelve Dollars ($12) or more, then the purchase price per share shall be ninety-three percent (93%) thereof. The "Closing Bid Price" for any trading day shall be the closing bid price for that day as reported by Bloomberg LP or if that service is not then reporting the relevant information regarding the Common Stock of ZAP, a comparable reporting service of national reputation selected by the Shareholders and reasonably acceptable to Ridgewood. (v) The Allocated Remaining Shares purchased at each closing shall be the Shareholder's Cash Purchase Price divided by the applicable Per Share Price. (vi) Notwithstanding the foregoing, in any given month the aggregate Cash Purchase Price payable by a Shareholder shall not exceed the amount equal to the number of Allocated Remaining Shares remaining to be purchased by the Shareholder hereunder, multiplied by the applicable Per Share Price, even if such amount is less than the amount specified in Section 4(c)(i) hereof. (d) Escrow Agent Provisions. Additional provisions regarding the Escrow Agent and the mechanics of the closing of the purchases contemplated by this Section are attached hereto as Exhibit 2 (the "Escrow Instructions"). By signing this Agreement, each of Ridgewood and each of the Shareholders, subject to acceptance by the Escrow Agent, agrees to all of the terms and conditions of, and becomes a party to, the Escrow Instructions, all of the provisions of which are incorporated herein by this reference as if set forth in full. 4 (e) Expiration of Purchase Obligation. Each Shareholder's obligation under this Section 4 shall expire on the earliest to occur of (i) the date on which such Shareholder has purchased all of such Shareholder's Allocated Remaining Shares; (ii) the date on which Ridgewood no longer owns any of the Remaining Shares; (iii) the second anniversary of the execution of this Agreement; or (iv) the date on which the shares of ZAP are not traded on any of the NASDAQ Bulletin Board, SmallCap or National Markets. (f) Adjustment to ZAP Note. If the aggregate amount paid by the Shareholders for the Remaining Shares exceeds One Million Five Hundred Thousand Dollars ($1,500,000), then the principal amount of the Note shall be reduced by such excess. Notwithstanding the preceding sentence, if the aggregate amount paid by the Shareholders for the Remaining Shares is less than One Million Five Hundred Thousand Dollars ($1,500,000), then the principal amount of the Note shall be increased by the amount of such shortfall and such increase shall be amortized by ZAP at the rate of $100,000 per month (plus applicable interest) commencing the first day of the first calendar month after such increase. 5. Outstanding Conversions. Prior to the execution of this Agreement, each of the Shareholders had submitted to ZAP certain Notices of Conversion of Preferred Stock which have not yet been honored by ZAP, as scheduled below (the "Prior Conversions"). Upon the execution of this Agreement by all of the signatories identified below, ZAP will issue to the Shareholders certificates for the Stated Value (plus accrued dividends to the date of such issuance) of the Prior Conversions of Series A-1 and/or Series A-2 Convertible Preferred Stock converted by such notices, utilizing the Conversion Price specified therein. ZAP agrees that it will honor all further conversions of Series A-1 and/or Series A-2 Convertible Preferred Stock in accordance with the terms of the Transaction Agreements, including, without limitation, the 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 as filed with the Secretary of State of California on or about June 27, 2000 (a copy of which was attached as Exhibit 4.1 to Registration Statement on Form S-3 filed by ZAP with the Securities and Exchange Commission on August 17, 2000; the "Certificate of Determination"). 5 PRIOR CONVERSIONS: CONVERSIONS MADE PRIOR TO THE EXECUTION OF THIS AGREEMENT OPEN AS OF THE DATE HEREOF: Shareholder Notice Date Stated Value Series The Endeavour Capital Investment Fund S.A. 5/8/2001 $150,000 A-2 The Endeavour Capital Investment Fund S.A. 5/8/2001 $155,000 A-2 Celeste Trust Reg. 5/1/2001 $60,000 A-1 Celeste Trust Reg. 5/3/2001 $50,000 A-1 Celeste Trust Reg. 5/8/2001 $100,000 A-1 Esquire Trade & Finance 5/1/2001 $60,000 A-1 Esquire Trade & Finance 5/3/2001 $50,000 A-1 Esquire Trade & Finance 5/8/2001 $100,000 A-1 6. Release. All of the parties, and each of them (including ZAP; the Shareholders; Ridgewood, Mr. Swanson and Mr. Wilson), on behalf of themselves and their respective affiliates, hereby mutually release each other party and their affiliates from all liabilities to the releasing party, and each of them; provided, however, that such releases shall not affect (i) the ongoing rights of, or any outstanding or accrued obligations of ZAP to, the Shareholders with respect to outstanding Preferred Stock and to the Transaction Agreements, except as provided in the last sentence of this Section 6; or (ii) any indemnification or contribution rights of Ridgewood or its designees or affiliates under ZAP's certificate of incorporation or bylaws or under existing agreements between Ridgewood and ZAP. Anything in the immediately preceding provisions to the contrary notwithstanding, the releases from each Shareholder to ZAP shall, subject only to ZAP's compliance with the provisions of the second sentence of Section 5 hereof regarding ZAP's honoring of the Prior Conversions, include a release as to damages, penalties or other liabilities with respect to any late delivery payments which may be due to the relevant Shareholder with respect to conversions of Preferred Stock submitted by such Shareholder on or before May 31, 2001, and shall include a release from any and all claims for damages, penalties, and/or attorneys' fees relating to those conversions contained in that lawsuit set forth in Section 7 below. 6 7. Dismissal of Lawsuit. Upon the execution of this Agreement, all claims asserted by Celeste Trust Reg. and Esquire Trade & Finance (the "Plaintiffs") in the lawsuit pending against ZAP in the United States District Court for the Southern District of New York shall be promptly dismissed, without prejudice, by the Plaintiffs. 8. Covenants. (a) Ridgewood and the Shareholders. Ridgewood will not, nor will it permit any of its designees or affiliates to become affiliates of ZAP or to raise, directly or through any other party or derivatively, any claims against or with respect to ZAP or the Shareholders regarding the Shareholders, their holdings or transactions with respect to ZAP shares or their rights with respect to the conversion, exercise or any other terms of the Preferred Stock or any Warrants they may hold. In addition, Ridgewood and each of the Shareholders agree that the terms of their respective agreements hereunder, including, but not limited to the provisions of this paragraph (a), shall not be affected by a default, if any, by ZAP in its obligations to Ridgewood or to the Shareholders hereunder or otherwise. (b) ZAP. ZAP hereby confirms, acknowledges and warrants to, and agrees with, each of the Shareholders that (i) ZAP consents to the terms of their transaction with Ridgewood and will honor transfers made thereunder. In furtherance of the foregoing, and not in limitation thereof, ZAP acknowledges that, upon the First Day (as that term is defined in Section 4(c)(iii) hereof) of each Computation Period, the Shareholder shall be deemed the holder for all purposes (including, but not limited to, the sale thereof), even prior to the issuance of certificates in the Shareholder's name, of a number of shares of ZAP common stock equal to the Cash Purchase Price paid by such Shareholder, divided by the applicable Per Share Price determined in accordance with the provisions of Section 4 hereof (which Per Share Price, may be recomputed on a daily basis during the Computation Period). (ii) ZAP will honor the terms of the Transaction Agreements, including, but not necessarily limited to, honoring Notices of Conversion, as written. In furtherance of the foregoing, and not in limitation thereof, ZAP acknowledges that (x) the determination of the Conversion Price for each conversion shall be determined as 7 provided in the Certificate of Determination and that such formula is based on the terms annexed hereto as Exhibit 1 (which are excerpted from the Certificate of Determination), (y) there is no price (howsoever denominated) specified as the minimum Conversion Price or the floor price for the Conversion Price, and (z) in the event that delivery of Conversion Certificates for any conversions submitted after the date hereof is made after the Delivery Date (as those terms are defined in the Certificate of Determination), the provisions of Sections B(5) and (6) of Article III of the Certificate of Determination shall apply. (iii) ZAP will promptly issue one or more appropriate press releases and/or file any necessary or appropriate documentation with the Securities and Exchange Commission to (x) correct the filing as an exhibit to a registration statement (such as the registration statement on Form S-3 filed on March 7, 2001) of a document purporting to be the Certificate of Determination of the Preferred Stock in form other than that filed as Exhibit 4.1 to the S-3 Registration Statement filed with the SEC on or about August 17, 2000 and (y) reflect that there is no dispute between ZAP and the Shareholders regarding the formula for determining the Conversion Price for Preferred Stock. (iv) ZAP agrees that the following provision shall apply to the enforcement by a Shareholder of such Shareholder's rights hereunder or under any of the Transaction Agreements (it being understood that ZAP and the Shareholder may be referred to by other defined terms in any of the Transaction Agreements, but that this provision shall apply as if the correct defined terms were used in the following text): ZAP and the Shareholder acknowledge and agree that irreparable damage would occur in the event that any provision of this Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions, without the necessity to post a bond, to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which any of them may be entitled by law or equity; provided, however that ZAP, upon receipt of a Notice of Conversion, may not fail or refuse to deliver the stock certificates and the related legal opinions, if any, based on any claim that the Shareholder has violated any provision hereof or for any other reason, unless ZAP has first obtained a court order directing it not to deliver said stock certificates. 8 (v) The provisions of this subparagraph (b) or any other obligations or agreements of ZAP to the Shareholders hereunder or under the Transaction Agreements shall not be affected by any claim by Ridgewood against any one or more of the Shareholders hereunder. (c) Shareholders. The Shareholders hereby to commit to an equity line of credit of up to Three Million Dollars ($3,000,000) for ZAP on substantially the same terms, subject to final documentation, that were previously discussed in the latter half of the year 2000. A summary of such terms is annexed hereto as Exhibit 3. The Shareholders obligations to execute the agreements reflecting such equity line of credit contemplated by this subparagraph (c) shall expire on the close of business on July 31, 2001, unless extended by the Shareholders. 9. Miscellaneous Provisions. (a) Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York or the state courts of the State of New York sitting in the City of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. (b) Obligations Several. The obligations of each of the Shareholders under this Agreement and each of the Transaction Agreements is several to such Shareholder. No Shareholder is liable for the obligations of any other Shareholder. (c) Partial Invalidity. If any provision of this Agreement is found to be invalid or unenforceable by any court or other lawful forum, such provision shall be ineffective only to the extent that it is in contravention of applicable laws without invalidating the remaining provisions of this Agreement, unless such invalidity or unenforceability would defeat an essential business purpose of this Agreement. (d) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall 9 constitute one and the same instrument. This Agreement shall be deemed signed and delivered upon the exchange by facsimile transmission (fax) of signed counterparts, but the parties thereafter shall exchange original counterpart signature pages. (e) Attorneys Fees. Should any party to this Agreement institute any action or proceeding arising out of this Agreement, the substantially prevailing party in any such action or proceeding shall be entitled to receive from the other party or parties to such action or proceeding all costs and expenses, including reasonable attorneys' fees, incurred by the substantially prevailing party in connection with such action or proceeding. The determination of which party is the "substantially prevailing party," shall be made by the court or arbitrator, as applicable, at the time of the action or proceeding, as the case may be. Notwithstanding the foregoing, attorneys' fees incurred in enforcing any judgment are recoverable as a separate item and such agreement of the parties is intended to be severable from the other provisions of this Agreement and is intended to survive any judgment and is not to be deemed merged into any judgment. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding on the parties to this Agreement and on their respective heirs, devisees, successors and assigns. (g) Warranty of Authority. Each of the signatories hereto represents and warrants their authority to sign this Agreement and bind the respective parties hereto. (h) Nonadmission of Liability. The parties hereto specifically acknowledge that nothing herein constitutes an admission of liability with respect to any of the issues referred to or in connection with the matters herein. (i) Modification of Agreement. No supplement, modification, waiver or amendment with respect to this Agreement shall be binding unless executed in writing by all parties hereto. (j) Entire Agreement. This Agreement supercedes and integrates all prior Agreements, both verbal and written between the parties and it may not be amended except in writing signed by the parties. (k) Continuing Effect. Except to the extent, if any, specifically provided herein, nothing in this Agreement shall be deemed to amend or otherwise modify any of the 10 Transaction Agreements, each of which remains in full force and effect (except and limited to the extent so specifically provided herein). 11 EVIDENCING their agreement to the above terms and conditions, the parties have executed this Agreement as of the date first set forth above. SHAREHOLDERS: THE ENDEAVOUR CAPITAL ZAPWORLD.COM INVESTMENT FUND S.A. (60%) By: ______________________ By: ______________________ Name: Gary Starr Name: Shmuli Margulies Its: Chief Executive Officer Its: RIDGEWOOD ZAP, LLC ESQUIRE TRADE & FINANCE (20%) By: ______________________ By: ______________________ Name: Robert Swanson Name: ____________________ Its: Chairman Its: _______________________ Solely as to Paragraph 6: CELESTE TRUST REG. (20%) By: ______________________ _______________________________ Name: ____________________ Robert Swanson, an individual Its: _______________________ -------------------------- Douglas Wilson, an individual 12 EX-23.1 10 slp94f.txt CONSENT OF GRANT THORNTON We have issued our report dated March 9, 2001, accompanying the financial statements of ZAP (formerly Zapworld.com) and Subsidiaries contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." /s/ Grant Thornton LLP San Francisco, California September 28, 2001 EX-23.2 11 slp94e.txt CONSENT OF FOLEY & LARDNER FOLEY & LARDNER ATTORNEYS AT LAW BRUSSELS ONE MARITIME PLAZA, SIXTH FLOOR ORLANDO CHICAGO SAN FRANCISCO, CALIFORNIA 94111-3404 SACRAMENTO DENVER TELEPHONE: (415) 434-4484 SAN DIEGO DETROIT FACSIMILE: (415) 434-4507 SAN FRANCISCO JACKSONVILLE TALLAHASSEE LOS ANGELES TAMPA MADISON WASHINGTON, D.C. MILWAUKEE WEST PALM BEACH WRITER'S DIRECT LINE 415-438-6453 EMAIL ADDRESS CLIENT/MATTER NUMBER wevers@foleylaw.com 069053-0104 September 28, 2001 Mr. Gary Starr ZAP 117 Morris Street Sebastopol, CA 95472 Re: ZAP Form SB-2 Registration Statement Dear Mr. Starr: This law firm consents to the incorporation of its name and its opinion letter regarding the legality of the securities being cleared for registration with the Securities and Exchange Commission into the Form SB-2 Registration Statement filed on September 28, 2001. Sincerely, FOLEY & LARDNER /s/ William D. Evers By: William D. Evers, Partner