-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HnfUagieIiZGHNDkEpUguaVuN4qFNQotStxaKubF6vso+adzxY4V9DJDQYuIX3a1 iy9UrihNAm6W+ae06ITvTg== 0000950005-97-000991.txt : 19971204 0000950005-97-000991.hdr.sgml : 19971204 ACCESSION NUMBER: 0000950005-97-000991 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 24 FILED AS OF DATE: 19971203 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAP POWER SYSTEMS INC CENTRAL INDEX KEY: 0001024628 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC & OTHER ELECTRICAL EQUIPMENT (NO COMPUTER EQUIP) [3600] IRS NUMBER: 943210624 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-41411 FILM NUMBER: 97731954 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 SB-2 1 REGISTRATION STATEMENT As Filed with the Securities and Exchange Commission on December ___, 1997 Registration No.______ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ZAP POWER SYSTEMS (Name of small business issuer in its charter) ----------------- California 3710 94-321 0624 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation Industrial Identification No.) or organization) Classification Code) James McGreen 117 Morris Street Sebastopol, CA 95472 (707) 824-4150 (Name, Address and Telephone Number of Agent for Service) ----------------------- Copies to: William D. Evers, Esq. Kevin F. Barrett, Esq. Evers & Andelin, LLP 155 Montgomery, 12th Floor San Francisco, CA 94104 Phone No.: (415)391-4291 Fax No.: (415)391-4292 ------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. CALCULATION OF REGISTRATION FEE - -------------------------------- -------------------- ---------------------- ---------------------- -------------------
Title of each class Amount to be Proposed Maximum Proposed Maximum Amount of of Securities to be Registered Registered Offering Price Per Aggregate Offering Registration Fee Unit Price (1) - -------------------------------- -------------------- ---------------------- ---------------------- ------------------- Common Stock, no par value 500,000 $6.00 $3,000,000 $910 Total $3,000,000 $910 - -------------------------------- -------------------- ---------------------- ---------------------- ------------------- (1) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as amended (the "Securities Act"), solely for purposes of calculating the registration fee. 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 the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification. SUBJECT TO COMPLETION DATED _________ Preliminary Prospectus ZAP Power Systems [GRAPHIC OMITED] 500,000 SHARES COMMON STOCK All of the 500,000 shares of common stock offered by this Prospectus are being sold either by ZAP Power Systems ("ZAP" or the "Company") or shares will be offered through Brokers. Prior to this Offering, there has been no public market for the Company's common stock; therefore, the public offering price has been determined by the Company. After completion of this Offering, and dependent largely upon the number of shares sold in this Offering, the Company's shares may be traded on a stock exchange (no application has been made to any stock exchange) or in the over-the-counter market, or no active trading market may develop or be sustained. See "Risk Factors" and "Shares Eligible for Future Resale." This offering (the "Offering") is being made directly by the Company for not more than 500,000 shares (the "maximum" amount). There is no minimum number of shares to be sold in this Offering and all funds received will go immediately to the Company. See "Use of Proceeds." This Offering will be terminated upon the earlier of: the sale of the maximum amount, twelve months after the date of this Prospectus or the date on which the Company decides to close the Offering. A minimum purchase of 100 shares is required. The Company reserves the right to reject any Share Purchase Agreement in full or in part. See "Plan of Distribution." The common stock offered hereby involves a high degree of risk. See "Risk Factors." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Public Underwriting Proceeds to Public Discounts and Company (2) Commission (1) Per Share $6.00 $ .60 $5.40 Total Maximum (500,000 shares) $3,000,000 $300,000 $2,700,000 (1) The shares are being sold directly by the Company through a designated executive officer who is registered as sales representative, where required, and will not receive any commission and through Brokers. See "Plan of Distribution." Further, Centennial Capital Management, Incorporated (the "Selling Agent") has been engaged by the Company to serve as a selling agent of the Offering on a best-efforts basis. The Selling Agent will receive a total commission, in cash, equal to 10% of the gross proceeds from this Offering that the Selling Agent sells. (2) Before deducting estimated expenses of $160,000 payable by the Company, including registration fees, escrow agent fees, costs of printing, copying and postage and other offering costs, in addition to legal and accounting fees.
The date of this Prospectus is December ____, 1997. 1 No person has been authorized to give any information or to make any representations in connection with this Offering other than those contained in this Prospectus and, if given or made, such information and representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any date subsequent to the date hereof. This Prospectus is available in an electronic format, upon appropriate request from a resident of those states in which this Offering may lawfully be made. The Company will transmit promptly, without charge, a paper copy of this Prospectus to any such resident upon receipt of a request. TABLE OF CONTENTS
Page Page ---- ---- Reference Data 2 Management 17 Prospectus Summary 3 Executive Compensation 19 Risk Factors 5 Principal Shareholders 20 Use of Proceeds 7 Certain Transactions 20 Dividend Policy 7 Description of Common Stock 20 Capitalization 8 Shares Eligible for Future Resale 21 Dilution 9 Plan of Distribution 21 Management's Discussion & Analysis of Legal Matters 22 Financial Condition and Results of Operations 10 Experts 22 Business 13 Additional Information 22 Index to Financial Statements F-1
Until February 27, 1998 (90 days after the date of this Prospectus) all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. REFERENCE DATA The Company became subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act") upon the filing of its initial Prospectus on November 29, 1996. The Company furnishes its shareholders with quarterly annual reports containing financial statements audited by an independent public accounting firm after the end of its fiscal year. The Company's fiscal year ends on December 31. In addition, the Company will send shareholders quarterly reports with unaudited financial information for the first three quarters of each fiscal year. The Company was incorporated under the laws of the state of California, on September 23, 1994. The Company's corporate offices are located at 117 Morris Street, Sebastopol, CA 95472. The Company's telephone number is (707) 824-4150. The Company's facsimile number is (707) 824-4159. The Company's E-mail address is zap@zapbikes.com and its Web site is zapbikes.com. 2 - -------------------------------------------------------------------------------- PROSPECTUS SUMMARY The following summary is qualified in its entirety and should be read in conjunction with the more detailed information and Financial Statements, including Notes, appearing elsewhere in this Prospectus. The Company ZAP Power Systems ("ZAP") develops, manufactures and markets lightweight low-powered electric vehicles (EVs). The Company currently produces an electric power assist kit for bicycles and tricycles and assembles complete electric powered bicycles and tricycles. The Company also distributes electric scooters. Several members of ZAP's management team have more than two decades of work in the EV and transportation industries. On February, 13, 1996, the first of three patents applied for was granted by the U.S. Patent Office, and on September 30, 1997 the second patent was granted by the U.S. Patent Office. These patents cover the configuration, location and operation of the motor system and battery. Management's objective is to achieve strategic market dominance within the EV marketplace, beginning with the market for electric power bicycles. Management intends to achieve this objective by forming exclusive alliances with leading developers of EV technologies, by structuring joint ventures with strong manufacturing partners around the world, by creating alliances with the governmental and private entities that support the EV industry, and by setting up various EV distribution networks. The Company's objective is to become a market leader in the U.S. electric bicycle industry. The Company won the World Solar Bicycle Race in Akita, Japan in 1995. The ZAP/Varna race bike placed first in both racing categories, beating more than 100 entries from around the world. It established two World Records and earned the title 1995 World Champion. These world records still hold today. Proposed Development The Company's development goals for 1997-1998 are to (a) further capitalize the Company through this Offering, (b) obtain strategic partners, (c) lower production costs through vendor and strategic partner relationships, and increased sales volume, (d) increase the distribution network (both domestic and in international markets) through companies that already have excellent distribution in the bicycle, motor bike or independent ZAP electric vehicle outlet stores and (e) continue to build the management team, both at headquarters and internationally.
The Offering Common Stock Offered by the Company................ 500,000 shares (maximum) Common Stock Outstanding Prior to the Offering..... 2,571,909 shares and 1,350,000 options reserved for employees Use of Proceeds.................................... Proceeds from the sale of the shares will be used to fund expansion and marketing, and for general working capital.
- -------------------------------------------------------------------------------- 3 SUMMARY OF FINANCIAL DATA The summary financial data for the years ended December 31, 1994, 1995 and 1996 have been derived from the Financial Statements and Notes to Financial Statements, audited by Moss Adams, LLP, independent auditors, whose report thereon is also included. The summary financial data for the nine month periods ended September 30, 1997 have been derived from unaudited interim financial statements of the Company contained elsewhere herein and reflect, in Management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto included elsewhere in this Prospectus.
September 23 Nine Months Nine Months Through Year Ended Year Ended Ended Ended December 31, 1994 December 31, December 31, September 30, September 30, 1995 1996 1996 1997 (audited) (unaudited) (unaudited) Statements of Income Data: Revenue $ 61,300 $650,800 $1,170,900 $ 852,634 $1,327,148 Cost of goods sold 67,100 435,400 862,700 618,225 1,035,096 -------- -------- ---------- --------- ---------- Gross profit (loss) (5,800) 215,400 308,200 234,409 292,052 Operating 67,200 447,200 1,132,000 761,015 1,123,049 Operating Income (loss) (73,000) (231,800) (823,800) (526,606) (818,710) Other Income 300 222,000 19,500 10,278 9,537 Interest Expense - (2,700) (11,400) (6,517) (22,217) Income before provision for taxes (72,700) (12,500) (815,700) (522,845) (831,390) Provision for taxes on income 800 3,500 1,600 0 0 Net income (loss) $(73,500) $(16,000) $(817,300) $(522,845) $(831,390)
Balance Sheet Data: Dec. 31, Dec. 31, Sept. 30, Dec. 31, Sept 30, 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- Working capital $39,591 $20,100 $(46,308) $(44,800) $128,581 Total assets 80,988 191,400 415,125 770,200 924,710 Long-term debt, less current portion 311,701 0 43,408 28,400 26,928 Shareowners' equity (32,267) 60,400 21,652 112,400 336,808
4 RISK FACTORS This Offering involves a high degree of risk. In addition to the other information set forth in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing any of the shares of Common Stock offered hereby. This Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed in this Prospectus. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Prospectus. The EV market may be very limited and slow to develop. A market for EVs depends upon their cost relative to internal combustion vehicles, the politics of air pollution control, the buying preferences of people who want private transportation, and many other factors. Past predictions about the growth rate of the EV market have generally been wrong. EV Market predictions are subject to changes in government polices and the price of gasoline. Management's strategy for the EV market may not work. Members of management have considerable experience in designing and implementing EV product, marketing and distribution strategies. For ZAP, they have selected a particular entry product, manufacturing process and marketing and distribution methods. There is a wide range of alternative strategies for the EV market, and the potential for competition is immense. Management will need to manage major growth and new markets. The plan described in "Business: Proposed Development" envisions growth to a level beyond management's past experience. Revisions to the proposed development may be required and new challenges will be presented to management. Sufficient capital may not be available for the Company to carry out its plan. The proceeds of this Offering are intended to achieve certain objectives. See "Use of Proceeds." More capital may be required for those purposes than the Company will have. See "Capitalization." Changes in the Company's objectives, to take advantage of opportunities or to meet competitive challenges, may require more capital. Management may not be able to obtain additional funds, from public or private sources. If any further capital is raised by issuing equity securities, dilution to then existing shareholders will result. Any debt financing would require additional interest expense and principal repayments, reducing the Company's earnings potential and net cash flow. If additional funds are required and not available, the Company may be forced to limit growth. See "Business-Strategy," "Capitalization" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources." New competition could quickly appear. The Company's current competition is described in "Business: Competition." However, many businesses in related activities could add an operation to compete directly with the Company. Most of those businesses have far greater financial and marketing resources, operating experience and name recognition than ZAP. Loss of the founders or other key employees could interrupt progress. The founders, Gary Starr and James McGreen, started and developed the Company to its present position and further development is largely dependent upon their continued commitment and full-time efforts. The Company has no key-person life insurance policy on either of them or upon other key employees. 5 No dividends are presently intended. The Company presently intends to retain any earnings and pay no dividends. Future dividends, if any, will depend on the Company's profitability, financial condition, capital requirements and other considerations determined by the Company's Board of Directors. See "Dividend Policy." Voting control will remain with the founders. Immediately prior to this Offering, the Company's Managing Director and its President together beneficially owned 52% of the Company common stock. After the completion of this Offering, they will own 43% if the maximum is sold and will effectively be able to control the Company. See "Principal Shareholders." Sales of existing shares could affect the market price. Sales of common stock outstanding prior to this Offering may adversely affect the market price of the shares after this Offering. See "Shares Eligible for Future Resale." The share offering price was set by the Company. Prior to this Offering, there has not been any public market for shares of Zap common stock; therefore, the initial offering price for the shares was determined by the Company. Among factors considered in determining the public offering price were the Company's results of operations, its current financial condition, its future prospects, the state of the markets for its products, the experience of management, the economics of the industry segments in general and the demand for similar securities of companies considered comparable to ZAP. See "Plan of Distribution -- Determination of Offering Price." There may not be a trading market for the shares. The Company does not currently meet the requirements for listing on an organized stock exchange or quotation of over-the-counter market maker trades on the NASDAQ market. After completion of this Offering, the Company intends to apply for a listing on a United States regional exchange, if the Company meets certain numerical listing requirements. However, there can be no assurance that the Company will be listed or that a market will develop or be sustained. If it does not, the Company has been advised that a registered securities broker-dealer would provide an order matching service for persons wishing to buy or sell shares, upon completion of this Offering. However, there is currently no agreement between the Company and a registered securities broker-dealer. The share price can vary after this Offering. The price of the Company's Common Stock, after the completion of this Offering, can vary due to general economic conditions and forecasts, the general business condition of the Company, the release of the Company's financial reports and sales of Common Stock outstanding prior to this Offering. No minimum amount for this Offering. Because there is no required minimum amount of shares required to be sold in this Offering, all the cash received will go directly to the Company, to be used as described in "Use of Proceeds." If only a minimum amount were sold, the result could be that all the proceeds were used to pay expenses of this Offering. The purchasers will have a dilution of book value per share. Purchasers of shares in this Offering will realize immediate substantial dilution of approximately $4.77 per share (or 80%) in the pro forma net tangible book value from the initial public Offering price, if the maximum amount offered is raised. See "Dilution" and "Plan of Distribution -- Determination of Offering Price." State and federal regulation could affect the company's future. States that have passed laws concerning electric bikes are not consistent with one another, or with Federal laws. Management is working with both state and federal agencies to obtain common language and regulations for electric bikes and to keep them from being regulated as motor vehicles. See "Business -- 6 Government Regulation." If they are regulated as motor vehicles this would add additional marketing and product development costs. Protection of patent and trademark rights could be costly. The ZAP electric bicycle power system is a U.S. patented system. One additional patent is pending for ZAP's folding scooter product "Zappy." ZAP is an internationally registered trademark. Management believes that its intellectual property is very important to the success of the Company and it intends to protect against imitation. Litigation may be necessary and it could cause considerable drain on the Company's cash and diversion of management's time. USE OF PROCEEDS The net proceeds available to the Company from the sale of the shares in this Offering are estimated to be approximately $2,540,000 if the maximum is sold, after deducting underwriting discounts, commissions and other offering expenses (estimated to be $460,000). The Company expects to use the net proceeds for the purposes outlined below. If the Company raises less than the maximum amount of this Offering, it intends to prioritize expenditures as follows: first, use funds from the Offering for working capital and corporate needs, second, increase sales and manufacturing capacity and third, improve existing products and develop new products.
500,000 shares ----------------------- 1. Development of additional distribution channels.......... $ 772,160 30.4% 2. Increase of manufacturing capacity....................... 515,620 20.3% 3. New product development.................................. 515,620 20.3% 4. Product improvements..................................... 101,600 4.0% 5. Working Capital and General Corporate Purposes........... 635,000 25.0% ----------------------- $ 2,540,000 100.0% =======================
Management does not anticipate changes in the proposed allocation of estimated net proceeds of this Offering, but reserves the right to make changes if management believes those changes are in the best interests of the Company. Management does not foresee reallocating any significant portion of the proceeds to working capital and general corporate purposes. DIVIDEND POLICY The Company has not declared or paid dividends since its inception. The Company presently intends to retain any earnings to facilitate growth and does not anticipate paying cash dividends in the foreseeable future. The company's future lending agreements may also prohibit the payment of dividends. 7 CAPITALIZATION The following table sets forth the actual capitalization of the Company on September 30, 1997. Short-term debt: Short-term debt.......................................... $152,429 Current maturities of long-term debt..................... 3,583 ---------- Total short-term debt ........................... 156,002 ---------- Long-term debt: Total long-term debt, less current maturities............ 26,928 ---------- Shareowners' equity: Common stock, no par value, 10,000,000 shares authorized; 2,343,135 at 9/30/97 shares outstanding.................. 2,087,361 Accumulated Deficit .......................................... (1,750,553) ---------- Shareowners' equity ..................................... 336,808 ---------- Total capitalization ........................... $519,738 ========== 8 DILUTION On September 30, 1997 the Company had a net tangible book value of $336,808, or $0.14 per share. The net tangible book value per share is equal to the Company's total tangible assets, less its total liabilities and divided by its total number of shares of common stock outstanding. After giving effect to the sale of shares being offered, at the public Offering price of $6.00 per share, and the application of the estimated net proceeds, the pro forma net tangible book value of the Company as of September 30, 1997, would have been $2,876,808 or $1.23 per share. This represents an immediate increase in net tangible book value of $1.09 per share to existing shareowners and an immediate dilution of $4.77 per share to new investors purchasing shares in this Offering. The following table illustrates the per share dilution in net tangible book value per share to new investors: (500,000 shares) ---------------- Public offering price per share...................... $6.00 Net tangible book value per share on September 30, 1997......................... $0.14 Increase in net tangible book value per share attributed to new investors................... $1.09 ----- Pro forma net tangible book value per share As of September 30, 1997, after this Offering... $1.23 ----- Net tangible book value dilution per share to new investors................................ $4.77 ===== The following table sets forth on a pro forma basis as of September 30, 1997 the difference between existing shareowners and new investors purchasing shares in this Offering, with respect to the number of shares purchased, the total consideration paid and the average price paid per share, at the maximum:
Shares Purchased Total Consideration ------------------------- ------------------------- Average Price Number Percent Amount Percent Per Share -------- -------- -------- -------- -------------- Existing Shareowners...... 2,343,135 83.00% $3,139,827 51.00% $ 1.32 New Investors............. 500,000 17.00 3,000,000 49.00 6.00 --------- ------- ----------- ------- ------ Total.................. 2,843,135 100.00% $6,139,827 100.00% ========= ======= =========== =======
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Financial Statements and Notes thereto, "Capitalization" and "Prospectus Summary" appearing elsewhere in this Prospectus. Operating data presented in this discussion are unaudited. Overview The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles, electric scooters and tricycles, and other low-power electric transportation vehicles. Historically, unit sales have been approximately 50% kits and 50% electric bicycles. Dollar sales have been 40% kits and 60% electric bicycles. The Company sells its electric bicycles and kits to retail customers, auto dealerships, bike dealerships and mail order catalogs. Net revenue is net of returns. The Company sells to the mail order catalogs and selected customers on credit with net 30 day terms. The Company sells to bike dealerships with terms being cash on delivery. The retail sales are primarily paid for with a credit card or personal check before shipment of the product. During 1994, 1995, 1996 and 1997 the Company was being paid by governmental agencies and private foundations to further develop the electric bike to fit into various roles in the US and overseas markets. During this period the Company developed electric motor systems for offshore sales and manufacturing. In addition, the Company has developed an electric police bike. The Company's work to develop offshore manufacturing abilities for the domestic and foreign markets involved private and public foundations in South East Asia. Since in the fourth quarter of 1995 the company has sold bikes to retail and wholesale customers as its core business. The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bike. The Company also installs the motor system on bikes the Company buys and then sells the complete electric bike to the customer. The Company purchases complete bikes from various bike manufacturers for use with the company's electric motor system. The electric motor kit has approximately 62 unique parts. The electric motor kit manufacturing and installation of the motor systems to the bikes is done at its Sebastopol location. The electric motors are purchased from an original equipment manufacturer (OEM) in the auto and air-conditioning industry. The company is using one company for its motors, although there are other companies that could be used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer industry for power interrupt systems. The electronic system uses standard electronic components. The electric motor kits and electric bikes sold by ZAP are shipped typically by U.P.S. and Federal Express. Larger quantity orders to wholesale distributors are shipped common carrier. The Company has developed long term purchase arrangements with its key vendors. The Company has no contractual relationships with any of its vendors. The Company's growth strategy is to increase net sales by augmenting its marketing and sales force, and by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas. The Company will continue to increase production capability to meet the increasing demand for its product. The Company will continue to develop the product so it is the low cost leader in the industry. Product improvements and new product introductions will continue to enlarge ZAP's presence in the electric vehicle industry. 10 Results of Operations The following table sets forth, as a percentage of net sales, certain items included in the Company's Income Statements (see Financial Statements and Notes thereto elsewhere in this Prospectus) for the periods indicated:
Years Ended Nine Months Ended Nine Months Ended December 31, September 30, September 30, 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- Statements of Income Data: Net sales 100% 100% 100% 100% 100% Cost of sales 109 67 74 73 78 Gross Profit (9) 33 26 27 22 Operating expenses 110 69 97 89 85 Loss from operations (119) (36) (71) (62) (63) Other income (expense) 0 34 1 0 (1) Profit (Loss) before income taxes (119) (2) (70) (62) (64) Provision for income taxes 1 1 0 0 0 Net profit (loss) (120) (2) (70) (62) (64)
Quarter Ended September 30, 1996 Compared to Quarter Ended September 30, 1997 Net sales. Most sales were to retail customers, wholesale customers and distributors. Net sales increased $97,407 or 34% from September, 1996 to September, 1997 due to sales of kits and bicycles to a large bicycle company. Gross profit (loss). Gross profit increased as a percentage of net sales, from 31% to 34%. The increased bike and kit sales volume resulted in manufacturing cost reductions on a per unit basis. Selling. Selling expense decreased from 33% of sales to 30% of sales. In 1997 the company increased its marketing and sales expenditures due to a launching of its new products into the marketplace. General and administrative expense. General and administrative expenses decreased as a percentage of net sales from 32% in 1996 to 30% in 1997. This was due to allocating fixed salary and rent expenses over more sales dollars than in the previous year. Research and development expense. Research and development expense increased as a percentage of net sales from 5% in 1996 to 13% in 1997. The Company expenditures for development of its products was significant in 1997 due to the development of more new products including the Zappy and single motor cruiser. Other income (expense). Other income decreased significantly in 1997 to 189% due to higher interest expense. Nine Months Ending September 30, 1996 Compared to Nine Months Ending September 30, 1997 Net sales. Net sales increased by $474,514 or 56% from $852,634 for the nine months ended September 30, 1996 ("the 1996 period") to $1,327,148 for the nine months ended September 30, 1997 ("the 1997 period"). The net sales increase resulted from increased bike and kit sales through expanded distribution channels both domestically and off shore. Gross profit (loss). As a percentage of sales, gross profit decreased from 27% in the 1996 period to 22% in the 1997 period. This decrease was due to the liquidation of 1996 models and start up costs of 1997 models. 11 Selling expense. Selling expense decreased as a percentage of sales from 40% in the 1996 period to 32% in the 1997 period. Sales dollars increased at a higher rate than the percentage of selling expense dollars. General and administrative expense. General and administrative expense decreased as a percentage of sales from 43% in the 1996 period to 39% in the 1997 period. Sales dollars increased at a higher rate than General Administrative expenditures. Miscellaneous income and interest expense. Miscellaneous income and interest expense decreased as a percentage of sales from 1% in the 1996 period to 0% in the 1997 period. Liquidity and Capital Resources At September 30, 1997 and September 30, 1996 the Company had a working capital of $128,581 and ($46,308) respectively. The increase in the working capital was primarily due to funds received from the prior public offering, which was begun November 29, 1996. The proceeds from that prior offering went to fund increased inventories levels, accounts receivables and capital expenditures. The increase in current liabilities was due to the increases in purchases of inventory to support the increase in sales. Upon completion of this Offering, the company expects to have a working capital of approximately $2,400,000. The Company had net cash provided by operating activities of ($522,791) in September, 1996 and net cash provided by operating activities of ($831,390) in September, 1997. The decrease in net cash provided by operating activities from September, 1996 to September, 1997 was due to greater finance emphasis on product marketing and development. The Company had net cash provided by investing activities of ($74,639) for the nine months ending September, 1996 and net cash provided by investing activities totaling ($107,613) for the nine months ended September 30, 1997. These related principally to the purchase of upgraded computer equipment and other machinery. The Company had net cash provided by financing activities of $120,000 for the nine months ended September 30, 1996, and $899,487 for the nine months ended September 30, 1997. Net cash provided by financing activities for the nine months ended September 30, 1997 was from the sale of common stock from the prior public offering. Net cash provided by financing activities in 1996 was provided by notes payable and sales of common stock. The Company's primary capital needs are to fund its growth strategy, which includes increasing its net sales, increasing distribution channels, introducing new products and continuing to improve existing product lines. Recent Accounting Pronouncements During October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established a fair value-based method of accounting for stock-based compensation plans. The Company is currently following the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company plans to adopt SFAS No. 123 utilizing the disclosure alternative during 1997. Seasonality and Quarterly Results The Company's business is subject to seasonality influences. Although the company has not experienced these influences on sales volumes, the bike industry typically slows down during the winter months, November to March in the U.S. The company is selling worldwide and will focus its business to allow net sales to increase evenly throughout the year by obtaining distribution channels in different global regions to compensate for slowdowns in other regions. 12 Inflation The Company's raw materials are sourced from stable cost competitive industries. As such the company does not foresee any material inflationary trends for its raw material sources. BUSINESS The Company The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles, electric tricycles, electric scooters, and other low-power electric transportation vehicles. Management's objective is to establish the Company as a leading electric vehicle manufacturer and distributor. To achieve this objective, Management intends to form exclusive alliances with leading developers of EV technologies, structure joint ventures with strong manufacturing partners around the world, and create alliances with the governmental and private entities that support the EV industry. Company Background Founded in 1994, the Company resulted from more than two decades of work by its Management in the electric vehicle and transportation industries. See "Management." The Company currently has 39 employees. In three years, ZAP has already made great strides towards its global mission of transforming transportation. Over 6,000 people in over thirty countries are now using ZAP vehicles as their preferred mode of transportation. The Company's principal assembly facility and corporate offices are located at 117 Morris Street in Sebastopol, California. The Company also rents a facility at 111 Morris for research and development projects. Products ZAP's products are designed to encourage and enable bicyclists to ride their existing bicycles more often (by providing additional power to overcome hills or headwinds) or to provide the user with an electric bicycle or electric vehicle that can sustain faster speeds with less exertion than a conventional bicycle. ZAP's market surveys have shown that the user of a ZAP electric vehicle will often use a ZAP product for recreation or short commutes instead of a conventional vehicle. ZAP currently offers a number of different power assist retrofit kits. These ZAP power systems include dual or single motors, a sealed maintenance free battery, one or two-speed controller, and an automatic battery charger. The ZPS-2 power system is designed for mountain, road and cruiser type bikes. The ZPS-T is designed for tricycles. All of ZAP's bicycles incorporate the ZAP patented power system technology: ElectriCruizer(TM) is a cruiser style bicycle that has upright comfort style handle bars and six manual gears. ZAP Power Bike(TM) is a hybrid road bike with 18 manual gears. ZAP Trike(TM) is a three wheeled bike which contains a larger battery and a carry basket. ZAP Patrol Bike(TM) is a suspension mountain bike with built-in lights and siren. Zappy(TM) is a stand-up, portable, lightweight scooter featuring a 12-volt battery with a built-in charger and a collapsible frame. World Bike(TM) is a unisex bike designed for the World Market. 13 Proposed Development The Company has several improvements and new products under development. The most significant of these are listed below: Electricycle(TM) Scooter features a 24-volt sealed and integrated battery system along with a 10 amp charger. This product is being manufactured in China. Electric Go-Cart. A prototype has been built that Management anticipates will successfully tap into this worldwide market. This product should do particularly well, compared to its gas alternatives, in locations where it's preferable to race indoors or where noise is a limiting factor. The Company's research and development team continues to refine the overall efficiency and performance of its products. The current development process for its electric bicycle includes creating a new solid state control circuit, a compact and lightweight "smart" charger, a throttle-type speed control, and an integral quick release plastic battery case, adaptable to nearly any bicycle. Research and development of auxiliary products is also ongoing. Bicycling Magazine recently showcased a prototype futuristic composite electric bicycle powered by a ZAP system. Using the same technology as developed for land vehicles, the Company is in research to take advantage of the growing need for non-polluting, 3-wheel tuk-tuk type vehicles. The Company is also studying an electric wheel motor that will incorporate an advanced motor built into the wheel of a bicycle. The Company has been awarded two grants totaling $40,000 from the U.S. Government to assist in the development of its improved battery containment design, its electric scooter, and to provide marketing assistance in Southeast Asia. The Company has also received a $25,000 grant from the State of California Energy Commission to assist in this effort. Strategic Partnering Management has established affiliations and/or contracts with several organizations in the EV industry. The most significant of these are listed below. The Electric Power Research Institute (EPRI) contracted with the Company to develop bicycles for police departments and utility applications. EPRI is a research group that is funded by more than 600 electric utility companies. The Company works closely with the commercialization division of EPRI to develop markets for low-power EVs. ZAP, through EPRI, leased 40 demo electric bikes to participating utilities in 1995. Electrical Utility Companies. Several electrical utility companies are now either selling, marketing or promoting the ZAP product line. ZAP has sold over 200 electric bikes and retrofit kits to utilities to date. Over 60 utilities have donated over 100 electric bikes to police departments for their testing. The balance of units have been sold to the utilities' service customers and used by the utilities to promote electric vehicle transportation. ZAP is also building a positive partnership with law enforcement agencies around the country. Over 90 police departments are now using ZAP vehicles. Growth Strategies Management intends to expand its domestic market share (recreational and police enforcement EVs) by increasing the number of its manufacturer representatives and by expanding its distribution organization. Trade shows, print advertising, and public relation activities are planned. The Company also plans to continue its demonstration projects with electrical utility companies. 14 ZAP is preparing the necessary documentation to open ZAP electric vehicle franchise outlet stores. Part of the proceeds from this Offering will be utilized to market and develop these stores. Leverage of the Company's brand name: the Company's brand name and products receive promotion through editorial references in cycling, recreation, and electric vehicle publications. ZAP intends to expand into other low-power electric vehicle products. The Industry Worldwide, bicycles and scooters are the number one mode of transportation. There are an estimated one billion bicycles in daily use. More than 100 million new bicycles enter the world market each year. In the U.S., the market for bicycles is approximately 10 percent of the world market with 99 million bicycles in service. According to a 1995 study by the Bicycle Market Research Institute (BMRI), approximately 15 million bicycles were sold in the United States in 1996, representing approximately $2.5 billion of retail sales. The industry is currently experiencing growth in both the recreational market and the market for police departments. The Company currently assembles and sells complete electric bicycles in addition to its sale of electric power assist kits. Its market depends upon the extent to which current and future bicycle owners choose to add electric energy to assist their own physical energy. According to the Orange County Register, September 1996, an estimated 26 million Americans want bikes but are put off by the potential strain. It is estimated that up to one third of all bikes sold could be electrified. The growth of the market for electric vehicles has been, and will likely continue to be, driven by aggressive federal, state, and local laws. These laws require the reduction of pollution from conventional gas vehicles, particularly from two-stroke vehicles (i.e., motorcycles and scooters). Following are representative examples: The U.S. Energy Policy Act of 1992 (EPAC) provides that federal, state and public utility fleets must begin to purchase alternative fuel vehicles in 1993 with major acceleration of these purchases to begin in 1998. The State of California has mandated that 10% of all new car sales in the state must be Zero Emission Vehicles (ZEV) by the year 2003. New York, Massachusetts and other Northeastern states have similar directives. General Motors, Ford and Toyota announced that they are offering electric vehicles through specific auto dealers this year. Management believes that these expensive high-profile EVs will assist the market for low cost EVs (electric bicycles). In support of these laws, utility companies have setup over 500 "free" public charging stations in the state of California. High profile retailers such as WalMart, Denny's and Raley's have agreed to participate in the program to promote the use of EV's. In foreign counties: The Republic of China gives buyers of electric scooters a rebate equivalent to $200 (U.S.). It is considering a Zero Emission Vehicle scooter mandate by the year 2000. Japan, Thailand, and Costa Rica have agreed to provide low duties on any electric vehicle subcomponents. 15 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 EVs over conventional vehicles and is providing free parking to EVs in Paris. The major identified barrier to widespread adoption of EVs has been the initial cost of an electric vehicle compared to the non-electric alternative. The Company's technology, however, provides for an extremely low cost electric vehicle. Franchising The Company intends to franchise outlets to sell the Company's products. The Company has received qualification to franchise in California, Florida and Texas. The Company intends to seek qualification to franchise in additional states. Competition There are several companies manufacturing, distributing and selling electric bicycles in the U.S. Of these, the Electric Transportation Company ("ETC") and the GT "Charger" are the best financed and highest profile. Globally, large companies such as Yamaha, Honda, and Suzuki have entered the market. Although they are primarily marketing their electric bicycles in Japan, there are no barriers to any of these companies, or other companies, from offering similar electric bicycles in other markets. Management believes that it brings to the Company experience that is unparalleled in the emerging EV industry. The Company's management team possesses a strong background in the management, marketing, engineering, and financial aspects of the EV industry (see "Management"). Employees The company has 31 full-time and 8 part-time employees. Facilities The Company leases office and manufacturing space at 117 Morris Street, Sebastopol, California. The lease expires on June 1, 1998 and has a monthly rent of $4,400. The Company also leases a research and development shop with a monthly rent of $1,500. Legal Proceedings The Company is not currently involved in any material litigation or legal proceedings and is not aware of any material litigation or proceeding pending or threatened against it. Government Regulation The Company is subject to various federal, state and local environmental laws and regulations which limit the discharge, storage and disposal of a variety of substances such as paints and solvents. Operations of the Company are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Administration Act and regulations and applicable state laws thereunder. Electric bicycles have been defined as mopeds or motorcycles in some states and as such are required to conform to the regulations for mopeds or motorcycles. The state of California recently passed a law exempting electric bikes from motor vehicle requirements, 22 other states have similar laws. The Federal Department of Transportation is currently reviewing the ZAP product for interpretation. Intellectual Property Protection The ZAP electric bicycle power system is a U.S. patented system. Additional patents are pending. ZAP is an internationally registered trademark. Additional trademarks are pending. The Company intends to 16 take action to protect against imitation of its products and to protect its patents, copyrights and trademarks as necessary. Qualified Small Business Stock The Omnibus Budget Reconciliation Act of 1993 provides, in certain circumstances, a reduction in the capital gains tax for certain taxpayers who purchase shares at original issue from a "qualified small business" and dispose of those shares after a holding period of at least five years. One-half of the gain (up to certain limits) is generally excluded from taxable income for regular tax purposes. A "qualified small business" must have not more than $50 million in gross assets at any time after August 10, 1993 through the date of issuance of the shares. In addition, at least 80% of its assets must be used "in the active conduct of one or more qualified trades or businesses" throughout the holding period. The Internal Revenue Service has issued proposed Regulations under this law. Qualifying for its benefits will depend in part on future events. The Company makes no representation as to the availability of the benefits of this provision to prospective purchasers of its Common Stock. The Company intends to submit reports to the Internal Revenue Service and to the Company's shareholders as may be required under the law for use of this exclusion. Potential investors are advised to consult their own tax counsel for further details. MANAGEMENT Name Age Position - ---------------------- ----- ----------------------- Gary Starr 42 Managing Director James McGreen 44 President and Director Sanford Theodore 33 Principal Financial Officer and Controller Andrew Hutchins 37 General Manager Jessalyn Nash 38 Director Lee S. Sannella, M.D 81 Director Nancy K. Cadigan 39 Director and Secretary Richard Balzhiser 65 Member, Advisory Board Hal Larson 73 Member, Advisory Board Jack Guy 65 Member, Advisory Board Gary Starr is Managing Director of the Company. He has been building and driving electric cars for more than 20 years. In addition to overseeing the marketing of more than 5,000 electric vehicles, Mr. Starr has invented several solar electric products and conservation devices. Mr. Starr founded U.S. Electricar's electric vehicle operations in 1983. That company recently signed a licensing agreement with Hundai. Mr. Starr also serves as an advisor to Zebra Motors, Inc., a designer of an electric sports car, and has been a technical advisor to UCLA's Lewis Center for Regional Policy Studies. He's been a member of the California Environmental Technology Advisory Council and has been a guest lecturer at Stanford University Graduate School of Business. 17 In 1993, Mr. Starr earned a Private Industry Council Recognition Award for creating job opportunities in the EV industry and was named as one of the ten most influential electric car authorities by Automotive News. More recently, he was honored by the American Lung Association of San Francisco with a Clean Air Award in Technology and was recognized by U.S. Senator Barbara Boxer for his contribution towards clean air. Mr. Starr has several publications: Electric Cars: Your Guide to Clean Motoring, The Shocking Truth of Electric Cars, and The True Cost of Oil. In addition, he has appeared on more than 300 radio and television talk and news shows (including Larry King Live, The Today Show, Inside Edition, CNN Headline News, Prime Time Live, and the CBS Evening News and the McNeil Lehrer News Hour) as a recognized authority in the field of electric vehicles. James McGreen, President, has over 25 years experience in design, development, engineering, manufacturing and marketing. He has brought over 100 successful consumer products from conception to the mass market. He has been a pioneer in the ultralight aircraft, personal watercraft, and motorcycle racing fields. He is the founder and/or former president of Protopipe Exhaust Systems, Inc., McGreen Metalworking, Kanemoto Racing and McGreen Development. His commitment to electric transportation began in 1991 with successful competition in Electrathon racing. He holds several records and winning times for this lightweight electric vehicle class. He has been a racer of motorcycles and has built motor parts, frames, chassis and other specialty parts for both manufacturers and other racers. McGreen designed and built composite racing sail boats. A skilled machinist, welder, and tool and die maker, he has designed and built nearly every kind of lightweight motorized vehicle. A prolific inventor, McGreen has filed five patents (1 granted, 2 pending, 2 expired) in the resource conservation and transportation fields. He also managed the world championship team that won the World Solar Bike Races, in Akita, Japan in 1995. In 1996, McGreen was selected as an honored member of the Who's Who of American Inventors for his positive impact on society. Sanford Theodore, Principal Financial Officer and Controller has been involved in various financial and accounting positions for over 10 years. Well versed with computerized accounting and auditing processes, he has worked with Optical Coating Laboratory, Western Dairy Products, and Blue Cross. Mr. Theodore received a bachelor's degree in Business Administration from San Diego State University in 1985. Andrew Hutchins, General Manager has been involved in the retail bicycle industry since he was 11 years old when he worked for his family's retail bicycle shop. He successfully started, managed, and operated a retail bicycle store for 11 years prior to selling it for several times his initial costs. Before opening his bicycle store, Mr. Hutchins received a degree in Business Economics and Communication Studies from the University of California at Santa Barbara in 1982. Jessalyn Nash, Masters in Business, is an environmental and business consultant to rapid growth entrepreneurial companies. She has specialized in marketing, distributor relations and sales programs. Ms. Nash previously held positions with NeXT, Inc. and in National Sales and Marketing with Apple Computer, Inc. Nash has been an environmental advocate for over 20 years. She has operated her consulting business since 1989. Lee Sannella, M.D. has been an active researcher in the fields of alternative transportation, energy and medicine for more than 25 years. Dr. Sannella has been a founding shareholder in many start up high tech companies. He was a Director of U.S. Electricar from 1983 to 1992. A graduate of Yale University, he maintained an active medical practice for many years in ophthalmology and psychiatry. He worked with the Sonoma Medical Society on improving radiation standards and is a best-selling author. He has served on advisory boards of the City of Petaluma, California, on the Board of Directors of the San Andreas Health Council of Palo Alto, California, the Veritas Foundation of San Francisco, California and the AESOP Institute. He earned his M.D. from Yale University. 18 Nancy K. Cadigan assisted Jim McGreen in managing McGreen Development, the research organization that developed the original ZAP Power System. She has broad experience in sales, trade show events, and office management. With an educational background in Recreation and Leisure, Ms. Cadigan has worked in public and commercial recreation for more than twenty years. She has conducted public education classes on recycling, reuse and composting practices. Currently, Ms. Cadigan is involved in organic farming. In all of her work, she looks for environmentally sound solutions to ordinary problems and has been a strong advocate of the ZAP mission since its inception. In the past five years she has worked for the Oakland Parks and Recreation Department (1990-92), Alameda Waste Management Authority (1992-93), Urban Ore (1993-94), McGreen Development (1994), ZAP Power Systems (1994-present), and Women's Health Specialists (1995-1996). Advisory Board. Dr. Richard E. Balzhiser, President Emeritus of the Electric Power Research Institute (EPRI), served as President and CEO of EPRI from 1988-1996. He joined EPRI in 1973 at the time of its founding after serving as Deputy Director for Energy and Environment in the White House Office of Science and Technology. Dr. Balzhiser currently serves on the Houston Industries and Electrosource Boards as well as Advisory Boards to Mobil, MIT, University of Michigan, and the University of Wisconsin. He is chairing committees for the World Bank and World Energy Council. Dr. Balzhiser earned his Ph.D. from the University of Wisconsin. Hal Larson was the Executive Creative Director for the advertising agency Tatham, Laird & Kudner. He has been responsible for the advertising for Kraft Cheese, Sears, Quaker, 7-up, and Oscar Meyer. He also served as Creative Director of J. Walter Thompson and West Coast Creative Director of Cunningham & Walsh. Mr. Larson has directed advertising for the Republican National Committee and has written several books and lectured at several Universities. Mr. Larson earned his B.S. degree from the University of Oregon and his M.S. degree from Boston University. Jack Guy has been employed by the Electric Power Research Institute (EPRI) since 1974. He is responsible for commercializing EPRI's new products and technologies in Electric Transportation. From 1956 to 1974 , Mr. Guy was a manager for General Electric Co. Mr. Guy has also served as a special agent for the U.S. Army Counterintelligence Corps. Indemnification of Directors and Officers The Company's Articles of Incorporation provide that the liability of the directors for monetary damages shall be limited to the fullest extent permissible under California law. Insofar as indemnification for liabilities arising under the federal securities laws may be permitted to directors, officers and controlling persons of the Company pursuant to that provision, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in those laws and is, therefore, unenforceable. Director Term of Office and Compensation All directors terms of office expire at the next annual meeting of shareholders. The Company's directors do not receive any cash compensation for their service on the Board of Directors, but directors may be reimbursed for certain expenses in connection with their attendance at Board meetings. EXECUTIVE COMPENSATION For 1996, Gary Starr and James McGreen, the Company's executive officers, received compensation of $31,175 and $33,270 respectively. 19 PRINCIPAL SHAREHOLDERS The following table sets forth certain information known to the Company regarding the beneficial ownership of the Company's Common Stock immediately prior to this Offering, and as adjusted to reflect the sale of the shares being offered, for (i) each director and executive officer of the Company, (ii) each shareholder known by the Company to own beneficially 5% or more of the outstanding shares of its Common Stock and (iii) all directors and officers as a group. The Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by them, have sole investment and voting power with respect to their shares, subject to community property laws where applicable.
Percentage of Common Shares Outstanding: Directors, Shares Before Offering Maximum Sold Executive Officers Beneficially -------------------- ------------------- and 5% Shareholders: Owned (2,571,909 shares) (3,071,909 shares) - ---------------------- ------------ -------------------- ------------------- James McGreen 709,160* 28% 23% Gary Starr 611,978* 24% 20% All directors and 1,321,138 52% 43% executive officers as a group (2 persons) * Includes 72,000 shares of Common Stock issuable upon exercise of currently exercisable incentive stock options but excludes 25,000 shares of Common Stock issuable under options but not currently exercisable.
CERTAIN TRANSACTIONS On September 23, 1994, the date the Company commenced business, James R. McGreen, the Company's President, transferred various assets, subject to certain liabilities, to the Company, receiving in exchange 900,000 shares (post split) of the Company's common stock. The net amount recorded on the Company's accounting records was $9,000. Mr. McGreen's net cost of those assets, less prior amortization of cost for tax purposes, was $10,691. On the same date, Gary Starr paid $6,000 for 600,000 shares (post split) of the Company's common stock. There have been no other transactions, nor are any transactions proposed, in which the Company was or is to be a party, in which any member of its management or director had any direct or indirect material interest. DESCRIPTION OF COMMON STOCK The Company has authorized 10,000,000 shares of Common Stock, without par value. Immediately prior to this Offering, there were 2,571,909 shares of Common Stock outstanding and held of record by 1,100 shareholders. Owners of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by shareholders, except that, upon giving the legally required notice, shareholders may cumulate their votes in the election of directors. The owners of Common Stock are entitled to receive dividends when, as and if declared by the board of directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the Common Stock shareholders are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Common Stock. Common Stock shareholders, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the Common Stock. All of the outstanding shares of Common Stock are, and the shares of Common Stock offered by this Offering Circular, when issued for the consideration set forth in this Offering Circular, will be fully paid and non-assessable. 20 Registration Rights There are no agreements between current shareholders and the Company with respect to the registration of such shares under the Securities Act. Transfer Agent and Registrar The transfer agent and registrar for the Company's Common Stock is American Securities Transfer & Trust, Inc. SHARES ELIGIBLE FOR FUTURE RESALE Upon completion of this Offering, the Company will have 3,071,909 shares outstanding if the maximum amount is sold. The shares sold in this Offering will be freely tradable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144") described below. Sales of outstanding shares to residents of certain states or jurisdictions may only be effected pursuant to a registration in or applicable exemption from the registration provisions of the securities laws of those states or jurisdictions. Further, the 361,890 shares of Common Stock sold in the Company's prior initial public offering, which commenced on November 28, 1996, are freely tradable without restriction or further registration under the Securities Act. The remaining 2,210,019 shares of Common Stock outstanding upon completion of this Offering, which are held of record by shareholders prior to this Offering and prior to the initial public offering, are "restricted securities" and may not be sold in a public distribution except in compliance with the registration requirements of the Securities Act or an applicable exemption under the Securities Act, including an exemption pursuant to Rule 144. In general, Rule 144 allows a person who has held restricted securities for at least one year to sell into the public trading market, in any three-month period, up to one percent of the total number of the Company's then outstanding shares (approximately 30,720 shares immediately after completion of this Offering), provided there is adequate current public information available about the Company and the securities are sold in regular brokers' transactions. Rule 144(k) provides that persons who are not deemed to be "affiliates" and who have beneficially owned shares for at least two years are entitled to sell their shares at any time under Rule 144 without regard to the limitations described above. These one and two-year periods began in September 1994 with respect to 1,500,000 shares, in January 1995 for 159,000 shares and in the period from January 1996 to October 3, 1996 for 364,950 shares. Sales of substantial amounts of shares in the public market could adversely affect prevailing market prices and could impair the Company's future ability to raise capital through an offering of its equity securities. The Company's common stock is not listed or quoted on any organized exchange or other trading market, nor has the Company applied for a formal listing or quotation. There can be no assurances that a market will develop or be sustained. The post-offering fair value of the Company's common stock, whether or not any secondary trading market develops, is variable and may be impacted by the business and financial condition of the Company, as well as factors beyond the Company's control. The price may also vary due to economic conditions and forecasts and general conditions in the electric bike, and bike industries. PLAN OF DISTRIBUTION General The Company proposes to offer and sell the shares directly to members of the public residing in selected states. (A listing of those states in which residents may purchase shares is on the Share Purchase Agreement, which accompanies this Prospectus). Announcements of this Offering, in the formprescribed by Rule 134 of the Securities Act, will be communicated to selected persons. A copy of this Prospectus will be 21 delivered to those who request it, together with the Subscription Agreement. All shares will be sold at the public offering price of $6.00 per share and a minimum purchase of 100 shares is required. The Company reserves the right to reject any subscription or share purchase agreement in full or in part. The Company will effect offers and sales of shares through printed copies of this Prospectus delivered by mail and electronically and through broker dealers. Any voice or other communications will be conducted in certain states through its executive officers, and in other states through a designated sales agent, licensed in those states. Under Rule 3a4-1 of the Exchange Act, none of these employees of the Company will be deemed a "broker," as defined in the Exchange Act, solely by reason of participation in this Offering, because (1) none is subject to any of the statutory disqualifications in Section 3(a)(39) of the Exchange Act, (2) in connection with the sale of the shares hereby offered, none will receive, directly or indirectly, any commissions or other remuneration based either directly or indirectly on transactions in securities, (3) none is an associated person (partner, officer, director or employee) of a broker or dealer and (4) each meets all of the following conditions: (A) primarily performs substantial duties for the issuer otherwise than in connection with transactions in securities; (B) was not a broker or dealer, or an associated person of a broker or dealer, within the preceding 12 months; and (C) will not participate in selling an offering of securities for any issuer more than once every 12 months. Determination of Offering Price Prior to this Offering there has been no market for the common stock of the Company, and there can be no assurances that a market will develop or be sustained. Accordingly, the public offering price has been determined by the Company's Board of Directors. Among factors considered in determining the public offering price were the Company's results of operations, the Company's current financial condition, its future prospects, the state of the markets for its products, the experience of management and the economics of the industry segment in general. LEGAL MATTERS The validity of the shares hereby offered will be passed upon for the Company by Evers & Andelin, LLP, San Francisco, California. EXPERTS The Financial Statements of the Company as of and for the year ended December 31, 1996 have been included herein and in the Registration Statement in reliance on the report of Moss Adams, LLP, Santa Rosa, California, independent certified public accountant, appearing elsewhere herein, and upon the authority of said firm as an expert in accounting and auditing. ADDITIONAL INFORMATION A Registration Statement on Form SB-2, including amendments thereto, relating to the shares offered hereby has been filed with the Securities and Exchange Commission, Office of Small Business Policy, Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the shares offered hereby, reference is made to such Registration Statement, exhibits and schedules. A copy of the Registration Statement may be inspected by anyone without charge at the Commission's principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the Northeast Regional Office located at 7 World Trade Center, 13th Floor, New York, New York, 10048 and copies of all or any part thereof may be obtained from the Public Reference Branch of the Commission upon the payment of certain fees prescribed by the Commission. In addition the Commission maintains a World Wide Web site on 22 the Internet at http://www.sec.gov that contains reports, proxy and information statements and other documents filed electronically with the Commission, including the Registration Statement. The Company intends to furnish its shareholders with annual reports containing financial statements audited by its independent public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 23 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS Section 4 of Article X of the Registrant's By-laws provides that it may indemnify any director, officer, agent or employee as to those liabilities and on those terms and conditions as are specified in Section 317 of the California Corporations Code. In any event, the Registrant shall have the right to purchase and maintain insurance on behalf of any such persons whether or not the Registrant would have the power to indemnify such person against the liability insured against. Insofar as indemnification for liabilities arising under the Securities Act, indemnification may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing section. The Registrant has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Expenses of the Registrant in connection with the issuance and distribution of the securities being registered are estimated as follows, assuming the Maximum offering amount is sold: Securities and Exchange Commission filing fee $ 910 Blue Sky filing fees 5,500 Accountant's fees and expenses 25,000 Legal fees and expenses 56,000 Printing 15,000 Marketing expenses 10,000 Postage 25,000 Transfer Agent's fees 5,000 Miscellaneous 17,590 -------- Total $160,000 ======== The Registrant will bear all expenses shown above. Item 26. RECENT SALES OF UNREGISTERED SECURITIES a) The following information is given for all securities that ZAP Power Systems (the "Company") sold within the past three years without registering the securities under the Securities Act. Note the Company sold registered securities via a public offering effective November 28, 1996. 24 Date Title Amount 1/31/95 to 12/30/95 Common Stock 159,000 12/31/95 to 10/3/96 Common Stock 551,019 b) No underwriters were used in connection with any of the issuances of shares. The class of persons to whom the Company issued shares was those persons known to the 1. Employees, Directors, consultants, Business associates, private investors 2. Employees, Directors, Consultants, Business associates, private investors c) No underwriters were used in connection with any of the issuances of shares or options so there were no underwriting discounts or commissions. The transactions and the types and amounts of consideration received by the Company were: 1. Cash 2. Cash d) Total amounts are well within the $1,000,000 limit of Rule 504. Item 27. EXHIBITS ITEM (601) DOCUMENT PAGE - --------- -------- ---- 3.1 Articles of Incorporation, September 23, 1994 3.2 Amendment to Articles of Incorporation filed November 8, 1996 3.3 By-laws 4.1 Article II of By-laws (Reference is made to Exhibit 3.3) 4.2 Share Specimen 5. Opinion of Evers & Andelin, LLP with respect to the legality of the shares being registered 10.1 Lease of registrant's facilities 10.2 Contract with PowerBiking, Inc. 10.3 State of California Franchise Qualification 10.4 State of Florida Franchise Qualification 10.5 Franchise Agreement 25 19.1 10QSB Report 3rd Quarter, 1997 19.2 10QSB Report 2nd Quarter, 1997 19.3 10QSB Report 1st Quarter, 1997 19.4 10KSB, 1996 23.1 Consent of Moss Adams, LLP 23.2 Consent of Evers & Andelin, LLP 99.1 Share Purchase Agreement (as revised) 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. e) Insofar as indemnification for liabilities arising under the securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. 26 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe the registrant meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned in the City of Sebastopol, on November ____, 1997. ZAP Power Systems By:_____________________________ By:_________________________________ Gary Starr James McGreen Managing Director President and Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date ________________________ Managing Director November ___, 1997 Gary Starr ________________________ President and Director November ___, 1997 James McGreen ________________________ Secretary and Director November ___, 1997 Nancy K. Cadigan ________________________ Principal Financial Officer Sanford Theodore and Controller November ___, 1997 ________________________ Director November ___, 1997 Lee S. Sannella, M.D ________________________ Director November ___, 1997 Jessalyn Nash 27 EX-3.1(I) 2 ARTICLES OF INCORPORATION EXHIBIT 3.1 1913349 ENDORSED FILED In the office of the Secretary of State of the State of California SEP 23 1994 TONY MILLER, Acting Secretary of State ARTICLES OF INCORPORATION OF ZAP POWER SYSTEMS ONE: The name of this corporation is ZAP POWER SYSTEMS. TWO: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE: The name and address in this state of the corporation's initial agent for service of process is Gary Starr, 6933 Nolan Rd., Forestville, California 95436. FOUR: This corporation is authorized to issue only one class of shares of stock which shall be designated common stock. The total number of shares it is authorized to issue is 1,000,000 shares. FIVE: The names and addresses of the persons who are appointed to act as the initial directors of this corporation are: James McGreen 2235 Clement St., Alameda, California 94501 Gary Starr 6933 Nolan Rd., Forestville, California 95436 Nancy K. Cadigan 2235 Clement St., Alameda, California 94501 Susan Bryer Starr 6933 Nolan Rd., Forestville, California 95436 SIX: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. SEVEN: The corporation is authorized to indemnify the directors and officers of the corporation to the fullest extent permissible under California law. IN WITNESS WHEREOF, the undersigned, being all the persons named above as the initial directors, have executed these Articles of Incorporation. Dated: September 21, 1994 ------------------ /s/ JAMES McGREEN ------------------------------------- James McGreen /s/ GARY STARR ------------------------------------- Gary Starr /s/ NANCY K. CADIGAN ------------------------------------- Nancy K. Cadigan /s/ SUSAN BRYER STARR ------------------------------------- Susan Bryer Starr The undersigned, being all the persons named above as the initial directors, declare that they are the persons who executed the foregoing Articles of Incorporation, which execution is their act and deed. Dated: September 21, 1994 ------------------ /s/ JAMES McGREEN ------------------------------------- James McGreen /s/ GARY STARR ------------------------------------- Gary Starr /s/ NANCY K. CADIGAN ------------------------------------- Nancy K. Cadigan /s/ SUSAN BRYER STARR ------------------------------------- Susan Bryer Starr EX-3.1(II) 3 BY-LAWS [STATE OF CALIFORNIA LOGO] A483656 SECRETARY OF STATE CORPORATION DIVISION I, BILL JONES, Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHERE OF, I execute this certificate and affix the Great Seal of the State of California this NOV - 8 1996 ----------------------------------- /s/ BILL JONES ----------------------------------- Secretary of State [STATE OF CALIFORNIA SEAL LOGO] EX-3.2 4 CERTIFICATE OF AMENDMENT A483656 ENDORSED--FILED In the office of the Secretary of State of the State of California NOV 08 1996 BILL JONES, Secretary of State CERTIFICATE OF AMENDMENT TO ARTICLES OF INCORPORATION OF ZAP POWER SYSTEMS JAMES McGREEN and GARY STARR certify that: 1. They are the Chief Executive and Chief Financial Officers of ZAP POWER SYSTEMS, a California corporation. 2. The Board of Directors of ZAP POWER SYSTEMS has approved the following amendment to Article FOUR of the Articles of Incorporation of the corporation: ARTICLE FOUR: This corporation is authorized to issue only one class of shares of stock which shall be designated common stock. The total number of shares it is authorized to issue is 10,000,000 (ten million) shares. 3. The amendment has been approved by the required vote of the shareholders in accordance with Section 902 of the California Corporations Code. The corporation has only one class of shares. Each outstanding share is entitled to one vote. The corporation has 712,790 shares outstanding and, hence, the total number of shares entitled to vote with respect to the amendment was 712,790. The number of shares voting in favor of the amendment exceeded the vote required, in that the affirmative vote of the majority, that is, more than 50 percent of the outstanding shares was required for approval of the amendment and the amendment was approved by the affirmative vote of 581,830 shares, or slightly more than 81% percent of the outstanding voting shares. Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing certificate are true and correct of their own knowledge and that this declaration was executed on: Date: 10/10/96 /s/ James McGreen ------------------------------- James McGreen, Director/Chief Executive Officer Date: 10/10/96 /s/ Gary Starr ------------------------------- Gary Starr, Director/Chief Financial Officer Date: 10/10/96 /s/ Nancy Cadigan ------------------------------- Nancy Cadigan, Director Date: /s/ Lee Sannella ------------------------------- Lee Sannella, Director Date: 10/10/96 /s/ Jessalyn Nash ------------------------------- Jessalyn Nash, Director EX-3.3 5 EXHIBIT 3.3 BYLAWS OF Zap Power Systems ARTICLE I OFFICES SECTION 1. PRINCIPAL EXECUTIVE OFFICE The location of the principal executive office of the corporation shall be fixed by the board of directors. It may be located at any place within or outside the state of California. The secretary of this corporation shall keep the original or a copy of these bylaws, as amended to date, at the principal executive office of the corporation if this office is located in California. If this office is located outside California, the bylaws shall be kept at the principal business office of the corporation within California. The officers of this corporation shall cause the corporation to file an annual statement with the Secretary of State of California as required by Section of 1502 of the California Corporations Code specifying the street address of the corporation's principal executive office. SECTION 2. OTHER OFFICES The corporation may also have offices at such other places as the board of directors may from time to time designate, or as the business of the corporation may require. ARTICLE II SHAREHOLDERS' MEETING SECTION 1. PLACE OF MEETINGS All meetings of the shareholders shall be held at the principal executive office of the corporation or at such other place as may be determined by the board of directors. Page 1 SECTION 2. ANNUAL MEETINGS The annual meeting of the shareholders shall be held each year on February 15, at which time the shareholders shall elect a board of directors and transact any other proper business. If this date falls on a legal holiday, then the meeting shall be held on the following business day at the same hour. SECTION 3. SPECIAL MEETINGS Special meetings of the shareholders may be called by the board of directors, the chairperson of the board of directors, the president, or by one or more shareholders holding at least 10 percent of the voting power of the corporation. SECTION 4. NOTICES OF MEETINGS Notices of meetings, annual or special, shall be given in writing to shareholders entitled to vote at the meeting by the secretary or an assistant secretary or, if there be no such officer, or in the case of his or her neglect or refusal, by any director or shareholder. Such notices shall be given either personally or by first-class mail or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the stock transfer books of the corporation or given by the shareholder to the corporation for the purpose of notice. Notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting. Such notice shall state the place, date, and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and that no other business may be transacted or (2) in the case of an annual meeting, those matters which the board at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of Section 6 of this Article, any proper matter may be presented at the annual meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of the nominees which, at the time of the notice, the board of directors intends to present for election. Notice of any adjourned meeting need not be given unless a meeting is adjourned for forty-five (45) days or more from the date set for the original meeting. Page 2 SECTION 5. WAIVER OF NOTICE The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present, whether in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers or consents shall be filed with the corporate records or made part of the minutes of the meeting. Neither the business to be transacted at the meeting, nor the purpose of any annual or special meeting of shareholders need be specified in any written waiver of notice, except as provided in Section 6 of this Article. SECTION 6. SPECIAL NOTICE AND WAIVER OF NOTICE REQUIREMENTS Except as provided below, any shareholder approval at a meeting, with respect to the following proposals, shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting, or in any written waiver of notice: a. Approval of a contract or other transaction between the corporation and one or more of is directors or between the corporation and any corporation, firm, or association in which one or more of the directors has a material financial interest, pursuant to Section 310 of the California Corporations Code; b. Amendment of the Articles of Incorporation after any shares have been issued pursuant to Section 902 of the California Corporations Code; c. Approval of the principal terms of a reorganization pursuant to Section 1201 of the California Corporations Code; d. Election to voluntarily wind up and dissolve the corporation pursuant to section 1900 of the California Corporations Code; e. Approval of a plan of distribution of shares as part of the winding up of the corporation pursuant to Section 2007 of the California Corporations Code. Page 3 Approval of the above proposals at a meeting shall be valid with or without such notice, if it is by the unanimous approval of those entitle to vote at the meeting. SECTION 7. ACTION WITHOUT MEETING Any action that may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent, in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholders' approval, with respect to any one of the following proposals, without a meeting, by less than unanimous written consent shall be given at least ten (10) days before the consummation of the action authorized by such approval: a. Approval of a contract or other transaction between the corporation and one or more of its directors or another corporation, firm or association in which one or more of its directors has a material financial interest, pursuant to Section 310 of the California Corporations Code; b. To indemnify an agent of the corporation pursuant to Section 317 of the California Corporations Code; c. To approve the principal terms of a reorganization, pursuant to Section 1201 of the California Corporations Code; or d. Approval of a plan of distribution as part of the winding up of the corporation pursuant to Section 2007 of the California Corporations Code. Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than a unanimous written consent to those shareholders entitled to vote who have not consented in writing. Notwithstanding any of the foregoing provisions of this section, and except as provided in Article III, Section 4 of these bylaws, directors may not be elected by written consent except by the unanimous written consent of all shares entitled to vote for the election of directors. Page 4 A written consent may be revoked by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not be revoked thereafter. Such revocation is effective upon its receipt by the secretary of the corporation. SECTION 8. QUORUM AND SHAREHOLDER ACTION A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If a quorum is present, the affirmative vote of the majority of shareholders represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number is required by law and except as provided in the following paragraphs of this section. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted except as provided in the foregoing provisions of this section. SECTION 9. VOTING Only shareholders of record on the record date fixed for voting purposes by the board of directors pursuant to Article VIII, Section 3 of these bylaws, or, if there be no such date fixed, on the record dates given below, shall be entitled to vote at a meeting. If no record date is fixed: a. The record date for determining shareholders entitled to notice of, or to vote at a meeting of shareholders, shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. Page 5 b. The record date for determining the shareholders entitled to give consent to corporate actions in writing without a meeting, when no prior action by the board is necessary, shall be the day on which the first written consent is given. c. The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. Every shareholder entitled to vote shall be entitled to one vote for each share held, except as otherwise provided by law, by the Articles of Incorporation or by other provisions of these bylaws. Except with respect to elections of directors, any shareholder entitled to vote may vote part of his or her shares in favor of a proposal and refrain from voting the remaining shares or vote them against the proposal. If a shareholder fails to specify the number of shares he or she is affirmatively voting, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares the shareholder is entitled to vote. At each election of directors, shareholders shall not be entitled to cumulate votes unless the candidates' names have been placed in nomination before the commencement of the voting and a shareholder has given notice at the meeting, and before the voting has begun, of his or her intention to cumulate votes. If any shareholder has given such notice then all shareholders entitled to vote may cumulate their votes by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of his or her shares or by distributing such votes on the same principle among any number of candidates as he or she thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Votes cast against a candidate or which are withheld shall have no effect. Upon the demand of any shareholder made before the voting begins, the election of directors shall be by ballot rather than by voice vote. SECTION 10. PROXIES Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares by filing a written proxy with the secretary of the corporation, executed by such person or his or her duly authorized agent. Page 6 A proxy shall not be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall continue in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in Section 705 of the California Corporations Code. ARTICLE III DIRECTORS SECTION 1. POWERS Subject to any limitations in the Articles of Incorporation and to the provisions of the California Corporations Code, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by, or under the direction of, the board of directors. SECTION 2. NUMBER The authorized number of directors shall be four until changed by amendment to this article of these bylaws. After issuance of shares, this bylaw may only be amended by approval of a majority of the outstanding shares entitled to vote; provided, moreover, that a bylaw reducing the fixed number of directors to a number less than five (5) cannot be adopted unless in accordance with the additional requirements of Article IX of these Bylaws. SECTION 3. ELECTION AND TENURE OF OFFICE The directors shall be elected at the annual meeting of the shareholders and hold office until the next annual meeting and until their successors have been elected and qualified. SECTION 4. VACANCIES A vacancy on the board of directors shall exist in the case of death, resignation, or removal of any director or in case the authorized number of directors is increased, or in case the shareholders fail to elect the full authorized number of directors at any annual or special meeting of the shareholders at which any director is elected. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. Page 7 Except for a vacancy created by the removal of a director, vacancies on the board of directors may be filled by approval of the board or, if the number of directors then in office is less than a quorum, by (1) the unanimous written consent of the directors then in office, (2) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice complying with this Article of these Bylaws, or (3) a sole remaining director. Vacancies occurring on the board by reason of the removal of directors may be filled only by approval of the shareholders. Each director so elected shall hold office until the next annual meeting of the shareholders and until his or her successor has been elected and qualified. The shareholders may elect a director at any time to fill a vacancy not filled by the directors. Any such election by written consent other than to fill a vacancy created by the removal of a director requires the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the chairperson of the board of directors, the president, the secretary or to the board of directors unless the notice specifies a later time for the effectiveness of the resignation. If the resignation is effective at a later time, a successor may be elected to take office when the resignation becomes effective. Any reduction of the authorized number of directors does not remove any director prior to the expiration of such director's term in office. SECTION 5. REMOVAL Any or all of the directors may be removed without cause if such removal is approved by a majority of the outstanding shares entitled to vote, subject to the provisions of Section 303 of the California Corporations Code. Except as provided in Sections 302, 303 and 304 of the California Corporations Code, a director may not be removed prior to the expiration of such director's term of office. The Superior Court of the proper county may, on the suit of shareholders holding at least 10 percent of the number of outstanding shares of any class, remove from office any director in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation and may bar from re-election any director so removed for a period prescribed by the court. The corporation shall be made a party to such action. Page 8 SECTION 6. PLACE OF MEETINGS Meetings of the board of directors shall be held at any place, within or without the State of California, which has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation or as may be designated from time to time by resolution of the board of directors. Meetings of the board may be held through use of conference telephone or similar communication equipment, as long as all directors participating in the meeting can hear one another. SECTION 7. ANNUAL, REGULAR AND SPECIAL DIRECTORS' MEETINGS An annual meeting of the board of directors shall be held without notice immediately after and at the same place as the annual meeting of the shareholders. Other regular meetings of the board of directors shall be held at such times and places as may be fixed from time to time by the board of directors. Call and notice of these regular meetings shall not be required. Special meetings of the board of directors may be called by the chairperson of the board, the president, vice president, secretary, or any two directors. Special meetings of the board of directors shall be held upon four (4) days' notice by mail, or forty-eight (48) hours' notice delivered personally or by telephone or telegraph. A notice or waiver of notice need not specify the purpose of any special meeting of the board of directors. If any meeting is adjourned for more than 24 hours, notice of the adjournment to another time or place shall be given before the time of the resumed meeting to all directors who were not present at the time of adjournment of the original meeting. SECTION 8. QUORUM AND BOARD ACTION A quorum for all meetings of the board of directors shall consist of a majority of the members of the board of directors until changed by amendment to this article of these bylaws. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the board, subject to the provisions of Section 310 (relating to the approval of contracts and transactions in which a director has a material financial interest); the provisions of Section 311 (designation of committees); and Section 317 (e) (indemnification of directors) Page 9 of the California Corporations Code. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. A majority of the directors present at a meeting may adjourn any meeting to another time and place, whether or not a quorum is present at the meeting. SECTION 9. WAIVER OF NOTICE The transactions of any meeting of the board, however called and noticed or wherever held, are as valid as though undertaken at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting, or an approval of the minutes thereof. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Waivers of notice or consents need not specify the purpose of the meeting. SECTION 10. ACTION WITHOUT MEETING Any action required or permitted to be taken by the board may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Such action by written consent shall have the same force and effect as a unanimous vote of the directors. SECTION 11. COMPENSATION No salary shall be paid directors, as such, for their services but, by resolution, the board of directors may allow a reasonable fixed sum and expenses to be paid for attendance at regular or special meetings. Nothing contained herein shall prevent a director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attendance at meetings. Page 10 ARTICLE IV OFFICERS SECTION 1. OFFICERS The officers of the corporation shall be a president, a vice president, a secretary, and a treasurer who shall be the chief financial officer of the corporation. The corporation also may have such other officers with such titles and duties as shall be determined by the board of directors. Any number of offices may be held by the same person. SECTION 2. ELECTION All officers of the corporation shall be chosen by, and serve at the pleasure of, the board of directors. SECTION 3. REMOVAL AND RESIGNATION An officer may be removed at any time, either with or without cause, by the board. An officer may resign at any time upon written notice to the corporation given to the board, the president, or the secretary of the corporation. Any such resignation shall take effect at the date of receipt of such notice or at any other time specified therein. The removal or resignation of an officer shall be without prejudice to the rights, if any, of the officer or the corporation under any contract of employment to which the officer is a party. SECTION 4. PRESIDENT The president shall be the chief executive officer and general manager of the corporation and shall, subject to the direction and control of the board of directors, have general supervision, direction, and control of the business and affairs of the corporation. He/she shall preside at all meetings of the shareholders and directors and be an ex-officio member of all the standing committees, including the executive committee, if any, and shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 5. VICE PRESIDENT Page 11 In the absence or disability of the president, the vice presidents, in order of their rank as fixed by the board of directors (or if not ranked, the vice president designated by the board) shall perform all the duties of the president and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the president. Each vice president shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 6. SECRETARY The secretary shall keep, or cause to be kept, at the principal executive office of the corporation, a book of minutes of all meetings of directors and shareholders. The minutes shall state the time and place of holding of all meetings; whether regular or special, how called or authorized; the notice thereof given or the waivers of notice received; the names of those present at directors' meeting; the number of shares present or represented at shareholder's meeting; and an account of the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation, or at the office of the corporation's transfer agent, a share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation, the original or a copy of the bylaws of the corporation, as amended or otherwise altered to date, certified by him or her. The secretary shall give, or cause to be given, notice of all meetings of shareholder and directors required to be given by law or by the provisions of these laws. The Secretary shall have charge of the seal of the corporation and have such other powers and perform such other duties as may from time to time be prescribed by the board of these bylaws. Page 12 In the absence or disability of the secretary, the assistant secretaries if any, in order of their rank as fixed by the board of directors (or if not ranked, the assistant secretary designated by the board of directors), shall have all the powers of , and be subject to all the restrictions upon,, the secretary. The assistant secretaries, if any, shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 7. TREASURER The treasurer shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of the accounts of the properties and business transactions of the corporations. The treasurer shall deposit monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He or she shall disburse the funds of the corporation in payment of the just demands against the corporation as authorized by the board of directors; shall render to the president and directors whenever they request it, an account of all his or her transactions as treasurer and of the financial condition of the corporation; and shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or the bylaws. In the absence or disability of the treasurer, the assistant treasurers, if any, in order of their rank as fixed by the board of directors (or in not ranked the assistant treasurer designated by the board of directors), shall perform all the duties of the treasurer and when so acting, shall have all the powers of and be subject to all the restrictions upon the treasurer. The assistant treasurers, if any, shall have such other powers and perform such other duties as may from time to time be prescribed by the board of directors or these bylaws. SECTION 8. COMPENSATION The officers of this corporation shall receive such compensation for their services as may be fixed by resolution of the board of directors. Page 13 ARTICLE V EXECUTIVE COMMITTEES SECTION 1 The board may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. Any such committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: a. The approval of any action for which the approval of the shareholders or approval of the outstanding shares is also required. b. The filling of vacancies on the board or in any committee. c. The fixing of compensation of the directors for serving on the board or on any committee. d. The amendment or repeal of bylaws or the adoption of new bylaws. e. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable. f. A distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board. g. The appointment of other committees of the board or the members thereof. ARTICLE VI CORPORATE RECORDS AND REPORTS SECTION 1. INSPECTION BY SHAREHOLDERS The share register shall be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. Such inspection and copying under this section may be made in person or by agent or attorney. Page 14 The accounting books and records of the corporation and the minutes of proceedings of the shareholders and the board and committees of the board shall be open to inspection upon the written demand of the corporation by any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for any proper purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Shareholders shall also have the right to inspect the original or copy of these bylaws, as amended to date and kept at the corporation's principal executive office, at all reasonable times during business hours. SECTION 2. INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney. The right of inspection includes the right to copy and make extracts. SECTION 3. RIGHT TO INSPECT WRITTEN RECORDS If any record subject to inspection pursuant to this chapter is not maintained in written form, a request for inspection is not complied with unless and until the corporation at its expense makes such record available in written form. SECTION 4. WAIVER OF ANNUAL REPORT The annual report to shareholders, described in Section 1501 of the California Corporations Code is hereby expressly waived, as long as this corporation has less than 100 holders of record of its shares. This waiver shall be subject to any provision of law, including Section 1501 (c) of the California Corporations Code, allowing shareholders to request the corporation to furnish financial statements. Page 15 SECTION 5. CONTRACTS, ETC. The board of directors, except as otherwise provided in the bylaws, may authorize any officer of officers, agent of agents, to enter into any contract or execute any instrument in the name and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the board of directors, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract, or to pledge its credit, or to render it liable for any purpose or to any amount. ARTICLE VII INDEMNIFICATION AND INSURANCE OF CORPORATE AGENTS SECTION 1. INDEMNIFICATION The directors and officers of the corporation shall be indemnified by the corporation to the fullest extent not prohibited by the California Corporations Code. SECTION 2. INSURANCE The corporation shall have the power to purchase and maintain insurance on behalf of any agent (as defined in Section 317 of the California Corporations Code) against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of section 317 of the California Corporations Code. ARTICLE VIII SHARES SECTION 1. CERTIFICATES The corporation shall issue certificates for its shares when fully paid. Certificates of stock shall be issued in numerical order, and shall state the name of the record holder of the shares represented thereby; the number, designation, if any, and the class or series of shares represented thereby; and contain any statement or summary required by any applicable provision of the California Corporations Code. Page 16 Every certificate for shares shall be signed in the name of the corporation by 1) the chairperson or vice-chairperson of the board or the president or a vice president and 2) by the treasurer or the secretary or and assistant secretary. SECTION 2. TRANSFER OF SHARES Upon surrender to the secretary or transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, it shall be the duty of the secretary of the corporation to issue a new certificate to the person entitled thereto, to cancel the old certificate, and to record the transaction upon the share register of the corporation. SECTION 3. RECORD DATE The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to receive payment of any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall not be more than sixty (60) days or less than ten (10) days prior to the date of the meeting nor more than sixty (60) days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise the rights as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. ARTICLE IX AMENDMENT OF BYLAWS SECTION 1. BY SHAREHOLDERS Bylaws may be adopted, amended, or repealed by the affirmative vote or by the written consent of holders of a majority of the outstanding shares of the corporation entitled to vote. However, a bylaw amendment which reduces the fixed number of directors to a number less than five (5) shall not be effective if the votes cast against the amendment or the shares not consenting to its adoption are equal to more than 16 2/3 percent of the outstanding shares entitled to vote. Page 17 SECTION 2. BY DIRECTORS Subject to the right of shareholders to adopt, amend, or repeal bylaws, the directors may adopt, amend or repeal any bylaw, except that a bylaw amendment changing the authorized number of directors may be adopted by the board of directors only if prior ot the issuance of shares. CERTIFICATE This is to certify that the foregoing is a true and correct copy of the Bylaws of the corporation named in the title thereto and that such Bylaws were duly adopted by the board of directors of the corporation on the date set forth below. Dated: Sept. 26, 1994 -------------- /s/ Nancy K. Cadigan ------------------------------- Nancy K. Cadigan Secretary Page 18 EX-4.2 6 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS SEE RESTRICTIVE LEGEND ON REVERSE SIDE ZAP POWER SYSTEMS COMMON SHARES The shares represented by this certificate have not been registered under any federal or state securities law. They have been required for investment and may not be transferred without an effective registration statement pursuant to such laws or an opinion of legal counsel satisfactory to the Corporation that registration is not required. This Certifies that__________________________________________is the owner of _________________________________________________________________fully paid and non-assessable Shares of the above Corporation transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. In Witenss Whereof, the said Corporation has caused this Certificate to be signed by its duly authorized officers and to be sealed with the Seal of the Corporation. Dated_____________________________ ______________________________ ______________________________ SECRETARY TREASURER PRESIDENT [GRAPHIC OMITTED] "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR QUALIFIED UNDER ANY STATE SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGINED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL, FOR THE HOLDER OF THE SECURITIES SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS UNDER STATE LAW." The following abbreviations, when used on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. Additional abbreviations may also be used though not in the list. TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties JT ENT -- as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT--____Custodian____(Minor) under Uniform Gifts to Minors Act (State) For value received, the undersigned hereby sells, assigns and transfers unto ________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ______________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares represented by the Within certificate, and hereby irrevocably constitutes and appoints___________________________________________Attorney to transfer the said shares on the books of the within-named Corporation with the full power of substitution in the premises. Dated,__________________________ ___________________________________ In presence of ________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular without alteration or enlargement, or any change whatever. EX-5 7 LEGALITY OF SHARES Evers & Andelin, LLP Lawyers and Counselors At Law - ----------------------------- November 19, 1997 Phyllis E. Andelin William D. Evers Jay P. Hendrickson Paul E. Manasian Philip J. Nicholsen, PC ------------- Rafael Aguirre-Sacasa Kevin F. Barrett Kenneth A. Brunetti William L. Lowery Phone (415) 391-4294 Fax (415) 391-4292 James McGreen President and Director ZAP Power Systems 117 Morris Street Sebastopol, California 95472 Re: Legality of Shares Dear Mr. McGreen: You have asked us as counsel for ZAP Power Systems, a Delaware corporation (the "Company"), for our opinion regarding the legality of the shares being cleared for registration with the Securities and Exchange Commission pursuant to the filing of a Form SB-2 Registration Statement under the Securities Act of 1933, dated November 19, 1997. The Registration Statement is on behalf of the Company and covers 500,000 shares of the Common Stock of the Company. We have been asked to opine as to the legality of the securities being cleared. We have made reasonable inquiry and are of the opinion that the securities being cleared, will, when sold, be legally issued, fully paid and non-assessable. We are not opining as to any other statements contained in the Registration Statement, nor as to matters that occur after the date thereof. Very truly yours, EVERS & ANDELIN, LLP /s/ William D. Evers ---------------------------- By William D. Evers, Partner 155 Montgomery Street, 12th Floor San Francisco California 94104 415 391 4291 EX-10.1 8 MATERIAL CONTRACTS COMMERCIAL LEASE Table of Contents Preamble ARTICLE 1. TERM OF LEASE 1.01 Original Term 1.02 Extended Term 1.03 Holding Over 1.04 Landlord's Inability to Deliver Possession 1.05 Termination for Failure ARTICLE 2. RENT 2.01 Security Deposit 2.O2 Minimum Rent 2.03 Late Charge 2.04 Rental Increase ARTICLE 3. USE OF PREMISES 3.01 Permitted Use 3.0Z Insurance Hazards 3.03 Waste or Nuisance 3.04 Compliance With Laws ARTICLE 4. TAXES AND UTILITIES 4.01 Utilities 4.02 Personal Property Taxes 4.03 Real Property Taxes ARTICLE 5. ALTERATIONS AND REPAIRS 5.01 Condition of Premises 5.02 Maintenance by Landlord 5.03 Maintenance by Tenant 5.04 Maintenance of Plate Glass 5.05 Alterations and Liens 5.06 Inspection by Landlord 5.07 Surrender of Premises ARTICLE 6. INDEMNITY AND INSURANCE 6.01 Hold-Harmless Clause 6.02 Public Liability and Property Damage ARTICLE 7. SIGNS AND TRADE FIXTURES 7.01 Installation and Removal of Trade Fixtures 7.02 Unremoved Trade Fixtures 7.03 Signs ARTICLE 8. DESTRUCTION OF PREMISES 8.01 Landlord's Election to Repair or Terminate 8.02 Insurance Proceeds ARTICLE 9. CONDEMNATION 9.01 Total Condemnation ARTICLE 10. DEFAULT, ASSIGNMENT, AND TERMINATION 10.01 Prohibition Against Subletting or Assignment 10.02 Subordination 10.03 Default Defined 10.04 Termination of Lease and Recovery of Damages 10.05 Landlord's Right to Continue Lease in Effect 10.06 Landlord's Right to Relet 10.07 Landlord's Right to Cure Tenant Defaults 10.08 Cumulative Remedies 10.09 Waiver of Breach ARTICLE 11. MISCELLANEOUS 11.01 Force Majeure-Unavoidable Delays 11.02 Attorney's Fees 11.03 Notices 11.04 Binding on Heirs and Successors 11.05 Partial Invalidity 11.06 Sole and Only Agreement 11.07 Time of Essence EXHIBIT "A". LEGAL DESCRIPTION EXHIBIT "B". IMPROVEMENTS EXHIBIT "C". PARCEL MAP Preamble This lease is made and entered into on 1-12-96, 1996 by and between DANIEL O. DAVIS and ROBBIN H. DAVIS ("landlord"), and ZAP POWER SYSTEMS/ELECTRICYCLE CORPORATION, a California Corporation ("Tenant"). It is understood by parties hereto, that Tenant has been in possession of the property since November 1, 1995 and has paid rent in full for Nov. & Dec. 1995. Landlord, for and in consideration of the rent to be paid by Tenant and of the covenants and provisions to be kept and performed by Tenant under this lease, hereby leases to Tenant, and Tenant agrees to lease from Landlord, the following: the real property commonly known as 117 Morris Street, Sebastopol, California, and legally described on Exhibit "A" attached hereto ("the Property"), together with the warehouse and office space and paved parking now existing thereon and all improvements now existing and to be made by Landlord and as set forth in Exhibit "B" attached hereto. The term "Premises" as used in this lease shall mean all of the Real Property, the structures known as 117 Morris Street and all of the improvements thereto. ARTICLE 1. TERM OF LEASE Original Term Section 1.01 This lease for the property described in Exhibit "A" shall be for a term of (2) years and (5) months, commencing at 12:01 A.M. on January 1, 1996 ("Commencement Date"), and ending at 1 12:01 A.M. on June 1, 1998 ("Original Term"), unless terminated earlier pursuant to the provisions of this lease. The Tenant understands and agrees that possession of 117 Morris Street shall be delivered by Landlord January 1, 1996 subject to the provisions this lease. Regardless of the date of Possession, the Commencement date of this lease, which encompasses all of the property in Exhibit "A", shall be January 1, 1996. Extended Term Section 1.02 In the event Tenant is not then in default under this lease, Tenant shall have the option and right to extend the Original Term of this lease for one period of (5) years commencing on expiration of the Original Term. In the event Tenant is not then in default under this lease, Tenant shall have the option and right to extend this lease for one additional period of five (5) years commencing on expiration of the first five (5) year Extended Term. If Tenant elects to extend the term of this lease, Tenant must give Landlord written notice of Tenant's election to extend at least sixty (60) days before expiration of the previous term. During the Extended Term of this lease, if any, Landlord and Tenant shall be bound by all of the obligations, covenants, and agreements of this lease except that Tenant shall have no right to further extend the term of this lease beyond or after expiration of the two five (5) year Extended Terms granted under this section. References throughout this lease to "the term of this lease" shall include both the Original Term and the Extended Term, if any, unless otherwise indicated. Holding Over Section 1.03. In the event Tenant holds over and continues in possession of the Premises after expiration of the Original Term (when Tenant has not validly exercised its option to extend the term of the lease in accordance with Section 1.02) or after expiration of the Extended Term (when Tenant has validly exercised its option to extend the term of the lease in accordance with Section 1.02), Tenant's continued occupancy of the Premises shall be considered a month-to-month tenancy subject to all the terms and conditions of this lease. Landlord's Inability to Deliver Possession Section 1.04. If Landlord is for any reason unable to deliver possession of the Premises to Tenant on the dates of Possession set forth in Section 1.01 of this lease, this lease shall not be void or voidable nor shall Landlord be liable to Tenant for any loss or damage resulting from failure to deliver possession to Tenant so long as Landlord has exercised, and continues to exercise, reasonable diligence to deliver possession of the Premises to Tenant. No rent shall, however, accrue or become due from Tenant to Landlord under this lease until the actual physical possession of the Premises is delivered, or the right to actual unrestricted physical possession of the Premises under this lease is tendered by Landlord to Tenant. Furthermore, the term of this lease shall not be extended by Landlord's inability to deliver possession of the Premises to Tenant on the dates of Possession set forth in Section 1.01. Termination for Failure of Possession Section 1.05. Notwithstanding any provision of Section 1.04 of this lease, if Landlord for any reason fails to deliver actual physical possession of the Premises, or fails to tender actual unrestricted physical possession of the Premises under this lease, to Tenant within one hundred eighty (180) days after the date for Possession specified in Section 1.01 of this lease, Tenant may terminate this lease by giving Landlord written notice of its election to do so. In the event Tenant elects to so terminate this lease, this lease shall become null and void as of the date Tenant delivers its written notice of termination to Landlord, and thereafter neither party to this lease shall be under any further obligation or liability to the other because of this lease and Landlord shall return to Tenant any consideration received from Tenant pursuant to or for execution of this lease. If Tenant elects to terminate this lease in accordance with the provisions of this section, it shall give written notice of its election to terminate to Landlord not later than five (5) days after the dates specified for Possession in Section 1.01 of this lease. ARTICLE 2. RENT Security Deposit Section 2.01. Tenant has, contemporaneously with the execution of this lease and in addition to the minimum cash rental for the first month of the term hereof, deposited with Landlord the sum of four thousand four hundred dollars ($4,400.00), receipt of which is hereby acknowledged by Landlord, said sum being hereinafter referred to as the "Deposit Amount". The Deposit Amount shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants and conditions of this lease by Tenant to be kept and performed during the term hereof, including payment of rent, repair of damages to the premises caused by Tenant, and to clean the premises upon termination. If at any time during the term of this lease any of the rent herein reserved shall be overdue and unpaid, or any other sum payable to Tenant to Landlord hereunder shall be overdue and unpaid, then Landlord may at its option (but Landlord shall not be required to), apply any portion of the Deposit Amount to the payment of any such overdue rent or other Sum. In the event of the failure of Tenant to keep and perform all of the terms, covenants and conditions of this lease to be kept and performed by Tenant then, at its option, Landlord may, after terminating this lease, apply the entire Deposit Amount, or so much thereof as may be necessary, to compensate Landlord for all loss or damage sustained or suffered by Landlord due to such breach on the part of Tenant. Should the entire Deposit Amount, or any portion thereof, be applied by Landlord for the payment of overdue rent or other sums due and payable to Landlord by Tenant hereunder, then Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a sufficient amount in cash to restore said security to the original Deposit Amount; the Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this lease. If the claim of the Landlord upon the deposit is only for defaults in payment of rent, then any remaining portion of the deposit shall be returned to Tenant no later than two (2) weeks after the date the Landlord receives possession of the premises. Where the claim of Landlord upon the deposit includes amounts reasonably necessary to repair damages to the premises caused by the Tenant or to clean the premises (not to include reasonable wear and tear), then any remaining portion of the deposit shall be returned to the Tenant no later than thirty (30) days from the date the Landlord receives possession of the premises. Upon termination of the Landlord's interest in the demised premises, Landlord shall within a reasonable time, do one of the following acts, either of which shall relieve the Landlord of further liability with respect to the deposit: (1) Transfer the portion of the deposit remaining after any lawful deductions to the Landlord's successor in interest, and thereafter notify the Tenant by personal delivery or certified mail of the transfer, of any claims made against the deposit, and of the transferee's name and address. (2) Return the portion of the deposit remaining after any lawful deductions to the Tenant. Minimum Rent Section 2.O2. Tenant agrees to pay to Landlord a fixed minimum rental for the use and occupancy of the Premises (the "Minimum Rent"). The amount of Minimum Rent payable for each month during the Original Term shall be four thousand four hundred dollars ($4,400.00), and the amount of Minimum Rent payable for each month during the Extended Terms, if any, shall be the same. The Minimum Rent shall be payable on the first day of each and every month commencing the first day the premises are made available for possession. The rent shall be payable at the office of Landlord at 111 Morris Street, Sebastopol, California, or at any other place or places as Landlord may from time to time designate by written notice delivered to Tenant. Minimum Rent for partial calendar months occurring at the commencement and termination of the term of this lease shall be prorated accordingly. Rental Increase Section 2.03 The Minimum Rent described above shall be adjusted on every 1st Anniversary of the commencement date of this lease beginning on January 1, 1997 (including during any extension of this lease) to reflect the average percentage increase in the Consumer Price Index or All Urban Consumers using 1977 as a base year, as compiled by the Bureau of Labor Statistics of the United States Department of Labor for the San Francisco-Oakland Metropolitan Area for the reference month closest preceding each of the adjustment dates over the same Consumer Price Index for all Urban Consumers for the base reference month immediately preceding the commencement of this lease. The Minimum Rent as adjusted on each of the this lease or any interest therein by Tenant except as provided in Section 10.01 of this lease. adjustment dates shall be the rent payable by Tenant to Landlord monthly for the use and occupancy of the premises until the next adjustment date; provided, however, in no event shall any adjustment result in a decrease in the Minimum Rent to a sum less than the Minimum Rent payable for each month of the Original Term. Late Charges Section 2.04. Tenant acknowledges that late payment of rent may cause Landlord to incur costs and expenses, the exact amount of such costs being extremely difficult and impractical to fix. Such costs may include, but are not limited to, processing and accounting expenses, late charges that may be imposed on Landlord by terms of any loan secured by the property, costs for additional attempts to collect rent, and preparation of notices. Therefore, if any installment of rent due from Tenant is not received by Landlord within five (5) business days after the date due, Tenant shall pay to Landlord an additional sum of ten percent (10%) of the amount due as a late charge, which shall be deemed additional rent. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord may incur by reason of Tenant's late payments. Acceptance of any late charge shall not constitute a waiver of Tenant's default with respect to the past due amount, or prevent Landlord from exercising any other rights and remedies under this agreement, and as provided by law. ARTICLE 3. USE OF PREMISES Permitted Use Section 3.01. During the term of this lease (including the Original Term and the Extended Term, if any), the Premises shall be used for the exclusive purpose of operating and conducting a solar energy and environmental equipment sales and production facility, including bicycles, scooters and other equipment for uses normally incident to that purpose, and for no other purpose. Tenant shall not use or permit the Premises to be used for any other purpose, without the prior written consent of Landlord. In conducting the business specified in this section in and on the Premises, Tenant shall sell any merchandise and render any services that are customarily sold and rendered by the operators of similar businesses. Insurance Hazards Section 3.02. Tenant shall not commit or permit the commission of any acts on the Premises nor use or permit the use of the Premises in any manner that will increase the existing rates for or cause the cancellation of any fire, liability, or other insurance policy insuring the Premises or the improvements on the Premises. Tenant shall, at its own cost and expense, comply with any and all requirements of Landlord's insurance carriers necessary for the continued maintenance at reasonable rates of fire and liability insurance policies on the Premises and the improvements on the Premises. Waste or Nuisance Section 3.03. Tenant shall not commit or permit the commission by others of any waste on the Premises; Tenant shall not maintain, commit, or permit the maintenance or commission of any nuisance as defined in Civil Code Section 3479 on the Premises; and Tenant shall not use or permit the use of the Premises for any unlawful purpose. Compliance With Laws Section 3.04. Tenant shall at Tenant's own cost and expense comply with all statutes, ordinances, regulations, and requirements of all governmental entities, both federal and state and county or municipal, [including those requiring capital improvements to the Premises,] relating to Tenant's use and occupancy of the Premises whether those statutes, ordinances, regulations, and requirements are now in force or are subsequently enacted. The judgment of any court of competent jurisdiction, or the admission by Tenant in a proceeding brought against Tenant by any government entity, that Tenant has violated any such statute, ordinance, regulation, or requirement shall be conclusive as between Landlord and Tenant and shall constitute grounds for termination of this lease by Landlord. The Landlord shall be responsible for any hazardous waste which is discovered on the subject premises and which is proven to have existed at the commencement or this lease. ARTICLE 4. TAXES AND UTILITIES Utilities Section 4.01. Tenant shall pay for all utilities and services furnished to or used by it, including, without limitation, gas, electricity, water, telephone service; and trash collection. Tenant shall make all arrangements for such services and shall pay all connection charges, and shall hold Landlord harmless from any liability for charges for said service. Personal Property Taxes Section 4.02. Tenant shall pay before they become delinquent all taxes, assessments, and other charges levied or imposed by any governmental entity on the furniture, trade fixtures, appliances, Premises including, without limiting the terms used in this section, any shelves, counters, vaults, vault doors, wall safes, partitions, fixtures, machinery, plant equipment, office equipment, television or radio antennas, and communication equipment brought on the Premises by Tenant. Real Property Taxes Section 4.03. Landlord shall pay all real property taxes and assessments levied or assessed against the premises during the term of this lease; ARTICLE 5. ALTERATIONS AND REPAIRS Condition of Premises Section 5.01. Tenant accepts the Premises, as well as the Improvements indicated and agreed on as per plan, in their present condition or as planned to be made, and stipulates with Landlord that the Premises and Improvements are in good, clean, safe, and tenantable condition as of the date of this lease. Tenant further agrees with and represents to Landlord that the Premises have been inspected by Tenant, that it has received assurances acceptable to Tenant by means independent of Landlord or any agent of Landlord of the truth of all facts material to this lease, and that the Premises are being leased by Tenant as a result of its own inspection and investigation and not as a result of any representations made by Landlord or any agent of Landlord except those expressly set forth in this lease. Maintenance by Landlord Section 5.02. Landlord shall, at its own cost and expense, maintain in good condition and repair the structural elements of the Building, landscaping, walkways, driveways, trash enclosures, and painting and maintenance of exterior walls. For purposes of this section, "structural elements" shall mean the exterior roof, exterior walls (except show window glass), structural supports, and foundation of the Building. Landlord shall not be liable for any damages to Tenant or the property of Tenant resulting from Landlord's failure to make any repairs required by this section unless written notice of the need for those repairs has been given to Landlord by Tenant and Landlord has failed for a period of 30 days after receipt of the notice, unless prevented by causes not the fault of the Landlord, to make the needed repairs. Notwithstanding anything in this section to the contrary, Tenant shall promptly reimburse Landlord for the full cost of any repairs made pursuant to this section required because of the negligence or other fault, other than normal and proper use, of Tenant or its employees or agents or subtenants, it any. Landlord and its agents shall have the right to enter the Premises at all reasonable times after giving Tenant twenty-four (24) hours notice (and at any time during an emergency) for the purpose of inspecting them or to make any repairs required to be made by Landlord under this lease. Maintenance by Tenant Section 5.03. Except as otherwise expressly provided in Section 5.02 of this lease, Tenant shall at its own cost and expense keep and maintain all portions of the Premises and all Improvements located on the Premises in good order and repair and in as safe and clean a condition as they were when received by Tenant from Landlord, reasonable wear and tear excepted. Maintenance of Plate Glass Section 5.04. Tenant shall, at its own cost and expense, repair and replace any plate glass in any show window on the Premises that is broken regardless of any cause. Furthermore, Tenant shall at Tenant's own cost and expense at all times during the term of this lease carry adequate plate glass insurance on the glass in all show windows on the Premises to perform the repair and replacement requirements of this section. Should Tenant fail to repair or replace any glass broken in a show window or fail to maintain adequate plate glass insurance on the glass in show windows on the Premises, Landlord may replace or repair the broken glass or secure that insurance and Tenant shall promptly reimburse Landlord for the cost of the repair, replacement, or insurance. In addition, Tenant shall pay Landlord interest on those costs at the rate of ten percent (10%) per year from the date the costs were incurred by Landlord to the date they are reimbursed to Landlord by Tenant. Alterations and Liens Section 5.05. Tenant shall not make or permit any other person to make any alterations to the Premises or to any Improvements on the Premises without the prior written consent of Landlord. Landlord shall not unreasonable withhold this consent. Tenant shall keep the premises free and clear from any and all liens, claims, and demands for work performed, materials furnished, or operations conducted on the Premises at the instance or request of Tenant. Furthermore, any and all alterations, additions, improvements, and fixtures, except furniture and trade fixtures, made or placed in or on the Premises by Tenant or any other person shall on expiration or earlier termination of this lease, become the property of Landlord and remain on the Premises. Landlord shall have the option, however, on expiration or termination of this lease, of requiring Tenant, at Tenant's sole cost and expense, to remove any or all such alterations, additions, improvements, or fixtures from the Premises. Inspection by Landlord Section 5.06. Tenant shall permit Landlord or Landlord's agents, representatives, or employees to enter the Premises at all reasonable times after giving Tenant twenty-four (24) hours notice for the purpose of inspecting the Premises to determine whether Tenant is complying with the terms of this lease, for the purpose of doing other lawful acts that may be necessary to protect Landlord's interest in the Premises, or for the purpose of performing Landlord's duties under this lease. Surrender of Premises Section 5.07. On expiration or earlier termination of this lease, Tenant shall promptly surrender and deliver the Premises to Landlord in as good condition as they are now at the date of this lease, excluding reasonable wear and tear, and repairs required to be made by Landlord under this lease. ARTICLE 6. INDEMNITY AND INSURANCE Hold-Harmless Clause Section 6.01. Tenant agrees to protect, indemnify, and save Landlord harmless from and against any all liability to third parties resulting from Tenant's occupation and use of the Premises, specifically including, without limitation, any claim, liability, loss, or damage arising by reason of: (a) The death or injury of any person or persons, including Tenant or any person who is an employee or agent of Tenant, or by reason of the damage to or destruction of any property, including property owned by Tenant or any person who is an employee or agent of Tenant, and caused or allegedly caused by either the condition of the Premises, or some act or omission of Tenant or of some agent, contractor, employee, servant, subtenant, or concessionaire of Tenant on the Premises; (b) Any work performed on the Premises or materials furnished to the Premises at the instance or request of Tenant or any agent or employee of Tenant; and (c) Tenant's failure to perform any provision of this lease or to comply with any requirement of law or any requirement imposed on Landlord or the leased premises by any duly authorized governmental agency or political subdivision. Public Liability and Property Damage Insurance Section 6.02. Tenant shall, at Tenant's expense, maintain and keep in force during the term of this lease a policy of comprehensive public liability insurance insuring Tenant and Landlord against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in an amount of not less than One Million Dollars ($],000,000), combined single limit. If Tenant shall fail to procure and maintain said insurance Landlord may, but shall not be required to, procure and maintain the same, but at the expense of Tenant. Not more frequently than each three (3) years, if in the opinion of Landlord or its insurance broker the amount of public liability and property damage insurance coverage of the time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord, its lender or insurance broker. (a) Fire Insurance. In order that the business of Tenant may continue with as little interruption as possible, Tenant shall, during the full term of this lease and any renewals or extensions thereof, maintain at Tenant's own cost and expense an insurance policy issued by a reputable company authorized to conduct insurance business in California insuring for their full insurable value all fixtures and equipment and, to the extent possible, all merchandise that is, at any time during the term of this lease or any renewal or extension thereof, in or on said premises against damage or destruction by fire, theft, or the elements. (b) Insurance Policy Form. The bodily injury liability insurance and property damage insurance to be maintained by Tenant shall be carried in the joint names of Landlord and Tenant. Such policy shall be subject to Landlord's approval as to form and substance and shall expressly provide that the policy shall not be canceled or altered without thirty (30) days prior written notice to Landlord. Upon insurance thereof, such policy or a duplicate or a certificate thereof, shall be delivered to Landlord for retention by it. The insurance policy to be maintained by Tenant shall be issued by good and responsible insurance companies authorized to do business in the state of California. ARTICLE 7. SIGNS AND TRADE FIXTURES Installation and Removal of Trade Fixtures Section 7.01. Tenant shall have the right at any time and from time to time during the term of this lease, at Tenant's sole cost and expense, to install and affix in, to, or on the Premises any items, herein called "trade fixtures", for use in Tenant's trade or business that Tenant may, in Tenant's sole discretion, deem advisable. Any and all trade fixtures that can be removed without structural damage to the Premises or any building or improvements on the Premises shall, subject to Section 7.02 of this lease, remain the property of the Tenant and may be removed by Tenant at any time before the expiration or earlier termination of this lease, provided Tenant repairs any damage caused by the removal. Unremoved Trade Fixtures Section 7.02. Any trade fixtures described in this Article that are not removed from the Premises by Tenant within thirty (30) days after the expiration or earlier termination regardless of cause, of this lease shall be deemed abandoned by Tenant and shall automatically become the property of Landlord as owner of the real property to which they are affixed. Signs Section 7.03. Tenant may erect, maintain, permit, and from time to time remove any signs at Tenant's sole cost and expense, in or about the Premises that Tenant may deem necessary or desirable, provided that any signs erected or maintained by Tenant and authorized by Landlord, and shall comply with all requirements of any governmental authority with jurisdiction. ARTICLE 8. DESTRUCTION OF PREMISES Landlord's Election to Repair or Terminate Section 8.01. Should the premises or the building on said premises be destroyed in whole or in part from any cause, Landlord may at Landlord's option either: (a) Continue this lease in full force and effect by repairing and restoring, at Landlord's own cost and expense, said premises to their former condition if that can be accomplished within ninety (90) days from the date of destruction, or (b) Terminate this lease by giving Tenant written notice of such termination. Insurance Proceeds Section 8.02. Any insurance proceeds received by Landlord because of the total or partial destruction of said premises of the building on said Premises shall be the sole property of Landlord free from any claims of Tenant, and may be used by Landlord for whatever purpose Landlord may desire. Should Landlord elect to repair and restore the premises to their former condition following partial or full destruction of said Premises or the building on said premises: (a) Tenant shall not be entitled to any damage for any loss or inconvenience sustained by Tenant as a result of the making of such repairs and restoration, unless caused by negligence of Landlord or Landlord's agents; (b) Landlord shall have full right to enter said Premises and take possession of so much of said Premises, including the whole of said Premises, as may be reasonably necessary to enable Landlord promptly and efficiently to carry out the work of repair and restoration; and (c) The rent payable by Tenant to Landlord for the part destroyed shall be abated to the extent and for the time Tenant is prevented from using that portion of the premises. ARTICLE 9. CONDEMNATION Section 9.01. If title to all or any part of the Premises be taken for any public or quasi-public use under any statute or by right of eminent domain, or by private purchase in lieu thereof, Landlord may terminate this Lease as of the date that possession of said premises or part thereof, be taken. All compensation awarded or paid upon such taking, including the full fair market value of the property taken and damage for injury, if any, to the remainder, shall belong solely to and be the property of Landlord, whether such compensation be awarded or paid as compensation for diminution in value of the leasehold or to the fee; provided, however, that Landlord shall not be entitled to any award made to Tenant for loss of good will to Tenants business or for cost of removal of stock and fixtures. If by reason of such taking, a reasonable amount of the premises reasonable suitable for Tenant's continued occupancy for the uses and purposes for which the premises are leased does not remain, Tenant may terminate this lease as of the date possession of said premises or part thereof be taken. If neither party terminates this lease by reason of a partial taking, the lease shall nevertheless terminate unless the parties reach agreement as to the rent payable hereunder for the remaining portions of the premises prior to the date possession of the portion of the premises is taken. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions hereof. ARTICLE 10. DEFAULT, ASSIGNMENT, AND TERMINATION Restriction Against Subletting or Assignment Section 10.01. Tenant shall not encumber, assign, otherwise transfer this lease, any right or interest in this lease, or any right or interest in the Premises or any of the Improvements that may now or hereafter be constructed or installed on the Premises without first obtaining the express written consent of Landlord. Tenant shall not sublet the Premises or any part of the Premises or allow any other person, other than Tenant's agents, servants, and employees to occupy the Premises or any part of the Premises without the prior written consent of Landlord. A consent by Landlord to one assignment, one subletting, or one occupation of the Premises by another person shall not be deemed to be a consent to any subsequent assignment, subletting, or occupation of the Premises by another person. Any encumbrance, assignment, transfer, or subletting without the prior written consent of Landlord, whether voluntary or involuntary, by operation of law or otherwise, is void and shall, at the option of Landlord, terminate this lease. The consent of Landlord to any assignment of Tenant's interest in this lease or the subletting by Tenant of the Premises or parts of the Premises shall not be unreasonable withheld. Subordination Section 10.02. Tenant agrees that this lease shall be subordinate to any mortgages or trust deeds that are now or may hereafter be placed upon said premises and to any and all advances made or to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof, provided the mortgagee or beneficiary named in said mortgages or trust deed shall agree to recognize the lease of the Tenant in the event of foreclosure if the Tenant is not in default. If any mortgagee or beneficiary elects to have this lease superior to its mortgage, or deed of trust by notice to Tenant, then this lease shall be deemed superior to the lien of any such mortgage or trust deed, whether this lease is dated or recorded before or after said mortgage or trust deed. Default Defined Section 10.03. The occurrence of any of the following shall constitute a material default and breach of this lease by Tenant: (a) Any failure by Tenant to pay the rent or to make any other payment required to be made by Tenant under this lease when that failure continues for ten (10) days after written notice of the failure is given by Landlord to Tenant. (b) The abandonment or vacation of the Premises by Tenant (the absence of Tenant from or the failure by Tenant to conduct business on the Premises for a period in excess of fourteen (14) consecutive days shall constitute an abandonment or vacation for purposes of this lease.) (c) A failure by Tenant to observe and perform any other provision of this lease to be observed or performed by Tenant, when that failure continues for thirty (30) days after written notice of Tenant's failure is given by Landlord to Tenant; provided, however, that if the nature of that default is such that it cannot reasonable be cured within said thirty (30) day period, Tenant shall not be deemed to be in default if Tenant commences that cure within the said thirty (30) day period and thereafter diligently prosecutes it to completion. (d) The making by Tenant of any general assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, it is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, when possession is not restored to Tenant within thirty (30) days; or the attachment, execution, or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this lease, when that seizure is not discharged within thirty (30) days. Termination of Lease and Recovery of Damages Section 10.04. In the event of any default by Tenant under this lease, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the right to terminate this lease and all rights of Tenant hereunder by giving written notice of the termination. No act of Landlord shall be construed as terminating this lease except written notice given by Landlord to Tenant advising Tenant that Landlord elects to terminate the lease. In the event Landlord elects to terminate this lease, Landlord may recover from Tenant: (a) The worth at the time of award of any unpaid rent that had been earned at the time of termination of the lease; (b) The worth at the time of award of the amount by which the unpaid rent that would have been earned after termination of the lease until the time of award exceeds the amount of rental loss that Tenant proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid rent for the balance of the term of this lease after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; and (d) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this lease. The term "rent" as used in this section shall mean the Minimum Rent, the Percentage Rent, and all other sums required to be paid by Tenant pursuant to the terms of this lease. As used in subsections (a) and (b) above, the "worth at the time of award" is computed by allowing interest at the rate of ten percent (10%) per year. As used in subsection (c), the "worth at the time of award" is computed by discounting that amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Landlord's Right to Continue Lease in Effect Section 10.05. (a) If Tenant breaches this lease and abandons the Premises before the natural expiration of the term of this lease, Landlord may continue this lease in effect by not terminating Tenant's right to possession of the Premises, in which event Landlord shall be entitled to enforce all its rights and remedies under this lease, including the right to recover the rent specified in this lease as it becomes due under this lease. For as long as Landlord does not terminate this lease, Tenant shall have the right to assign or sublease the Premises with the Landlord's prior written consent. Landlord shall not unreasonably withhold consent. (b) No act of Landlord, including but not limited to Landlord's entry on the Premises, efforts to relet the Premises, or maintenance of the Premises, shall be construed as an election to terminate this lease unless a written notice of that intention is given to Tenant or unless the termination of this lease is decreed by a court of competent jurisdiction. Landlord's Right to Relet Section 10.06. In the event Tenant breaches this lease, Landlord may enter on and relet the Premises or any part of the Premises to a third party or third parties for any term, at any rental, and on any other terms and conditions that Landlord in its sole discretion may deem advisable, and shall have the right to make alterations and repairs to the Premises. Tenant shall be liable for all of Landlord's costs in reletting, including but not limited to remodeling costs required for the reletting. In the event Landlord relets the premises, Tenant shall pay all rent due under and at the times specified in this lease, less any amount or amounts actually received by Landlord from the reletting. Landlord's Right to Cure Tenant Default Section 10.07. If Tenant breaches or fails to perform any of the covenants or provisions of this lease, Landlord may, but shall not be required to, cure Tenant's breach. Any sum expended by Landlord, with the ten maximum legal rate of interest, shall be reimbursed by Tenant to Landlord with the next due rent payment under this lease. Cumulative Remedies Section 10.08. The remedies granted to Landlord in this Article shall not be exclusive but shall be cumulative and in addition to all remedies now or hereafter allowed by law or provided in this lease. Waiver of Breach Section 10.09. The waiver by Landlord of any breach by Tenant of any of the provisions of this lease shall not constitute a continuing waiver or waiver of any subsequent breach by Tenant either of the same or another provision of this lease. ARTICLE 11. MISCELLANEOUS Force Majeure-Unavoidable Delays Section 11.01. If the performance of any act required by this lease to be performed by either Landlord or Tenant is prevented or delayed by reason of an act of God, strike, lockout, labor troubles, inability to secure materials, restrictive governmental laws or regulations, or any other cause except financial inability that is not the fault of the party required to perform the act, the time for performance of the act will be extended for a period equivalent to the period of delay, and performance of the act during the period of delay will be excused. However, nothing contained in this section shall excuse the prompt payment of rent by Tenant as required by this lease or the performance of any act rendered difficult solely because of the financial condition of the party required to perform the act. Attorney's Fees Section 11.02. If any litigation is commenced between the parties to this lease concerning the Premises, this lease, or the rights and duties of either in relation to the Premises or to this lease, the party prevailing in that litigation shall be entitled to, in addition to any other relief that may be granted in the litigation, a reasonable sum as and for it's attorney's fees in that litigation that are determined by the court in that litigation or in a separate action brought for that purpose. Notices Section 11.03. Except as otherwise expressly provided by law, any and all notices or other communications required or permitted by this lease or by law to be served on or given to either party to this lease by the other party to this lease shall be in writing and shall be deemed duly served and given when personally delivered to the party to whom they are directed, or in lieu of personal service, when deposited in the United States mail, first-class postage prepaid, addressed to Tenant at 117 Morris Street, Sebastopol, California 95472 or to Landlord at 111 Morris Street, Sebastopol, California 95472. Either party, Tenant or Landlord, may change it's address for the purpose of this section by giving written notice of that change to the other party in the manner provided in this section. Binding on Heirs and Successors Section 11.04. This lease shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of Landlord and Tenant, but nothing in this section shall be construed as a consent by Landlord to any assignment of Partial Invalidity Section 11.05. If any provision of this lease is held by a court of competent jurisdiction to be either invalid, void, or unenforceable, the remaining provisions of this lease shall remain in full force and effect unimpaired by the holding. Sole and Only Agreement Section 11.06. This instrument constitutes the sole and only agreement between Landlord and Tenant respecting the Premises, the leasing of the Premises to Tenant, or the lease term created under this lease, and correctly sets forth the obligations of Landlord and Tenant to each other as of its date. Any agreements or representations respecting the Premises or their leasing by Landlord to Tenant not expressly set forth in this instrument are null and void. Time of Essence Section 11.07. Time is expressly declared to be of the essence in this lease. Executed on 1-12-96, at Sebastopol, California. /s/ Daniel O. Davis --------------------------------------------- Daniel O. Davis (Landlord) /s/ Robbin H. Davis --------------------------------------------- Robbin H. Davis (Landlord) /s/ James McGreen (President) --------------------------------------------- ZAP POWER SYSTEMS/ELECTRICYCLE CORP. (Tenant) by EXHIBIT "B" Improvements Landlord agrees to the following terms and conditions: 1) Offices will be cleaned and made ready for occupancy. 2) Office furniture, file cabinets, copier, and other items needed per Don Bright's walk through of Premises to become the property of ZAP Power Systems/Electricycle Corp. 3) Phone System will remain on Premises for tenants use for as long as Tenant occupies Premises. Tenant is responsible for upkeep and repair. Tenant shall take ownership of all phones. 4) Landlord to supply 8' X 20' outside area for storage container. 5) Landlord to supply one (1) double door entrance from downstairs office to warehouse, doors to be included EX-10.2 9 EXCLUSIVE BROKER AND MARKETING AGREEMENT EXCLUSIVE BROKER AND MARKETING AGREEMENT THIS EXCLUSIVE BROKER AND MARKETING AGREEMENT is made and entered into effective as of March 5, 1996 (the "Effective Date") by and between ZAP Power Systems Corporation, a California corporation (herein referred to either as "ZAP" or "Manufacturer") located at 117 Morris St., Sebastopol, CA 95472 and Power Biking INC., a California Corporation (herein referred to either as "PBI" or "Broker") located at 5213 El Mercado Parkway, Unit D, Wikiup, Ca. 95403 (collectively, the "Parties"). RECITALS A. ZAP has invented, developed and manufactured certain electric vehicles and components (defined below as "Assembled Products") thereof which it desires to sell and distribute in certain territories with the assistance of Broker. B. Broker desires to obtain distributors and/or customers for ZAP's products in certain territories on an exclusive and non-exclusive basis as more fully set forth below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties hereto mutually agree as follows: 1. Definitions When used herein, the additional definitions set forth herein below shall have the following meanings: A. Affiliates of a Party hereto shall mean (i) each person or entity that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, five percent (5%) or more of (A) the profits or losses of any person or (B) the securities having ordinary voting power in the election of directors or other governing body, or (c) the voting power of any person or entity or other ownership interests of any such Party, (ii) each person or entity that controls, is controlled by or is under common control with such Party or any Affiliate of such Party or (iii) each of such Party's officers, directors, or general partners or similarly positioned-individuals. For the purpose of this definition, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities or by contract or otherwise. 1 B. Aftermarket Accessories shall mean and include (i) any physical nonstandard item that can be added to an "Assembled Product" (as defined below) and/or (ii) any general item of merchandise for use in connection with an Assembled Product (such as clothes, banners, etc.), sometimes distributed, sold, or otherwise commercialized directly or indirectly by or for ZAP or any of its Affiliates during the Term of this Agreement. C. Aftermarket Options shall mean any and all contractual rights sold by PBI or ZAP to protect or insure a ZAP product including, but not limited to extended warranties, service contracts, maintenance contracts, theft insurance, and tire puncture insurance. D. Assembled Products shall mean the battery and/or solar powered electric motor driven vehicle(s) described in Exhibit A hereto (which Exhibit is incorporated herein by this reference) manufactured, distributed, sold or otherwise commercialized directly or on behalf of ZAP or any of its affiliates during the term of this Agreement. If and when ZAP expands its line of vehicles (i.e. electric automobiles) then, it agrees to enter good faith negotiations with PBI to enter into an agreement to extend this agreement to said new vehicles. E. Components shall mean any and all engines, controllers, transmissions drive-trains or any other separate parts or components that are a necessary and integrated part of an Assembled Product, and is also provided, manufactured, distributed, sold or otherwise commercialized directly or indirectly by Manufacturer or any of its Affiliates during the Term of this Agreement. F. Dollars or "$" shall mean currency of the United States of America. G. PBI Enrolled Dealer shall mean any "New Automobile Franchised Dealership" (i.e. a dealer for General Motors, etc.) that is enrolled by PBI that continues to be a Party in good standing under their Dealer/Manufacturer Sales and Service Agreement (herein called "Dealer Agreement"). H. Exclusive Territories shall mean the geographic area constituting the following geographic regions, to wit: The 50 states of the United States of America including all of its possessions and Territories and Canada. I. Products shall mean and collectively refer to any one or more of the following: Aftermarket Accessories, Assembled Products and/or Components. (Note, AFTERMARKET OPTIONS are not PRODUCTS) 2 2. Appointment/Products/Territory/Term A. Grant of Exclusive Broker Appointment: Manufacturer hereby appoints PBI the exclusive right and appoints PBI on an exclusive basis as its exclusive broker within the Exclusive Territory to market, advertise, merchandise, promote and commercialize the Products and any of them to and through PBI Enrolled Dealers during the Term of this Agreement. PBI Enrolled Dealers shall contract directly with ZAP pursuant to the Dealer Agreement. Once the standard form of Dealer Agreement is completed (which must be completed at the earliest possible date as PBI needs this document to enroll PBI Enrolled Dealers) it will be attached hereto as Exhibit B and incorporated herein by this reference ("Dealer Agreement"). PBI will cause its best effort (contingent upon Zap's product availability and production capacity) to locate and present to ZAP New Automobile Franchised Dealerships (defined in subsection 1G hereof) for consideration and enrollment by ZAP as a PBI Enrolled Dealer for ZAP and to exploit and fully develop the market. B. Special Customer Agreements at ZAP's Discretion PBI is expected to concentrate its efforts on the establishment of a distribution network consisting primarily of New Automobile Franchise Dealers as PBI Enrolled Dealers. However, its is contemplated that from time to time PBI may encounter a potential candidate for a PBI Enrolled Dealer or identify a group of customers for ZAP Products that do not qualify for inclusion in PBI's network of PBI Enrolled Dealers. In all such circumstances, PBI is required to disclose the opportunity to ZAP. Where appropriate, ZAP (in its sole discretion) may engage PBI to participate in the development of a dealership or customer relationship with the prospect. Each time PBI is engaged to participate in a special situation, the Parties will complete a Special Customer Contract to set forth PBI's rights, duties, compensation arrangement, and other matters relating to the special situation. Each such Special Customer Contract will be separate and distinct from this Agreement. C. Non-Exclusive Purchasers (NEP) means a retail customer in the Exclusive Territory that PBI introduces to ZAP that ZAP accepts in its sole discretion as a NEP for PBI's benefit because the contemplated sale does not conflict with ZAP's other dealers or distribution objectives. In such an event, ZAP agrees to sell Assembled Products to NEP's on terms and conditions no less favorable than those given to similar type customers under reasonably similar circumstances. PBI's rights with respect to NEP's shall be nonexclusive. D. Term The Term of this Agreement shall begin on the Effective Date and ends on May 31, 1998, unless extended by written agreement of the parties or sooner terminated pursuant to Section 13 hereof. 3 3. Aftermarket Options Exclusivity: For the Term of this Agreement ZAP shall not sell any Aftermarket Option to PBI Enrolled Dealers and/or selected NEPs or selected Special Customers for whom PBI has been granted an exclusive to Aftermarket Options. 4. PBI COMPENSATION For the Term of this Agreement PBI will be compensated for Product sales made by PBI Enrolled Dealers, Special Customers and NEPs as follows: A. For all brokered sales (i.e. all purchase orders presented to ZAP through PBI) between the Effective Date and February 28, 1997, PBI will be paid the lesser of: (1) 18% of the Dealer Price charged by ZAP for sales of All Products or, (2) $.125 per Powerbike type Product; $55 per Powerkit type Product. B. For all brokered sales (i.e., all purchase orders presented to ZAP through PBI) after February 28, 1997 and the termination date of this Agreement, PBI will be paid the lesser of: (1) 15% of the Dealer Price charged by ZAP for sales of all Products, or (2) $100 per Powerbike type Product and $50 per Powerkit type Product. C. For sales brokered to NEP's and Special Customers, PBI will be paid a 20% brokerage fee if the Sales Price paid by the NEP or the Special Customer is 90% or more of Manufacturers' Suggested Retail Price for said Product. The brokerage fee due to PBI with respect to all other sales to a NEP or a Special Customer shall be negotiated and set forth in the appropriate agreement pertaining to the NEP or the Special Customer. D. Contingent Override Brokerage Fee: If but only if PBI satisfies in full the Incremental Unit Sales Quotas set forth in subsection 5B(5) hereof (without involving any need to cure any shortfall, and subject to only the exception set forth in subsection 4D(4) hereof), then PBI shall have earned the Override Brokerage Fee that shall be computed at a rate of 3% on sales in PBI's territory as prescribed in this subsection 4(D). The Override Brokerage Fee sales shall accrue and be paid as follows: 1. Commencing on March 1, 1997, ZAP will compute, the Override Brokerage Fee at a rate of 3% on all of ZAP's sales revenues for Assembled Products, Components, Aftermarket Accessories and Aftermarket Options in the Exclusive Territory that are not generated by "PBI Brokerage Activities Under This Agreement", which term is defined herein to mean; "Brokered sales of all Assembled Products, Components and Aftermarket Accessories and 4 Aftermarket Options" for which PBI is being paid Brokerage Fees under subsection 4A, B, C and D hereof." If PBI terminates its role as Broker before June 1, 1998 or PBI's current shareholders (i.e. Barry Biddulph and Rex Everett) spend less than a majority of their business efforts marketing ZAP's Products then no Override Brokerage Fees will be due. 2. The Override Brokerage Fee computed for each month (in which ZAP has received payment) will be paid thirty (30) days after the last day of each said month (i.e., a payment received in June by ZAP in 1997 will be paid not later than July 31, 1997). 3. Payments made pursuant to this subsection 4D and 4D(1) shall be made from March 1, 1997 to and until May 31, 1998 and continued as outlined in section 13b(2). 4. PBI shall not fail to earn the Override Brokerage Fees hereunder if PBI's inability to meet the Incremental Unit Sales Quota(s) hereunder is caused by ZAP's failure to deliver Product to the customers of the PBI Enrolled Dealers, NEPs, and/or Special Customers. In such an event, PBI shall be entitled to and shall be paid the Override Brokerage Fees. ZAP's manufacturing process time for most Products is eight (8) weeks. PBI's orders will account for this lead time. 5. Quotas: PBI agrees to meet or exceed the "Performance Quotas" set forth below. A. Cumulative PBI Enrolled Dealers Quota: On April 30, 1997, PBI shall have Zap Dealer Agreements submitted for at least for thirty (30) PBI Enrolled Dealers. B. Incremental Unit Sales Quota: PBI shall meet the following Brokered "Unit Sales" quotas for any combination of Assembled Products (a unit includes of the following, a Powerbike, a Powerbike, a Zappy, or a ZAP Powerkit) as follows: 1. 30 unit sales by March 5, '96. 2. 75 unit sales in the month of March '96. 3. 75 unit sales in the month of April '96. 4. 100 unit sales in the month of May '96. 5 5. 3,000 unit sales by April 30, 1997 (includes 280 units required in first four months, February '96 to May '96). 6. 10,000 unit sales by May 31, 1998 (includes 3.000 unit sales required as of April 30, 1997). C. Escrow and Payments: Manufacturer will establish and maintain an escrow account (or equivalent) for the collection of sales proceeds immediately. All payments for Products brokered by PBI hereunder for which Broker is entitled to a fee shall be paid in U.S. Dollars to a ZAP escrow account in which PBI shall have a right for disbursement by an escrow agent as outlined in the escrow Agreement attached as Exhibit C. (to be completed immediately). The Dealer Agreement shall provide that Purchaser shall make payments payable to the foregoing Escrow Account (the "Escrow Account"). Amounts hereunder shall be considered to be paid as of the day on which funds are received in the Escrow Account. The name on this Escrow Account will be ZAP Powerbikes Enterprise. 6. PBI Duties: A. PBI will use its best effort to cause the establishment of a PBI Enrolled Dealer Network for ZAP in the Exclusive Territory. B. PBI shall promptly refer to the Manufacturer any correspondence or inquiries of any kind that it may receive from purchasers or potential subdistributors, dealerships or sales representatives located anywhere inside or outside the Exclusive Territory except New Automobile Franchise Dealer(s) and NEP's inside the Exclusive Territory. C. PBI agrees to conduct its business in a manner that will reflect favorably upon the good name and reputation of the Products and on Manufacturer. D. PBI agrees to conduct its business in a responsible manner that will positively support ZAP's activities hereunder, including its marketing and advertising efforts. E. PBI will disclose to ZAP any willful infringement of ZAP's patent or trademark rights by third Parties which PBI has actual knowledge. 7. Manufacturer Duties A. Manufacturer agrees to conduct its business in a responsible manner that will support positively PBI activities hereunder. In this regard, Manufacture's will exercise diligence in all areas of its business including among others: 6 B. Manufacturer will diligently work to carrying on a continuous effort to improve its Products with innovations that will make Products costs competitive, of first class quality, and preferred technology. Manufacturer will give PBI at least 30 days advanced written notice of any new Products or Product changes. In this regard, Manufacturer will use its best efforts to introduce what is commonly known as its "ZAPPY" as its first new Product not later than December 31, 1996. C. Manufacturer will cooperate with Brokers creations and production of training manuals, videos, and such other materials Sales Agents deems necessary for use by PBI Enrolled Dealers. D. Manufacturer will establish and maintain an Escrow Account (or equivalent) for the collection of sales proceeds to be allocated and dispersed to Manufacturer and PBI under the Escrow Agreement pursuant to the terms of subsection 5C hereof. E. Manufacturer will undertake such reasonable legal enforcement and protection of Manufacturers patent and trademark rights as Manufacturer deems appropriate. F. Manufacturer will grant all PBI Enrolled Dealers first call rights to receive delivery of all Products for which they have provided Manufacturer a purchase order at least sixty (60) calendar days before the delivery date. G. Manufacturer will provide all PBI's Special Customers and NEP's fulfillment of their sales orders on a consistent, FIFO basis. H. Manufacturer will, at Manufacturer's discretion, obtain and maintain "Brand Names" for its Products. I. Manufacturer will indemnify PBI from any loss arising from Manufacturers failure to deliver Products in a timely fashion. J. ZAP shall not install any Dealers in any of PBI's "Protected" Dealer areas if the "Protected" Dealer is meeting its quotas. 8. Advertising duties of PBI and MANUFACTURER'S support thereof A. Manufacturer shall furnish to PBI (free of charge), at PBI's address of record reproduction-ready transparencies of ZAP created drawings, specifications and other technical information (including service manuals and warranty booklets) for the Products requested by PBI for marketing production by PBI at its sole expense. PBI (at its expense) is hereby authorized to reproduce the same in the literature and material it produces and make 7 needed and accurate translations thereof as may be appropriate in the Exclusive Territories. In this regard, Manufacturer will provide PBI accurate and legally correct information for use in PBI's marketing efforts. PBI is required to obtain approval from Manufacturer of all of the literature and any other advertising material prior to its publication by PBI to third Parties. B. From time to time the Manufacturer may agree to engage in co-op advertising with Authorized Dealers as recommended by Broker. Manufacturer reserves its right to decide the extent of its participation in co-op advertising based on a review of PBI's proposal. C. PBI is to pay for all of its marketing and advertising costs and overhead. D. Manufacturer is responsible to provide all technical, installation, and service related information necessary for Authorized Dealers to provide competent service to its purchasers. E. Manufacturer is to provide Authorized Dealers on video/audio tape(s) for the "installation and service" of the Products. F. ZAP will provide Authorized Dealers an 800 number for technical assistance during all normal business hours in the United States. G. ZAP will pay PBI $1,000 by March 15, 1996 for the photography cost for ZAP bikes. ZAP will gain access to the negatives for reproduction. 9. Relationship of the Parties The Parties agree that PBI is only a broker to ZAP and that their relationship to not be that of employer or that of an employee, a partnership, or a joint venture of any kind. Manufacturer shall not make any statement or otherwise represent Broker as having any relationship with Manufacturer which is based on an alleged relationship other than that described herein. 10. Trademark/Patents/Proprietary Information/Competition. A. Manufacturer grants to PBI for the term of this Agreement a non-exclusive right and license to use all of ZAP's Trademarks that pertain to the Products covered by this Agreement, including but not limited to the trademark ZAP/ZAP Power Systems and Electricycle Products in connection with the advertising, merchandising, promotion and commercialization of the Products in the Exclusive Territories. Upon the termination of this Agreement, PBI's rights and license hereunder shall automatically and immediately cease and 8 as of termination, PBI will refrain thereafter all references to ZAP and ZAP related Products. B. Wherever practical Manufacturer will seek patent protection of it's proprietary Products under the laws of the United States and Canada and elsewhere. If and when patents are issued Manufacturer will seek to further protect it's Products with additions to the patents and new patents for new innovations that will protect Manufacturer's markets from competition. Also, Manufacturer will use all reasonable efforts (as Manufacturer deems in its sole discretion) to seek enforcement and legal protection of it's patents from infringements by competitors and others. C. Manufacturer will use it's best efforts to keep it's proprietary information secret. In this regard PBI agrees to sign a Non-competition and Confidentiality Agreement in form and substance acceptable to both Parties. Manufacturers and PBI shall comply with all laws, statutes, rule and regulations applicable to its business and the marketing of the Products. 11. Indemnification in Favor of Manufacturer A. PBI shall indemnify, defend, protect and hold harmless Manufacturer, its Affiliates and all officers, directors, employees and agents thereof (hereinafter referred to as "Indemnifies") harmless from all claims, suits, damages, losses, expenses, costs, obligations, liabilities, recoveries and deficiencies, (including without limitation, interest, penalties, damages or injury to property or person and incidental and consequential damages, as well as reasonable attorneys' fees, costs of defense and expert witness fees incurred in connection therewith) which may be asserted against or suffered by any Manufacturer indemnities which arise or result from any violation by PBI of any law, statute, rule regulation or any inaccurate advertising claim made by PBI without Manufacturers approval, or any breach of this Agreement by PBI. B. For the term of this Agreement, PBI shall carry reasonable errors and omissions insurance (which may be paid for by PBI as an "additional" insured to ZAP's other insurance's if doing so is less expensive and causes no disadvantage to ZAP) in form and amount which are customary in the industry for the activities performed by PBI hereunder. PBI shall name Manufacturer as an additional insured of said policies if customary and reasonably available. A Certificate of Insurance shall be provide to Manufacturer for the Term of this Agreement evidencing such coverage in the Exclusive Territory. Said policies shall require that insurer(s) may not terminate or materially modify insurance without prior notice to Manufacturer at least twenty (20) days in advance of termination or modification. Manufacturer shall have the right to review and approve said policies. 12. Indemnification in favor of PB 9 A. Manufacturer shall indemnify, defend, protect and hold harmless PBI, its Affiliates and all officers, directors, employees and agents thereof (hereinafter referred to as "PBI's Indemnities") harmless from all claims, suits, damages, losses, expenses, costs, obligations, liabilities, recoveries, and deficiencies, (including without limitation, interest, penalties, damage or injury to property or person and incidental and consequential damages as well as attorneys' fees, costs or defense, and expert witness fees incurred in connection therewith) which may be asserted against or suffered by any PBI Indemnity which arise or result from any product liability claims or any violation by ZAP of any law, statute, rule, regulation, or any breach of this Agreement. B. ZAP shall defend, indemnify, and hold all PBI Indemnities harmless as provided above for all advertising claims made by PBI which have been approved by ZAP in advance. C. Manufacturer agrees that it shall not carry less than one million dollars of "occurance" product liability insurance and casualty insurance for the term of this agreement. Manufacturer shall name PBI (said policy shall name) PBI's officers and its affiliates and Barry Biddulph and Rex Everett as individuals as additional insured on said policies. ZAP agrees to increase this product liability insurance to prudent higher limits as soon as financially reasonable. ZAP agrees a certificate of insurance shall be provided to PBI for such insurance policies. Said policies shall require that insurer may not terminate or materially modify such insurance without prior notice to PBI at least twenty (20) days in advance of termination or modification. PBI shall have the right to review and approve said policies. 13. Term of Agreement/Renewal/Overide Commissions/Buy Out Formulas A. The Term of this Agreement shall become effective on the Effective Date and shall terminate on May 31, 1998, unless extended by written agreement of the parties or sooner terminated pursuant to the terms of this Section 13. B. Either party may terminate this Agreement (with or without cause) by giving the other party at least sixty (60) days advance written notice to terminate. 1. If Zap terminates the agreement before May 31, 1998 then it will owe PBI a "Buyout Amount" equal to either, (a) if the Override Brokerage Fee has been earned by PBI, then their Buyout Amount shall be $4,000,000 less the Override Brokerage Fee paid to PBI through the termination date or (b) if the Override Brokerage Fee has not been earned by PBI, then the Buyout Amount shall be $4,000,000 less the "Buyout Reduction Amount" derived herein below, as follows: 10 Unit and dealer quotas will be weighted based on their relative importance to Zap. The weights are 80% for unit sales and 20% for dealers. FIRST, The Total Weighted Quota for subsection 13B(1) (b) is 2,406 and was derived as follows: (3,000 unit sales quota times 80%) plus (30 dealer contracts submitted times 20%). For subsection 13B(2) it is 8,006 because the 10,000 unit sales required on May 31, 1998 is used. SECOND, The Weighted Actual Results for unit sales and dealer contracts submitted to Zap by PBI would be determined. For subsection 13B(1)(b) the Quota performance measurement period ends May 31, 1997. For subsection 13B(2) the Quota performance measurement period ends on May 31, 1998. THIRD, the reduction formula should be applied for subsection 13B(1) the Buyout Reduction Amount is derived as follows: "(1(representing 100%) minus (The weighted actual results divided by The Total weighted quota)) times $4,000,000". For subsection 13B(2), the reduction percentage is derived under the formula above by replacing the $4,000,000 with the 10% called for in that provision. Example for 13B(1)(b): Actual results Unit sales 2,000 Dealer contracts 25 The Weighted Actual Results (2,000 times 80%)+(25 times 20%) equals 1,605 The Buyout Reduction Amount is $1,340,000 derived as follows: 1,605 divided by 2,406 equals 0.665 1 minus 0.665 equals 0.335 $4,000,000 times 0.335 equals $1,340,000 Therefore, the Buyout Amount under subsection 13B(1)(b) would be $2,660,000 ($4,000,000 less $1,340,000). 2. If the parties do not elect to extend the Term of this Agreement beyond the expiration date of May 31, 1998 (the Term), then, for the period June 1, 1998 to and including May 31, 2001, in addition 11 to paying an Override Brokerage Fees of 3% herein described in Section 4D and 4D(1), as further consideration of the value of the PBI Enrolled Dealer network then in place, PBI will also be paid a Dealer Network Buyout Amount computed at a rate of 10% of the Sales revenues to customers of the then PBI Enrolled Dealers (provided, however, that said 10% shall be reduced by applying the reduction formula in subsection 13B(1)(b) hereof, with 10% being substituted for the $4,000,000 and the 10,000 Unit Sales required by May 31, 1998, substituted for the 3,000 Unit Sales required by May 31, 1997. Notwithstanding anything in this provision to the contrary, if the parties elect to extend this agreement beyond the expiration date of May 31, 1998, then, this provision will be of no force or effect and no Dealer Network Buyout Amount will be due to PBI hereunder. C. At any time, either party may terminate this Agreement upon written notice to the other Party within thirty (30) days after the occurrence of any of the events set forth below is true with respect to the Noticed Party, to wit: 1. Makes an assignment for the benefits of its creditors; 2. Has a receiver appointed for all or any substantial portion of its business or assets and such receiver is not dismissed within 90 days thereafter, 3. Files or has filed against it, any petition under any bankruptcy or insolvency law, and, if such filing is involuntary, is not dismissed within 90 days thereafter, 4. is dissolved or liquidated without a successor in interest assuming all obligations hereunder. 5. PBI sells in excess of 40% of its capital stock in any transaction or series of related transactions, merges or is acquired by another entity or sells all, or substantially all of its assets ("Change in Control"), whereby the Party in control thereafter is a competing manufacturer or markets products substantially similar to the Products. In any event of a change of control, PBI shall provide notice to ZAP of the identity of the new owner(s). 14. Effect of Termination or Expiration Termination or expiration of this Agreement shall not relieve PBI or Manufacturer of any obligations or responsibilities it incurs prior to the termination or expiration of this Agreement. 15. Dispute Resolution 12 A. Any disputes between the Parties that arise out of this Agreement shall be submitted to final and binding arbitration in the City of Santa Rosa, County of Sonoma, State of California, under the Arbitration Rules of the American Arbitration Association then in effect, upon written notification and demand of any Party hereto. If any Party demands such arbitration, the American Arbitration Association shall be requested to submit a list of prospective arbitrators consisting of persons experienced in matters involving commercial contracts. The provisions of California's Code of Civil Procedure Section 1283.05 and the laws of the State of California are incorporated herein and shall be applicable to the arbitration. In making the award, the arbitrator shall award to the prevailing Party. Any award may be entered as a judgment in any court of competent jurisdiction in Santa Rosa, California. Should judicial proceedings be commenced to enforce or carry out this provision or any arbitration award, the prevailing Party in such proceedings shall be entitled to reasonable attorneys' fees and costs in addition to other relief. Any Party shall have the right, prior to receiving an arbitration award, to obtain preliminary relief from a court of competent jurisdiction to: (i) avoid injury or prejudice to that Party; or (ii) to protect the rights of any Party; or (iii) to maintain the status quo as it existed immediately prior to the dispute; or (iv) to obtain possession or property in order to avoid a material risk of damage to or loss of that property. 16. Miscellaneous A. Applicable law This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. B. Headings. The headings used herein and in the Exhibits attached hereto are descriptive only and for the convenience of identifying provisions, and are not determinative of the meaning or any such provisions. C. Entire Agreement This Agreement and the documents attached hereto as Exhibits constitute the entire Agreement and understanding between the Parties with respect to the subject matter herein and therein, and supersede and replace any and all prior Agreements and understandings. whether oral or written with respect to such matters. The provisions of this Agreement may be waived, altered, amended or replaced in whole or in part only upon the written consent of all Parties to this Agreement. D. Severability If for any reason any provision of this Agreement shall be determined to be invalid or inoperative, the validity and effect of the other provisions herein shall not be affected thereby, provided that no such severability shall be effective if it causes a material detriment to any Party. 13 E. Successors and Assigns Subject to any provisions herein with regard to assignment, all covenants and Agreements herein shall bind and insure to the benefit of the respective heirs, executors, administrators, successors and assigns of the Parties hereto. F. Venue Any action proceeding arising directly or indirectly from this Agreement shall be litigated or arbitrated, as the case may be, in an appropriate state or federal court in the County of Sonoma, State of California. G. Counterparts This Agreement may be executed in any number of counterparts, each of which may be executed by less than all of the Parties to this Agreement of which shall be enforceable against the Parties actually executing such counterparts, and all of which together shall constitute one instrument. H. No Implied Waivers The failure of either Party at any time to require performance by the other Party of any provision hereof shall not affect in any way the right to require such performance at any time thereafter, nor shall the waiver by either Party of a breach of any provision hereof be taken or held to be a waiver of any subsequent breach of the same provision or any other provision. I. Days Whenever the term "day" is used herein, unless otherwise stated, it refers to calendar days. J. Notices All notices, requests, demands, instructions or other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given upon delivery. If delivered personally or by one-day courier, or by facsimile transmission where receipt is acknowledged by the receiving machine or if given by prepaid telegram, or mailed first-class, postage prepaid, registered or certified mail, return receipt requested, shall be deemed to have been given 72 hours after such delivery, to the applicable Party's address set forth on the signature page as well as any addresses set forth on the signature page hereto. Either Party hereto may change the address(es) to which such communications are to be directed by giving written notice to the other Party hereto of such change in the manner provided above. K. Signature The Parties shall be entitled to rely upon and enforce a facsimile of any authorized signatures as if it were the original. 17. Representations and Covenants: Manufacturer and PBI hereby represents and covenants to the other as follows: 14 A. It has full right, power and authority to enter into this Agreement and there is nothing which would prevent it from performing its obligations under the terms and conditions imposed on it by this Agreement. B. This Agreement has been duly authorized by all of its necessary corporate action and constitutes a valid and binding obligation on it, enforceable in accordance with the terms thereof. C. There is no provision in its company or corporate charter, articles or incorporation, by-laws or the equivalent company or corporate governing documents and no provision in any existing mortgage, indenture, contract or Agreement binding on it which would be contravened by the execution, delivery or performance by it of this Agreement. D. No consent of any third Party is or shall be required as a condition to the validity of this Agreement. E. There is no action or proceeding pending or in so far as it knows or ought to know threatened against it before any court, administrative agency or other tribunal which might have a material adverse effect on its business or condition, financial or otherwise, or its operation of any business which would not have to be disclosed in Securities and Exchange Commission filings. F. It covenants and agrees that its representations contained in this Agreement shall remain true in all respects at all times after the Effective Date hereof with the same effect as though such representations had been made on and as of each such subsequent date. 18. Disclosure The Parties agree that the disclosure by PBI of this Agreement may be required by some or all of the PBI Enrolled Dealers, and that the disclosure of this Agreement may be appropriate even though it is not required by such PBI Enrolled Dealers. Any Party hereto may, therefore, disclose all or any part of this Agreement to third Parties in its own discretion provided, however, that this Agreement may not be disclosed to any direct competitors of Manufacturer or PBI. 19. Audit Manufacturer shall keep accurate books of account at its principal place of business covering all transactions relating to the Agreement. PBI or its duly authorized representatives shall have the right, at reasonable hours of the day and upon reasonable notice, to examine such books and all other documents and material in Manufacturer's "possession or control" with respect to material accounting matters covered by this Agreement. All books of account and records of ZAP and its affiliates relating to this Agreement shall be retained for at least five (5) years after the applicable transaction date or the period of time as required by the California Franchise Tax Board where applicable to such records whichever period is longer. 15 20. Force Majeure Neither Party hereto shall be liable in damages, or shall be subject to termination of this Agreement by the other Party, for any delay or default in performing any obligation hereunder if that delay or default is due to any cause beyond the reasonable control and without fault or negligence of that Party; provided that, in order to excuse its delay or default hereunder, a Party shall notify the other Party of the occurrence or causes, specifying the nature, particulars and expected duration thereof;, and provided further, that within ten (10) business days after the termination of such occurrence or cause, such Party shall give notice to the other Parties specifying the date of termination thereof. All obligations of the Parties shall return to being in full force and effect upon the termination of such occurrence or cause (including, without limitation, any payments that became due and payable hereunder prior to the termination of such occurrence or cause). For the purposes of this Section 20, a "cause beyond their reasonable control" of a Party shall include, without limiting the generality of the phrase, any act of God act of any government or other authority or statutory undertaking, industrial dispute, fire, earthquake, explosion, accident, power failure, flood, riot or war (declared or undeclared). 21. Compliance with Laws. Each Party shall comply with applicable federal, state and local governmental laws, rules, regulations and ordinances with respect to performance under this Agreement, including, without limitation, applicable provisions of the Export Administration Act of 1979, as amended (50 U.S.C.A. App. 2401 et seq.) and regulations promulgated thereunder, and any other applicable federal, state or local laws, rules, regulations and ordinances governing the export and use of commodities and data, and shall cooperate with each other Party in its compliance with this Section. 22. Biddulph/Biddulph Chevrolet is Separate from PBI Biddulph Chevrolet is a separate entity from PBI and in no way subject to this clause or any portion of this Agreement. In Witness Whereof, the Parties hereto have cause this Agreement to be executed by their respective duly authorized representative as of the date first above written. ZAP POWER SYSTEMS, Inc. POWER BIKING INC. BY: James McGreen 5/6/96 BY: ???? 5/6/96 ------------------------ -------------------------- President 117 Morris Street 5213 El Mercado Parkway Sebastopol, Ca. 95472 Unit D Wikiup, Ca. 95403 Ph. (707) 824-4150 Ph. (707) 522-6260 Fax (707) 824-4159 Fax (707) 522-6288 23. Supersedes all prior agreements all prior existing agreements between ZAP and PBI are hereby superceded by this Agreement and shall be of no further force and effort. 16 EXHIBIT A-ASSEMBLED PRODUCTS DESCRIBED FOR EXCLUSIVE SALES AGREEMENT BETWEEN ZAP & PBI DATED MARCH 5, 1996 As of the Effective Date of the Agreement the Assembled Products covered by this Agreement are as follows. Bicycles, Tricycles, Skateboards, Zappy, and Powerkits. 17 EXHIBIT B-FORM OF DEALER AGREEMENT FOR EXCLUSIVE SALES AGREEMENT BETWEEN ZAP & PBI DATED MARCH 5, 1996 FORM OF AGREEMENT TO BE ADDED WHEN COMPLETED 18 EXHIBIT C-FORM OF ESCROW AGREEMENT FOR EXCLUSIVE SALES AGREEMENT BETWEEN ZAP & PBI DATED MARCH 5, 1996 To be added when completed 19 EX-10.3 10 STATE OF CALIFORNIA FRANCHISE QUALIFICATION STATE OF CALIFORNIA -- BUSINESS, TRANSPORTATION AND HOUSING AGENCY PETE WILSON, Governor DEPARTMENT OF CORPORATIONS San Francisco, California OCT 3 1997 [GRAPHIC OMITTED] IN REPLY REFER TO: FILE NO: 995--2764 Mr. Rafael Aquirre-Sacasa Evers & Andelin, LLP 155 Montgomery Street, 12th Floor San Francisco, CA 94104 Re- ZAP Power Systems Dear Mr. Aquirre-Sacasa We are enclosing the Order issued in the above-entitled matter. The registration of the offer and sale of franchises requested in the application filed on September 18, 1997, is effective until April 20, 1998. Please note that pursuant to section 31121, a registration renewal application must be filed no later than 15 business days prior to the expiration of the registration. There is no stop order in effect pursuant to section 31115 of the Franchise Investment Law. Sincerely, /s/ W. ANTHONY COLBERT W. ANTHONY COLBERT Corporations Counsel Securities Regulation Division (415) 557-1815 Enclosure LOS ANGELES 90010-3001 SACRAMENTO 95814-2725 SAN DIEGO 92101-3697 3700 WILSHIRE BOULEVARD 980 NINTH STREET 1350 FRONT STREET (213) 736-2741 (916) 445-7205 (619) 525-4233 SAN FRANCISCO 94102-5303 1390 MARKET STREET (415) 557-3787 STATE OF CALIFORNIA BUSINESS, TRANSPORTATION AND HOUSING AGENCY DEPARTMENT OF CORPORATIONS File No. 995-2764 Applicant- ZAP Power Systems ORDER DESIGNATING REGISTRATION PERIOD The registration of the offer and sale of franchises requested in the application filed on September 18, 1997, will terminate April 20, 1998. Dated: San Francisco, California OCT 3 1997 BRIAN A. THOMPSON, Chief Deputy Commissioner of Corporations By /s/ W. ANTHONY COLBERT ----------------------------- W. ANTHONY COLBERT Corporations Counsel 995-27634 ZAP POWER SYSTEMS - -------------------------------------------------------------------------------- DBA: ZAP ELECTRIC VEHICLE OUTLET No.C 458383 9-18-97 - ------------- Filing Date Cash / / ACCTS. REC/REIMB ____Coordinations Ck. /X/ $ 675.00 ____Notifications M.O. / / REMARKS: ____Non-Issuer Not. ____Permits FRANCHISE REGISTRATION ORIGINAL RECEIPT ____Amendments ____Transfers ____Broker-Dealers _____LICENSE $___________ ____Investment Adv. Invest. $____________ ____Agent's Certs. STATE OF CALIFORNIA ____Copies DEPARTMENT OF CORPORATIONS ____Other Revenue (I) By ????????? 9/19/97 --------------------------------------- ADM 578 Receipt Date 85 94914 EX-10.4 11 STATE OF FLORIDA FRANCHISE QUALIFICATION [Florida Seal] Florida Department of Agriculture & Consumer Services BOB CRAWFORD, Commissioner The Capitol * Tallahassee. Florida September 23, 1997 ESQ. RAFAEL AGUIRRE-SACASA Please Respond To: EVERS & ANDELIN, LLP 155 MONTGOMERY ST., 12TH FLOOR Division of Consumer Services SAN FRANCISCO, CA 94104 227 N. Bronough Street City Centre Building, Suite 7200 Tallahassee, Florida 32301 Subject: ZAP ELECTRIC VEHICLE OUTLET Dear Sir or Madam: This letter is to acknowledge receipt of your exemption notice submitted pursuant to Section 559.802, Florida Statutes, the Sale of Business Opportunites Act. The following identification number has been assigned to your business: Business Identification Number: 07-288 Issued: 09/23/97 Expires: 09/23/98 The initial exemption granted under Section 559.802, Florida Statutes, is for a period of one year after the date of filing the notice, and may be renewed each year, for an additional one year, upon filing a notice for renewal and paying a renewal fee of $100.00. Should you have any questions, please contact me. Sincerely, BOB CRAWFORD COMMISSIONER OF AGRICULTURE /s/ R.L. JAMES ----------------------------- R.L. JAMES Regulatory Consultant (904) 922-2770/800-HELP-FLA (Florida only) EX-10.5 12 FRANCHISE AGREEMENT EXHIBIT 10.5 ZAP POWER SYSTEMS FRANCHISE AGREEMENT 1 ZAP POWER SYSTEMS FRANCHISE AGREEMENT TABLE OF CONTENTS ARTICLE I GRANT OF FRANCHISE....................................................6 ARTICLE II TERM AND RENEWAL......................................................7 ARTICLE III FEES..................................................................9 ARTICLE IV SERVICES BY FRANCHISOR...............................................12 ARTICLE V LIMITATIONS OF THE FRANCHISE.........................................14 ARTICLE VI PROPRIETARY MARKS....................................................16 ARTICLE VII LEASE AGREEMENTS.....................................................20 ARTICLE VIII EQUIPMENT AND FURNISHINGS............................................22 ARTICLE IX TRAINING PROGRAM.....................................................22 ARTICLE X OPENING..............................................................23 ARTICLE XI OBLIGATIONS OF FRANCHISEE............................................24 ARTICLE XII ACCOUNTING AND RECORDS...............................................29 ARTICLE XIII CONFIDENTIAL POLICIES AND PROCEDURES MANUAL..........................31 ARTICLE XIV ADVERTISING AND PROMOTIONS...........................................32 ARTICLE XV RENOVATION OF OUTLET, EQUIPMENT AND FURNISHINGS......................36 ARTICLE XVI INSURANCE............................................................37 ARTICLE XVII RELATIONSHIP OF THE PARTIES: INDEMNIFICATION.........................39 2 ARTICLE XVIII FORCE MAJEURE........................................................41 ARTICLE XIX DEFAULT AND TERMINATION..............................................41 ARTICLE XX RIGHTS AND DUTIES OF THE PARTIES UPON EXPIRATION OR TERMINATION......45 ARTICLE XXI COMMENCEMENT AND HOURS OF OPERATION..................................48 ARTICLE XXII TRANSFERABILITY OF INTEREST..........................................49 ARTICLE XXIII OPERATION IN THE EVENT OF ABSENCE OR DISABILITY......................55 ARTICLE XXIV RISK OF OPERATIONS...................................................56 ARTICLE XXV TAXES, PERMITS AND INDEBTEDNESS......................................56 ARTICLE XXVI NON-COMPETITION; CONFIDENTIALITY.....................................57 ARTICLE XXVII MODIFICATION OF THE AGREEMENT........................................58 ARTICLE XXVIII ENTIRE AGREEMENT.....................................................58 ARTICLE XXIX DISPUTE RESOLUTIONS..................................................58 ARTICLE XXX EFFECTIVE DATE.......................................................59 EXHIBIT A GEOGRAPHIC AREA......................................................60 EXHIBIT B OUTLET LOCATION......................................................61 EXHIBIT C AREA OF PRIMARY RESPONSIBILITY.......................................62 EXHIBIT D UNDERTAKING TO FIND SUITABLE LOCATION (180 DAYS).....................63 EXHIBIT E AGREEMENT AND CONDITIONAL ASSIGNMENT OF LEASE........................68 EXHIBIT F MINIMUM SALES QUOTA..................................................72 3 ZAP POWER SYSTEMS FRANCHISE AGREEMENT THIS FRANCHISE AGREEMENT, ("Agreement") entered into this ____ day of _______19_, by and between ZAP Power Systems, a California Corporation doing business as ZAP Power Systems, having its principal place of business at 117 Morris Street, Sebastopol, California 95472 (hereinafter "ZAP" or "Franchisor") and ___________________________________________________________________residing at______________________________________________________________________________ __________________________________________________(hereinafter Franchisee). WHEREAS, Franchisor has spent time, effort and money in developing a business plan and method in connection with the operation of a retail electric vehicle outlet selling electric bicycle power kits, electric bicycles and tricycles, electric scooters and other low-power electric transportation vehicles ("Proprietary Products"), and other non-proprietary products, utilizing certain standards, specifications, methods, procedures, designs, techniques, management systems, identification schemes and proprietary marks, copyrights and information (collectively, the ASystem"); all of which may be changed, improved and further developed from time to time by Franchisor; and WHEREAS, the distinguishing characteristics of the System include, but are not limited to, the trade name and trademark "ZAP", a unique and readily recognizable design, color scheme and layout for the premises wherein such business is conducted; furnishings, signs, emblems and the trade names, trademarks, copyrights, insignias, slogans, methods of preparation, and merchandising, the aforesaid Proprietary Products for utilizing certain standards, specifications, procedures, designs, management systems, techniques and identification schemes (the "Proprietary Rights"); all of which characteristics may be changed, revised, improved and further developed from time to time; and WHEREAS, the reputation and good will with the public with respect to the quality of products available for purchase from ZAP Electric Vehicle Outlets have been and continue to be of major benefit to Franchisor and its franchisees; and WHEREAS, Franchisee recognizes the benefits to be derived from being identified with and being a franchisee of ZAP Power Systems and being able to utilize the System and the Proprietary Rights which Franchisor makes available to its franchisees; and 4 WHEREAS, Franchisee desires to own and operate a "ZAP Electric Vehicle Outlet" (hereinafter "Outlet" or "Franchised Business," at the location described in Exhibit "A" hereof upon the terms and conditions set forth herein, which terms and conditions are reasonably necessary to maintain the Franchisor's high and uniform standards of quality and service and to protect the good will and enhance the public image of the System and the Proprietary Rights; and WHEREAS, if this Franchise Agreement is being executed pursuant to a Zone Development Agreement, then the location described in Article I of the Franchise Agreement is within the Development Area as that term is defined in the aforementioned Zone Development Agreement and has been accepted by Franchisor as a site for an Outlet pursuant to the Zone Development Agreement; and WHEREAS, Franchisee desires to obtain a franchise to use the System and the Proprietary Rights at the location described in Exhibit "A," pursuant to the provisions hereof, and Franchisee has had a full and adequate opportunity to be advised thoroughly of the terms and conditions of this Franchise Agreement by counsel of his/her own choosing and represents and warrants that he/she has the business experience and financial ability to operate an "ZAP Electric Vehicle Outlet." WHEREAS, Franchisee acknowledges that Franchisee has read this Agreement and Franchisor's Franchise Offering Prospectus and that Franchisee understands and accepts the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain uniform high standards of quality at all Outlets and to protect the goodwill of the Proprietary Marks. WHEREAS, Franchisor expressly disclaims the making of any warranty or guarantee, expressed or implied, oral or written, regarding the potential revenues, profits or success of the business venture contemplated by this Agreement. Franchisee acknowledges that Franchisee has not received or relied upon any such warranty or guarantee. WHEREAS, Franchisee acknowledges that Franchisee has no knowledge of any representations by Franchisor, its officers, directors, shareholders or representatives about the franchise offered hereunder, about Franchisor or its franchising programs and policies that are contrary to the statements in Franchisor's Franchise Offering Prospectus or to the terms of this Agreement. WHEREAS, Franchisee acknowledges that this Agreement places detailed and substantial obligations on Franchisee including strict adherence to Franchisor's reasonable 5 present and future requirements regarding facilities, equipment, suppliers, operating procedures, management methods, merchandising strategies, sales promotion programs and related matters. Franchisee acknowledges that future improvements, changes and developments in the System may require additional expense to be undertaken by Franchisee. BEFORE SIGNING THIS AGREEMENT, FRANCHISEE SHOULD READ IT CAREFULLY WITH ASSISTANCE OF LEGAL COUNSEL. NOW, THEREFORE, in consideration of the foregoing and of the covenants herein contained, the parties intending to be bound legally, hereby agree as follows: ARTICLE I GRANT OF FRANCHISE 1.1 Franchisor hereby grants to Franchisee, upon the terms and conditions herein contained, the right and franchise, and Franchisee undertakes the obligation to operate a Outlet in conjunction with the Proprietary Rights and to use the System solely in connection therein. Franchisee shall locate the Outlet only at the location set forth in Exhibit "B" hereto. If, at the time of execution of this Agreement, a location of the Outlet has not been agreed to by the parties, then Franchisee shall execute Exhibit "D" hereof, which will obligate Franchisee to find a suitable location within one hundred and eighty (180) days from the date of this Agreement. In the event however, that a location for the Outlet has been selected as of the date hereof, Franchisee must submit to Franchisor for its approval, which approval shall not be unreasonably withheld, the address of the location Franchisee wishes to use for the Outlet which shall be within the geographic area described in Exhibit "A" of this Agreement; and after Franchisor has approved the Outlet's location, a written description of such location shall be attached to this Agreement as Exhibit "B," and shall form a part hereof, and Franchisee shall deliver a form of lease for such location, which form shall contain the conditional lease assignment language set forth in Exhibit "E" hereof. Franchisee shall not relocate the Outlet without the prior written approval of the Franchisor, which approval may be reasonably withheld. 1.2 During the term of this Agreement, the Franchisor agrees not to establish or operate a company-owned Outlet, nor will it grant a franchise to others to operate Outlets under the System at a location within the area described in Exhibit "C" hereto ("Area of Primary Responsibility" or "APR"). Except as specified in the preceding sentence, this franchise is nonexclusive. 6 1.3 Franchisee acknowledges the Franchisor's right to develop, operate and franchise other similar or different systems outside Franchisee's Area of Primary Responsibility, without offering same to Franchisee. 1.4 Franchisee further acknowledges the right of Franchisor to sell or market the Proprietary Products on a wholesale basis to other franchisees of Franchisor, bicycle dealers, utility companies, institutions, and in other distribution channels and to commence selling and marketing the Proprietary Products on a wholesale basis to franchisees of Franchisor, bicycle dealers, and to institutions outside Franchisee's Area of Primary Responsibility, under the Proprietary Marks outside the Area of Primary Responsibility and under a different name within Franchisee's Area of Primary Responsibility. However, nothing contained herein shall preclude or prevent Franchisee from selling the Proprietary Products on a wholesale basis within his or her APR. 1.5 This Agreement is not a development agreement and does not grant to Franchisee any development rights within the area described in Exhibit "A" hereto, except for his/her particular Outlet. 1.6 Franchisee accepts the franchise set forth above and agrees to undertake the obligation to operate the Outlet in conformity with the System and under the conditions set forth in this Agreement for the entire term, subject to its termination provisions. ARTICLE II TERM AND RENEWAL 2.1 Unless sooner terminated as hereinafter provided, this Agreement shall expire one (1) year from the date Outlet opened for business. The term will automatically renew for one year if Franchisee meets the Minimum Sales Quotas (the "Minimum Sales Quotas") as set forth in Exhibit F. In the event Franchisee fails to meet the Minimum Sales Quotas, this Agreement shall expire as provided herein unless renewed by Franchisor in its sole discretion. 2.2 Franchisee may, but shall have no obligation to, renew the franchise to own and operate the Outlet and the right to use the System and the Proprietary Rights at the Outlet for successive terms of one year, provided that prior to the expiration of the initial term and each successor term, the following conditions are first met: 7 A. Franchisee gives Franchisor written notice of election to renew not less than twelve (12) months, nor more than eighteen (18) months, prior to the end of the initial term and each successive term thereafter. B. Franchisee is not, when notice is given, in default of any provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor, including any other Franchise Agreement, lease or sublease and has substantially complied with the terms and, conditions of all such agreements during the term of this Agreement, and has not failed to remedy any breach specified by Franchisor in any default notice then outstanding. C. All monetary obligations owed by Franchisee to Franchisor, its subsidiaries or affiliates, the advertising fund, as hereinafter defined, have been satisfied prior to renewal and paid when due throughout the initial and all prior renewal terms of this Agreement. D. Franchisee executes, within thirty (30) days of receipt, the Franchisor's standard form of Franchise Agreement being executed by other franchisees renewing their franchises on the renewal date, which may contain certain terms and conditions substantially different from those set forth herein, including, without limitation, a different continuing weekly service fee and different advertising expenditure requirements (and new methods computing same) and different fees for Proprietary Products. E. Franchisee executes, within thirty (30) days of receipt, a general release under seal, in a form satisfactory to Franchisor, of any and all claims it may have against Franchisor and its officers, directors, shareholders and employees, in their corporate and individual capacities, including without limitation, all claims arising under any federal, state or local law, rule or ordinance, provided however, that all Rights enjoyed by the Franchisee and any causes of action arising in favor from the provisions of the Franchise Investment Law of the State of California and the regulations issued thereunder shall remain in force; it being the intent of this proviso to the nonwaiver provisions. F. Franchisee and any other person who has an interest in Franchisee (if Franchisee is a group of individuals or a corporation, partnership, unincorporated association or similar entity) attends and satisfactorily completes such retraining or refresher training program as Franchisor may require, in its sole discretion, at such time and place, prior to expiration of this Agreement, as Franchisor may reasonably designate. 8 G. Franchisee provides Franchisor with evidence that Franchisee has the right to remain in possession of the location of the Outlet or other premises acceptable to Franchisor for the new term. H. Franchisee performs, at its own expense, such remodeling, repairs, replacements and redecorating as Franchisor may reasonably require to cause the Outlet equipment, fixtures, furnishings and furniture to conform to the plans and specifications being used for new or remodeled Outlet as of the renewal date however, same shall be reasonable and will not place a significant economic burden on the Franchisee. 2.3 Renewal of the Franchise Agreement shall be conditioned upon Franchisee's compliance with such requirements and continued compliance with all the terms and conditions of the Franchise Agreement up to the date of renewal. If Franchisor decides not to renew, it shall give Franchisee written notice thereof as soon as reasonably practical under the circumstances, but in any event not less than thirty (30) days prior to expiration. Such notice shall specify the reasons for non-renewal. Under such circumstances, Franchisee may request extension of the term for a reasonable period of time not to exceed six (6) months during which period Franchisee may pursue the sale of its business as a franchised Outlet. Franchisor shall grant such extension so long as Franchisee exercises best efforts to sell and complies with the Franchise Agreement. ARTICLE III FEES 3.1 In consideration of the franchise granted herein, Franchisee shall pay to Franchisor the following fees once Franchisor has fulfilled and performed all of its initial obligations to Franchisee: A. Upon the opening of the Franchisee=s unit, Franchisee shall pay to the Franchisor the initial franchise fee of twelve thousand five hundred dollars ($12,500), which shall be paid upon execution of this Agreement and which shall be deemed fully earned and non-refundable upon receipt thereof and which shall be in consideration of expenses incurred by Franchisor in furnishing assistance and services to Franchisee and for Franchisor's lost or deferred opportunity to grant franchises to others within Franchisee's designated exclusive area. B. During the term of this Agreement, if Franchisor so elects at its sole discretion to stop selling Proprietary Products then Franchisee agrees to pay to Franchisor a "Continuing Monthly Service Fee" of two percent (2%) of gross sales ("CMSF") on all 9 sales generated by, from or through the Outlet during each month. The CMSF shall be payable from the date the Outlet is opened or upon the election of Franchisor to stop selling Proprietary Products, whichever last occurs. Such CMSF shall be based upon the gross sales of the Outlet during each month of operation. Payment of the CMSF shall be made by the fifth day of the following month. C. On the fifth day following each reporting month, Franchisee shall report to Franchisor by facsimile transmission a true and correct statement of Franchisee's total gross receipts (as defined below) for the reporting week. Further, on or before the fifth day following each reporting month, Franchisee will submit to Franchisor on a form approved by Franchisor, a correct statement, signed by Franchisee of Franchisee's total gross receipts for the previous month. Franchisee will make available for reasonable inspection and copying at reasonable times by Franchisor, all original books and records that Franchisor may deem necessary to ascertain Franchisee's total gross receipts. D. Franchisee shall give Franchisor authorization (in the form attached at Exhibit C or such other form as Franchisor shall accept) for prearranged payments (debits) from Franchisee's business operating account. Under this procedure, Franchisee shall authorize Franchisor to initiate debit entries and/or credit correction entries to a designated checking or savings account for the monthly payment of CMSF and Advertising Fees payable hereunder and any delinquent charges due thereon. Franchisee shall make the funds available for withdrawal by electronic transfer by Franchisor no later than the fifth day of the following month. The electronic transfer debit shall be based on the monthly total gross receipts orally reported to Franchisor by Franchisee on such day as required above. In the event that for any reporting month Franchisee has not electronically faxed reported total gross receipts to Franchisor, then Franchisor shall be authorized to debit Franchisee's account in an amount equal to the fees debited to Franchisee's account for the previous reporting month for which a report of Franchisee's total gross receipts was provided to Franchisor as required hereunder. E. If, following Franchisor's receipt of any written monthly gross receipts report, such report discloses an underpayment of CMSF or Advertising Fees, Franchisor shall be authorized to initiate a debit to Franchisee's account in the appropriate amount in accordance with the foregoing procedure. Any overpayment shall be credited to Franchisee's account. 3.2 Franchisee shall pay to the Franchisor's Advertising Fund the amount required to be paid pursuant to Article XIV hereof. 10 3.3 As used in this Agreement, the term "gross sales" shall mean the amount of sales of all electric vehicles and parts, merchandise, services and Proprietary Products sold in, on, about or from the Outlet by Franchisee, whether for cash, cash equivalents, redeemed gift certificates, check, charge account, credit or time basis, including but not limited to such sales and services: (i) Where orders originate and/or are accepted by Franchisee in the Outlet, but delivery or performance thereof is made from or at any place other than the Outlet; (ii) Pursuant to telephone or other similar orders received or filled at or in the Outlet; or There shall be deductible from gross sales: (i) The amount of over-rings, refunds, allowances or discounts to customers (including coupon sales), provided they have been included in gross sales; (ii) The amount of an excise or sales tax levied upon retail sales and payable over to the appropriate government authority; and (iii) Isolated sales of non-inventory items or the bulk sale of the business itself, if the same have been included in gross sales. 3.4 In addition to any other remedies Franchisor may have, if Franchisee is more than three (3) days late making any of the payments referenced in this Article III, an annual interest rate of eighteen percent (18%), shall be payable on the unpaid CMSF from the date such payment was due. Franchisee acknowledges that this paragraph shall not constitute agreement by Franchisor or its affiliates to accept such payments after same are due or a commitment by Franchisor to extend credit to, or otherwise finance Franchisee's operation hereunder. The foregoing remedy shall be in addition to any other remedy Franchisor may have, including termination of this Agreement. 3.5 Notwithstanding any designation by Franchisee, Franchisor shall have the sole discretion to apply any payments by Franchisee to any past due indebtedness of Franchisee for CMSF, advertising fees, purchases from Franchisor and or Franchisor's Proprietary Suppliers. 11 ARTICLE IV SERVICES BY FRANCHISOR 4.1 Franchisor or its designated Zone Development Agent agrees to use its best efforts to maintain the excellent reputation of all Outlets and, in connection therewith, to make available to Franchisee the following: A. Such standard prototypical construction plans, specifications and layouts for the leasehold improvements, equipment, furniture, decor and signs identified with Outlets as Franchisor makes available to all new franchisees from time to time. B. Review of Franchisee's site proposal and approve or disapprove same, review the lease and approve and disapprove same, review Franchisee's site plans and final construction plans and specifications of the System upon Franchisor's receipt of Franchisee's written request for approval thereof. C. Initial training in the System, including standards, methods, procedures and techniques, at such times and places as Franchisor may designate for its training program in its discretion and subject to Article IX hereof. D. Such opening assistance from Franchisor's personnel, including planning and developing opening and promotional programs, as Franchisor determines is necessary or appropriate. E. The use of Franchisor's confidential standard business policies and operations manuals (here collectively called the "Manual") and training aids as may be revised, updated or replaced from time to time by Franchisor. F. Such special parts, techniques, assembly instructions, new products and other merchandising, new services, standardized cost and portion control system, marketing and other data and advice as may from time to time be developed by Franchisor and deemed by it to be helpful in the operation of the Outlet by Franchisee. G. Such periodic individual or group advice, consultation and assistance, rendered by telephone, or by newsletter or bulletins made available from time to time to all franchisees of Franchisor, as Franchisor may, from time to time deem necessary or appropriate, in its discretion. 12 H. Such bulletins, brochures and reports as may from time to time be published by Franchisor in its discretion regarding its plans, policies, research, developments and activities. I. Such other resources and assistance as may hereafter be developed and offered from time to time by Franchisor to its franchisees. J. The Franchisor may provide Franchisee with advertising, marketing and other promotional materials created and developed by Franchisor for Franchisee's use at cost, and guidance and advice regarding local advertising and promotion for the grand opening of the Outlet. K. The Franchisor shall inspect, from time to time, Franchisee's Outlet in order to evaluate the proper execution of the System, and confer with Franchisee and Franchisee's employees in connection therewith in order to assist in the proper business operation of Franchisee's Outlet, and to insure Franchisee's compliance with this Agreement and with the System. The Franchisor, at its discretion, shall have the right to make inspections at such times and frequencies during normal business hours, without prior notice to Franchisee. L. The Franchisor shall use its best efforts to require maintenance of high and uniform standards in the execution of the System at all Outlets utilizing the System, thus protecting and enhancing the reputation of the Proprietary Rights. M. The Franchisor, in order to insure that the distinguishing characteristics of the System are uniformly maintained, Franchisor may establish, from time to time, reasonable standards for the Proprietary Products, equipment, commodities and supplies and for the use of same by Franchisee in the execution of the System. 4.2 The Franchisor or its designee shall sell to Franchisee all of his/her requirements of the Proprietary Products as is set forth herein, unless prevented from so doing by Force Majeure, governmental restrictions, labor disputes, inability to obtain supplies, or similar contingency. Under no circumstances however, will the Franchisor be responsible or liable for any consequential damages which Franchisee may incur as a result of the occurrence of any of the aforesaid incidents. 4.3 The Franchisor or its designee shall offer for sale to Franchisee many non-Proprietary Products which Franchisee offers to the public. These products may include electric motors and electric motor kits which are commercially prepared by large manufacturers. 13 ARTICLE V LIMITATIONS OF THE FRANCHISE 5. 1 Franchisee understands and acknowledges and agrees that every detail of the System is important to the Franchisor and its other franchisees. Therefore in order to develop and maintain uniformly high standards to increase the demand for the Proprietary Products and to protect the reputation and good will of the Franchisor, Franchisee agrees that: A. The Franchisee's use of the System and Proprietary Rights granted hereunder are personal to Franchisee and cannot be sold, assigned or transferred, in whole or in part, except as set forth in Article XV hereof. B. Franchisee acknowledges that he/she has had no part in the creation or development of Franchisor's trademarks, service marks and trade names and that Franchisor owns the exclusive worldwide license of the Proprietary Rights and of the identification schemes, standards, specifications, operating procedures and other concepts embodied in the System. Franchisee will use the System and the Proprietary Rights strictly in accordance with the terms of this Agreement, and any unauthorized use of the System and the Proprietary Rights is and shall be deemed an infringement of Franchisor's rights as set forth hereunder. Except as expressly provided by this Agreement, and any other Franchise Agreements, Franchisee shall acquire no right, title or interest to the System, or the Proprietary Rights, or any and all good will associated with the System, and the Proprietary Rights shall inure exclusively to Franchisor's benefit; and upon the expiration or termination of this Agreement, no monetary amount shall be assigned as attributable to any good will associated with Franchisee's use of the System and the Proprietary Rights. Franchisee will, at no time, take any action whatsoever to question or contest the validity, right, title or interest of Franchisor as to the Proprietary Rights and the good will associated therewith. C. Franchisee shall have no right to use the words "ZAP" in his/her corporate or partnership name or other names. Upon termination of the Franchise Agreement, Franchise shall discontinue all usage in any manner of the words "ZAP" and any and all trademarks, service marks or Proprietary Rights. D. All materials loaned or made available to the Franchisee and all disclosures not made to the general public are considered trade secrets and shall be kept confidential and used only in connection with the operation of the Outlet. The Manual and other confidential materials may not be duplicated, copied or exhibited, except with the prior written consent of Franchisor. 14 E. Except as provided in Article I hereof, the franchise and Proprietary Rights granted hereunder are nonexclusive and Franchisor retains the right, in its sole discretion: (i) To continue to franchise and operate other Outlets and to use the System and the Proprietary Rights at any location outside the APR, and to license others to do so; (ii) To develop, use and franchise the rights to any trade names, trademarks, service marks, trade symbols, emblems, signs, slogans, insignias, patents or copyrights not designed by Franchisor as Proprietary Rights, for use with similar or different products or services other than in connection with the System at any location, on such terms and conditions as Franchisor may deem advisable and without granting Franchisee any rights herein; (iii) To develop, merchandise, sell and license others to sell the Proprietary Products and other products, including clothing, to the public through non-retail channels of distribution in the Development Area, if an Area Development Agreement is in effect, and APR and to use the Proprietary Rights in connection therewith; and (iv) To promote or conduct special sales at fairs, charity events, athletic contests or other special events through mobile units or temporary locations within the Development Area if an Area Development Agreement is in effect and the APR; provided however, that the opportunity to conduct each special sale shall first be offered to Franchisee on such terms and conditions as Franchisor, in its sole discretion, shall specify. F. Franchisee shall not conduct any special sale at a fair, charity event, athletic contest or special event through mobile units or temporary locations or sell any Proprietary Products at any location, temporary or permanent, other than at the Outlet, without the prior written consent of Franchisor. G. Franchisor has the right to determine, approve and supervise the quality of service, the tools and equipment used by Franchisee and the method of assembly of all products sold from the Outlet; to conduct periodic inspections of the Outlet and the equipment, furnishings and products therein, without notice, during normal business hours, to examine the electric vehicles assembled, offered for sale and sold by Franchisee and to take all action it deems necessary to maintain the quality and standards of the Proprietary Products, the Outlet, Proprietary Rights, and Proprietary Marks. 15 H. Franchisee, or at least one person executing this Agreement, shall participate personally in the direct day to day operations of the Outlet and shall carefully monitor the performance of any person who is actively in involved in the operation of the Outlet I. Any disputes between Franchisee and Franchisor as to matters such as merchandising, production distribution, promotions, advertising, sales and general business policies which may have an effect on the reputation or goodwill of Franchisor shall be resolved as determined in the reasonable discretion of Franchisor. J. Because complete and detailed uniformity under many varying conditions may not be possible or practical, Franchisor specifically reserves the right and privilege, in its reasonable discretion and as it may be deemed to be in the best interest of all franchisees and the System in any specific instance, to reasonably vary the standard specifications and practices for any franchisee based upon the peculiarities of a particular site or circumstance, density of population, business potential, population of trade area, existing business practices or any other condition which Franchisor deems to be of importance to the successful operation of such franchisee's business. Franchisee shall have no recourse against Franchisor on account of any variation from standard specifications and practices granted to any of the franchisees and shall not be entitled to require Franchisor to grant to Franchisee a like or similar variation. K. In all public records in its relationship with other persons, in any document, and at the Outlet, Franchisee shall indicate clearly that Franchisee is an authorized Franchisee and of the independent ownership of Franchisee=s business and that the operations of said business are separate and distinct from the operation of the Franchise. 5.2 Franchisee shall use his/her Outlet for the exclusive conduct of the business franchised hereunder, and a material deviation therefrom, without the Franchisor's prior written approval, shall constitute a material breach of this Agreement, and any renewal thereof. ARTICLE VI PROPRIETARY MARKS 16 6.1 When used in this Agreement, "Proprietary Marks" mean trademark, service mark or other word, system device or any combination thereof, used to identify "ZAP" and the Proprietary Products. 6.2 Franchisee is hereby granted the nonexclusive right to use "ZAP" Proprietary Marks, good and trade secrets in the operation of the Outlet only at the location specified in Article I hereof. Nothing in this Agreement shall be construed as authorizing or permitting their use at any other location or for any other purposes. 6.3 Franchisee acknowledges that the ownership of all of the Proprietary Marks, goodwill and trade secrets remain solely with Franchisor and that Franchise shall not register or attempt to register the Proprietary Marks or to assert any rights in them other than as specifically granted in this Agreement, or claim any right, title or interest therein nor shall Franchisee contest the validation or ownership of the Proprietary Marks. 6.4 At the Franchisor's request, Franchisee shall assign, transfer and convey to the Franchisor, in writing, additional rights, if any, that may be acquired by Franchisee as a result of his use of Proprietary Marks during the term of this Agreement. 6.5 The Franchisor reserves the right to approve within fourteen (14) days of submission, all signs, memos, stationery, business cards, advertising material, forms and all other objects and supplies using the Proprietary Marks. All advertising, publicity, point of sale materials, signs, decorations, furnishings, equipment, or other materials employing the word "ZAP" shall be designed and prepared in accordance with this Agreement and/or any manuals, directives or memos, and Franchisee shall obtain the Franchisor's approval prior to such use, which approval shall not be unreasonably withheld or delayed. 6.6 If at any time and in its sole discretion, Franchisor modifies, discontinues or adopts new Proprietary Marks, or elects to substitute or add trade names, trademarks or service marks, Franchisee shall adopt, use and display such Proprietary Marks and he/she shall promptly discontinue use and display of the outmoded or superseded marks, at Franchisor's sole cost and expense. 6.7 Franchisee shall immediately, i.e., within three (3) business days, notify the Franchisor of any claim, demand, or suit based upon or arising from the unauthorized use of, or any attempt by any other person, firm, or corporation to use, withhold authorization, or any infringement of or challenge to, any of, the Franchisor's Proprietary Marks, or any other litigation instituted by any person, firm, corporation or governmental entity against Franchise, regardless of the nature of same. 17 6.8 At its own expense, the Franchisor shall undertake the defense or prosecution of any litigation which relates to the use of any of the Proprietary Marks or that, in the Franchisor's judgment, may affect the goodwill of the System; and the Franchisor may, in such circumstances undertake any other action which it deems appropriate. The Franchisor shall have sole and complete discretion in the conduct of any defense, prosecution or other action which it undertakes. Franchisee shall be required to execute and convey any and all documents and perform those acts which, in the opinion of the Franchisor, are reasonably necessary for the defense or prosecution of the litigation or for such other action as may be undertaken by the Franchisor. 6.9 In order to develop and maintain high uniform standards of quality and service and to protect the reputation and goodwill of the Franchisor, Franchisee agrees to do business and conduct advertising using only the name "ZAP Electric Vehicle Outlet". Franchisee shall not do business or advertise using any other name. Franchisee is not authorized to, nor shall he/she use the word "ZAP" as a part of the legal name of any corporation, partnership, proprietorship or other business entity to which Franchisee is associated, or with a bank account, trade account or in any legal or financial connection. 6.10 Franchisee shall be required to affix the (R)sm symbol upon all advertising, publicity, signs, decorations, furnishings, equipment or other printed or graphic material employing the word "ZAP" and/or any other of the Proprietary Marks. 6.11 Franchisee acknowledges that he/she does not have any right to deny the use of the Proprietary Marks to any other ZAP Electric Vehicle Outlet franchisees. In consideration therefore, Franchisee shall execute all documents and take such action as may be requested to allow other franchisees to have full use of the Proprietary Marks. 6.12 If, during the term of this Agreement, there is a claim or assertion of a prior use of the trademarks in "ZAP" or any other of the Proprietary Marks in the area in which Franchisee is doing business or in another area or areas, Franchisee, upon notice from Franchisor, shall so use the Proprietary Marks in such a way and at the Franchisor's discretion to avoid or alleviate such conflict. 6.13 In order to make certain that the products and services offered under the Proprietary Marks meet the quality and performance standards set by Franchisor, Franchisor and its agents shall at all reasonable times have the right: (i) to enter and inspect the Outlet and observe the manner in which Franchisee is selling his/her products and rendering his/her services; (ii) to confer with Franchisee's employees and customers; and 18 (iii) to select electric vehicles and supplies for test and evaluation purposes. 19 ARTICLE VII LEASE AGREEMENTS 7.1 The approval of any particular location by Franchisor pursuant to the terms of this Agreement is subject to Franchisee executing Conditional Assignment of Lease Agreement which is annexed hereto as Exhibit "E." No warranty or representation as to the availability of the location, potential for success or any other representations are to be implied by said approval on behalf of Franchisor or upon actually leasing said premises then subleasing same back to Franchisee. It shall be the Franchisee's sole obligation to obtain a suitable location for the Outlet within one hundred and eighty (180) days from the date hereof. Approval by Franchisor only signifies its bona fide belief that the site meets the minimum site criteria set by Franchisor. It is the sole responsibility of Franchisee to undertake site selection activities, to investigate all applicable zoning, licensing, leasing and other requirements for a proposed site, to insure that the site selected complies with all such requirements and to otherwise secure premises for the establishment and operation of the Outlet. The failure to find such location shall provide the Franchisor with the right, but not the duty, to terminate this Agreement. 7.2 The lease or sublease shall be specifically for the operation of a ZAP Electric Vehicle Outlet, which lease shall provide upon termination or expiration of this Agreement for any reasons, Franchisor shall have the right, but not the obligation, in its sole discretion, to assume Franchisee's status and replace Franchisee as lessee and Franchisee shall, upon exercise of that right by Franchisor, be fully released and discharged from all liability for rent and all other future liability under such lease (though not from any liability for unpaid rent and any then existing liabilities under said lease to which Franchisor shall have no responsibility or obligation). 7.3 Except as otherwise provided in this Agreement, Franchisee will not assign, transfer lease or rent any portion of the premises containing the Outlet without the prior written approval of Franchisor, which approval may not be unreasonably withheld. 7.4 In the event Franchisee's lease for the Outlet is terminated or expires and cannot be renewed during the initial or any renewal terms of the Franchise, Franchisee may apply for the right to relocate the Outlet, which application shall not be unreasonably denied provided that: A. Franchisee is not in default of any of the material provisions of this Agreement or any successor hereto; and 20 B. Franchisee=s proposed new location is approved in writing by Franchisor as satisfying its then current procedures and criteria for site approval, which approval may not be unreasonably withheld. 7.5 Subject to the existence of other Outlets including those not yet established but under agreement, upon any such relocation, Franchisee's APR shall be established according to the provisions hereof or as the parties otherwise may agree upon in writing. 7.6 Franchisee's execution of a lease or sublease for a site for his/her Outlet shall constitute approval by Franchisee of such site and location of the terms of such lease or sublease and shall be deemed to be a waiver of any claim or rights against Franchisor relating to the choice of such site and location or the terms of such lease or sublease. 7.7 Franchisee shall not execute any documents of purchase, lease or sublease for any such location without the prior written approval of Franchisor as to the location and terms of sale in the event of purchase, or as to the location or terms of the lease or sublease, which approval may not be unreasonable withheld. 7.8 Franchisee agrees to pursue diligently the fixturing and build-out of the Outlet. All leasehold improvements shall be completed and the Outlet will be in operation within ninety (90) days from the date the Franchisee receives all necessary permits. The Outlet shall be constructed in accordance with the plans and specifications provided or approved by Franchisor and in compliance with all applicable laws, regulation laws and ordinances. 7.9 If Franchisee is renovating an existing building, all plans and specifications, including final work drawings, must be approved by Franchisor in writing before any work is begun on the Outlet, which approval may not be unreasonably withheld. 7.10 Franchisee shall not deviate from the approved plans and specifications in any manner in the fixturing, build-out or renovation of the Outlet without the prior written approval of Franchisor. If at any time, Franchisor determines that Franchisee has not fixtured, built-out or renovated the Outlet in accordance with the plans and specifications approved or provided by Franchisor, Franchisor shall, in addition to any other remedies, have the right to obtain an injunction from a court of competent authority against the continued construction and the opening of the Outlet, or, if the Outlet has already opened, against the continued operation of the Outlet. 21 ARTICLE VIII EQUIPMENT AND FURNISHINGS 8.1 Franchisee agrees to install only in and about the Outlet such equipment including but not limited to a security system, vinyl floorcoverings, a workbench and storage and display cases, fixtures, furnishings, furniture, interior and exterior signs and other personal property, as are required and which strictly conform to appearance, uniform standards, specifications and layout of Franchisor as exist from time to time, which include but are not limited to being brand new equipment manufactured by a first quality manufacturer. Franchisor shall have the right to inspect all equipment, fixtures, furnishings, furniture and signs, and their installation, to assure Franchisee's compliance with its standards, specifications and layout, prior to the opening of the Outlet. 8.2 In the event Franchisee installs any equipment, fixtures, furniture, interior and exterior signs or any other personal property which is not in conformity with Franchisor's appearance, uniform standards, specifications or layout, Franchisor may, in addition to any remedies under this Agreement, demand that Franchisee close the Outlet and take the necessary steps to bring his equipment, fixtures, furnishings, furniture, interior and exterior signs and other personal property into conformity with Franchisor's appearance, uniform standards, specifications and layouts. Franchisee shall not reopen the Outlet until Franchisor has issued its written consent to do so. 8.3 Franchisee agrees to maintain all equipment and furnishings in good working order and appearance, and as items of equipment become obsolete or mechanically defective to the extent that they require replacement, Franchisee shall replace such items with either the same or substantially the same type and kind of equipment as are being installed in all Outlets at the time such replacement becomes necessary. ARTICLE IX TRAINING PROGRAM 9.1 The following persons shall satisfy all of the conditions established by Franchisor, from time to time, for admission to and graduation from Franchisor's initial mandatory training program at the training school designated by Franchisor and shall attend and satisfactorily complete additional training programs established by Franchisor from time to time: 22 (i) Franchisee, if Franchisee is an individual, or one of the persons executing this Agreement if the Franchisee is a corporation, partnership or other entity, provided that the Franchisee has not previously completed the training program; and (ii) Two persons who are actively involved in the management or operation of the franchised business. 9.2 Each person shall successfully complete the mandatory training program to Franchisor's reasonable satisfaction. In the event of the failure of Franchisee or any other person to complete the training program successfully, for any reason, a substitute trainee, satisfactory to Franchisor, shall attend and successfully complete the program and shall operate or supervise the operation of the Outlet thereafter if Franchisor, at its option, so directs. 9.3 No fee shall be charged by Franchisor for the participation of those individuals referenced in Section 9.1 above in the Franchisor=s initial training program. However, Franchisee shall be responsible for the costs and expenses (such as room, board and transportation) of each person who attends the program. However, Franchisor shall charge the sum of five hundred dollars ($500) for each additional person who Franchisee wishes to have trained by Franchisor. Persons listed above shall also attend any advanced training program or seminars conducted by Franchisor if requested to do so by Franchisor 9.4 The persons listed above shall also attend the sessions if requested to do so by Franchisor, free of charge. Franchisee shall be responsible for the cost and expense of each person who attends any such program. 9.5 Franchisor shall also maintain an on-site training program. Franchisor will provide on the job training at the Outlet for approximately six (6) business days during the grand opening of the Outlet. Franchisor shall not charge a fee for this service. ARTICLE X OPENING Franchisee shall give Franchisor at least fifteen (15) days prior written notice of the opening of the Outlet by delivering to Franchisor an executed "Notice of Intent to Open," including any attachments thereto, which Notice of Intent to Open shall be delivered within 23 sixty (60) days following the execution of a lease or sublease. If such notice is not given, Franchisor shall be relieved of its obligation under this Agreement to provide assistance in connection with the opening of the Outlet and the planning and development of pre-opening promotions and programs, except if such failure is the result of circumstances beyond Franchisee's control. ARTICLE XI OBLIGATIONS OF FRANCHISEE 11.1 Franchise covenants and agrees that: A. In order to further protect the System, the Proprietary Rights and the goodwill associated therewith, Franchisee shall: (i) Operate under the Proprietary Marks and only in a manner consistent with the scope of the registration of such marks and advertise only under the Proprietary Rights designated by Franchisor for use for that purpose and will use such rights without prefix or suffix; (ii) Feature and use the Proprietary ZAP Electric Vehicle Outlet solely in the manner prescribed by Franchisor pursuant to this Agreement and the Manual and as Franchisor may, from time to time, direct in writing; (iii) Observe such requirement with respect to service mark, trade name, trademark and fictitious name registrations, patents and copyright notices in conformance with applicable law and as Franchisor may, from time to time, direct in writing; and (iv) Upon receipt of written notice from Franchisor to discontinue the use, modify or substitute any name, mark or patent as Franchisor may direct, do so immediately. B. Franchisee sells from the Outlet, all electric vehicle products, including but not limited to the Proprietary Products, and render such services specified by Franchisor; and not sell or offer for sale any other electric vehicle products or services of any kind or character without first obtaining the prior express written consent of Franchisor. Franchisee shall use only such Proprietary Products, methods of assembly and service as conform to the standards and specifications of Franchisor in effect from time to time. However, Franchisor shall not be responsible for any miscalculation with respect to 24 the assemblage of electric vehicles, except with respect to those Proprietary Products manufactured and sold to Franchisee by Franchisor. Franchisee shall discontinue selling or offering for sale any products Franchisor may, in its discretion, disapprove in writing at any time. C. Cause himself, herself and his or her employees to wear apparel which conforms strictly to the specifications, design, color and style approved by Franchisor from time to time. D. Maintain at all times, at its expense, the Outlet, equipment, fixtures, furnishings and furniture and related premises, parking areas, landscape areas and interior and exterior signs in good, clean attractive and safe condition in conformity with Franchisor's high standards and public image, and in connection therewith, shall make such repairs and replacements thereto as may be required to keep the Outlet in the highest degree of sanitation, repair and condition, including, without limitation, such periodic repainting, repairs to equipment, and replacement of outdated signs, as Franchisor may reasonably direct. However, Franchisee shall not undertake any alterations or additions to the buildings, equipment or parking area without the prior written consent of Franchisor. E. Franchisee will comply with all laws, ordinances and regulations affecting the operation of the Outlet. Without limiting the generality of the foregoing, Franchisee specifically agrees to comply with applicable health and safety laws, ordinances and regulations so as to be rated in the highest available health and safety classification by the appropriate governmental authorities and to furnish to Franchisor within one (1) day of Franchisee's receipt thereof, copies of all inspection reports, warnings, certificates and ratings issued by any governmental agency which reflects Franchisee's failure to meet and maintain the highest applicable ratings, or Franchisee's non-compliance or less than full compliance with any applicable law, rule or regulation. F. Franchisee will permit authorized personnel of Franchisor to enter the Outlet at any time, without prior notice, during normal business hours, for the purpose of inspecting and examining the operations and facilities (including, but not limited to, testing, sampling and inspecting the products assembled or manufactured by Franchisee and all products including the Proprietary Products, sold at the Outlet, as well as the storage and preparation of such products). Franchisee shall cooperate with Franchisor's representatives in such inspections by permitting and rendering such assistance as they may reasonably request. Franchisee shall permit Franchisor's representatives to remove from the Outlet, samples of any products, without payment therefor, in amounts reasonably necessary for testing by Franchisor or, at Franchisor's option, testing by an independent certified laboratory/site to determine whether said products meet Franchisor's 25 then current standards and specifications. In addition to any other remedies it may have under this Agreement, Franchisor may require Franchisee to bear the cost of such testing if the supplier from whom such products were acquired has not been approved by Franchisor or if the product fails to conform to Franchisor's specifications. Upon notice from Franchisor or its agents, Franchisee shall take such steps as may be necessary to correct immediately any deficiencies detected during any inspection or by such testing, including without limitation, immediately ceasing to use any methods, products or advertising materials which do not conform to Franchisor's then current specifications, standards or requirements. G. Franchisee shall purchase all fixtures, furnishings, signs, equipment, non-electric vehicle inventory and other supplies used in the operation of the Outlet solely from suppliers who demonstrate the ability to meet Franchisor's standards and specifications for such items and who possess adequate quality controls and capacity to supply Franchisee's needs promptly and reliably. Franchisor shall have the right, without prior notice, to inspect and test any of the products any supplier used by Franchisee to insure the supplier meets with Franchisor's standards and specifications. Upon written notice from Franchisor that any supplier does not meet Franchisor's standards and specifications, Franchisee shall immediately cease using the products of that supplier. H. Franchisee shall purchase and/or order all Proprietary Products from or through Franchisor or suppliers approved by Franchisor, except if Franchisee shall have received prior written approval from the Franchisor to use another supplier. If Franchisee desires to purchase any such items from a supplier other than Franchisor or a supplier who has been approved by Franchisor, Franchisee shall submit to Franchisor a written request for such approval or shall request the supplier to do so. Franchisor shall have the right to require, as a condition of its approval, that its representatives be permitted to inspect the supplier's facilities and that samples from the supplier be delivered, at Franchisor's option, to Franchisor or its designee for testing and that such samples demonstrate to Franchisor's satisfaction an ability to meet Franchisor's standards and specifications. A charge not to exceed the cost of such inspection and testing shall be paid by the Franchisee or by the supplier seeking approval, and Franchisor shall not be liable for damage to any sample which may result from the testing process. Supplier controls and the financial and managerial capacity to supply Franchisee's needs promptly and reliably, shall be preconditions to Franchisor's approval of a supplier. Franchisor reserves the right, at its option, to reinspect the facilities and to retest the products of any such approved supplier at any time, without prior notice, and to revoke such approval if the supplier has failed to continue to meet any of the foregoing criteria. 26 I. Notwithstanding the foregoing, Franchisor reserves the absolute right to be either the sole source of supply or the sole designator of suppliers who will provide the Proprietary Products, supplies or parts involving trade secrets or confidential formulae and shall have no obligation to release any trade secrets or confidential formulae to the Franchisee or any supplier. In either instance, Franchisee shall be obligated to place all such orders through the Franchisor. J. Franchisee will at all times maintain sufficient supplies of ZAP Electric Vehicles, parts and Proprietary Products and employ sufficient help so as to operate the Outlet at its maximum efficiency. K. In connection with the operation of the Franchisee's Outlet, the Franchisee is required to purchase certain containers, packaging supplies, paper goods and other product service items for the preparation, sale and service of approved Electric vehicle products. To the extent that Franchisor is able to supply the same, Franchisee shall have the right to purchase same, if he/she so desires, from Franchisor, at prices established by Franchisor from time to time. Franchisee's obligations hereunder shall be satisfied so long as Franchisee uses such items and keeps the Outlet maintained in accordance with Franchisor's strict specifications and standards for the these items. In the event that Franchisee desires to purchase containers, packaging supplies, paper, goods and products service items from sources other than Franchisor, Franchisor shall, without charge, make a license available to such other sources of such products to print the required name, trademarks, and text thereon, but in no event shall Franchisee be entitled to use any containers packaging supplies, paper goods and other product service items at his/her Outlet which do not duplicate those authorized by Franchisor for use in connection with the service and sales of approved electric vehicle products. Prior to the use of any such items, Franchisee shall have requested in writing and obtained Franchisor's written approval to have the required name, trademark, and text printed thereon in the form and style directed by Franchisor, and also have had the same so imprinted on the goods prior to using them. L. Franchisee shall only sell or offer for sale, such electric vehicles, parts and Proprietary Products as are prescribed in the Manual, which have heretofore been approved or authorized by Franchisor, and which must appear in the catalog. In no event shall Franchisee sell non-Proprietary Products or any clothing or other hard good items which contain the Proprietary Mark, ZAP Electric Vehicle Outlet, without Franchisor's prior consent, which consent may be withheld at Franchisor's sole discretion. Franchisee must obtain Franchisor's written approval for any contemplated catalog or product changes and all additions to and/or deletions in items sold in the Franchisee's Outlet which approvals may be withheld. 27 M. Franchisee shall use the standard ZAP Electric Vehicle Outlet catalog and catalog format as required by Franchisor. Franchisee may employ any reputable printer to reproduce Franchisee's catalogs using the Franchisor's format and specifications. This provision shall not constitute a license of any copyright or trademark to the prospective printer of such catalogs. Any changes in the catalog used at Franchisee's Outlet shall be approved in writing by Franchisor prior to use. At Franchisor's sole discretion, the standard catalog format may contain advertising reference to other ZAP Electric Vehicle Outlet franchisees and may contain a toll free telephone number for franchise information. N. Franchisor and Franchisee understand and agree that the operation of the Outlet, maintenance of its premises and equipment, conduct and appearance of its personnel, and the preparation and sale of products therefrom are all regulated by governmental statutes and regulations. To this end, Franchisor and Franchisee agree that Franchisee owes an obligation to the patrons of the Outlet, the Franchisor, the System and to himself or herself to comply fully and faithfully with all applicable governing authorities and all of the same are made a part of this agreement as if fully set forth herein. It is further agreed that in the event any product sold, manufactured or assembled at the Franchisee's Outlet evidences deviation from the standards of Franchisor's Proprietary Products or are in violation of applicable law or regulations, or in the event the products premises, equipment, personnel or operation of the Outlet fail to be maintained in accordance with the governmental requirements incorporated in this Agreement as aforesaid, Franchisee shall immediately recall said products and/or close its Outlet until Franchisor's inspection evidences a compliance with the applicable governmental requirements and with the standards of Franchisor's Proprietary Products. In the event Franchisee or his/her agents or employees fail or refuse to comply with all of the foregoing remedial measures or in the event of any repetition of any deviation in the Outlet: (i) The prevailing party shall be paid the costs and expenses, including attorney's fees, of both parties, incurred in enforcing the provisions of this subsection or any other provision of this Agreement in obtaining Franchisee's compliance herewith, by the losing party. The remedies set forth herein are in addition to and not in substitution for those set for in Article XVIII of this Agreement. O. Franchisee acknowledges that all telephone numbers and directory listing for the Outlet will be the property of Franchisor upon termination, expiration or non-removal of this Agreement. Franchisor will have the sole and exclusive right and authority to transfer, terminate and amend such telephone numbers and directory listings as Franchisor, in its sole discretion, deems appropriate upon termination or expiration of this Agreement. In the event Franchisor takes any action pursuant to this section, or with 28 respect to the termination of this Agreement, the appropriate telephone company and all listing agencies, without liability to Franchisor, may accept this Agreement, the Assignment of the Telephone Numbers and the directive of Franchisor as conclusive evidence of the rights of Franchisor in such telephone numbers and directory listings. P. Franchisee shall pay, on a timely basis, for all electric bicycle kits, motors, bicycles, tricycles, electric scooters and other low power electric vehicles, and other product service items and other items used in the operation of the Outlet. Franchisee is aware that failure to make prompt payment to its suppliers may cause irreparable harm to the reputation and credit of Franchisor and other franchisees. Q. Franchisee shall promptly pay when due, all taxes levied or assessed by reason of its operation and performance under this Agreement including, but not limited to, if applicable, state employment tax, state sales tax, (including any sale or use tax on equipment purchased or leased) and all other taxes and expenses of operating the Outlet. In the event of bona fide dispute as to the liability for the taxes assessed against Franchisee, Franchisee may contest the validity or the amount of the tax in accordance with procedures of the appropriate taxing authority. In no event however, shall Franchisee permit a tax sale or seizure by levy or execution or similar writ or warrant to occur against the Outlet's premises or equipment. R. Franchisee may be required to pay all shipping, transportation, handling, and storage costs incurred from the delivery of the Proprietary Products to the Outlet. In addition, Franchisee may be required to maintain additional storage space if deemed necessary by Franchisor, to supply adequately and properly Proprietary Products to the Outlet. This may also include the purchase, lease, or rental of a vehicle to deliver the Proprietary Products to the Outlet. ARTICLE XII ACCOUNTING AND RECORDS 12.1 Franchisee shall maintain during the term of this Agreement, and shall preserve for the time period specified in the Manual, full, complete, and accurate books, records and accounts in accordance with the standard accounting system prescribed by Franchisor in the Manual or otherwise in writing. 12.2 Franchisee shall submit to Franchisor, no later than the fifth day of each month during the term of this Agreement, a monthly profit and loss statement, on forms prescribed by or supplied by Franchisor, which accurately reports all gross sales during the 29 preceding month and such other data and information regarding the operation of the Outlet as Franchisor may reasonably require. 12.3 Franchisee shall submit to Franchisor upon request, a certified copy of any and all federal and/or state sales or income tax returns applicable to the Outlet. 12.4 Franchisee shall, at his expense, submit to Franchisor within thirty (30) days at the end of each quarter during the term of this Agreement or any renewals thereof, on forms prescribed by Franchisor, an unaudited financial statement for the preceding quarter, including both an income statement and balance sheet. Each financial statement shall be signed by Franchisee or by Franchisee's treasurer or chief financial officer, attesting that the statement is true and correct. 12.5 Fanchisee shall, at his/her expense, submit to Franchisor within ninety (90) days of each fiscal or calendar year during the term of this Agreement, a complete financial statement for the said fiscal or calendar year, including but not limited to both an income statement and a balance sheet prepared by an independent certified public accountant, together with such other information in such form as Franchisor may reasonable require. Franchisor reserves the right to require this fiscal or calendar year financial statement to be a certified audited financial statement including both an income statement and a balance sheet certified by an independent certified public accountant. 12.6 Franchisee shall also submit to Franchisor current financial statements and such other forms, report records, information, and data as Franchisor may reasonably designate, in the form and at the times and places reasonably required by Franchisor, upon request and as specified from time to time in the Manual or otherwise. 12.7 Franchisee shall equip the Outlet with a point of sale cash register and financial information collection system which meets Franchisor's standards and specifications therefor. Such point of sale system shall utilize computer equipment or like terminal, with telecommunications capabilities compatible with Franchisor's business systems including applicable computer hardware and software without the necessity of any alteration by Franchisor of its software or equipment. Franchisee shall acquire such equipment, hardware and software from a supplier designated or approved by Franchisor at Franchisee=s expense. 12.8 Franchisor or its designated agents shall have the right, at all reasonable times, without prior notification to examine a copy, made at Franchisor=s expense, of any and all of Franchisee's records and books of account. Franchisor shall also have the right, at any reasonable time, to have an independent audit made of the books and records of the 30 Franchisee. If an audit should reveal that payments due Franchisor have been understated by two percent (2%) or more in any report to Franchisor, then Franchisor may, at its option, charge Franchisee for any and all costs and expenses connected with the audit conducted by the independent auditors (including, without limitation reasonable accounting and attorneys fees). Franchisee shall also immediately pay to Franchisor the amount understated upon demand, in addition to interest from the date such amount was due until paid, at the annual rate of eighteen percent (18%). The foregoing remedies shall be in addition to any other remedies Franchisor may have hereunder. ARTICLE XIII CONFIDENTIAL POLICIES AND PROCEDURES MANUAL 13.1 In order to protect the reputation and goodwill of Franchisor, and the System and to maintain requisite operating standards under the Proprietary Rights, Franchisee shall conduct his Outlet in accordance the provisions, standards, and procedures set forth in Franchisor's Confidential Policies and Procedures Manual (hereinafter the "Manual"). 13.2 Franchisee shall, at all times, treat the Manual, any other manuals created for or approved for in the operation of the Outlet, and the information contained therein as confidential, and shall use all reasonable efforts to maintain such information as secret and confidential. Franchisee shall not at any time, without Franchisor's prior written consent, copy, duplicate, record, or otherwise reproduce the foregoing material 13.3 The Manual shall at all times remain the sole property of Franchisor, and shall be returned immediately upon termination of this Agreement. 13.4 Franchisor may, from time to time, revise the contents of the Manual when it reasonably considers such revisions to be necessary to improve or maintain the standards of the System and Franchisee expressly agrees to comply with each new or changed standard, provided, however that such revisions are made for Franchisees and are reasonable in nature. Any revisions to the contents of the Manual shall be deemed effective seven (7) days after the date of mailing such revisions to Franchisee unless otherwise specified by Franchisor. 13.5 Franchisee shall at all times insure that its copy of the Manual is kept current and up to date, and in the event of any dispute as to the contents of the Manual, the terms of the master copy of the Manual maintained by Franchisor at its home office shall be controlling. 31 13.6 Franchisee acknowledges that the contents of the Manual and any revisions or modification made thereto, shall constitute provisions of this Agreement as if fully set forth herein. ARTICLE XIV ADVERTISING AND PROMOTIONS 14.1 Franchisor and Franchisee agree that there are substantial benefits to be derived from advertising the System and Proprietary Products, and that the cooperative efforts of Franchisor, Franchisee and other franchisees will maximize the potential success of the advertising program by providing a more uniform advertising program, creating greater product, trademark and trade name identity, and a higher quality program. Franchisee will also benefit from the experience Franchisor provides in administering the advertising program and the lower rates obtained by joint advertising with other ZAP Electric Vehicle Outlet franchisees and Franchisor. 14.2 In the event Franchisor elects to establish a regional or national advertising fund ("Advertising Fund") Franchisee shall contribute a sum equal to one percent (1%) of the gross sales, as defined herein, of the Outlet for each week in which the Outlet is open and operating (the "Advertising Fee"). The Advertising Fee shall be due and payable in accordance with Article III hereof. Franchisor shall contribute to the Advertising Fund an amount equal to one percent (1%) of Franchisor's gross sales derived from its company-owned ZAP Electric Vehicle Outlet. 14.3 Franchisor agrees that the Advertising Fee shall be aggregated with fees collected from other franchisees and shall be used by Franchisor for: (i) Formulating, developing, administering, preparing, producing and conducting advertising and promotions for the benefit of all franchisees, including Franchisee, either on a national, regional or local basis (including without limitation, the cost of preparing and conducting television, radio, magazine, and newspaper advertising campaigns, direct mail campaigns, marketing surveys and other public relations activities, providing brochures, advertising slicks and other marketing materials to franchisees of the System); (ii) Formulating Yellow Page advertising copy; and (iii) Advertising agency fees, if any; 32 14.4 All sums paid by Franchisee to the Advertising Fund shall be maintained in an account separate from other monies of Franchisor and shall not be used to defray any of Franchisor's other operating expenses, nor in any way inure to the benefit of Franchisor. Franchisor shall maintain separate bookkeeping accounts for the Advertising Fund. 14.5 Within one hundred and twenty (120) days after the end of each of its fiscal years, Franchisor shall render to Franchisee an annual statement, prepared by Franchisor and reviewed by its independent accountants, of all advertising and promotional expenditures made in accordance with Section 14.3 hereof during the preceding fiscal year. 14.6 The form, content, time and medium for all advertising and promotional activities conducted pursuant to this Article shall be determined by Franchisor in its sole and absolute subjective discretion exercised in good faith, and Franchisee agrees to permit Franchisor to use its discretion in conducting all advertising. 14.7 Franchisor shall direct all advertising and/or promotional programs, with the sole discretion over concepts, materials, and media used in such programs and the placement and allocation thereof. Franchisee acknowledges and agrees that the Advertising Fund is intended to maximize general public recognition and acceptance of the trademarks and service marks and for the benefit of the System, and that Franchisor and its designees undertake no obligation in administering the Advertising Fund to make expenditures for the Franchisee which are either equivalent or proportionate to his/her contribution or which insure that any particular franchise benefits directly or pro rata from the placement or use of any advertising. 14.8 It is anticipated that all contributions to and earnings of the Advertising Fund shall be expended for advertising and/or promotional purposes during the taxable year within which the contributions and earnings are received. If, however, excess amounts should remain in the Advertising Fund at the end of such taxable year, all expenditures in the following taxable year(s) shall be made first out of accumulated earnings from previous years, next out of earnings in the current year and finally, from contributions. 14.9 Although the Advertising Fund is intended to be of perpetual duration, Franchisor maintains the absolute right to terminate same upon sixty (60) days notice to all franchisees. However the Advertising Fund shall not be terminated until all monies have been expended for advertising and/or promotional purposes. 33 14.10 Franchisor shall have the right to include, in such national or regional advertising programs as it may administer, "suggested retail prices" of the goods or services sold by Franchisee and other franchisees of Franchisor similarly situated; provided that Franchisor shall include within all such advertising the phrase "available at participating locations only" or such other cautionary language as shall advise the consumer that suggested retail prices may not be adhered to by all franchisees of Franchisor. Franchisor shall have no right to compel Franchisee to charge "suggested retail prices." 14.11 Franchisor may, from time to time, develop, establish and market special discount or coupon programs designed to induce volume users of Franchisee's goods or services to patronize Franchisee's Outlet, and Franchisee shall have the right, but not the obligation, to participate therein. Franchisor shall notify Franchisee of the creation of all such discount or coupon programs and shall advise Franchisee with respect to all of the elements thereof. Within five (5) days after receipt of such notice, Franchisee shall advise Franchisor as to whether or not Franchisee wishes to participate in such discount or coupon programs. If Franchisee notified Franchisor that he/she wishes to participate, Franchisee shall in all respects adhere to all elements of said program. If Franchisee elects to be excluded from discount or coupon program or programs, Franchisor shall have the right to advise consumers, by advertising, sales solicitation or otherwise, that Franchisee is not a participant in such program, and Franchisee shall not be entitled to the benefits thereof. Franchisor shall establish all such discount or coupon programs in its sole, subjective discretion, and shall not consult or confer with Franchisee or any other franchisee with respect to the nature, content or amount of any discount or coupon established pursuant to any such program. 14.12 Franchisee shall make such refunds as are required by reason of complaints to the Better Business Bureau or other similar offices or organizations. Franchisee shall immediately inform and forward to Franchisor all written complaints from customers or others. 14.13 Franchisee shall make customer service complaint cards available to his/her customers on a daily basis, and forward same to Franchisor's home office for inspection and review. In addition, Franchisee shall be obligated to display franchise information cards on its sales counter. 14.14 Franchisor may provide Franchisee, from time to time, with approved local advertising and marketing plans and materials, including, without limitation, newspaper mats, radio commercial tapes, television commercial prints sales aids, and other promotional and marketing materials, at a price equal to Franchisor's cost thereof. Local 34 advertising and marketing materials not prepared or previously approved by Franchisor or its designated agents shall be submitted (by certified mail, return receipt requested) to Franchisor for approval (except with respect to prices to be charged), which approval shall not be unreasonably withheld, prior to their use by Franchisee. If written disapproval is not received by Franchisee within seven (7) days from the date of receipt by Franchisor of such materials, Franchisor shall be deemed to have waived the required approval; provided, however, that Franchisee shall discontinue the use thereof within a reasonable time, if Franchisor subsequently requests such action in writing. 14.15 Franchisee understands that certain of Franchisor's other franchisees do or will operate under different agreements with Franchisor. Such franchisees may be required to contribute to the Advertising Fund, if at all, at rates that differ from the rate(s) provided in this Agreement and/or based on formula that differ from the formula provided in this Agreement. Franchisor does not represent that Franchisee, or other franchisees will contribute to or benefit from the Advertising Fund equally. 14.16 Franchisee shall use the trademarks only in strict conformity to the Manual, and shall include in any advertising, or promotional materials which use the trademarks, such trademark notices as are required by the Manual. All copyrighted materials supplied by Franchisor to Franchisee, and used by Franchisee in connection with the Franchised Business, shall contain such copyright notices as are required by the Manual. 14.17 Franchisee shall be obligated to spend a minimum of two and one-half percent (2.5%) of gross sales per month on local advertising within his/her Area of Primary Responsibility. Such sum shall not be included in or deducted from the fees paid to the National Advertising Fund. Such advertising shall first be submitted to Franchisor for its approval seven (7) days prior to its use and Franchisor shall provide its approval or disapproval within seven (7) days. 14.18 Franchisor shall maintain the right to audit Franchisee's books and records, upon twenty-four (24) hours notice, with respect to whether local advertising sums are being spent thereon. 14.19 Franchisor recognizes Franchisee's concern that Franchisor not abuse its discretion in administering the Advertising Fund and Franchisee recognizes Franchisor's concern that it retain sufficient flexibility and control over the Advertising Fund to use it for the benefit of the System as a whole and in a manner that will allow it to compete effectively. Accordingly, Franchisor agrees that in carrying out its rights and responsibilities hereunder it shall do so honestly and in good faith for the benefit of the System and the ZAP Electric Vehicle franchised and non-franchised Outlets as it may 35 exist from time to time. Moreover, in its decision making with respect to the Advertising Fund and otherwise pursuant to this Article, Franchisor shall give serious consideration to the views of Franchisee and other System franchisees. 14.20 Franchisee shall advertise continually in the classified or Yellow Pages of the local telephone directory using such copy as may be reasonably specified by Franchisor. If requested by Franchisor, Franchisee shall participate in a joint listing, the cost of which shall be shared equally by Franchisee and other participating franchisees. The expenditure for such advertising shall not be considered as credit toward any other advertising expenditures required under this Article XIV. 14.21 Franchisee shall not advertise or use in advertising or any other form of promotion, the Proprietary Marks or copyrighted materials of Franchisor without appropriate [(R), (C) or TM] copyright and registration marks or the designations or sign where applicable. 14.22 Regarding Franchisee's grand opening, Franchisee shall spend the sum of between five and ten thousand dollars ($5,000 - $10,000). Such monies shall be expended by Franchisee on grand opening advertising and promotion in or for Franchisee's market area during the first forty-five (45) days of the Outlet's business operations. All such grand opening advertising and promotional materials shall be submitted by Franchisee to Franchisor for a review and approval prior to use consistent with this Article. The expenditure required under this Section 14.22 shall be in addition to all other advertising/promotion expenditure required of Franchisee hereunder. ARTICLE XV RENOVATION OF OUTLET, EQUIPMENT AND FURNISHINGS 15.1 To maintain a modern, progressive, sanitary and uniform operational image, Franchisor shall have the right, at any time after expiration of five (5) years from the opening for business of the Outlet by Franchisee, to require Franchisee to perform such remodeling, repairs, replacements and redecoration in and upon the Outlet, equipment and furnishings used by Franchisee and which Franchisor shall deem reasonable, necessary and practicable to bring the Outlet, equipment and furnishings up to the then current standards of other Outlets; provided, however, that in making and performing same, Franchisee shall not be required to expend at any one time an amount in excess of fifty percent (50%) of the aggregate depreciation allowable on a straight line basis over the useful life of the personal property located in the Outlet from the date the Outlet was opened for business to the date of such expenditure, less amounts previously expended for 36 remodeling, repairs, replacements and redecoration in and upon such Outlet, equipment and furnishings notwithstanding the fact that Franchisee leases the Outlet or any depreciable personal property. It is understood and agreed that Franchisor shall perform remodeling, repairs, replacements and redecoration in and upon Outlets owned by it and the equipment and furnishings used by it in connection with the operations of such Outlet comparable to that required of Franchisee hereunder. 15.2 If Franchisee shall, at any time, deem it necessary and practical to replace any signs, equipment or furnishings repair or remodel the Outlet or take any similar action, Franchisee shall perform such replacement, repairs or remodeling in accordance with Franchisor's then current standards and specifications and, in addition, if the cost of such replacement, repairs or remodeling exceeds two thousand five hundred dollars ($2,500) Franchisee shall obtain the prior written consent of Franchisor. In the event Franchisee violates this provision, Franchisor shall have all of the rights and remedies set forth in this Agreement. ARTICLE XVI INSURANCE 16.1 Franchisee agrees to maintain insurance during the term of this Agreement and any renewals hereof at Franchisee's expense as follows: A. All insurable properties shall be insured against loss or damage by fire, lightning, windstorm, flood, hail, explosion, riot, riot attending a strike, civil commotion, air traffic, vehicle, smoke, or other risks usually insured against by persons operating like properties in the localities where the properties operated by Franchisee are located, in amounts sufficient to prevent Franchisee from becoming coinsurer consistent within the terms of the policies in question, and in any event in amounts not less than one hundred percent (100%) of the replacement cost thereof. B. During the build-out of the Outlet, policies of "Builder's Risk Insurance" shall be maintained in amounts not less than customarily required in the area in which the Outlet is located. C. Insurance against all types of public liability including but not limited to products liability, shall be maintained against claims for personal injury death or property damage suffered by others upon, in or about the Outlet or as a result of the use of products sold by it or services rendered by it or any claims arising out of the business of Franchisee pursuant to this Agreement or the operation of the Outlet or occurring as a 37 result of the maintenance or operation by Franchisee of any automobiles, trucks or other vehicles or airplanes or other facilities; with a minimum of personal injury coverage of One Million Dollars ($1,000,000) per occurrence and property damage coverage of not less than One Million Dollars ($1,000,000). D. Worker's compensation, unemployment compensation, disability insurance, social security and other insurance coverages, shall be maintained in such amounts as may now or hereafter be required by any applicable law. E. Products Liability Insurance in an amount not less than One Million Dollars ($1,000,000). 16.2 All such policies shall insure Franchisee and name Franchisor, its officers, directors, principal stockholders and employees as additional insureds, and shall stipulate that Franchisor shall receive a thirty (30) day written notice of cancellation or modification, and shall protect the Franchisee and Franchisor against any liability which may accrue by reason of this Agreement, the Franchise, the Proprietary Rights or the ownership, maintenance operation of the Outlet by Franchisee. 16.3 Franchisee's obligation to obtain and maintain the foregoing policy or policies of insurance shall not be limited in any way by reason of any insurance which may be maintained by Franchisor, nor shall Franchisee's performance of this obligation relieve it of liability under the indemnity provision set forth in Paragraph 17.3 hereof. Franchisee shall deliver to Franchisor certificates of insurance, together with proof of payment therefor at least ten (10) days prior to opening the Outlet. All policies shall be renewed and evidence of renewal mailed to Franchisor prior to their respective expiration dates. 16.4 The insurance shall cover the acts or omissions of each and all of the persons who perform services of whatsoever nature at the Franchisee's Outlet and any other persons who patronize the Outlet while in such attendance and for whatever purpose. 16.5 Fifteen (15) days prior to the opening of Franchisee's Outlet Franchisee will deliver to the Franchisor certificates of the insurance together with copies of the actual policies issued and will promptly pay all premiums thereon as and when the same become due. The Franchisor shall have the right, but shall not be obligated to pay premiums due and unpaid by Franchisee or else to obtain substitute coverage in case of cancellation. Any cost thereof to the Franchisor shall be added to the CMSF otherwise payable to the Franchisor under this Agreement, provided however, that same shall be due and payable to the Franchisor by the Franchisee within five (5) days of demand therefor. 38 16.6 The Franchisor reserves the right to make reasonable demand that Franchisee obtain insurance from time to time which is different in coverage, risks, amount or otherwise from the foregoing in order to protect fully the parties having insurable interests in the Franchisee's Outlet. 16.7 Franchisee shall immediately notify the Franchisor, in writing, of any accidents, injury, occurrence claim that might give rise to a liability or claim against the Franchisor or which could materially affect Franchisee's business, and such notice shall be provided no later than the date upon which Franchisee notifies his/her insurance carrier. ARTICLE XVII RELATIONSHIP OF THE PARTIES: INDEMNIFICATION 17.1 The relationship between the Franchisor and Franchisee is strictly that of a franchisor and franchisee, and Franchisee shall be deemed to be an independent contractor. This Agreement does not create a joint venture, partnership or agency, or any fiduciary relationship and any act or omission of either party shall not bind or obligate the other except as expressly set forth in this Agreement. 17.2 Franchisee recognizes that the Franchisor has entered into this Agreement in reliance upon and in recognition of the fact that Franchisee will have full responsibility for the management and operation of the business and that the amount of profit or loss resulting from the operation of the business will be directly attributable to the performance of Franchisee. 17.3 Franchisee will, at all times, indemnify and hold harmless, to the fullest extent permitted by law, Franchisor, its corporate affiliates, successors and assigns and the respective directors, officers, employees, agents and representatives of each (Franchisor and all others hereinafter collectively "Indemnities") from all "losses and expenses" (as defined below) incurred in connection with any action, suit, proceeding, claim, demand, investigation or inquiry (formal or informal) or any settlement thereof (whether or not a formal proceeding or action has been instituted) which arises out of or is based upon any of the following: A. Franchisee's infringement, alleged infringement, or any other violation or alleged violation of any patent, service mark or copyright or other proprietary right owned or controlled by third parties, 39 B. Franchisee's violation, breach or asserted violation or breach of contract, federal, state or local law, regulation, ruling, standard or directive or of any industry standard. C. Libel, slander or any other form of defamation by Franchisee. D. Franchisee's violation or breach of any warranty, representation, agreement or obligation in this Agreement. E. Acts, errors or omissions of Franchisee or any of its agents, servants, employees, contractors, partners, affiliates or representatives. 17.4 Franchisee agrees to give Franchisor notice of any such action, suit, proceeding, claim, demand, inquiry or investigation. At the expense and risk of Franchisee, Franchisor may elect to assume (but under no circumstances is obligated to undertake), the offense and/or settlement of any such action, suit, proceeding, claims, demand, inquiry or investigation. Such an undertaking by Franchisor shall, in no manner or form, diminish Franchisee's obligation to indemnify Franchisor and to hold it harmless. 17.5 In order to protect persons or property, or its reputation or goodwill, or the reputation or goodwill of others, Franchisor may at any time and without notice, as it in its judgment deems appropriate, order, consent or agree to settlements or take such other remedial or corrective action as it deems expedient with respect to the action, suit proceeding, claim, demand inquiry or investigation, if in Franchisor's sole judgment there are reasonable grounds to believe that: A. Any of the acts or circumstances enumerated in Section 17.3 of this Article have occurred; or B. Any act, error or omission of Franchisee may result directly or indirectly in damage, injury or harm to any person or any property. 17.6 All losses and expenses incurred under this Article XVII shall be chargeable to and paid by Franchisee pursuant to its obligations of indemnity under this Section, regardless of any actions, activity or defense undertaken by Franchisor or the subsequent success or failure of such actions, activity or defense. 17.7 As used in this Article XVII the phrase "losses and expenses" shall include without limitation, all losses compensatory, exemplary damages, fines, charges, costs, expenses, lost profits, attorney's fees, court costs, settlement amount, judgments, 40 compensation for damages to the Franchisor's reputation and goodwill, costs of or resulting from delays, financing, costs of advertising material and media time/space and costs of changing, substituting or replacing the same and any and all expenses of recall, refunds, compensation, public notices and other such amounts incurred in connection with the matters described. 17.8 Indemnities do not assume any liability whatsoever for acts, errors, or omissions of those with whom Franchisee may contract, regardless of the purpose. Franchisee shall hold harmless and indemnify Indemnities for all losses and expenses which may arise out of any acts, errors or omissions of these third parties. 17.9 Under no circumstances shall Indemnities be required or obligated to seek recovery from third parties or otherwise mitigate their losses in order to maintain a claim against Franchisee. Franchisee agrees that the failure to pursue such recovery or mitigate loss will in no way reduce the amounts recoverable by Indemnities from Franchisee. 17.10 In accordance with the Manual, Franchisee shall prominently display, by posting of a sign within public view, on or in the premises of the franchised facility, a statement that clearly indicates that said business is independently owned and operated by the Franchisee as a ZAP Electric Vehicle Outlet franchisee of Franchisor and not as an agent thereof. ARTICLE XVIII FORCE MAJEURE Neither party shall be responsible to the other for nonperformance or delay in performance occasioned by, and causes beyond its control, including without limiting the generality of the foregoing acts or omissions of other party, acts of civil or military authority, strikes, lockouts, embargoes, insurrections or acts of God, inability of Franchisor to purchase, deliver and/or manufacture the Proprietary Products, provided that inability of a party to obtain funds shall be deemed to be a cause within the control of such party. If any such delay occurs, any applicable time period shall be automatically extended for a period equal to the time lost, provided that the party affected makes reasonable efforts to correct the reason for such delay and gives to the other party prompt notice of any such delay. ARTICLE XIX DEFAULT AND TERMINATION 41 19.1 Franchisor may terminate this Agreement upon the occurrence of any of the following events of default: A. Failure by Franchisee to make complete and timely payment of any and all fees regardless of their nature, and billings due Franchisor or any of its subsidiary or affiliated corporations. B. Failure to comply with the reporting or record keeping requirements of this Agreement. C. The intentional misstatement by Franchisee of any material fact, or failure to disclose or understatement of any material fact in any report furnished by Franchisor pursuant to this Agreement. D. A material breach by Franchisee of any provision of this Agreement, or any other agreement between Franchisor and Franchisee or any of its subsidiary or affiliated corporations. E. Failure by Franchisee to make good faith efforts to carry out the provisions of this Agreement. F. Franchisee=s engaging in any conduct or practice that is detrimental or harmful to the good name, good will or reputation of Franchisor, the System, other franchisees or the public, for example, keeping the Outlet in a dirty state, not maintaining proper inventory levels, selling unapproved items, or that is a fraud upon consumers, or is an unfair, unethical or deceptive trade act or practice. G. The pledge of or the attempted pledge of Franchisor's credit by Franchisee, or an attempt by Franchisee to bind the Franchisor to any obligation not authorized by Franchisor. H. Failure by Franchisee to promote actively his/her Outlet or to participate in the advertising, promotional, or marketing activities, services and programs that are established by Franchisor or the Advertising Fund; provided same does not contravene applicable anti-trust laws. I. Unauthorized or improper use by Franchisee of Franchisor's Proprietary Rights, or misuse or unauthorized disclosure by Franchisee of the Manual, information or materials. 42 J. Failure to use or sell the Proprietary Products authorized by Franchisor to the exclusion of any others and the failure to perform all of the services required by Franchisor, including but not limited to the forwarding of copies of all health or sanitation or other regulatory agency reports to Franchisor immediately upon receipt thereof. K. Failure to secure an approved location for a Outlet within one hundred and eighty (180) days from the date of this Agreement or failure to open Franchisee's ZAP Electric Vehicle Outlet at the location designated by Franchisee within ninety (90) days after all applicable permits for the Outlet are obtained. L. Failure to correct, or if unable to undertake efforts to begin to correct, any local, state or municipal health or sanitation law or code violations within twenty-four (24) hours after being cited for such violation. M. Sale of non-Proprietary Products or products not previously approved by Franchisor from the Outlet. 19.2 To terminate Franchisee for default of this Agreement pursuant to Section 19.1 above, Franchisor shall first provide Franchisee with written notice of termination, which notice shall specify the reason for and the Effective Date of Termination. This Agreement shall terminate on the date specified therein, which shall not be less than thirty (30) days from the posted day of the notice (or such longer period as provided by State law), unless: A. Franchisee cures the default or reason for termination during the notice period; or B. Franchisee has, in good faith, initiated a cure of the default or reasons for termination within the notice period and such default or reason cannot be completely cured during the notice period because of factors reasonably beyond the exclusive control of Franchisee, in which event, Franchisor, by notice, shall permit Franchisee a reasonable opportunity in light of such factors to effect a complete cure. C. The provisions of Section 19.2 (A) and 19.2 (B) notwithstanding, this Agreement shall nonetheless terminate automatically if any default or any reason for termination has been set forth in three (3) prior notices of termination within any prior twelve (12) month period, and/or if four (4) or more health code violations have been committed within any prior twelve (12) month period. 43 19.3 Franchisor may immediately terminate this Agreement upon the occurrence of any of the following events of default and upon written notice to Franchisee: A. Any action by Franchisee, any of his/her partners, if Franchisee is a partnership, or any of its officers, directors or stockholders of Franchisee is a corporation, which results in: (i) An affirmative act of insolvency; (ii) In assignment for the benefit of creditors; or , (iii) The filing of a petition under any bankruptcy, reorganization, insolvency, or moratorium law, or any law for the relief of, or relating to debtors. B. The filing of any involuntary petition under any bankruptcy statute against Franchisee, any of its partners or any of its stockholders owning at least fifty percent (50%) of any class of stock or the appointment of any receiver or trustee to take possession of property of Franchisee, any of its partners or any of its stockholders owning fifty percent (50%) of any class of stock of Franchisee, provided such petition is not vacated within one hundred twenty (120) days of filing. C. Failure by Franchisee to satisfy fully a civil judgment obtained against Franchisee for a period of more than thirty (30) days after all rights of appeal have been exhausted or execution of such a judgment, execution of lien or foreclosure by a secured party or mortgage against Franchisee's property, which judgment, execution of lien or foreclosure by a secured party or mortgage would have an adverse or detrimental effect upon Franchisee's Outlet. D. Conviction of Franchisee or any partner of Franchisee or any officer, director or stockholder owning at least fifty percent (50%) of any class of stock of Franchisee, of any crime which would adversely affect the goodwill interest of Franchisee or Franchisee's business. E. The uncured default by Franchisee under any lease or sublease of Franchisee's Outlet which results in the loss of the right to possession therein for any reason whatsoever. F. A final judgment or the unappealed decision of a court, regulatory officer, agency or quasi-regulatory agency that results in the temporary or permanent 44 suspensions or revocations of any permits or licenses, possession of which is a prerequisite to the operation of Franchisee's business or is required under applicable law. G. The direct or indirect assignment, transfer, sale or encumbrance by Franchisee of this Agreement of franchisee or any of his rights or privileges contrary to this Agreement, or any attempt by Franchisee to sell, assign, transfer or encumber the Outlet contrary to the terms and conditions of this Agreement. H. Failure by Franchisee to remain open for business as required by this Agreement or as may be required by the Manual, as may be limited by local law, the prime landlord or the abandonment or vacating by Franchisee of his Outlet for three (3) or more consecutive days with the intent not to return (or for such other period as would be grounds for termination of Franchisee's lease or sublease). ARTICLE XX RIGHTS AND DUTIES OF THE PARTIES UPON EXPIRATION OR TERMINATION 20.1 For the purpose of this Agreement, the "Effective Date of Termination" shall be the date indicated in any notice of termination sent pursuant to Article 19.2 or 19.3 of this Agreement or the day after the Term as set forth in Article 2.1 of this Agreement. 20.2 Upon the Effective Date of Termination, Franchisee shall no longer be an authorized ZAP Electric Vehicle Outlet franchisee and Franchisee shall pay all sums of money due Franchisor or any of its subsidiary or affiliated corporations within fifteen (15) days of the Effective Date of Termination, unless Franchisor gives written notice of an extension of this period. 20.3 Upon the Effective Date of Termination, Franchisee shall discontinue the use of all Proprietary Marks owned by or associated with Franchisor and all similar names and marks, or any other designation or associating Franchisee with the System. If Franchisee is a corporation or partnership and, notwithstanding prohibition of utilizing the Proprietary Marks in a corporate or partnership name, has used the Proprietary Marks or designations that associate Franchisee with Proprietary Marks in its corporate designations that associate Franchisee with the Proprietary Marks in its corporate or partnership name, Franchisee shall, within fifteen days of the Effective Date of Termination, take all 45 necessary steps to eliminate the Proprietary Marks from corporate or partnership name, at his/her own cost and expense. 20.4 Upon the Effective Date of Termination, Franchisee shall cease displaying and using all signs, stationery, letterheads, forms, manuals, printed matter, advertising and other material containing the Proprietary Rights or Proprietary Marks, ZAP Electric Vehicle Outlet or any other names, marks or designations that associate Franchise with the System. 20.5 After the Effective Date of Termination, Franchisee shall refrain from taking any action indicating or implying that he/she is or was an authorized franchisee. 20.6 Franchisee shall, at the Franchisor's option, assign to Franchisor or the Franchisor's designee, Franchisee interest in any lease then in effect for the premises of the Outlet, and Franchisor shall notify franchisee to whom such interest must be assigned within thirty (30) days after termination or expiration of this Agreement or shall vacate the Outlet immediately after termination or expiration of this Agreement and pursuant to the lease or sublease a agreement. 20.7 Franchisee shall immediately cease to use any telephone numbers, post office box, and any other business listings used by Franchisee in the Outlet, and the assignment of telephone numbers shall be deemed effective in order to accomplish the foregoing results. In the event Franchisor requires Franchisee to assign, lease or sublease for the Outlet pursuant to Article 19.6 hereof, Franchisee shall execute such documents and such other acts as may be necessary to permit Franchisor or its designee, at Franchisor's option, to assume telephone number and listing, receive mail, and otherwise commence operations under the System and Proprietary Rights immediately at the location of the Outlet. 20.8 In the event that Franchisee is permitted to, and does remain in business at the premises of the Outlet, Franchisee shall make such modifications or alterations to the premises as dictated by Franchisor, including, but without limitation, removing and changing all signage, obtaining a new telephone number, changing the catalog, the colors and decor design and the trade names and trademarks, immediately upon termination or expiration of this Agreement as may be necessary to prevent the operation of any business thereon by himself, or others derogation of this Article XX, and shall make such specific additional changes thereto as Franchisor may reasonably request for that purpose and to distinguish said premises from their former appearance and from other ZAP Electric Vehicle Outlets. In the event Franchisee fails or refuses to comply with the requirements of Article XX, Franchisor shall have the right subject to local law, to enter upon the 46 premises of the Outlet, without being liable for trespass, for the purpose of making or causing to be made such changes as may be required at the expense of Franchisee, which expense Franchisee shall pay upon demand. 20.9 Franchisee agrees that in the event he continues to operate or subsequently begins to operate any other business from the premises where the Outlet activities are conducted, he shall not use any reproduction, counterfeit, copy or colorable imitation of the Proprietary Marks, either in connection with such other business or in the promotion thereof, which is likely to cause confusion, mistake or deception, or which is likely to dilute Franchisor's exclusive rights in and to the Proprietary Marks, and further agrees not to utilize any designation of origin or description or representation which falsely suggests or represents an association or connection with Franchisor or the System. 20.10 Franchisee shall pay to Franchisor all damages, costs and expenses, including reasonable attorney fees incurred by Franchisor subsequent to the termination or expiration of the franchise herein granted in the event Franchisor is required to seek injunctive or any other judicial relief for the enforcement of the provisions of this Article XX. 20.11 Franchisee shall immediately turn over to the Franchisor, the Manual, trade secrets, catalogs, records, files, instructions, correspondence and brochures and any and all other materials relating to the operation of the Outlet which are in Franchisee's possession, custody or control and all copies thereof (all of which are acknowledged to be the Franchisor's property) and shall retain no copies or records of the foregoing, excepting only Franchisee's copy of this Agreement and any correspondence between the parties and any other documents which Franchisee reasonably needs for compliance with any provision of law. 20.12 Franchisor shall have the right (but not the duty), to be exercised by notice of intent to do so within thirty (30) days after the Effective date of Termination, to purchase any or all equipment, supplies, inventory, signs, advertising materials, and items bearing the service mark "ZAP" at fair market value (less the amount of any outstanding liens or encumbrances) giving no effect to goodwill. If the parties cannot agree on fair market value within a reasonable time, an independent appraiser shall be designated by the parties and his determination shall be binding. If Franchisor elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Franchisee and the cost of the appraisal, if any, against any payment therefor. 47 20.13 Franchisee shall comply with all provisions of this Agreement which explicitly or implicitly concern Franchisee's obligations after termination, including without limitation, the covenant contained in Article XXV of this Agreement. 20.14 Franchisee shall maintain all financial records and reports required pursuant to this Agreement for a period of not less than three (3) years after the Effective Date of Termination. Franchisee shall permit Franchisor to make final inspection of Franchisee's financial records, books, tax returns, and other accounting records within three (3) years of the Effective Date of Termination. 20.15 In the event of termination for any default by Franchisee hereunder, the extent of all damage which Franchisor has suffered by virtue of such default shall be and remain a lien in favor of Franchisor against any and all the personal property, machinery, fixtures and equipment owned by Franchisee on the Outlet premises at the time of such default. 20.16 Termination of this Agreement shall not affect the rights of Franchisee to operate ZAP Electric Vehicle Outlets in accordance with the terms of any other Franchise Agreements until and unless such other Franchise Agreements, or any of them, are terminated in accordance with their terms. Notwithstanding the foregoing, termination of this Agreement or any uncured default hereunder constitutes grounds for termination of the Area Development Agreement, if same is in effect at the time of said termination or uncured default. 20.17 No right or remedy herein conferred upon or reserved to Franchisor is exclusive or any other right or remedy herein granted or by law or equity provided or permitted, but each shall be cumulative of every other right or remedy given hereunder. 20.18 Nothing contained herein shall be deemed to relieve Franchisee of any obligations or responsibilities or liabilities incurred by Franchisee during the term of this Agreement or any renewals hereof, and which obligations, responsibilities or liabilities shall survive the termination, expiration or non-renewal of this Agreement. ARTICLE XXI COMMENCEMENT AND HOURS OF OPERATION Franchisee recognizes that continuous and daily operations of the Outlet is essential to the adequate promotion of Franchisee's Outlet. Franchisee or his/her designated manager shall be personally available to operate the Outlet from 7 a.m. to 8 p.m. Monday through Saturday 48 and from 9 a.m. to 8 p.m. on Sunday, or as required by any lease or sublease if different, or as dictated by local trade custom, except where prohibited or otherwise regulated by governmental authority, including any state or local licensing authority and shall otherwise conduct the business in accordance with generally accepted business standards. These requirements may be changed by Franchisor from time to time upon reasonable notice to Franchisee. ARTICLE XXII TRANSFERABILITY OF INTEREST 22.1 The Franchisor shall have the right to transfer or assign all or any part of its rights or obligations herein to any person or legal entity, provided such person or legal entity agrees to be bound by all of the terms and conditions set forth herein and agrees to assume same. 22.2 Franchisee understands and acknowledges that the rights and duties set forth in this Agreement are personal to Franchisee, and that the Franchisor has granted this franchise in reliance on Franchisee's business skill, financial capacity, and personal character. Accordingly, neither Franchisee nor any immediate or remote successor to any part of Franchisee's interest in this franchise nor any individual, partnership, corporation, or other legal entity which directly or indirectly controls Franchisee shall sell, assign, transfer, convey, give away, pledge, mortgage, or otherwise encumber any interest in this franchise or in any legal entity which directly or indirectly owns this franchise without the prior written consent of the Franchisor, which consent shall be subject to the conditions precedent, but which will not be unreasonably withheld; provided, however, that the Franchisor=s prior written consent shall not be required for a transfer of less than a five percent (5%) interest in a publicly-held corporation. A publicly-held corporation is a corporation registered under the Securities Exchange Act of 1934. Any purported assignment or transfer, by operation of law or otherwise, not having had written consent of the Franchisor required by this Article XXII shall be null and void and shall constitute a material breach of this Agreement, for which the Franchisor may then terminate without opportunity to cure pursuant to Article XIX of this Agreement. 22.3 The Franchisor shall not unreasonably withhold its consent to a transfer of any interest in Franchisee or in this franchise; provided, however, that if the transfer, alone or together with other previous, simultaneous, or proposed transfers, would have the effect of transferring a controlling interest in the Outlet, either directly or indirectly, the Franchisor may, in its sole discretion, require all of the following as conditions precedent to its approval: 49 A. All of Franchisee's monetary obligations to Franchisor, to affiliates, subsidiaries, landlord, vendors and all suppliers shall have been satisfied; B. Franchisee is not in default of any provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor; C. The transferor shall have executed a general release, in a form satisfactory to the Franchisor, of any and all claims against the Franchisor and its officers, directors, principal shareholders, and employees, in their corporate and individual capacities, including without limitation, claims arising under federal, state and local laws, rules, and ordinances, provided however, that all rights enjoyed by the transferor and any causes of action arising in its favor from the provisions of this Agreement shall not be released except to the extent identified in the release. D. The transferee shall, at Franchisor's option, either (i) enter into a written assignment under seal and in a form satisfactory to the Franchisor, assuming and agreeing to discharge all of Franchisee's obligations for the balance of the term of this Agreement; and if the obligations of the Franchisee were guaranteed by the transferor, the transferee, has the option to continue operating under the Franchise Agreement or shall guarantee the performance of all such obligations in writing in a form satisfactory to the Franchisor, or (ii) the transferee shall execute (and/or, upon the Franchisor's request, shall cause all interested parties to execute) for a full new term, the then-current standard form of Franchise Agreement and other ancillary agreements shall as the Franchisor may require for the Outlet, which agreements supersede this Agreement in all respects and the terms of which agreements may differ from the terms of this Agreement; including but not limited to the increase in the CMSF, Advertising Fee, and Proprietary Products fees then being paid by all new franchisees entering the System. E. The transferee shall demonstrate to the Franchisor=s reasonable satisfaction that it meets the Franchisor=s managerial and business standards; possesses a good moral character, business reputation, and credit rating; has the aptitude and ability to conduct the business franchised herein (as may be evidenced by prior related business experience or otherwise); and has adequate financial resources and capital to operate the business; F. At the transferee=s expense, the transferee or the transferee's manager shall complete any training programs then in effect for all new franchisees entering the System; 50 G. At the transferee's expense, the transferee shall upgrade, renovate or remodel the Outlet to conform to the standards then prescribed by the Franchisor of all Outlets under the System, and shall complete such upgrading and other reasonable remodeling or refurbishing requirements within the time reasonably specified by the Franchisor; H. Franchisee shall remain liable for all of the obligations to the Franchisor in connection with the Outlet prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by the Franchisor to evidence such liability. I. Except in the case of a transfer to a corporation formed solely for the convenience of ownership, a transfer fee equal to twenty-five percent (25%) of the initial fee then being charged to new franchisees shall have been paid by the transferee to the Franchisor to cover the Franchisor's administrative, training and other expenses incurred in connection with the transfer. J. Franchisee shall comply with Article XXV hereof, subsequent to the transfer or sale. 22.4 Franchisee acknowledges and agrees that each of the foregoing conditions which must be met by the transferee are necessary to assure such transferee's full performance of the obligations hereunder. 22.5 In the event Franchisee wishes to form a corporation after this Agreement is executed, solely for the convenience of ownership, the following requirements shall also apply to Franchisee: A. Franchisee's newly formed corporation shall be duly organized and its charter shall at all times provide that its activities are confined exclusively to operating the Franchised Business. B. Copies of Franchisee's Articles of Incorporation, Bylaws, and other governing documents, and any amendments thereto, including the resolutions of the Board of Directors authorizing entry into this Agreement, shall be delivered promptly to the Franchisor. C. All stock certificates of such corporation bear the following legend, which shall be printed legibly and conspicuously on the face of each such stock certificate: 51 "The transfer of this stock certificate is subject to the terms and conditions of a certain Franchise Agreement entered into with ZAP Power Systems dated __________________, 19___." D. Franchisee shall maintain a current list of all owners of record and all beneficial owners of any class of voting stock of Franchisee and shall furnish the list to the Franchisor upon request. In the event that the Franchisee is an individual who is transferring this franchise to a corporation solely for the convenience of ownership, said Franchisee shall own at least the majority of equity and voting stock in such corporation. E. All shareholders or general partners of Franchisee shall jointly and severally guarantee Franchisee's performance hereunder and shall bind themselves to the terms of this Agreement, by executing a Transfer of Franchise to a corporation form, if the Franchisee is an individual who is then forming the corporation solely for the convenience of ownership, provided, however, that the Requirements of this Section 22.5 E. shall not apply to a publicly-held corporation. F. In no event shall the formation of the corporation relieve the individual Franchisee from his or her personal liability under this Agreement. 22.6 Securities of the Franchisee may not be offered to the public without the prior written consent of the Franchisor. All registration materials required for such offering by federal or state law shall be submitted to the Franchisor for review prior to their being filed with any government agency and any materials to be used in any exempt offering shall be submitted to the Franchisor for review prior to their use. No public offering by Franchisee shall imply (by way of Proprietary Rights or otherwise) that the Franchisor is participating in an underwriting, issuance or public offering of Franchisee's or the Franchisor's securities, and the Franchisor's review of any offering shall be limited solely to the subject of the relationship between Franchisee and the Franchisor. Franchisee and the other participants in the registration must fully indemnify the Franchisor in connection with the registration. For each proposed public offering, Franchisee shall reimburse the Franchisor for its reasonable costs and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. Franchisee shall give the Franchisor at least sixty (60) days prior written notice prior to the effective date of any public offering, or other transaction covered by this Section 22.6. 22.7 Any party holding any interest in Franchisee or in this franchise and who desires to accept any bona fide offer from a third party to purchase such interest shall first notify the Franchisor in writing of each such offer, and the Franchisor shall have 52 the right and option, exercisable within fifteen (15) days after receipt of such written notification, to send written notice to the Franchisee that the Franchisor intends to purchase the Franchisee's interest on the same terms and conditions offered by the third party. Any material change in the terms of any offer prior to closing shall constitute a new offer subject to the same rights of first refusal by the Franchisor as in the case of an initial offer. Failure of the Franchisor to exercise the option afforded by this Section 22.7 shall not constitute a waiver of any other provision of this Agreement, including all of the requirements of this Article XXII, with respect to a proposed transfer and all requirements with respect thereto. 22.8 In the event the consideration, terms and/or conditions offered by a third party are such that the Franchisor may not reasonably be required to furnish the same consideration, terms, and/or conditions, then it may purchase interest in the Outlet proposed to be sold for the reasonable equivalent in cash. If the parties cannot agree, within a reasonable time, on the reasonable equivalent in cash of the consideration, terms and/or conditions offered by a third party, an independent appraiser shall be designated by the parties and his determinations shall be binding on both. 22.9 In the event that a proposed transfer is between any two individuals or entities holding any interest in Franchisee as of the date of this Agreement, or in the event that the proposed transferee is the spouse, son, daughter, or heir of any individual who seeks to transfer any interest in Franchisee, the Franchisor shall not have any right of first refusal as provided in this Section. 22.10 In the event of the death or incapacity of an individual Franchisee, or any principal owner owning fifty percent (50%) or more of the equity of Franchisee, the heirs, beneficiaries, devisee or legal representatives of said individual or principal owner shall, within one hundred eighty (180) days of such event: A. Apply to Franchisor for the right to continue to operate the Franchise for the duration of the term of the Agreement and any renewals hereof, which right shall be granted upon the fulfillment of all of the conditions set forth in Article XXI of this Agreement (except that no transfer fee shall be required); or B. Sell, assign, transfer, or convey Franchisee's interest in compliance with the provisions of Article XXI of this Agreement; provided however, in the event a proper and timely application for the right to continue to operate has been made and rejected, the one hundred eighty (180) days to sell, assign, transfer or convey shall be computed from the date of said rejection. For purposes of this section, Franchisor's silence on an application made pursuant to Section 21.10.A though the one hundred eighty days 53 (180) days following the event of death or incapacity shall be deemed a rejection made on the last day of such period. 22.11 In the event of the death or incapacity of an individual Franchisee, or any principal owner described in paragraph 22.10 above, where the aforesaid provisions of Article XXII have not been fulfilled within the time provided, all rights licensed to Franchisee under this Agreement shall, at the option of Franchisor, terminate forth-with and automatically revert to Franchisor. 22.12 The Franchisor's consent to a transfer of any interest in the franchise granted herein shall not constitute a waiver of any claims it may have against the transferring party, nor shall it be deemed waiver of the Franchisor's right to demand exact compliance with any of the terms of this Agreement by the transferee. 22.13 Franchisee acknowledges and agrees that the restrictions on transfer imposed herein are reasonable and are necessary to protect the franchise, the System and the Proprietary Rights, as well as ZAP's excellent reputation and image, and are for the protection of Franchisor and its franchisees. Any assignment or transfer permitted by this Article XXII shall not be effective until Franchisor receives a completely executed copy of all transfer documents, and Franchisor issues its consent in writing thereto. 22.14 Franchisee shall not, without the prior written consent of Franchisor place in, on or upon the Outlet or in any communication media, any form of advertising relating to the sale of the business franchised or the rights granted hereunder. Further, in the event Franchisor shall procure a purchaser for Franchisee (or any principal owner), in addition to all other fees payable hereunder in connection with the transfer, Franchisee or the assignee shall pay Franchisor a commission equal to ten percent (10%) of the total purchase price payable by the purchaser. 22.15 Notwithstanding anything to the contrary above or herein, it is contemplated that Franchisee, in connection with the initial financing of the establishment of Franchisee's Outlet, its business and operations, maybe required to provide a bank or financial institution with a security interest in substantially all of its assets, including a pledge of this Agreement and Franchisee's common stock or other equity. Franchisor will not have a right of first refusal in connection with Franchisee's giving of such security interest. Further, Franchisor's consent to the giving of such security interest and/or pledge will be granted so long as Franchisee is in compliance with this Agreement as well as its other agreements with Franchisor, if any, the security interest in the assets of the Outlet is given in order to facilitate the financing of the development of such Outlet or other Outlets of Franchisee and subject to the following: 54 In connection with any pledge of this Agreement, any lease (or similar agreement) in respect of any premises for the Outlet and/or the stock or other equity of Franchisee, Franchisee's bank or financial institution must agree to the reasonable satisfaction of Franchisor that: (i) it will notify Franchisor reasonably promptly of any defaults by Franchisee of any of Franchisee's obligations in connection with any loan made to Franchisee; (ii) if it seeks to reassign or transfer the stock or other equity of Franchisee and/or Franchisee's interest in this Agreement or the business conducted hereunder to a third party, such third party must meet Franchisor's then current criteria for its franchisees to Franchisor's satisfaction (but Franchisor shall exercise reasonableness in making this determination) and the other conditions set forth herein in connection with obtaining Franchisor=s consent to an assignment or transfer shall apply; and (iii) if, regarding the premises for the Outlet, Franchisee must give it a security interest in the lease for such premises, then; (a) such security interest must be given solely to facilitate the development of that or another Outlet of Franchisee (or its affiliate); and (b) the bank or financial institution must agree, with respect to such lease to furnish Franchisor with a right of first refusal (exercisable on not less than thirty (30) days written notice to Franchisor) to take over the lease by agreeing to be bound by the original terms and conditions thereof. ARTICLE XXIII OPERATION IN THE EVENT OF ABSENCE OR DISABILITY In order to prevent any interruption of the Franchised Business which would cause harm to said business and thereby depreciate the value thereof, Franchisee authorizes the Franchisor, which may, if it so chooses, in the event that Franchisee abandons or is absent or incapacitated by reason of illness for a period in excess of three (3) consecutive business days, and is not, therefore, in the sole judgment of the Franchisor, able to operate the Franchised Business hereunder, to operate said business for so long as the Franchisor deems necessary and practical and without waiver of any other rights or remedies the Franchisor may have under this Agreement. All monies received from the operation of the business during such period of operation by the Franchisor shall be kept in a separate account and the expenses of the business, including reasonable compensation and expenses for the Franchisor's representative, shall be charged to said account. If, as herein provided, the Franchisor temporarily operates for Franchisee the business licensed herein, Franchisee agrees to indemnify and hold harmless the Franchisor and any representative of the Franchisor who may act hereunder from any and all acts which the Franchisor may perform in regard to the interests of Franchisee or any third party. This remedy shall be cumulative to any other remedy available to the Franchisor. 55 ARTICLE XXIV RISK OF OPERATIONS Franchisee recognizes that there are many uncertainties in this business and therefore, Franchisee agrees and acknowledges that, except as specifically set forth in this Agreement, no representations, warranties, guaranties or agreements have been made to Franchisee, either by the Franchisor or by anyone acting on its behalf or purporting to represent it, including, but not limited to, the prospects for successful operations, the level of business or profits that Franchisee might reasonably expect to achieve, the desirability, profitability or expected traffic volume of the ZAP Electric Vehicle Outlet franchised hereby, whether or not the Franchisor assisted Franchisee in the selection of the location of the Outlet. Franchisee hereby acknowledges that all such factors are necessarily dependent upon variables which are beyond the Franchisor's control, including, without limitation, the ability, motivation, amount and quality of effort expended by Franchisee. Franchisee therefore releases the Franchisor, its subsidiary or affiliated corporations, officers, directors, affiliates and employees from any and all claims, suits and liability relating to the operation of Franchisee's Outlet including, but not limited to, the results of its operation, except to the extent that the same is predicated on the breach of a specific written obligation of the Franchisor contained in this Agreement. ARTICLE XXV TAXES, PERMITS AND INDEBTEDNESS 25.1 Franchisee shall promptly pay, when due, all taxes and assessments against the premises, inventory, and the equipment used in connection with Franchisee's business, and all liens and encumbrances of every kind or character created or placed upon or against any of said property, and all accounts and other indebtedness of every kind incurred by Franchisee in the conduct of said business. 25.2 Franchisee shall comply with all applicable federal, state and local laws, rules and regulations; and shall timely obtain, maintain and renew any and all permits, certificates, or licenses necessary for the full and proper conduct of the business under this agreement including, without limitation operating licenses, licenses to business, fictitious name registrations and sales tax permits, as applicable. 25.3 Franchisee shall notify Franchisor in writing within five (5) days of the commencement of any action, suit or proceeding, and of the issuance of any order, writ, 56 injunction, award or decree of any court, agency other governmental instrumentality which may adversely affect the operation or financial condition of the Franchised Business. ARTICLE XXVI NON-COMPETITION; CONFIDENTIALITY 26.1 Franchisee, and persons controlling, controlled by or under common control with Franchisee, acknowledge that pursuant to this Agreement, they will receive valuable training and confidential information, including, without limitation, information regarding the promotional, operational sales and marketing methods and techniques of the Franchisor and the System, and accordingly covenant that during the term of this Agreement, except as otherwise approved in writing by the Franchisor, the Franchisee and persons controlling, controlled by or under common control with Franchisee will not, either directly or indirectly, for himself, herself, or through, on behalf of, or in conjunction with any person, persons or legal entity: A. Divert or attempt to divert any business or customer of the business franchised under this Agreement to any competitor, or to any other Outlet operation, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the good will associated with the Franchisor's Proprietary Rights and the System; B. Employ or seek to employ any person who is at that time employed by the Franchisor or by any other franchisee, or otherwise directly or indirectly induce or seek to induce such person to leave his or her employment thereat; or C. Own, maintain, advise, help, invest in or make loans to, be employed by, engage in, or have any interest in any business (including any business operated by the Franchisee prior to entry into the Agreement) specializing in whole or in part, in operating any Outlet, electric vehicle business, store or facility which sells electric vehicles or related products as the franchisee of the System. 26.2 The Franchisee and persons controlling, controlled by or under common control with Franchisee, covenant that except as otherwise approved in writing by the Franchisor, the Franchisee will not, for a continuous uninterrupted period commencing upon the expiration or termination of this Agreement, regardless of the cause for termination, or upon transfer of the Outlet, and continuing for two (2) years thereafter (and, in the case of any violation of this covenant, for two (2) years after the violation ceases), either directly or indirectly, for himself, or herself, or through, on behalf of or in 57 conjunction with any persons, partnership or corporation, own, maintain, advise, help, invest in, make loans to, be employed by, engage in or have any interest in any business specializing, in whole or in part in operating any Outlet, business, store or facility which sells electric bicycles, tricycles and vehicles or related products and/or similar Proprietary Products as the franchisees of the System, which is located: A. Within a radius of ten (10) miles of the location of the Outlet. ARTICLE XXVII MODIFICATION OF THE AGREEMENT This Agreement cannot be modified unless by the written agreement of the Franchisor and Franchisee. The Operations Manual may be modified by the Franchisor and such change shall be binding on the Franchisee. ARTICLE XXVIII ENTIRE AGREEMENT This Agreement is the entire agreement of the Franchisor and Franchisee. All previous written or verbal agreements are merged herein and only the terms hereof are binding. ARTICLE XXIX DISPUTE RESOLUTIONS Initially all claims and controversies of any kind relating to this Agreement shall be submitted to mediation pursuant to the services of an established mediation services with the venue being in San Francisco, California. In the event the matter cannot be disposed by mediation, all claims and controversies of any kind relating to this Agreement shall be finally settled by arbitration before a single arbitrator in San Francisco, in accordance with rules then obtaining of the American Arbitration Association. Said arbitration shall be subject to the laws of the State of California and all parties to this Agreement shall be bound by the decision in any such arbitration. Judgment upon such arbitration may be entered by any court of proper 58 jurisdiction. In any such arbitration, the arbitrators: (i) shall apply the provisions of this Agreement with varying therefrom in any respect, and they shall not have the power to add to, modify or change the provisions of this Agreement; (ii) shall make specific written findings of fact or law; and (iii) shall apply the law of California to all substantive issues of law. The foregoing shall not preclude the parties from seeking injunctive relief or other equitable relief from any court of proper jurisdiction pending the outcome of any arbitration. Attorneys fees and costs shall be allocated by agreement in mediation and by the arbitrators in arbitration. In the event of injunctive relief, the prevailing party shall be entitled to reasonable attorney's fees and costs. ARTICLE XXX EFFECTIVE DATE This Agreement shall be effective as of the date it is executed by ZAP Power Systems. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. WITNESS: ZAP POWER SYSTEMS _______________________________ By: ________________________________ Date: _________________________ Date: ______________________________ WITNESS: FRANCHISEE: _______________________________ By: ________________________________ Date: _________________________ Date: ______________________________ 59 EXHIBIT A GEOGRAPHIC AREA The following describes the geographic area within which Franchisee will locate the Outlet. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Refer to Section 1.1 of Agreement) 60 EXHIBIT B OUTLET LOCATION The following is the address of Franchisee's Outlet. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Refer to Section 1.1 of Agreement) 61 EXHIBIT C AREA OF PRIMARY RESPONSIBILITY The following describes the area within which the Franchisor will not establish or operate a company owned Outlet or grant franchises to others to operate any Outlet under the System: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Refer to Section 1.1 of Agreement) 62 EXHIBIT D UNDERTAKING TO FIND SUITABLE LOCATION (180 DAYS) ZAP Power Systems (hereinafter "Franchisor") and ___________________ (hereinafter "Franchisee") have this date _____________, l9___, entered into a certain Franchise Agreement (hereinafter "Agreement") and desire to supplement terms, as set forth below. The parties hereto agree as follows: A. Site Location Within one hundred and eighty (l80) days after execution of this Addendum, Franchisor shall acquire, by lease or sublease, at Franchisee's expense and subject to Franchisor's approval as hereinafter provided, a location for the Franchised Business. Such location shall be within the following geographic area (which is described solely for the purpose of selecting a site for the Franchised Business): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- B. Guidelines and Evaluation In connection with Franchisee's selection of a site for the Franchises Business, the Franchisor shall furnish to Franchisee the following: l. Site selection guidelines, and such site selection, counseling and assistance as the Franchisor may deem advisable. 2. Such site evaluation as Franchisor may deem advisable in response to Franchisee's request for site approval. C. Site Approval Prior to the acquisition by lease or purchase of any proposed location for the Franchised Business, Franchisee shall submit to the Franchisor, in the form specified by Franchisor, a description of the proposed location, a market feasibility study for the proposed location, and such other information or materials as Franchisor may reasonably require, together with a letter of intent or other evidence satisfactory to Franchisor which confirms Franchisee's favorable prospects for obtaining the proposed location. Recognizing that time is of the essence, Franchisee agrees that it must submit such 63 information and material for the proposed location to Franchisor for its approval no later than _____________ (__) days after the execution of the Franchise Agreement. Franchisor shall have ______________(__) days after receipt of such information and materials from Franchisee to approve or disapprove, in its sole discretion, the proposed location as the location for the Franchised Business. The proposed location shall not be deemed approved unless written notice of approval is given to Franchisee by Franchisor. D. Pre-Approved Site If at the time of execution of this Franchise Agreement, the Franchisee has already obtained Franchisor's approval of a location for the Franchised Business, Franchisee shall not be required to comply with Paragraphs A through C hereof, but shall comply with all provisions of this Addendum and the Franchise Agreement. E. Lease Provisions The lease, if any, for the premises of the Franchised Business, shall be submitted to Franchisor for its written approval prior to execution by Franchisee and the lessor, and shall contain the following terms and conditions: l . That the premises shall be used only for the operation of the business franchised hereunder. 2. That the landlord has examined Franchisor's standard design concepts and consents to Franchisee's use of such Property Marks and signage as Franchisor may prescribe for the Franchised Business. 3. That the landlord agrees to furnish Franchisor with copies of any and all letters and notices sent to Franchisee pertaining to the lease and premises, at the same time such letters and notices are sent to Franchisee. 4. Franchisee may not sublease or assign all or any part of its occupancy rights, or extend the term of or renew the lease, without Franchisor's prior written consent. 5. That Franchisor shall have the right to enter the premises to make any modification necessary to protect Franchisor's Proprietary Marks or to sure any default under the lease or under this Agreement. 64 6. That Franchisor shall have the option to assume Franchisee's occupancy rights, and the right to sublease, for all or any part of the remaining term, Franchisee's default or termination under such lease or under this Agreement, without Landlord's consent. 7. That Franchisor shall be furnished a copy of the executed lease, including all attachments thereto and related agreements, if any, within five (5) days after its execution, and no change or amendment to such lease affecting the above terms and conditions shall be effective without Franchisor's prior approval. F. Relocation Upon Franchisor's approval of a location for the Franchised Business, or upon execution of this Agreement, whichever occurs earlier, the street address of the approved location of the Franchised Business shall be recorded and shall be attached as Exhibit "A" to this Franchise Agreement. Franchisee shall not relocate the Franchised Business without the prior written consent of Franchisor. G. Designs Franchisor shall make available at no charge to Franchisee standard conceptual designs for the exterior and interior appearance and layout of the Franchised Business, and lists of required or approved fixtures, furnishings, and signs. Franchisor shall also provide Franchisee with specifications for equipment, supplies, and inventory necessary to establish and operate the Franchised Business. H. Plans Before commencing any construction or improvements upon the Franchised Business, Franchisee, at its expense, shall comply, to Franchisor's satisfaction, with all of the following requirements: l. Franchisee shall employ an architect to prepare detailed plans and specifications for construction or leasehold improvement of the Franchised Business and, Franchisee shall submit to Franchisor a copy of Franchisee's agreement with the architect. 2. Franchisee shall submit to Franchisor, for Franchisor's approval, detailed plans and specifications adapting Franchisor's standard conceptual designs to Franchisee's location and to local and state laws, regulations, and ordinances. When approved by Franchisor, such plans and specifications shall not thereafter be changed or modified without the prior written consent of Franchisor. 65 3. Franchisee shall employ a qualified general contractor to supervise construction or leasehold improvements of the Franchised Business and Franchisee shall submit to Franchisor a copy of Franchisee's agreement with the general contractor and copies of agreements with subcontractors working on the premises, if any. 4. Franchisee shall obtain all necessary building, zoning, sign and construction permits, as well as insurance required under Article XVI of the Franchise Agreement, and shall certify in writing to Franchisor that all such permits and insurance have been obtained. I. Construction Franchisee shall commence construction or leasehold improvements (hereinafter "Construction") of the Franchised Business within ___________(__) days after Franchisee executes this Addendum, executes a lease, or obtains the right to possession of the premises, whichever occurs latest. Franchisee shall provide written notice to Franchisor of the date construction of the Franchised Business commences within __________(__) days after commencement. Franchisee shall maintain continuous construction of the Franchised Business premises and shall complete construction, including all exterior and interior carpentry, electrical, painting and finishing work, and installation of all furnishings, fixtures, equipment, and signs, in accordance with the approved plans and specifications at Frachisee's expense, within __________ (__) months after commencement (exclusive of time lost by reason of strikes, lockouts, fire and other casualties and acts of God). Each week during the construction period, Franchisee and Franchisee's architect or general contractor shall certify in writing to Franchisor that all work is proceeding on schedule, and in accordance with the approved plans and specifications and all applicable laws, regulations, ordinances and restrictive covenants. Franchisee further agrees that Franchisor and its agents shall have the right to inspect the construction at all reasonable times. J. Permits and Approvals Before or upon completion of construction, Franchisee shall obtain, and shall furnish to Franchisor copies of all necessary permits, approvals and certificates required for occupancy of the premises and operation of the Franchised Business. Franchisee shall obtain Franchisor's approval for opening and shall open the Franchised Business within __________(__) months after the date of commencement of construction. 66 K. Time of Essence Franchisee and Franchisor agree that time is of the essence in Franchisee's performance of its obligations hereunder. Any failure by Franchisee to meet the time limits imposed under this Addendum shall constitute a default under Section 19.2 of the Agreement, for which Franchisor may terminate this Agreement upon notice to Franchisee. L. Effect of Franchise Agreement This addendum shall be considered an integral part of the Agreement between the parties hereto, and the terms of this Addendum shall be controlling with respect to the subject matter hereof. Except as modified or supplemented by this Addendum, the terms of the Agreement are hereby ratified and confirmed. IN WITNESS WHEREOF, the parties hereto have duly executed sealed and delivered this Addendum in triplicate on the day and year first above written. ZAP POWER SYSTEMS _________________________ By: _________________________ Witness _________________________ By: _________________________ Witness Franchisee 67 EXHIBIT E AGREEMENT AND CONDITIONAL ASSIGNMENT OF LEASE This Agreement and Conditional Assignment of Lease ("Agreement") is made of this ___ day of __________, l9___, by and among the following parties: LESSOR: _________________________ _________________________ _________________________ LESSEE: _________________________ _________________________ _________________________ FRANCHISOR: ZAP Power Systems 117 Morris Street Sebastopol, CA 95472 RECITALS: WHEREAS, Under the terms of the Lease Agreement attached hereto as Exhibit A, Lessor has agreed to lease to Lessee certain premises (the "Premises") located at the following street address: WHEREAS, Franchisor has accepted the Premises as a suitable location for Lessee's Outlet, subject to the provisions of the Franchise Agreement and further subject to the terms and conditions set-for therein. WHEREAS, THEREFORE, in consideration of the mutual covenants herein contained other good and valuable consideration, including the acceptance by Franchisor of the Premises as a location for a ZAP Electric Vehicle Outlet, the parties hereby agree as follows: 1. Use of Premises Lessee shall use the Premises only for the Operation of a ZAP Electric Vehicle Outlet pursuant to its Franchise Agreement with franchiser and for no other purposes whatsoever. 68 2. Signage, Etc. Lessor hereby consents to Lessee's use and display on the Premises of such exterior and interior signs, posters, promotional materials, and equipment, furnishings, and decor as are currently required by Franchisor pursuant to the Franchise Agreement. In the event that such requirements are changed in the future, Lessor agrees that it will not unreasonably withhold its consent to Lessee's compliance with such changes. In the event that local ordinances or zoning requirements prohibit the use of the Franchisor's standard signage, Franchisor will not unreasonably withhold its consent to the modification of its standard signage to comply with such requirements. 3. Notices Lessor agrees to furnish Franchisor copies of any and all letters and notices to Lessee pertaining to any default by Lessee under the Lease at the same time and in the same manner as any such notice is sent to Lessee. Lessee agrees to furnish Franchisor prompt written notice of ally and all amendments, waivers, extensions, renewals or other modifications of the Lease. All notices hereunder shall be mailed or delivered to the addresses set forth above, unless changed from time to time by any party through written notice mailed or delivered to the other parties. 4. Assignment Lessor hereby acknowledges that Lessee has agreed under the Franchise Agreement that, in the event of termination or expiration of the Franchise Agreement or Lessee's default under the Lease, Lessee shall, at Franchisor's option, assign to Franchisor any and all interests of Lessee in the Lease, including any rights to renew the Lease or to sublease the Premises; and Lessor hereby consents to such assignment, sublease the Premises; and Lessor hereby consents to such assignment, subject to the following conditions: (A) Franchisor shall notify Lessor in writing within thirty (30) days after termination or expiration of the Franchise Agreement or Frachisor's receipt of any notice or default by Lessee under the Lease if Franchisor elects to accept assignment of the Lease; Franchisor's failure to accept assignment of the Lease upon any default of Lessee under the Lease shall not be deemed a waiver of Franchisor's future right to accept such assignment in the event of any future default by Lessee; 69 (B) If Franchisor elects to accept assignment of the Lease, Franchisor shall take possession of the Premises within thirty (30) days after notice of such election to Lessor, and Franchisor shall commence payment of rent upon taking possession of the Premises; (C) If Franchisor elects to accept assignment of the Lease, Franchisor shall take possession of the Premises within thirty (30) days after notice of such election to Lessor, and Franchisor shall commence payment of rent upon taking possession of the Premises; (D) Nothing herein shall affect Lessor's right to recover from Lessee any and all amounts due under the Lease or to exercise any rights of Lessor against Lessee as provided under the Lease. 5. Assignment to Third Party At any time after giving notice of its election to accept assignment of the lease, Franchisor may request to assign its lease, or sublease the Premises, to a third party. Lessor agrees not to unreasonably withold its consent to any such assignment or sublease on the same terms as the Lease; provided however, that if Lessor refuses to consent to such assignment or sublease by Franchisor, Franchisor shall have no further obligations thereunder. 6. Entry of Franchisor Lessor and Lessee hereby acknowledge that Lessee has agreed under the Franchise Agreement that Franchisor and its employees or agents shall have the right to enter the Outlet operated by Lessee at the Premises at any time during business hours for the purpose of conducting inspections, protecting Franchisor's Proprietary Marks, and correcting deficiencies of Lessee. Lessor and Lessee hereby agree not to interfere with or prevent such entry by Franchisor, its employees or agents. 7. De-Identification Lessor and Lessee hereby acknowledge that in the event the Franchise Agreement expires or is terminated, Lessee is obligated under the Franchise Agreement to take certain steps to de-identify the location as a "ZAP Electric Vehicle Outlet" operated by Lessee. Lessor agrees to cooperate fully with Franchisor in enforcing such provisions of the Franchise Agreement against Lessee, including allowing Franchisor, its employees and agents to enter and remove signs, decor and materials bearing or displaying any marks, designs or logos of Franchisor; provided, however, that Lessor shall not be required to bear any expenses thereof. Lessee agrees that if Lessee fails to de-identify the Premises 70 promptly upon termination or expiration as required under the Franchise Agreement, Franchisor may cause all required de-identification to be completed at Lessee's expense. 8. General Provisions (A) This Agreement shall be binding upon the parties hereto and their successors, assigns, heirs, executors, and administrators. The rights and obligations herein contained shall continue notwithstanding changes in the persons or entities that may hold any leasehold or ownership in the land or building. Any party hereto may record this agreement or a memorandum hereof. (B) Any party hereto may seek equitable relief, including without limitation injunctive relief or specific performance, for actual threatened violation or nonperformance of this Agreement by any other party. Such remedies shall be in addition to all other rights provided for under this or other agreements between any of the parties. The prevailing party in any action shall be entitled to recover its legal fees together with court costs and expenses of litigation. (C) Nothing contained in this Agreement shall affect any term or condition in the Franchise Agreement between Lessee and Franchisor. Nothing herein shall be deemed to constitute a guaranty or endorsement by Franchisor of the terms and conditions of the Lease between Lessor and Lessee. In the event that Franchisor, in its sole discretion, determines not to accept assignment of the Lease as permitted hereunder, neither Lessor nor Lessee shall have any claims against Franchisor. No terms or conditions contained in the Lease shall be binding on Franchisor unless and until it elects to accept assignment of the Lease hereunder. IN WITNESS WHEREOF, the parties hereto have executed this agreement as of the date first above written. WITNESS: LESSOR: - --------------------------------- --------------------------------- WITNESS: LESSEE: - --------------------------------- --------------------------------- FRANCHISOR: ZAP POWER SYSTEMS By: _____________________________ Title: ___________________________ 71 EXHIBIT F MINIMUM SALES QUOTA This Agreement shall automatically renew for a period of one year in the event that Franchisee meets the Minimum Sales Quotas, as determined on a cumulative average basis (the "Cumulative Average"), in each respective year as set forth below. 1. Year One. Net Sales in excess of one hundred twenty-five thousand dollars ($125,000). 2. Year Two. Net Sales in excess of two hundred thousand dollars ($200,000). 3. Year Three and thereafter. Net Sales in excess of two hundred fifty thousand dollars ($250,000). Net Sales are defined as Gross Sales less returns and allowances and applicable sales tax. Example: Assume Franchisee has Net Sales of $100,000 in Year One. This means that the Franchisee does not meet the Minimum Sales Quota for Year One, and Franchisor can terminate the franchise relationship pursuant to Article II of the Franchise Agreement. However, assuming Franchisor decides to extend the term of the Franchise Agreement (pursuant to Article II) despite Franchisee's failure to meet the Minimum Sales Quota for Year One, and assuming further that Franchisee has Net Sales of $350,000 in Year Two, then the Cumulative Average for Years One and Two is $225,000 ($100,000 + $350,000 = $450,000 divided by 2). In this case, Franchisee does meet the Minimum Sales Quota for Year Two because the Cumulative Average is greater than the Minimum Sales Quota required for Year Two ($225,000 > $200,000). As a result, the term of the Franchise Agreement is automatically renewed for one year. After the third year, the Cumulative Average shall be calculated on a three-year basis, with the same right in Franchisor to terminate or extend this Agreement pursuant to Article II. -------------------------------- Franchisee's Initials (Refer to Article 2.1 of the Agreement) 72 ZAP POWER SYSTEMS INFORMATION FOR PROSPECTIVE FRANCHISEES REQUIRED BY THE FEDERAL TRADE COMMISSION TO PROTECT YOU, WE HAVE REQUIRED YOUR FRANCHISOR TO GIVE YOU THIS INFORMATION. WE HAVE NOT CHECKED IT. AND DO NOT KNOW IF IT IS CORRECT. IT SHOULD HELP YOU MAKE UP YOUR MIND. STUDY IT CAREFULLY. WHILE IT INCLUDES SOME INFORMATION ABOUT YOUR CONTRACT, DO NOT RELY ON IT ALONE TO UNDERSTAND YOUR CONTRACT. READ ALL OF YOUR CONTRACT CAREFULLY. BUYING A FRANCHISE IS A COMPLICATED INVESTMENT. TAKE YOUR TIME TO DECIDE. IF POSSIBLE, SHOW YOUR CONTRACT AND THIS INFORMATION TO AN ADVISOR, LIKE A LAWYER OR AN ACCOUNTANT. IF YOU FIND ANYTHING YOU THINK MAY BE WRONG OR ANYTHING IMPORTANT THAT HAS BEEN LEFT OUT, YOU SHOULD LET US KNOW ABOUT IT. IT MAY BE AGAINST THE LAW. THERE MAY ALSO BE LAWS ON FRANCHISING IN YOUR STATE. ASK YOUR STATE AGENCIES ABOUT THEM. FEDERAL TRADE COMMISSION WASHINGTON, D.C. 20580 1 FRANCHISE OFFERING CIRCULAR [LOGO HERE] ZAP Power Systems, a California Corporation 117 Morris Street Sebastopol, CA 95472 USA Telephone: (707) 824-4150 Facsimile: (707) 824-4159 E-mail: zap@zapbikes.com Website: zapbikes.com Brief Description of Business The Franchisee will operate a ZAP Electric Vehicle Outlet that sells proprietary electric power bicycle kits, electric bicycles and tricycles, electric scooters, and other low-power electric transportation vehicles. The Franchisor offers franchises for single locations and multiple locations as well as zone franchises. Payments Required Under single and/or multiple franchises, the initial fee will be $12,500 for the first Outlet and $10,000 for each one thereafter. These franchise fees are not due until Franchisor has fulfilled and performed all of its initial obligations to the Franchisee. This sum does not include rent for the business location. Under a zone franchise, the initial development fee (representing cumulative initial franchise fees) depends upon the number of Outlets required to be opened in a given zone. The estimated initial investment required ranges from $99,500 to $158,000. Except for the prepayment of franchise fees and certain working capital funds needed to commence operations, there is no initial investment required upon execution of a zone development agreement following the opening of multiple locations. RISK FACTORS: 1. THE FRANCHISE AND ZONE DEVELOPMENT AGREEMENTS REQUIRE THE FRANCHISEE AND DEVELOPER TO ARBITRATE ANY CLAIMS AGAINST THE FRANCHISOR ONLY IN THE COUNTY OF SAN FRANCISCO, STATE OF CALIFORNIA OUT OF STATE ARBITRATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST MORE TO ARBITRATE IN CALIFORNIA THAN IN YOUR OWN STATE. 2 2. THE FRANCHISE AND ZONE DEVELOPMENT AGREEMENTS STATE THAT CALIFORNIA LAW GOVERNS THE AGREEMENTS, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 3. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE. Information comparing franchisors is available. Call the state administrators listed in Exhibit 1 or your public library for sources of information. Registration of this franchise with the state does not mean that the state recommends it or has verified the information in this Offering Circular. If you learn that anything in this Offering Circular is untrue, contact the Federal Trade Commission and the state authority listed on Exhibit 1. Effective Date:______________________________, 1997 3 ZAP POWER SYSTEMS OFFERING CIRCULAR TABLE OF CONTENTS THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES ................................ 5 BUSINESS EXPERIENCE ............................................................ 6 LITIGATION ..................................................................... 7 BANKRUPTCY ..................................................................... 7 INITIAL FRANCHISE FEE .......................................................... 8 OTHER FEES ..................................................................... 9 INITIAL INVESTMENT .............................................................10 RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES ...............................13 FRANCHISEE'S OBLIGATIONS .......................................................15 FRANCHISOR'S OBLIGATION ........................................................16 TERRITORY ......................................................................22 TRADEMARKS .....................................................................23 PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION ................................25 OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS ....25 RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL ...................................26 RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION ..........................27 PUBLIC FIGURES .................................................................31 EARNINGS CLAIMS ................................................................31 LIST OF OUTLETS ................................................................31 FINANCIAL STATEMENTS ...........................................................31 CONTRACTS ......................................................................31 RECEIPT ........................................................................32 APPENDIX 1 .....................................................................34 APPENDIX 2 .....................................................................35 EXHIBITS 1 Franchise Agreement 2 Zone Development Agreement 3 Audited Balance Sheet
4 Item 1 THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES The Franchisor is ZAP Power Systems doing business as ZAP Power Systems, and will be referred to as "we", "us", "our", "Franchisor", or "ZAP" in this Offering Circular. We will refer to the person who buys the franchise as "you" or "your" throughout the Offering Circular. If you are a corporation, certain provisions of the agreement also apply to your owners and will be noted. We are a California corporation incorporated in September of 1994. We do business as "ZAP Power Systems." Our principal business address is 117 Morris Street, Sebastopol, California 95472. We do not have a predecessor company nor do we have any affiliates. ZAP develops, manufactures and markets lightweight low-powered electric vehicles. We currently produce an electric power assist kit for bicycles and tricycles and assemble complete electric-powered bicycles and tricycles. We also distribute electric scooters. Several members of ZAP's management team have more than two decades of work in the electric vehicle and transportation industries. We franchise the right to sell ZAP Electric Vehicles and Power Kits to the public. We have no other business activities. Each Outlet will be operated under our standard Franchise Agreement (the "Franchise Agreement"), which is attached as Exhibit I of this Offering Circular. You will be required to operate your "ZAP Electric Vehicle Outlet" (the "Outlet") according to our standards and specifications and you will have to sign our Franchise Agreement. Our Outlets sell high quality, proprietary electric vehicle products (collectively, the "Proprietary Products"), and a wide variety of non-proprietary products. Our Outlets operate under a uniform business format, consisting of methods, procedures, building designs, decor, color schemes and trade dress. This format also includes certain trademarks, service marks, logos, copyrights and commercial symbols owned by us (the "Marks"). You will be competing with other bicycle retailers and other distributors. The market for bicycle retailers is developed in some major cities but is undeveloped in many areas. There are no regulations specific to the operation of this type of Outlet although you will be required to comply with all local, state and federal health and sanitation laws in the operation of your Outlet. There may be other laws 5 applicable to your business and we urge you to make further inquiries about these laws. Item 2 BUSINESS EXPERIENCE The following is the list of directors, principal officers and other executives who have management responsibility in the operation of our business relating to the franchises described in this Offering Circular. Each person's principal occupation and business experience during the past five years, including the names and locations of prior employers, is described below. Managing Director Gary Starr Mr. Starr is Managing Director for ZAP. He has been building and driving electric cars for more than 20 years. In addition to overseeing the marketing of more than 5,000 electric vehicles, Mr. Starr has invented several solar electric products and conservation devices. Mr. Starr founded U.S. Electricar's electric vehicle operations in 1983. Mr. Starr also serves as an advisor to Zebra Motors, Inc., a designer of an electric sports car, and has been a technical advisor to UCLA's Lewis Center for Regional Policy Studies. He's been a member of the California Environmental Technology Advisory Council and has been a guest lecturer at Stanford University's Graduate School of Business. In 1993, Mr. Starr earned a Private Industry Council Recognition Award for creating job opportunities in the Electric Vehicle industry and was named as one of the ten most influential electric car authorities by Automotive News. More recently, he was honored by the American Lung Association of San Francisco with a Clean Air Award in Technology and was recognized by U.S. Senator Barbara Boxer for his contributions towards clean air. President and Director: James McGreen Mr. McGreen has over 25 years experience in design, development, engineering, manufacturing and marketing. He has brought over 100 successful consumer products from conception to the mass market. He has been a pioneer in the ultralight aircraft, personal watercraft, and motorcycle racing fields. He is the founder and/or former president of Prototype Exhaust systems, Inc., McGreen Metalworking, Kanemoto Racing and McGreen Development. His commitment to electric transportation began in 1991 with 6 successful competition in electrathon racing. He holds several records and winning times for this lightweight electric vehicle class. He has been a racer of motorcycles and has built motor parts, frames, chassis and other specialty parts for both manufacturers and other racers. Mr. McGreen has also designed and built composite racing sail boats. A skilled machinist, welder, and tool and die maker, he has designed and built nearly every kind of lightweight motorized vehicle. A prolific inventor, Mr. McGreen has filed five patents (1 granted, 2 pending, 2 expired) in the resource conservation and transportation fields. General Manager: Andrew Hutchins Mr. Hutchins has been involved in the retail bicycle industry since he was 11 years old when he worked for his family's retail bicycle shop. He successfully started, managed, and operated a retail bicycle store for 11 years prior to selling it for several times his initial costs. Before opening his bicycle store, Mr. Hutchins worked in the insurance industry, specializing in sales and management. Mr. Hutchins received a degree in Business Economics and Communication Studies from the University of California at Santa Barbara. Item 3 LITIGATION No material litigation involving ZAP has occurred, nor is any required to be disclosed in this Offering Circular. Furthermore, neither Franchisor, nor any individuals named in Item 2, above, is subject to any currently effective order of any national securities association or national securities exchange, as defined in the Securities Exchange Act of 1934, 15 U.S.C.A. 78a et seq., suspending or expelling such persons from membership in such association or exchange. Item 4 BANKRUPTCY No person previously identified in Items 1 or 2 of this Offering Circular has been involved as a debtor in proceedings under the U.S. Bankruptcy Code (or comparable foreign laws) in a manner required to be disclosed in this Item. 7 Item 5 INITIAL FRANCHISE FEE Single and Multiple Franchises You must pay an initial franchise fee of $12,500 (the "Initial Franchise Fee") for the first Outlet and $10,000 for each one after the first. You must pay the full amount of the initial franchise fee when you sign the Franchise Agreement, but not until Franchisor has fulfilled and performed all of its initial obligations to the Franchisee. The Initial Franchise Fee is payable by all franchisees who buy a franchise. If within 180 days after the Franchise Agreement is signed you cannot find a suitable site for your Outlet or do not sign a lease or sublease, or obtain some type of possession rights, and if we elect to cancel the Franchise fee, then you are entitled to a refund of the Initial Franchise fee less $500. If you wish to buy multiple franchises (with a limit of ten), you will be required to pay the Initial Franchise Fee of $12,500 in advance for each franchise. For example, if you buy six franchises, you will have to pay a total of $62,500. This fee is not refundable except as discussed above. Zone Franchises A Zone Developer is a person or entity who purchases at least a minimum of 10 franchises (the actual minimum number of franchises may vary from region to region) to be developed and built over a period of time. If you become a Zone Developer, you must pay us a Zone Development Fee as follows: (1) upon signing the Zone Development Agreement, but after we have fulfilled and performed all of our initial obligations with respect to your franchises, you must pay to us 100% of the Initial Franchise Fee for the minimum number of Outlets (e.g., $125,000) and a negotiated percentage of the Initial Franchise Fees for the additional Outlets to be developed under the terms of the Zone Development Agreement; (2) upon the signing of any particular Franchise Agreement, you must pay us the remaining balance, if any, of the Initial Fee for the Outlet referenced in the Franchise Agreement being signed. Each and every Franchise Agreement referenced in the Zone Development Agreement must be signed and all Initial Franchise Fees must be paid in full before construction can be started on any Outlet location. 8 Even though there are contrary provisions in the Franchise Agreement, you must understand that the entire Zone Development Fee is non-refundable. Additional Initial Fees In addition to the initial fees mentioned above, you must purchase your initial supply of Proprietary Products from us. These additional fees are not due until Franchisor has fulfilled and performed all of its initial obligations to the Franchisee. Item 6 OTHER FEES These franchise fees are not due until Franchisor has fulfilled and performed all of its initial obligations to the Franchisee.
- ------------------------------------------------------------------------------------------------------------------------------------ Name of Fee Amount Due Date Remarks - ------------------------------------------------------------------------------------------------------------------------------------ Continuing 2% of Gross Payable monthly Gross sales Monthly Service Sales by the fifth day include any and Fee(1) ("CMSF") of the following all items sold month less certain taxes and discounts - ------------------------------------------------------------------------------------------------------------------------------------ National 1% of Gross Payable monthly Commences when a Advertising Receipts by the fifth day national or of the following regional fund is month established - ------------------------------------------------------------------------------------------------------------------------------------ Local 2.5% of Gross Spent Monthly 2.5% is a Advertising Sales monthly average - ------------------------------------------------------------------------------------------------------------------------------------ Refresher No charge N/A You pay your own Training(2) expenses - ------------------------------------------------------------------------------------------------------------------------------------ Transfer Fee 25% of Initial Prior to Payable upon Franchise Fee transfer transfer - ------------------------------------------------------------------------------------------------------------------------------------ Renewal No charge N/A No Fee upon renewal - ------------------------------------------------------------------------------------------------------------------------------------ Audit Cost of Audit or 15 days after Payable only Inspection billing upon failure to properly report and pay - ------------------------------------------------------------------------------------------------------------------------------------ Interest Highest rate 15 days after Payable on all allowable by law billing past due accounts - ------------------------------------------------------------------------------------------------------------------------------------ Operations No charge N/A N/A Manual - ------------------------------------------------------------------------------------------------------------------------------------ Costs and Will vary under As incurred Payable upon - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------- (1) At our sole discretion, a CMSF may be charged in lieu of selling Proprietary Products to you. (2) The initial training class is for two persons. We do not charge a training fee for this initial training class, which is held in Sebastopol, California. You are responsible for the travel, living expense and related costs.
9
Attorney's Fees circumstances Default - ------------------------------------------------------------------------------------------------------------------------------------ Indemnification Will Vary As incurred You are responsible for reimbursing us if we are held liable for claims arising from your Outlet - ------------------------------------------------------------------------------------------------------------------------------------ Testing Cost of Testing 15 days after Covers the cost billing of testing products or suppliers you propose - ------------------------------------------------------------------------------------------------------------------------------------ Relocation Cost of 15 days after Covers our cost relocation billing of your relocation - ------------------------------------------------------------------------------------------------------------------------------------ Purchase of Costs Vary 15 days after Includes the Proprietary billing cost of shipping Products - ------------------------------------------------------------------------------------------------------------------------------------ Commission on 10% of Sales Upon Closing If we procure sale of Outlet Price the purchaser - ------------------------------------------------------------------------------------------------------------------------------------ You should understand that if we do not sell the Proprietary Products to you, we may charge you a 10% "Continuing Monthly Service Fee" (see first item in chart above). This "CMSF" is like a royalty fee.
Item 7 INITIAL INVESTMENT
Expenditure Estimated When Method of Whether To Whom Amount Payable Payment Refundable Paid - ------------------------------------------------------------------------------------------------------------------------------------ Franchise $12,500 Upon Lump Sum Partially Us Fee (1) Signing of Franchise Agreement, but after Franchisor has fulfilled its initial obligations - ------------------------------------------------------------------------------------------------------------------------------------ Leasehold $5,000 to As As Agreed No Other Improvements $15,000 incurred Suppliers (2) - ------------------------------------------------------------------------------------------------------------------------------------ Furniture $20,000 to As As Agreed No Us and Fixtures $40,000 Incurred Other Equipment Suppliers (2) - ------------------------------------------------------------------------------------------------------------------------------------ Signage $2,000 to As As Agreed No Us and $5,000 Incurred Outside Suppliers - ------------------------------------------------------------------------------------------------------------------------------------ Rent & $7,200 Per Lease Lump Sum Yes Landlord Security (est.) - ------------------------------------------------------------------------------------------------------------------------------------ 10 Deposit (3) - ------------------------------------------------------------------------------------------------------------------------------------ Opening $52,000 to As As Agreed No Us and Inventory $75,000 Incurred Outside and Suppliers Supplies (4) - ------------------------------------------------------------------------------------------------------------------------------------ Grand $5,000 to As As Agreed No Advertising Opening (5) $10,000 Incurred Sources - ------------------------------------------------------------------------------------------------------------------------------------ Training $2,000 to As As No Us Expense $2,500 Incurred Incurred - ------------------------------------------------------------------------------------------------------------------------------------ Misc. (6) $2,500 As As No Third Incurred Incurred Parties - ------------------------------------------------------------------------------------------------------------------------------------ Advertising $1,250 Monthly Lump Sum No Us Fees (7) (est.) - ------------------------------------------------------------------------------------------------------------------------------------ Royalty (8) 2% Monthly Lump Sum No Us - ------------------------------------------------------------------------------------------------------------------------------------ Working $5,000 to As As No Third Capital (9) $10,000 Incurred Incurred Parties - ------------------------------------------------------------------------------------------------------------------------------------ Estimated Min. As Total (10) $99,500 Incurred Max. $158,000 - ------------------------------------------------------------------------------------------------------------------------------------ 1. This fee is required for each Outlet, unless otherwise negotiated under a Zone Development Agreement. This fee(s) is refundable only under the circumstances set forth in Item 5 2. You may qualify for leasing of equipment from any non-affiliated third party leasing company in which event your initial cash outlay would be reduced. A leasing company may require only three months worth of lease payments as the only initial cash payment. The typical equipment package you will be required to obtain includes but is not limited to computer hardware and software, telephone equipment, credit card machine, and bicycle tools. We currently do not lease equipment to you. 3. A typical Outlet will range from 1,000 to 3,000 square feet. This example is for 1,000 square feet at $2.40 per square foot with first and last month's rent plus security deposit of one month's rent. The annual rent for such a space will depend upon the location but will typically range anywhere from $1.00 to $3.00 per square foot. Under such a lease, you typically will be obligated to pay in the first month for the first and last month's rent, plus a security deposit which is usually equivalent to one month's rent. In addition, certain utility companies may require you to pay a security deposit. 4. The actual amount will depend on the size of the Outlet and the amount and variety of the ZAP Electric Vehicle products, materials and supplies necessary for the opening of the Outlet under our standards. ll 5. Advertising costs or expenses will vary depending upon the market in which your Outlet is located and the type of advertising. You can expect a variety of promotional activities to take place during the first month of operation. These would include print media, broadcast media, direct mail, coupons, press releases, and/or give away promotions, all of which shall be consistent with the size of the market. You are required to spend a minimum of 2.5% (on average per month) of your weekly gross sales on local advertising and marketing and, when formed, to pay 1% of such sales to the National Advertising Fund. 6. This item covers miscellaneous opening costs and expenses, e.g., telephone installation costs, deposits for gas, electricity and related items ($500 approximately), business licenses ($500 approximately), legal and accounting expenses and insurance premiums ($500 approximately). 7. This is your 2.5% of local advertising based on an estimated first month's gross of $50,000. 8. There will be a royalty of two percent (2%) based on monthly Net Sales (defined as Gross Sales less returns and allowances and applicable sales tax). 9. This item estimates your initial start up expenses. These expenses include payroll costs, which can be as high as $1,250 per week for the first few weeks of operation, but do not include any draw or salary for you. These figures are estimates, and we do not represent or guarantee that you will not have additional expenses starting the business. Your actual costs may depend on factors such as: the extent to which you deviate from our prescribed methods and procedures; your management skill, experience and business acumen; local economic conditions; the local market for your products and services; the prevailing wage rate; competition; and the sales level reached during the initial period. 10. These figures are estimates based on general experience. You should review these figures carefully with a business advisor before making any decision to purchase the franchise. We do not currently offer financing directly or indirectly for any part of the initial investment. The availability and terms of financing will depend on factors such as the availability of financing generally, your creditworthiness, collateral you may have and the lending policies of financial institutions.
12 Except for the Initial Franchise Fee and the opening advertising and promotion fee, all other costs related to the development of your Outlet will be owing by you as you incur them. Except as noted in the Franchise Agreement and/or the Zone Development Agreement, none of these costs are refundable. We do not currently offer, either directly or indirectly, financing to you for any items, costs or fees. However, you may be able to finance your initial investment in whole or in part through a financial institution or directly from suppliers of specific items. The availability and terms of financing will depend on such factors as the availability of financing generally and your creditworthiness, loan security available from you, the lender's policies regarding financing and similar considerations. Franchise Agreement Your estimated initial cash investment with respect to the opening of each Outlet and the operation of that Outlet during the first three months that it is open is shown in the above chart. These costs are estimates only. Actual costs may vary depending upon the area of the country in which the Outlet is located and other factors. Zone Development Agreement If you enter into a Zone Development Agreement, you will need certain working capital funds to commence operations, and you will have to pay the Initial Development Fee. Also, an initial investment will be required each time you open a Outlet within the exclusive development zone. A copy of our Zone Development Agreement is attached as Exhibit 2. The Initial Development Fee you will be required to pay will depend upon the number of Outlets you are required to open under the Zone Development Agreement. Please refer to Item 5 of this Offering Circular for specifics regarding the Initial Development Fee. Item 8 RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES You are required to purchase the Proprietary Products only from us. The Proprietary Products are our electric power bicycle kits, electric bicycles and tricycles, electric scooters, and other low-power electric transportation vehicles, and various "ZAP" branded 13 products. We are presently the sole source of supply which provides Proprietary Products. We derive revenue from the sale of the Proprietary Products to you. The cost of the Proprietary Products is estimated at $240,000 of all purchases made in operating the Outlet and they are estimated to be approximately 60% of the total electric vehicle-related expenses in the on-going operation of the Outlet. Other than your purchase from us of our Proprietary Products, we do not require that you purchase or lease from a designated supplier goods, services, supplies, fixtures, equipment, or inventory. We do, however reserve the right to set product and equipment specifications from time to time which impose certain quality standards. You must submit to us for approval all supplies and materials before using them. We may examine the facilities of any supplier or distributor and test any materials or supplies to determine whether they meet our standards and specifications. We have the right to charge reasonable fees for testing and evaluating any new equipment, fixture, furniture, or sign that you propose to use as well as for testing and evaluating proposed and approved suppliers or distributors. We also may impose reasonable limitations on the number of approved suppliers or distributors of any product. We will notify you within a reasonable time (generally not to exceed 30 days) whether any supplies, materials, suppliers or distributors that you submit or propose meet with our approval. We may revoke prior approval for any reason. Our criteria for supplier approval are not available to you, although approval of a supplier or distributor may be conditioned on factors such as frequency of delivery, standards of service including prompt attention to complaints, the ability to service and supply Outlets within Zones designated by us and the quality of products sold. Further, your ability to purchase from other suppliers, including those who sell to our Outlets, will depend on such factors as a willingness of the suppliers to sell directly to you, the availability of various products and whether there are suppliers who are willing or able to manufacture products meeting our specifications. In addition to the purchases described above, you are obligated to obtain and maintain, at your own expense, such insurance coverage that we require. Our system may regulate the following- the types, amounts, terms and conditions of insurance coverage required for the Outlet; the standards for underwriters of policies providing required insurance coverage; our protection and rights under such policies as an additional named insured; required or impermissible insurance contract provisions; assignment of policy rights to us; periodic verification of insurance coverage that must be furnished 14 to us; our right to obtain insurance coverage at your expense if you fail to obtain required coverage; our right to defend claims; and similar matters relating to insured and uninsured claims. We have the right to obtain insurance coverage at your expense if you fail to obtain required coverage and to defend claims brought against any policy. Currently, you are required to have One Million Dollars ($1,000,000) coverage for your comprehensive liability insurance coverage, including property damage, bodily injury, business interruption, dram shop, automobile liability and as set by local law, workers' compensation insurance coverage. The cost of this coverage will vary depending on the insurance carrier's charges, terms of payment and your history. All insurance policies must name us as an additional insured party. We will loan to you an operating manual containing mandatory and suggested standards. We have formulated these standards to ensure high quality services and products, the efficient operation of the Outlet, and the protection of the goodwill associated with the Marks. We may modify the manual to improve any of these factors. However, no modification will alter your rights under the Franchise Agreement. We may issue portions of the manual to approved suppliers. There are currently no purchasing or distribution cooperatives. Item 9 FRANCHISEE'S OBLIGATIONS THIS TABLE LISTS YOUR PRINCIPAL OBLIGATIONS UNDER THE FRANCHISE AND OTHER AGREEMENTS. IT WILL HELP YOU FIND MORE DETAILED INFORMATION ABOUT YOUR OBLIGATIONS IN THESE AGREEMENTS AND IN OTHER ITEMS OF THIS OFFERING CIRCULAR.
- ------------------------------------------------------------------------------------------------------------------------------------ OBLIGATION ARTICLE IN SECTION IN ZONE ITEM IN OFFERING FRANCHISE DEVELOPMENT CIRCULAR AGREEMENT AGREEMENT - ------------------------------------------------------------------------------------------------------------------------------------ (a) Site selection Article VII N/A Items 7 and 11 and acquisition lease - ------------------------------------------------------------------------------------------------------------------------------------ (b) Pre-opening Article VII and N/A Item 8 purchases/leases XI - ------------------------------------------------------------------------------------------------------------------------------------ (c) Site Articles VII and N/A Items 6, 7 and development and VIII 11 other pre-opening requirements - ------------------------------------------------------------------------------------------------------------------------------------ (d) Initial and Article IX N/A Items 7 and 11 ongoing training - ------------------------------------------------------------------------------------------------------------------------------------ 15 - ------------------------------------------------------------------------------------------------------------------------------------ (e) Opening Article X N/A Item 11 - ------------------------------------------------------------------------------------------------------------------------------------ (f) Fees Articles III, XI Section II Items 5, 6, 7 and XIV and 11 - ------------------------------------------------------------------------------------------------------------------------------------ (g) Compliance Articles XI and N/A Item 11 with standards and XIII policies /Operations Manual - ------------------------------------------------------------------------------------------------------------------------------------ (h) Trademarks Article VI, XI Section VI Items 13 and 14 with proprietary and XXVI information - ------------------------------------------------------------------------------------------------------------------------------------ (i) Restrictions Article XI Section VI Items 8, 11 and on products 16 /services offered - ------------------------------------------------------------------------------------------------------------------------------------ (j) Warranty and None None None customer service requirements - ------------------------------------------------------------------------------------------------------------------------------------ (k) Territorial Article II; None Item 12 development and Exhibit F sales quotas - ------------------------------------------------------------------------------------------------------------------------------------ (1) On-going Article XI N/A Item 8 product/service purchases - ------------------------------------------------------------------------------------------------------------------------------------ (m) Maintenance, Articles XI and N/A Item 11 appearance and XV remodeling requirements - ------------------------------------------------------------------------------------------------------------------------------------ (n) Insurance Article XVI N/A Items 7 and 8 - ------------------------------------------------------------------------------------------------------------------------------------ (o) Advertising Article XIV N/A Items 6, 7 and 11 - ------------------------------------------------------------------------------------------------------------------------------------ (p) Article XVII Section XV Item 6 Indemnification - ------------------------------------------------------------------------------------------------------------------------------------ (q) Owner's Article XI Section VI Items 11 and 15 participation/ management /staffing - ------------------------------------------------------------------------------------------------------------------------------------ (r) Records/ Article XII N/A Items 6 and 11 Reports - ------------------------------------------------------------------------------------------------------------------------------------ (s) Inspection/ Article XII N/A Item 6 Audits - ------------------------------------------------------------------------------------------------------------------------------------ (t) Transfer Article XXII Section X Item 17 - ------------------------------------------------------------------------------------------------------------------------------------ (u) Renewal Article II Section IV Item 17 - ------------------------------------------------------------------------------------------------------------------------------------ (v) Post- Article XX Section IX Item 17 termination obligations - ------------------------------------------------------------------------------------------------------------------------------------ (w) Non- Article XXVI Section XI Item 17 competition covenants - ------------------------------------------------------------------------------------------------------------------------------------ (x) Dispute Articles XIX and Section XXI Item 17 resolutions XX - ------------------------------------------------------------------------------------------------------------------------------------
Item 11 FRANCHISOR'S OBLIGATION Except as listed below, we need not provide any assistance to you. 16 Before you open the Outlet, we will: (1) Give you our site selection criteria for the Outlet and, after you have selected and we have appropriated the site, designate your exclusive Zone. The site must meet our criteria for demographic characteristics, traffic patterns, parking, character of neighborhood, competition from and proximity to other businesses, the nature of other businesses in proximity to the site and other consumer characteristics, and the size, appearance and other physical characteristics of the proposed site. We will approve or disapprove a location you propose for the Outlet within 30 days after we receive a complete site report and other materials we request. We do not guarantee the success of any site or any lease. (Franchise Agreement-Section 4.1.B). (2) Give you mandatory and suggested specifications and layouts for your Outlet, including requirements for dimensions, design, image, interior layout, decor, fixtures, equipment, signs, furnishings and color scheme. (Franchise Agreement Section 4.1A) . (3) Loan you one copy of the Operations Manual. (Franchise Agreement - Article XIII). (4) Assist you in your grand opening advertising and promotional program for the Outlet. (Franchise Agreement, Section 4.1.J). (5) Train you and your manager. (Franchise Agreement - Article IX) This training is described in detail later in this Item. During the operation of the Outlet, we will: (1) Advise you regarding operating issues concerning the Outlet disclosed by reports you submit and inspections we make. In addition, we will give you guidance on standards, specifications and methods used by other Outlets in the System; new products and display methods; purchasing required fixtures, furnishings, equipment, signs, products, materials and supplies; advertising and marketing programs; employee training; and administrative, bookkeeping and accounting procedures. At our sole discretion, some or all of this guidance will be furnished in our Operations Manual, bulletins or other written materials and/or during telephone consultations at our office or the Outlets. (Franchise Agreement Section 4.1.F., G., H.). 17 (2) Provide you at our discretion with advertising, marketing and other promotional materials, at cost, and revise and approve or disapprove of proposed advertising materials prepared by you for use in local advertising (Franchise Agreement, Section 4.1 .J) (3) Sell you, or have a designee sell you, your entire supply of Proprietary Products, unless prevented by Force Majeure or other uncontrollable circumstances, and will be one source for some non-proprietary products (Franchise Agreement, Section 4.2) . (4) Inspect and observe the operations of the Outlet from time to time to determine whether you and the Outlet are complying with the Franchise Agreement and all System standards. (Franchise Agreement, Section 4.1.K) . (5) For a Developer, at our sole discretion, build a commissary for the production of Proprietary Products or build on as a jointventure with a Developer. (Zone Development Agreement, Section VII. (6) Establish, maintain and administer an advertising fund (the "Advertising Fund") at our sole discretion, for such national or regional advertising, marketing and public relations programs and materials that we deem necessary or appropriate. You will have to contribute to the Advertising Fund 1% of your gross sales. (See Item 6). Outlets owned and operated by us are obligated to contribute to the Advertising Fund when it is created. When and if established, we will direct all programs financed by the Advertising Fund, with sole discretion over the creative concepts, materials and endorsements used and the geographic, mark and media placement and allocation of the programs. The Advertising Fund may be used to pay for the following- the costs of preparing and producing video, audio and written advertising materials; the costs to administer regional and Multi-Regional advertising programs, including, without limitation, the costs of purchasing direct mail and other media advertising and employing advertising, promotion and marketing agencies to provide assistance; and the costs to support public relations, market research and other advertising, promotion and marketing activities. The Advertising Fund will furnish you with samples of advertising marketing and promotional formats and materials at no cost. Multiple copies of such materials with be furnished to you at our direct cost of producing them, plus any related shipping, handling and storage charges. 18 The Advertising Fund will be accounted for separately from our other funds and will not be used to defray any of our general operating expenses, except for such reasonable salaries, administrative costs, travel expenses and overhead as we may incur in activities related to the administration of the Advertising Fund and its programs, including conducting market research, preparing advertising, promotion and marketing materials and collecting and accounting for contributions to the Advertising Fund. We may spend, on behalf of the Advertising Fund, in any fiscal year, an amount greater or less than the aggregate contribution of all ZAP Electric Vehicle Outlets to the Advertising Fund in that year and the Advertising Fund may borrow from us or others to cover deficits or invest any surplus for future use. All interest earned on monies contributed to the Advertising Fund will be used to pay advertising costs before other assets of the Advertising Fund are expended. We will prepare an annual statement of monies collected and costs incurred by the Advertising Fund and furnish it to you upon written request. No money will be spent by the Advertising Fund to solicit new franchisees. We have the right to cause the Advertising Fund to be incorporated or operated through a separate entity at such time as we deem appropriate, and the successor entity will have all of the rights and duties described here. The Advertising Fund when created will be used to maximize recognition of the Marks and patronage at all of the Outlets. We will try to utilize the Advertising Fund to develop advertising and marketing materials and programs and to place advertising that will benefit all of the Outlets. We are not obligated to guarantee that expenditures by the Advertising Fund in or affecting any geographic zone are proportionate or equivalent to the contributions to the Advertising Fund by the Outlets operating in that geographic Zone or that any of the Outlets will benefit directly or in proportion to its contribution to the Advertising Fund from the development of advertising and marketing material or the placement of advertising. We assume no other direct or indirect liability or obligation to you with respect to collecting amounts due to, or maintaining, directing or administering, the Advertising Fund. All advertising, promotion and marketing must be completely clear and factual and not misleading and conform to the highest standards of ethical marketing and the promotion policies which we prescribe from time to time. Samples of all advertising, promotional and marketing materials that we have not prepared or previously approved must be submitted for approval before you use them. If you do not receive written disapproval within 15 days ]9 after we receive the materials, we will be deemed to have given the required approval. You may not use any advertising or promotional materials that we have disapproved. Franchise Agreement - Article XIV). There currently are no franchise advertising councils. We have no advertising cooperatives. You must keep your books and business records according to our formats. To help your reporting to us and other communications, you will have to operate an electronic cash register at the Outlet. The cash register system that you must use is: ================================================================================ We have the right to access your register at any time. We estimate that there will be an interval of 4 to 6 months between the execution of the Franchise Agreement and the opening of the Outlet, but the interval may vary based upon such factors as the location and condition of the site, the construction schedule for the Outlet, the extent to which an existing location must be upgraded or remodeled, the delivery schedule for equipment and supplies, delays in securing financing arrangements and completing training, and your compliance with local laws and regulations. You may not open the Outlet for business until all the following events have occurred- (1) we approve the Outlet as developed according to our specifications and standards (2) preopening training has been completed to our satisfaction; (3) the Initial Franchise Fee and all other amounts then due to us have been paid in full; and (4) we have been furnished with copies of all required insurance policies such other evidence of insurance coverage and payment of premiums as we request. You must open the Outlet for business within 180 days after the execution of the Franchise Agreement and 5 days after we notify you that the Outlet is ready to open. Our site selection approval is based on residential population, traffic counts and patterns, competing establishments, median income levels, availability of parking, rental and lease terms, physical configuration of the site and growth trends in the Zone. We must approve any site selected but our consent will not be unreasonably withheld, provided that your lease contains a Conditional Assignment of the Lease in a form designated by us. 20 Before the Outlet's opening, we will provide initial training for the operation of an Outlet to you and your manager for 4 to 6 days. This training will be given in Sebastopol, California. One day of training will take place at your location. Each of you must complete the initial training to our satisfaction. You also must participate in all other activities required to open the Outlet. Although there are no additional fees for this training, you are responsible for all travel and living expenses that you and your employees incur in connection with training. You must replace the manager if we determine that he or she is not qualified to serve in this position. If you (or your managing shareholder or partner) are unable to complete initial training to our satisfaction, we can terminate the Franchise Agreement. We expect that training will be conducted for you and your personnel after the Franchise Agreement has been signed and while the Outlet is being developed. We plan to be flexible in scheduling training to accommodate our personnel, you and your personnel. There currently are no fixed (i.e., monthly or bimonthly) training schedules. We plan on providing the following training which may be modified by us:
- ------------------------------------------------------------------------------------------------------------------------------------ SUBJECT TIME BEGUN INSTRUCTION HOURS OF HOURS OF JOB MANUAL CLASSROOM TRAINING TRAINING - ------------------------------------------------------------------------------------------------------------------------------------ ASSEMBLY/ Day 1 OPS Manual 8 INSTALLATION - ------------------------------------------------------------------------------------------------------------------------------------ PERSONNEL Day 2 OPS Manual 4 - ------------------------------------------------------------------------------------------------------------------------------------ ADMIN Day 3 OPS Manual 4 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATIONS Day 4 OPS Manual 8 - ------------------------------------------------------------------------------------------------------------------------------------ ADVERTISING Day 5 OPS Manual 4 - ------------------------------------------------------------------------------------------------------------------------------------ CUSTOMER Day 5 OPS Manual 4 SERVICE - ------------------------------------------------------------------------------------------------------------------------------------ REPAIR Day 6 OPS Manual 3 - ------------------------------------------------------------------------------------------------------------------------------------ INVENTORY Day 6 OPS Manual 3 CONTROL - ------------------------------------------------------------------------------------------------------------------------------------ MARKETING Day 6 OPS Manual 2 - ------------------------------------------------------------------------------------------------------------------------------------
You (or your managing shareholder or partner) and/or previously trained managers must attend any periodic refresher training courses that we designate. You also will have to pay us for training new managers hired after the Outlet's opening. Zone Development Agreement Except as listed below, we need not provide any assistance to Developer. 21 If we determine that a Developer has the financial capacity, that a proposed site for the Outlet within the development Zone is a suitable site and that Developer is in compliance with the Zone Development Agreement and all Franchise Agreements have been signed pursuant to the provisions of the Development Agreement, then we will grant to Developer a franchise for the operation of an Outlet at the site proposed by Developer. (Zone Development Agreement, Section VIII) Item 12 TERRITORY Franchise Agreement You will have the exclusive right to operate an Outlet at the single location designated in the Franchise Agreement and will have the exclusive right to operate an Outlet within a two to three mile radius of that location in suburban areas and from five blocks to ten blocks in a downtown area such as Los Angeles or San Francisco. However, no exclusivity will be granted with respect to Outlets located in regional malls. We will not operate or grant a franchise for the operation of a competing Outlet within your Exclusive Zone. We may designate certain Zones within which we will not grant exclusive rights. We reserve the right to sell our Proprietary Products through other channels of distribution under our trademark or service mark in airports and sports stadiums located in your Exclusive Area. But we have not nor will we establish other franchises or company-owned Outlets under a different trademark or service mark in your Exclusive Area. We also have the right to operate or franchise Outlets outside of your Exclusive Area. We have not nor will we establish a Company-owned Outlet or other channels of distribution using the name "ZAP Electric Vehicle Outlet" in your Exclusive Area. The minimum sales quota is ________________ in Gross Sales per year (see Exhibit F of Franchise Agreement). Your Outlet location and exclusive Area may not be altered except by a written agreement between you and us. Zone Development Agreement 22 Under a Zone Development Agreement, a developer may be granted an exclusive Zone within which to develop Outlets. We will not operate or grant a franchise to another for the operation of an Outlet within this Zone, except for certain pre-existing franchises, if any, disclosed in the Development Agreement. The development territory will not contain less than 500,000 residential or transient people ("transient" being defined as commuters or workers). The boundaries of the exclusive Zone will be outlined on a map attached to the Development Agreement. The exact number of Outlets which Developer must open each year will be specified in the Development Agreement and will be based, in part, upon the market potential of the development Zone. Developer may develop more Outlets than required in the Development Schedule with our consent for each Outlet. For each Outlet Developer must pay the fees required under the Franchise Agreement for that Outlet. We may terminate the Development Agreement, including Developer's territorial rights, and retain all fees paid by Developer if Developer fails to timely open the number of Outlets required in the Development Agreement or if we terminate any Franchise Agreement entered into by Developer pursuant to the Development Agreement. The operation by Developer of each Outlet is governed by the terms of the Franchise Agreement signed in connection with the opening and operation of each such Outlet. Thus, the termination of the Development Agreement will have no effect on the Franchise Agreement previously entered into by Developer. Item 13 TRADEMARKS We grant to you the right to use certain trademarks, service marks and other commercial symbols in connection with the operation of your Outlet. Our primary trademark is "ZAP" and certain associated designs (the "Marks"). This Mark was registered on the Principal Register of the United States Patent and Trademark Office on September 28, 1993, under registration no. 1,794,866. We also have three other trademarks pending before the United States Patent and Trademark Office. You must follow our rules when you use these Marks. You cannot use the Marks as part of a corporate name or with modifying words, designs or symbols except for those which we license to you. You 23 may not use the Marks in connection with the sale of any unauthorized products or services or in any manner not authorized in writing by us. There are no currently effective material determinations of the United States Patent and Trademark Office, the Trademark Trial and Appeal Board, or the trademark administrator of any state or any court, nor are there any pending infringement, opposition or cancellation proceedings or material litigation, involving the Marks anywhere, including in your exclusive Zone. There are no agreements currently in effect which significantly limit our right to use or license the use of the Marks in any manner material to the franchise. You must notify us immediately of any apparent infringement or challenge to your use of the Mark, or of any claim by any person of any rights in any Mark, and may not communicate with any person other than us, our attorneys and your attorneys in connection with any such infringement, challenge or claim. We have sole discretion to take such action as we deem appropriate and the right to control exclusively any litigation, United States Patent and Trademark Office proceeding or any other administrative proceeding arising from such infringement, challenge or claim or otherwise relating to the Mark. You must sign any instruments and documents, provide such assistance and take any action that, in the opinion of our attorneys, may be necessary or advisable to protect and maintain our interests in any litigation or United States Patent and Trademark Office proceeding or other proceeding or otherwise to protect and maintain our interests in the Marks. The Franchise Agreement requires us to participate in your defense and/or indemnify you for expenses or damages if you are a party to an administrative or judicial proceeding involving a Mark licensed to you by us or if the proceeding is resolved unfavorably to you. If it becomes advisable at any time in our sole discretion for us and/or you to modify or discontinue the use of any Mark and/or use one or more additional or substitute trade or service marks, you must comply with our directions within a reasonable period of time after receiving notice. We will reimburse you for your reasonable direct expenses of changing the Outlet's signage. However, we will not be obligated to reimburse you for any loss of revenue attributable to any modified or discontinued Mark or for any expenditures you make to promote a modified or substitute trademark or service mark. Item 14 24 PATENTS, COPYRIGHTS AND PROPRIETARY INFORM3%TION The ZAP electric bicycle power system was registered on the Principal Register of the United States Patent and Trademark Office on February 13, 1996, under registration no. 5,491,390. We also have two other patents pending before the United States Patent and Trademark Office. We claim copyright protection of our Operations Manual and related materials although these materials have not been registered with the United States Registrar of Copyrights. The Operations Manual and related materials are considered proprietary and confidential and are considered our property and may be used by you only as provided in the Franchise Agreement. You may not use our confidential information in any unauthorized way and you must take reasonable steps to prevent its disclosure to others. We may reveal certain proprietary information to you, which includes: designs, plans, schematics, formulae, customer lists, and information in the manuals provided to you. You and your employees are obligated to maintain the absolute confidentiality of this information at all times. There currently are no effective determinations of the Copyright Office (Library of Congress) or any court regarding any of the copyrighted materials. There are no agreements in effect which significantly limit our right to use or license the copyrighted materials. Finally, there are no infringing uses actually known to us which could materially affect a franchisee's use of the copyrighted materials in any state. We are not required by any agreement to protect or defend copyrights or confidential information, although we intend to do so when this action is in the best interest of our System. Item 15 OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS Franchise Agreement You must at all times directly supervise the operation of the Outlet or you may employ a manager for this purpose. Notwithstanding, we recommend that you conduct direct, on-premises supervision of the Outlet and not delegate this duty to another. If you do appoint a manager for these duties, we must train him or her. Also, you must inform us of your manager's identity, and each manager must sign an agreement not to divulge any trade secret or 25 confidential or proprietary information, or to engage in any other donut store business. You must devote your full time and efforts to managing the general business matters of the Outlet. Further, you may not, during the term of the Franchise Agreement, engage in any conflicting enterprises. Also, you are bound by confidentiality requirements discussed and noncompetition covenants discussed in Article XXVI in the Franchise Agreement. Zone Development Agreement Developer must devote his or her full time to the supervision of Outlets operated in the development Zone unless Developer designates an individual to supervise the Outlets known as an "operator." Developer, if it is a corporation or a partnership, may not engage in any other related business activities during the term of the Zone Development Agreement without our consent. We may require Developer to hire an experienced bicycle retailer service professional who will operate Developer's Outlets. Developer, or the operator designated by the developer, must successfully complete our training course. Any operator designated by Developer must (i) devote his or her full time to the development and supervision of Outlets, (ii) sign the confidentiality and non-competition covenants by which Developer is bound, and (iii) be approved in writing by us. Also, Developer is bound by confidentiality requirements and non-competition covenants discussed in the Zone Development Agreement. Item 16 RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL You must offer for sale and sell only those products and services that we have approved. You may not offer for sale any products or perform any services that we have not authorized or approved (see Item 8). We have the right to change the types of authorized products and services and there are no limits upon our right to do so. We place no restrictions upon your ability to serve customers provided you do so from the location of your Outlet. 26 The Zone Development Agreement does not contain any provision relating to the restrictions on goods and services offered by a Developer. However, certain restrictions will be contained in the Franchise Agreement signed by a Developer for Outlets located within the development zone. Item 17 RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION This table lists certain important provisions of the Franchise Agreement and related agreements. You should read these provisions in the agreements attached to this Offering Circular.
- ------------------------------------------------------------------------------------------------------------------------------------ Provision Article in Franchise Summary Agreement - ------------------------------------------------------------------------------------------------------------------------------------ a. Term of the Article II; Exhibit F 1 year Franchise - ------------------------------------------------------------------------------------------------------------------------------------ b. Renewal or Article II If you are in good extension of the term standing, sign the current form of franchise agreement. No renewal fee is charged. - ------------------------------------------------------------------------------------------------------------------------------------ c. Requirements for Article II; Exhibit F You have been in you to renew or extend substantial compliance with agreement. No fees are charged, but you may have to remodel, at your expense. - ------------------------------------------------------------------------------------------------------------------------------------ d. Termination by you N/A The Franchise Agreement does not provide for this. But you may seek to terminate on any grounds available to you at law. - ------------------------------------------------------------------------------------------------------------------------------------ e. Termination by us None None without cause - ------------------------------------------------------------------------------------------------------------------------------------ f. Termination by us Article XIX; Article We can terminate only with cause II; Exhibit F if you commit any one of several listed violations or if you do not meet the minimum sales quotas set forth in Exhibit F - ------------------------------------------------------------------------------------------------------------------------------------ g. "Cause" defined- Article XIX 30 days for operations defaults which can be defaults, 30 days for cured monetary defaults, 24 hours for health code violations - ------------------------------------------------------------------------------------------------------------------------------------ 27 - ------------------------------------------------------------------------------------------------------------------------------------ h. "Cause" defined- Article XIX Conviction of a defaults which cannot felony, abandonment, be cured unapproved transfers, bankruptcy, assignment for benefit of creditors, repeated violations - ------------------------------------------------------------------------------------------------------------------------------------ i. Your obligations Article XX Pay outstanding on termination amounts, de- /nonrenewal identification, return of confidential information and telephone numbers - ------------------------------------------------------------------------------------------------------------------------------------ j. Assignment of Article XXII No restriction on our contract by us right to assign. - ------------------------------------------------------------------------------------------------------------------------------------ k. "Transfer" by you Article XXII No restriction on our - - definition right to assign. Includes transfer of contract or assets or any ownership change. - ------------------------------------------------------------------------------------------------------------------------------------ 1. Our approval of Article XXII We have the right to transfer by you approve all transfer, our consent not to be unreasonably withheld - ------------------------------------------------------------------------------------------------------------------------------------ m. Conditions for our Article XXII Transferee qualifies, approval or transfer all amounts due are paid in full, transferee completes training, transfer fee paid, then current contract signed. - ------------------------------------------------------------------------------------------------------------------------------------ n. Our right of first Article XXII We can match any offer refusal to acquire your business - ------------------------------------------------------------------------------------------------------------------------------------ o. Our option to Article XXII We can buy the business on purchase your business termination or non- renewal for the formula price . described in Article XXII - ------------------------------------------------------------------------------------------------------------------------------------ p. Your death or Article XXIII Franchise must be disability assigned to approved buyer within 12 months. - ------------------------------------------------------------------------------------------------------------------------------------ q. Non-competition Article XXVI Can't divert business covenants during the or operate a competing term of the franchise business anywhere. - ------------------------------------------------------------------------------------------------------------------------------------ r. Non-competition Article XXVI No competing business covenants after the for 2 years, within 10 franchise is miles of any other ZAP terminated or expires Electric Vehicle Outlet - ------------------------------------------------------------------------------------------------------------------------------------ s. Modification of Article XXVII No modifications the agreement generally but Operations Manual - ------------------------------------------------------------------------------------------------------------------------------------ 28 - ------------------------------------------------------------------------------------------------------------------------------------ subject to change - ------------------------------------------------------------------------------------------------------------------------------------ t. Integration/merge Article XXVIII Only terms of clause franchise agreement are binding (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------ u. Dispute resolution Article XXIX All disputes must be by arbitration or arbitrated in mediation California (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------ v. Choice of forum Article XXIX Arbitration in California (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------ w. Choice of law Article XXIX California law applies (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ Provision Section in Zone Summary Development Agreement - ------------------------------------------------------------------------------------------------------------------------------------ a. Term Section V Length of the Development Schedule, but no less than 5 years - ------------------------------------------------------------------------------------------------------------------------------------ b. Renewal or Section IV None extension of the terms - ------------------------------------------------------------------------------------------------------------------------------------ c. Requirements for None None you to renew or extend - ------------------------------------------------------------------------------------------------------------------------------------ d. Termination by you Section VIII You may terminate on 30 days notice - ------------------------------------------------------------------------------------------------------------------------------------ e. Termination by us None None without cause - ------------------------------------------------------------------------------------------------------------------------------------ f. Termination by us Section VIII We can terminate only with cause if you commit any one of several listed violations or if you do not meet the minimum sales quotas set forth in Exhibit F of the Franchise Agreement. - ------------------------------------------------------------------------------------------------------------------------------------ g. "Cause" defined- Section VIII These are listed in defaults which can be this Section cured - ------------------------------------------------------------------------------------------------------------------------------------ h. "Cause" defined- Section VIII These are also listed defaults which cannot in this Section be cured - ------------------------------------------------------------------------------------------------------------------------------------ i. Your obligations Section IX Stop selecting sites, on termination/nonrenewal can't open outlets - ------------------------------------------------------------------------------------------------------------------------------------ j. Assignment of Section X No restriction on our contract by us right to assign - ------------------------------------------------------------------------------------------------------------------------------------ k. "Transfer" by you Section X Conditions for - - definition transfer are listed - ------------------------------------------------------------------------------------------------------------------------------------ 1. Our approval of Section X We have the right to transfer by you approve all transfers, our consent not be - ------------------------------------------------------------------------------------------------------------------------------------ 29 - ------------------------------------------------------------------------------------------------------------------------------------ unreasonably withheld. - ------------------------------------------------------------------------------------------------------------------------------------ m. Conditions for our Section X Transferee must meet approval of transfers our qualifications then current contract signed - ------------------------------------------------------------------------------------------------------------------------------------ n. Our right of first Section X We have the right to refusal to acquire match the offer your business - ------------------------------------------------------------------------------------------------------------------------------------ o. Our option to None None purchase your business - ------------------------------------------------------------------------------------------------------------------------------------ p. Your death or Section X Option passes to disability estate - ------------------------------------------------------------------------------------------------------------------------------------ q. Non-competition Section XI Can't divert business covenants during the or operate a competing term of the franchise business anywhere - ------------------------------------------------------------------------------------------------------------------------------------ r. Non-competition Section XI Non competing business covenants after the for 2 years, within 10 franchise is miles of any Outlet terminated or expires - ------------------------------------------------------------------------------------------------------------------------------------ s. Modification of Section XIX No modifications the agreement generally but Operations Manual subject to change - ------------------------------------------------------------------------------------------------------------------------------------ t. Integration/merge Section XIX Only terms of clause agreement are binding (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------ u. Dispute resolution Section XXI Arbitration in by arbitration or California mediation - ------------------------------------------------------------------------------------------------------------------------------------ v. Choice of forum Section XIX Arbitration in California (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------ w. Choice of law Section XIX California law applies (subject to state law) - ------------------------------------------------------------------------------------------------------------------------------------
These states have statutes which may supersede the franchise agreement in your relationship with the franchisor, including the areas of termination and renewal of your franchise: ARKANSAS [Stat. Section 70-807], CALIFORNIA [Bus. & Prof. Code Sections 20000-20043], CONNECTICUT [Gen. Stat. Section 42-133e et seq.], DELAWARE [Code Sections 2551-2556], HAWAII, [Rev. Stat. 482E-1] ILLINOIS [ILCS, Ch. 815, Sections 705/19-705/20], INDIANA [Stat. Section 23-2-2.7], IOWA [Code Sections 523H.1-523H.17], MICHIGAN [Stat. Section 19.854(27)], MINNESOTA [Stat. Section 80C.14], MISSISSIPPI [Code Section 75-24-51], MISSOURI Stat. Section 407.400], NABRASKA [Rev. Stat. Section 87-401], NEW JERSEY [Stat. Section 56:10-11], SOUTH DAKOTA [Codified Laws Section 37-5A-51], VIRGINIA [Code 13.1-557-574-13.1-564], WASHINGTON [Code Section 19.100.180], WISCONSIN [Stat. Sec. 135.03]. These and other state may have court decisions which may supersede the franchise agreement in your relationship with the franchisor, including the areas of termination and renewal of your franchise. SEE ALSO APPENDIX 2. Item 18 30 PUBLIC FIGURES We do not use any public figures to promote our franchise. Item 19 EARNINGS CLAIMS We do not furnish or authorize our salespersons to furnish any oral or written information concerning the actual or potential sales, costs, income or profits of a Outlet. Actual results may vary from unit to unit, and we cannot estimate the results of any particular franchise. Item 20 LIST OF OUTLETS There are no company owned or franchised outlets. PROJECTED OPENINGS AS OF DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------
STATE Franchise Projected Projected Company- Agreements Signed Franchise New owned Openings in but Location Not Locations in the the Next Fiscal Opened Next Fiscal Year Year - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
Item 21 FINANCIAL STATEMENTS Attached to this Offering Circular as Exhibit 3 is our audited balance sheet as of December 31, 1996 and Interim Unaudited Financial Statements as of June 30, 1997. Item 22 CONTRACTS The following agreements are attached as exhibits to this Offering Circular. Franchise Agreement - Exhibit 1 Zone Development Agreement - Exhibit 2 31 Item 23 RECEIPT Attached is an acknowledgment of receipt by you, acknowledging receipt of this Offering Circular by you, together with accompanying documents. 32 RECEIPT This Offering Circular summarizes certain provisions of the Franchise Agreement and other information in plain language. Read this Offering Circular and all Agreements carefully. If ZAP Power Systems offers you a franchise, ZAP Power Systems must offer you this Offering Circular to you by the earliest of: (1) The first personal meeting to discuss our franchise; or (2) Ten business days before the signing of a binding agreement; or (3) Ten business days before a payment to ZAP Power Systems. You must also receive a Franchise Agreement containing all material terms at least five business days before you sign a franchise agreement. If ZAP Power Systems does not deliver this Offering Circular on time or if it contains a false or misleading statement, or a material omission, a violation of Federal and State law may have occurred and should be reported to the Federal Trade Commission, Washington, D.C. 20580 and the Department of Corporations of the State of California. The ZAP Power Systems authorizes William D. Evers of Evers & Andelin, LLP at 155 Montgomery Street, Suite 1200, San Francisco, California 94104 to receive service of process for ZAP Power Systems. I have received a Uniform Franchise Offering Circular dated _____. This Offering Circular included the following exhibits: 1. Franchise Agreement 2. Zone Development Agreement 3. Audited Balance Sheet Dated: __________________________________________ Franchisee: _____________________________________ 33 APPENDIX 1 THE CALIFORNIA FRANCHISE INVESTMENT LAW REQUIRES THAT A COPY OF ALL PROPOSED AGREEMENTS RELATING TO THE SALE OF THE FRANCHISE BE DELIVERED TOGETHER WITH THE OFFERING CIRCULAR. 34 APPENDIX 2 A. California Business and Professions Code Sections 20000 through 20043 provide rights to the franchisee concerning termination or non-renewal of a franchise. If the Franchise Agreement contains a provision that is inconsistent with the law, the law will control. B. i. The Franchise Agreement provides for termination upon bankruptcy. This provision may not be enforceable under federal bankruptcy law (11 U.S.C.A. Sec. 101 et seq.). ii. The Franchise Agreement contains a covenant not to compete which extends beyond the termination of the franchise. This provision may not be enforceable under California law. iii. The Franchise Agreement requires binding arbitration. The arbitration will occur at San Francisco, California, with the costs being borne as allocated by the arbitrators. This provision may not be enforceable under California law. iv. The Franchise Agreement requires application of the laws of the State of California. This provision may not be enforceable under California law. 35 ZAP POWER SYSTEMS ZONE DEVELOPMENT AGREEMENT THIS ZONE DEVELOPMENT AGREEMENT ("Agreement") is made and entered into this ___ day of _________, 199__ between ZAP Power Systems, a California Corporation, whose present address is 117 Morris Street, Sebastopol, California 95472 (hereinafter "Company" or "Franchisor") and ___________________________________ whose principal address is ___________________________________________________ (hereinafter "Developer"). RECITALS THIS AGREEMENT sets forth the terms and conditions pursuant to which the Company will license Developer to develop and operate within the Development Zone (as defined in Schedule A attached hereto) "ZAP Electric Vehicle" Outlet utilizing the System and Proprietary Marks (as defined in Franchise Agreement), and certain related matters agreed upon by the parties. NOW, THEREFORE, the parties, in consideration of the undertakings and commitments of each party the other party set forth herein, hereby agree as follows: SECTION I GRANT A. The Company hereby grants to Developer, pursuant to the terms and conditions of this Agreement, certain development rights ("Development Rights") to establish and operate franchised Shop, and to use the System solely in connection therewith, at specific locations to be designated in separate Franchise agreements executed as provided in Section III A. hereof, and pursuant to the schedule set forth in Exhibit "A" of this agreement (hereinafter "Development Schedule"). Each Outlet developed hereunder shall be located in the zone described in Exhibit "B" of this Agreement (hereinafter "Development Zone"). B. Each Outlet for which a development right is granted hereunder shall be established and operated pursuant to a Franchise Agreement to be entered into between Developer and the Company in accordance with Section III A. hereof. C. Except as otherwise provided in this Agreement, the Company shall not establish nor franchise anyone other than Developer to establish an Shoppe in the Development Zone during the term of this Agreement, provided Developer is not in default hereunder. D. This Agreement is not a Franchise Agreement and does not grant to Developer any right to use the Company's Proprietary Marks or System. E. Developer shall have no right under this Agreement to franchise others under the Proprietary Marks or System. SECTION II DEVELOPMENT FEE A. In consideration of the development rights granted herein, Developer shall pay to the Company a Development Fee as set forth on Exhibit "C" hereof once the 1 Company has fulfilled and performed all of its initial obligations with respect to the Franchise. B. The Development Fee shall be fully earned by the Company and is non-refundable upon execution of this Agreement, and shall be for administrative and other expenses incurred by the Company and for the development opportunities lost or deferred as a result of the Development Rights granted Developer herein. SECTION III SCHEDULE AND MANNER FOR EXERCISING DEVELOPMENT RIGHTS A. Prior to Developer's selection of a proposed site for an Outlet, Developer shall submit to the Company for its evaluation and approval, in the form specified by the Company, a description of the site, the terms of the lease or purchase, a market feasibility study for the site and such other information and materials as the Company may reasonably require, together with a letter of intent or other evidence satisfactory to the Company, which confirms Developer's favorable prospects for obtaining the site. The Company shall have fifteen (15) business days after receipt of such information and materials from Developer to approve or disapprove the site in its sole discretion. In the event the Company does not disapprove the site by submitting written notice to Developer within said fifteen (15) business days, such site will be deemed approved by the Company. Developer will then be presented with the Franchise Agreement annexed hereto for execution. B. Recognizing that time is of the essence, Developer agrees to exercise each of the Development Rights granted hereunder in the manner specified herein, and to satisfy the Development Schedule in a timely manner. Failure by Developer to adhere to the Development Schedule shall constitute a default under this Agreement as provided in Section VIII hereof. C. Developer shall exercise each Development Right granted herein only by executing a Franchise Agreement for each Outlet at a site approved by the Company in the Development Zone as hereinafter provided, within ten (10) days after receipt of said Franchise Agreement from the Company for the approved site and returning the same to the Company for its execution. The Franchise Agreement for the first Development Right exercised hereunder shall be in the form attached hereto as Exhibit "D". The Franchise Agreement for each additional Development Right exercised hereunder shall be the same form as the Franchise Agreement annexed hereto as Exhibit "D", subject to any non-material changes therein which are required to be made by changes in any applicable law, regulation or ordinance in effect from time to time. In the event the Company does not receive the properly executed Franchise Agreement together with the initial franchise fee, with the appropriate number of copies within said ten (10) days from delivery thereof to Developer, the Company's approval of the site shall be void and Developer shall have no rights with respect to said site. D. Developer acknowledges that the approval of a particular site for an Outlet by the Company shall not be deemed to be an assurance or guaranty that the Outlet will operate successfully or at a profit from such site. E. Developer shall be required to execute each Franchise Agreement and own a minimum of fifty-one percent (51%) of the issued and outstanding stock for each Outlet to be opened pursuant to said Franchise. 2 SECTION IV RENEWAL This Agreement shall not be subject to renewal. SECTION V TERM AND RIGHT OF FIRST REFUSAL A. The term of this Agreement shall expire on the required opening date for the last Outlet to be developed and opened in accordance with the Development Schedule attached hereto. Within twelve months prior to the expiration of this Agreement, Franchisor shall reassess the potential of the Development Zone for the five years immediately following the expiration date. If Franchisor concludes that potential for additional Outlet exists within the Development Zone, Franchisor (subject to the provisions of Subparagraphs B. and C. below) shall offer Developer the right to enter into a new Zone Development Agreement having a term not to exceed five (5) years, based on the new Development Schedule established by Franchisor. If Developer believes the new Development Schedule offered by Franchisor is excessive in relation to the potential of the Development Zone, the Developer, before the expiration of the sixty (60) day period (described in Subparagraph C. below) for entering into the new Zone Development Agreement, may request that the issue be reviewed by Franchisor. B. Initial franchise fees for units to be developed under the Zone Development Agreement shall be one hundred percent (100%) of then current initial franchise fees for individual units and is nonrefundable. C. Developer must exercise the right to enter into the new Zone Development Agreement by executing such agreement no later than sixty (60) days after it is tendered by Franchisor to the Developer. Franchisor shall be under no obligation to offer Developer a new Zone Development Agreement unless Developer: (i) Has timely opened all Outlets in accordance with the Development Schedule set forth in Exhibit "A"; (ii) Is in compliance with this Agreement and (if applicable its affiliates are in compliance with) the Franchise Agreement and other agreements, if any, for each unit; (iii) Qualifies for expansion under Franchisor's then current Guidelines for Multi-unit Development and operations; and (iv) Provides Franchisor with a General Release in form and substance acceptable to Franchisor (which release shall include similar general releases from each principal owner), provided, however, that all rights enjoyed by the Developer and causes of action arising in its favor under applicable laws or regulations shall remain in force. 3 SECTION VI OBLIGATIONS OF DEVELOPER Developer acknowledges and agrees that: A. Except as otherwise provided herein, this Agreement includes only the right to select sites for the establishment of Outlet and to submit the same to the Company for its approval in accordance with the terms of this Agreement. This Agreement does not include the grant of a license by the Company to Developer of any rights to use the Proprietary Marks, the System, or to open or operate any Outlet within the Development Zone. Developer shall obtain the license to use such additional rights at each Outlet upon the execution of each Franchise Agreement by both Developer and the Company and only in accordance with the terms of the Franchise Agreement. B. The Development Rights granted hereunder are personal to Developer and cannot be sold, assigned, transferred or encumbered, in whole or in part, except as set forth in Section X hereof. C. The Development Rights granted hereunder are nonexclusive and the Company retains the right, in its sole discretion: 1. To continue to construct and operate other Outlet and to use the System and the Proprietary Marks at any location outside the Development Zone, and to license others to do so. 2. To develop, use and franchise the rights to any trade names, trademarks, service marks, trade symbols, emblems, signs, slogans, insignia or, copyrights not designated by the Company as Proprietary Marks for the use with different franchise systems for the sale of the different products or services not in connection with the System at any location, on such terms and conditions as the Company may deem advisable and without granting Developer any rights therein. 3. To develop, merchandise, sell and license others to sell any of the Company's products, proprietary or otherwise, presently existing or to be developed in the future, to the public through grocery and other non-Shoppe Stores in the Development Zone and to use the Proprietary Marks in connection therewith. 4. To promote or conduct special events within the Development Zone, provided, however, that the opportunity to conduct each special event shall first be offered to Developer in accordance with the terms of any valid and effective Franchise Agreement. D. Developer has sole responsibility for the performance of all obligations arising out of the operation of his business pursuant to this Agreement, including, but not limited to, the payment when due of any and all taxes levied or assessed by reason of such operation. E. In all public records, in its relationship with other persons, and in any documents, Developer shall indicate clearly the independent ownership of Developer's business and that the operations of said business are separate and distinct from the operation of the Company's business. 4 F. Developer shall at all times preserve in confidence any and all materials and information furnished or disclosed to Developer by the Company and Developer shall disclose such information or materials only to such of the Developer's employees or agents who must have access to it in connection with their employment. Developer shall not at any time, without the Company's prior written consent, copy, duplicate, record or otherwise reproduce such materials or information, in whole or in part, nor otherwise make the same available to an unauthorized person. G. Developer shall comply with all requirements of federal state and local laws, rules and regulations. H. Developer shall at no time have the right to sub-franchise any of its development rights hereunder. SECTION VII SERVICES OF THE COMPANY The Company shall, at its expense, provide the following services: A. Review the Developer's site selection for conformity to the Company's prototypical standards and criteria for selection and acquisition of sites upon the Company's receipt of Developer's written request for approval thereof. B. Provide Developer with standard specifications and layouts for the structures, equipment, furnishings, decor and signs identified with the Outlet as the Company makes available to all developers and franchisees from time to time. C. Review of the Developer's site plan and final build-out plans and specifications for conformity to the construction standards and specifications of the System, upon the Company's receipt of Developer's written request for approval thereof. D. Conduct such on site evaluation as the Company may, in its sole discretion, deem advisable as part of its evaluation of Developer's request for site approval, provided however, that the Company shall not be required to provide such on site evaluation for any proposed site prior to the Company's receipt of a description of such proposed site and a letter of intent (subject to Company's approval) or other evidence satisfactory to the Company, which confirms Developer's favorable prospects for obtaining the proposed site. If deemed appropriate and if the site requires inspection, the Company may conduct one (1) on site inspection. E. Provide such other resources and assistance as may hereafter be developed and offered by the Company to its other developers. SECTION VIII DEFAULT AND TERMINATION A. The occurrence of any of the following events of default shall constitute good cause for the Company, at its option and without prejudice to any other rights or remedies provided for hereunder or by law or equity, to terminate this Agreement: 5 1. If Developer shall, in any respect, fail to meet the Development Schedule. 2. If Developer shall use the System or Proprietary Rights, or any other names, marks, systems, insignia, symbols or rights which are the property of the Company except pursuant to, and in accordance with, a valid and effective Franchise Agreement. 3. If Developer, or persons controlling, controlled by or under common control with Developer, shall have any interest, direct or indirect, in the ownership or operation of any Outlet engaged in the sale of products similar to those permitted to be sold by Developer within the Development Zone or in any Outlet which looks like, copies or imitates the Outlet or operates in a manner tending to have such effect, other than pursuant to a valid and effective Franchise Agreement. 4. If Developer shall fail to remit to the Company any payments pursuant to Section II when same are due. 5. If Developer shall begin work upon any Outlet at any site unless all the conditions set forth in Section III hereof have been met. 6. If Developer shall purport to effect an assignment other than in accordance with Section X hereof. 7. Except as provided in Section X hereof, if Developer attempts to sell, assign, transfer or encumber this Agreement prior to the time that at least twenty-five percent (25%) of the Outlet to be constructed and opened for business in accordance with the Development Schedule are, in fact, open or under construction. 8. If Developer makes, or has made, any material misrepresentation to the Company in connection with obtaining this Agreement, any site approval hereunder, or any Franchise Agreement. 9. If Developer fails to obtain the Company's prior written approval or consent, including but not limited to site approval or site plan approval, as expressly required by this Agreement. 10. If Developer defaults in the performance of any other obligation under this Agreement. 11. If Developer defaults in the performance of any obligation under any Franchise Agreement with the Company, provided such default results in the termination of the Franchise Agreement. 12. If Developer suffers a violation of any law, ordinance, rule or regulation of a governmental agency in connection with the operation of the Outlet, and permits the same to go uncorrected after notification thereof, unless there is a bona fide dispute as to the violation or legality of such law, ordinance, rule or regulation, and Developer promptly resorts to courts or forums of appropriate jurisdiction to contest such violation or legality of such law. 13. If Developer or a shareholder of Developer owning twenty-five percent (25%) or more of Developer's voting stock is convicted in court of a competent jurisdiction of an indictable offense punishable by a term of imprisonment in excess of one (1) year. 6 14. If Developer, or any person controlling, controlled by or under Common control with Developer, shall become insolvent by reason of inability to pay their debts as they mature; shall be adjudicated a bankrupt; shall file or have filed against any of them a petition in bankruptcy, reorganization or similar proceeding under the bankruptcy laws of the United States; or if a receiver, permanent or temporary, of the business, assets or property of Developer or any such person, or any part thereof, is appointed by a court of competent authority or if Developer, or any such person, requests the appointment of a receiver or makes a general assignment for the benefit of creditors, or if a final judgment against Developer, or any such person, in the amount of $10,000 or more remains unsatisfied on record for sixty (60) days or longer; or if the bank accounts, property or receivables of Developer or any such person are attached and such attachment proceedings are not dismissed within a sixty (60) day period; or if execution is levied against the business or property of Developer or any such person or suit to foreclose any lien or mortgage against any of the Outlet, the premises thereof or equipment thereon is instituted and not dismissed within thirty (30) days. B. Upon occurrence of any of the events set forth in Section VIII, Paragraph A, the Company may, without prejudice to any other rights or remedies contained in this Agreement or provided by law or equity, terminate this Agreement. Such termination shall be effective thirty (30) days after written notice (or such other notice as may be required by applicable state law) is given by the Company to Developer of any of the events set forth in Section VIII, Paragraph A, Subparagraphs 1 through 14, if such defaults are not cured within such period. However, at the sole discretion of the Company, termination shall be effective immediately, without notice and without necessity of further action by the Company, upon occurrence of any of the events specified in Section VIII, Paragraph A, Subparagraphs 1 or 2, except where prohibited by an applicable state or federal law in which case this Agreement shall be terminated only in accordance with the provisions of any such law. C. Developer shall have the right to terminate this Agreement upon thirty (30) days written to the Company. SECTION IX DEVELOPER'S OBLIGATIONS FOLLOWING TERMINATION A. Upon termination of this Agreement becoming effective for any reason, or upon expiration to the term hereof, Developer agrees as follows: 1. To cease immediately any attempts to select sites on which to establish Outlet. 2. To cease immediately to hold itself out in any way as a Developer of the Company or to do anything that would indicate a relationship between it and the Company. B. Termination of this Agreement shall not affect the rights of Developer to operate Outlet in accordance with the terms of any Franchise Agreement with the Company executed prior to the termination of this Agreement until and unless such Franchise Agreement, or any of them, are terminated in accordance their terms, renewed or expire. C. No right or remedy herein conferred upon or reserved to the Company is exclusive of any other right or remedy provided by law. 7 SECTION X TRANSFERABILITY OF INTEREST A. This agreement is personal to Developer and Developer shall neither sell, assign, transfer nor encumber this Agreement, the Development Rights, or any other interest hereunder, nor suffer or permit any such assignment, transfer or encumbrance to occur directly, indirectly or contingently by agreement or by operation of law without prior written consent of the Company. Developer understands that this agreement may not be pledged, mortgaged, hypothecated, given as security for an obligation or in any manner encumbered. The assignment or transfer of any interest, except in accordance with this Paragraph, shall constitute a material breach of this Agreement. B. In the event that Developer is a corporation or desires to conduct business in a corporate capacity, said corporation or assignee corporation of any of Developer's rights under this Agreement to a corporation must receive the prior written approval of the Company and Developer agrees to comply with the provisions hereinafter specified including, without limitation, restriction on the number of shareholders of the corporation or assignee corporation and, where appropriate in the Company's discretion, personal guarantees by one or more shareholders of all of the obligations of said corporation or assignee corporation to the Company and other parties designed by the Company. The corporation or assignee corporation shall not engage in any business activities other than those directly related to the operation of the Outlet(s) pursuant to the terms and conditions of the Franchise Agreements with the Company; and all assets related to the operation of the Outlet(s) shall be held by the corporation or assignee corporation. There shall be no transfer fee charged by the Company if such assignment to a corporation is made within 90 days after the execution of this agreement. C. If Developer is a corporation or if Developer's rights hereunder are assigned to a corporation, the Developer, or those individuals disclosed on Exhibit "E" attached hereto, shall be the legal and beneficial owner of not less than fifty-one percent (51%) of the outstanding stock of said corporation and shall act as such corporate principal officer. The assignment to a corporation will not relieve Developer of personal liability to the Company for performance of any of the obligations under this Agreement . Any subsequent transfer of voting rights of the stock of the corporation or assignee corporation, and any transfer or issuance of shares of the corporation or assignee corporation shall be subject to the Company's prior written approval. The Company agrees that it will not reasonably restrict the issuance or transfer of shares of stock, provided that Developer complies with the provisions of this Section X, and provided that in no event shall any share stock of such corporation or assignee corporation be sold, transferred or assigned to a business competitor of the Company. The articles of incorporation and bylaws of the corporation or assignee corporation shall reflect that the issuance and transfer of shares of stock are restricted, and all stock certificates shall bear the following legend, which shall be printed legibly and conspicuously on each stock certificate: "The transfer of this stock is subject to the terms and conditions of a Zone Development Agreement with ZAP Power Systems dated _____________________. Reference is made to said Zone Development Agreement and related Franchise Agreement and to restrictive provisions of the charter and bylaws of this corporation". 8 D. The corporation or assignee corporation's corporate records shall indicate that a stop transfer order shall be in effect against the transfer of any stock, except for transfers permitted by this Section X. In addition to the foregoing, the stock of such corporation or assignee corporation shall not be publicly sold or traded without the prior express written consent of the Company which shall be given at the sole discretion of the Company. In the event the Company approves a public offering of the Developer, Developer shall present offering circular or prospectus to the Company for its review within a reasonable time prior to such offering becoming effective. In no event shall Developer offer its securities by use of the "Proprietary Marks" or any name deceptively similar thereto; however, Developer may make appropriate reference to the fact the Developer has a development agreement with the Company. Developer shall not relinquish control of the new public company without the prior written consent of the Company. Developer agrees to indemnify and hold Franchisor harmless from and against any claims, suits, actions or otherwise which arise out of or from such public offering. E. In the event of the death, disability or permanent incapacity of Developer, the Company shall consent to the transfer of all of the interest of Developer to Developer's spouse, heirs or relatives, by blood or marriage, or if this Agreement was originally executed by more than one party, then to the remaining party who originally executed this Agreement, whether such transfer is made by Developer's last will and testament or operation of law, provided that the requirements of Section X hereof have been met. In the event that Developer's heirs do not obtain the consent of the Company as prescribed herein, the personal representative of Developer shall have a reasonable time to dispose of Developer's interest hereunder, which disposition shall be subject to all the terms and conditions for transfers under this Agreement. F. Developer has represented to the Company that he is entering into this Agreement with the intention of complying with its terms and conditions and not for the purpose of resale of the Development Rights hereunder. Therefore, Developer agrees that any attempt to assign this Agreement, prior to the time that at least twenty-five percent (25%) of the Outlet(s) to be constructed hereunder are opened or under construction, shall be deemed to be an event of default hereunder except in the event of a transfer to a corporation pursuant to Section X, Paragraphs B and C hereof. G. Except as provided in Section X, Paragraph D, if Developer receives from a third person and desires to accept a bona fide written offer to purchase its business, i.e. one hundred percent (100%) of the Development Rights and interest, the Company shall have the option, exercisable within thirty (30) days after receipt of written notice setting forth the name and address of the prospective purchaser, the price and terms of such offer, a copy of such offer and the other information set forth in this Section X, Paragraph E, to purchase such business, Development Rights and interests, including Developer's right to develop sites within the Assigned Zone on the same terms and conditions as offered by said third party. In order that the Company may have information sufficient to enable it to determine whether to exercise its option, the Company may require Developer to deliver to the Company certified financial statements as of the end of Developer's recent fiscal year and such other information about the business and operations of Developer as the Company may request. If the Company declines, or does not accept the offer in writing within thirty (30) days, Developer may, within thirty (30) days from the expiration of the option period, sell assign and transfer it business, Development Rights and 9 interest to said third party, provided the Company has consented to such transfer as required by this Section X. Any material change in the terms of the offer prior to closing of the sale to such third party shall constitute a new offer, subject to the same rights of first refusal by the Company or its nominee as in the case of an initial offer. Failure by the Company to exercise the option afforded by this Paragraph shall not constitute a waiver of any other provision of this Agreement, including the requirements of this Section with respect to the proposed transfer. H. Developer acknowledges and agrees that the restrictions on transfer imposed herein are reasonable and are necessary to protect the Development Rights, the System and the Proprietary Rights, as well as the Company's reputation and image, and are for the protection of the Company, Developer and other developers. Any assignment or transfer permitted by this Section X shall not be effective until the Company receives a completely executed copy of all transfer documents, and the Company consents in writing thereto. I. Except as provided in this section the Company agrees not to unreasonably withhold its consent to a sale, assignment or transfer by Developer hereunder. Consent to such transfer otherwise permitted or permissible as reasonable may be refused unless: 1. All obligations of the Developer created by this Agreement, all other franchise documents, including all Franchise Agreements, and the relationships created hereunder are assumed by the transferee. 2. All ascertained or liquidated debts of Developer to the Company or its affiliated or subsidiary corporations are paid. 3. Developer is not in default hereunder. 4. The Company is reasonably satisfied that the transferee meets all of the requirements of the Company for new developers, including but not limited to, good reputation and character, business acumen, operational ability, management skills, financial strength and other business considerations. 5. Transferee executes or, in appropriate circumstances, causes all necessary parties to execute, the Company's standard form of Zone Development Agreement, Franchise Agreements for all Outlet open or under construction hereunder, and such other then current ancillary agreements being required by the Company of new developers on the date of transfer. 6. Developer executes a general release under seal, in a form satisfactory to the Company, of any and all claims against the Company, its officers, directors, employees and principal stockholders provided however, that all rights enjoyed by the Developer and only causes of action arising in its favor from the provisions law and regulations shall remain in force. 7. Developer or transferee pays to the Company a transfer fee in an amount equal to twenty-five percent (25%) of the Development Fee paid by Developer to cover the Company's reasonable costs in affecting the transfer and in providing training and other initial assistance to transferee. 8. All shareholders of transferee, if transferee is a corporation, shall personally guaranty the fill payment and performance of transferee corporation's obligations and other arrangements satisfactory to the Company relative to such payment and performance, subject to Subparagraph N.2 of this Section X below; l0 J. In the event of the death of Developer, or any principal owner thereof, at any time during the term this Agreement, the legal representative of Developer or such principal owner, together with all surviving principal owners, if any, jointly, shall, within three (3) months of Such event, apply in writing, for the right transfer this Agreement, or the interest of the deceased principal owner in this Agreement, to such person or persons as the legal representative may specify. Such transfer shall be approved by Franchisor upon the fulfillment of all of the conditions set forth herein, except that no transfer fee, upgrade requirements, or rights of first refusal shall be required if the proposed transferee is a beneficiary or heir of Developer or such principal owner. If the legal representative and all surviving principal owners, if any, do not comply with the aforesaid provisions or do not propose a transferee in accordance with the foregoing, all rights licensed to Developer under this Agreement shall terminate forthwith and automatically revert to Franchisor. K. The Company's consent to a transfer of any interest in Developer or in the development rights pursuant to this Section shall not constitute a waiver of any claims it may have against the transferring party nor shall it be deemed a waiver of the Company's right to demand exact compliance with any of the terms this Agreement by the transferee. L. The Company shall have the right to transfer or assign all or any part of its rights or obligations herein to any person or legal entity provided such person or legal entity agrees to be bound by all of the terms and conditions of this Agreement and, upon request, Developer shall provide, in a form prepared by the Company, an estopped letter which recites the fact that this Agreement is in full force and effect, etc. M. This Agreement shall inure to the benefit of the Company, its successors and assigns and the Company shall have the right to transfer or assign all or any part of its interest herein to any person or legal entity, provided such transferee agrees to perform all of the Company's obligations hereunder. N. Notwithstanding anything contained in this Agreement to the contrary the parties hereto agree as follows: 1. If applicable, certain of Developer's minority owners who hold interests of twenty percent (20%) less of the equity in Developer need not obtain Franchisor's approval or consent to their assignment, sale or other transfer of their equity interests in Developer, nor shall such assignment, sale or transfer be subject to any right of first refusal, upgrading of units, payment to Franchisor of a transfer fee or any other conditions precedent to Franchisor's consent to any transfer hereunder so long as: (a) each minority owner exercises or holds (alone or in combination with others) no right to exercise voting power or management control or direction over Developer or any aspect of Developer's business; and (b) each such minority owner has not been exposed to and has not been permitted access to Franchisor's trade secrets or Confidential Information as defined in any Franchise Agreement between Developer or its affiliate and Franchisor (and one or more principal owners confirms such facts in writing to Franchisor prior to consummation of any such transfer), except that if any such minority owner has had access to or been exposed to such secrets or information, then such minority owner promptly shall execute an agreement which: (i) Prohibits disclosure or use of Franchisor's trade secrets and confidential information. 11 (ii) Contains a non-competition covenant similar in scope to that contained in the form of Franchise Agreement attached hereto as Exhibit "D", all in a form reasonably satisfactory to Franchisor, and may not so assign, sell or transfer without having done so. The principal owners who execute this Agreement shall manage Developer's business and affairs in such a manner that all of the Developer's minority owners comply with the foregoing. Further, except as otherwise provided herein, so long as Developer and all principal owners comply with this Agreement and so long as such principal owners retain all voting rights in Developer and ownership of not less than fifty-one percent (51%) of the equity in Developer, Developer may arrange for the grant or issuance of equity interests in Developer to minority owners who each may hold or control, directly or indirectly, not more than twenty percent (20%) of such equity without first obtaining Franchisor's advance written consent therefor. 2. Notwithstanding anything to the contrary contained in this Agreement, if applicable, promptly following their execution of this Agreement, the principal owners also shall execute such documentation as Franchisor may reasonably request to place voting control and management control over the business of Developer in the hands of the survivor of them, in the event all but one of them dies, irrespective of who succeeds to ownership of each deceased person's interest in Developer under such circumstances. Section X Paragraph J shall not apply to the death of any other person or to the first to die of them so long as the preceding condition is satisfied and the voting and management control over the business of Developer resides, in Franchisor's reasonable opinion, in one of such principal owners and so long as one of them actively manages business and affairs of Developer. 3. Developer must notify Franchisor in writing and in advance as to the identity of any proposed principal owners and minority owners with whom Developer may wish to do business hereunder. All principal owners and all minority owners holding twenty percent (20%) or more of the equity in any entity contemplated hereunder first must be approved as suitable owners by Franchisor which approval will not be unreasonably withheld. Developer shall provide Franchisor, with such information and documentation as it may reasonably request to determine such suitability. Franchisor shall notify Developer of its approval or disapproval with five business days of its receipt of such documentation and information. All proposed principal owners must execute the applicable Franchise Agreement as a principal owner. Further, each minority owner must execute agreement containing nondisclosure and non-competition covenants, in such form as Franchisor may reasonably require, but in any event similar in scope to those referenced in paragraphs above which covenants shall apply if such owner has been permitted access to or has been exposed to Franchisor's trade secrets or confidential information, which one or more of the principal owners who execute this Agreement shall confirm or deny in writing promptly, following a request of Franchisor. Notwithstanding anything to the contrary contained in this Agreement, or in any other agreement involving Developer or its affiliate, neither Developer nor its affiliate may enter into any arrangement or agreement with such a minority owner which does not satisfy Section X above in all respects. No such transfer of interest to a minority owner alone shall be deemed a transfer of an interest hereunder. 4. In addition to the other requirements of this transfer paragraph, in the event Developer or a direct or indirect owner of Developer prepares or participates in the preparation of any written materials in connection with a private or public offering of any interest in Developer or its affiliate, all 12 materials required for such offering by federal and state law shall be submitted to Franchisor for review prior to the date filed with any government agency and any materials to be used in any exempt offering shall be submitted to Franchisor for review prior to their use. No such offering shall imply that Franchisor is participating as an underwriter, issuer or offeror of Developer's, such affiliate's or Franchisor's securities; and Franchisor's review of any offering shall be limited to the subject of the relationship between Developer and the subject of the relationship between Developer and Franchisor. Developer and the other participants in the offering shall fully indemnify Franchisor in connection with the Offering. 5. Notwithstanding anything to the contrary above or herein, it is contemplated that Developer, in connection with the initial financing of the establishment of the Developer's Outlet, its business and operations, will be required to provide a bank or financial institution with a security interest in substantially all of its assets, including a pledge of this Agreement and Developer's common stock or other equity. Franchisor will not have a right of first refusal in connection with Developer's giving of such security interest. Further, Franchisor's consent to the giving of such security interest and/or pledge of stock or other equity will be granted so long as Developer (and its affiliates, if applicable) is in compliance with this agreement as well as all other agreements with Franchisor, the security interest in the assets of any particular Outlet is given in order to facilitate the financing of the development of such unit or other Shop and subject to the following: In connection with the pledge of this Agreement, any lease (or similar agreement) in respect any premises for and/or the stock (or other equity) of Developer, Developer's bank or financial institution must agree to the reasonable satisfaction of Franchisor that: (i) it will notify Franchisor reasonably promptly of any defaults by Developer of any of Developer's obligations in connection with any loan made to Developer; (ii) if it seeks to reassign or transfer the stock of Developer and/or Developer's interest in this Agreement or the business conducted hereunder to a third party, such third party must meet Franchisor's then current criteria for its area developers to Franchisor's satisfaction (but Franchisor shall exercise reasonableness in making this determination) and the other conditions set forth herein in connection with obtaining Franchisor's consent before an assigmnent or transfer shall apply; and (iii) if, regarding the premises for any Outlet, Developer must give it a security interest in the lease(s) for such premises, then: (a) such security interest(s) must be given solely to facilitate the development of that or another Outlet of Developer (b) the bank or financial institution must agree; with respect to such lease(s) to furnish Franchisor with a right of first refusal (exercisable on not less than thirty days written notice to Franchisor) to take over the lease by agreeing to be bound by the original terms and conditions thereof. SECTION XI COVENANTS A. Developer specifically acknowledges that, pursuant to this Agreement, Developer will receive valuable training and confidential information, including, without limitation, assembly guidelines and instructions, information regarding the marketing methods and techniques of the Company and the System. Developer covenants that during the term of this Agreement except as otherwise approved in writing by the Company, Developer and persons controlling, controlled by or under common control with Developer, shall not, either directly 13 or indirectly, for itself or through, on behalf of or in conjunction with any person, persons or legal entity: 1. Divert or attempt to divert any business or client of the franchised business to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the System. 2. Employ or seek to employ any person who is at the time employed by the Company or by any other franchisee or developer of the Company, or otherwise directly or indirectly induce or seek to induce such person to leave his or her employment thereat. 3. Own, maintain, advise, help, invest in, make loans to, be employed by, engage in or have any interest in any Outlet (including any business operated by Developer prior to entry into this Agreement) specializing, in whole or in part, in the sale of the Proprietary Products both on a retail and wholesale basis and/or operating similar Outlet concept selling those food items by the Company or any of its franchisees or which Developer may be authorized to offer in connection with the Franchised Business. B. Developer covenants that except as otherwise approved in writing by the Company, Developer shall not, for a continuous and uninterrupted period commencing upon the expiration or termination of this Agreement, and continuing for two (2) years thereafter (and, in case of any violation of this covenant, for two (2) years after the violation ceases), either directly or indirectly, for himself or herself, or through, on behalf of or in conjunction with any person, persons, partnership or corporation, own, maintain, advise, help, invest in, make loans to, be employed by, engage in or have any interest in any business other than the franchised business specializing, in whole or in part, in providing the sale of the Proprietary Products both on a retail and wholesale basis and or operating a similar concept selling those food items sold by the Company and its franchisees or any other type of service which Developer may be authorized to offer in connection with the Franchised Business which is located: 1. Within the Development Area, or 2. Within a radius of ten (10) miles of the location of any Franchised Business; 3. Within a radius of ten (10) miles of the location of any other business using the System whether franchised or owned by the Company. C. Subsections A.3 and B. of this Section shall not apply to ownership by Developer of less than a five percent (5%) beneficial interest in the outstanding equity securities of any corporation which is registered under the Securities Exchange Act of 1934. D. The parties agree that each of the foregoing covenants shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion of a covenant in this Section XI is held unreasonable or unenforceable by a court or agency having valid jurisdiction in any unappealed final decision to which the Company is a party, Developer expressly agrees to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section XI. 14 E. Developer understands and acknowledges that the Company shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in Subsection A and B of this Section XI or any portion thereof, without Developer's consent, effective immediately upon receipt by Developer of written notice thereof, and Developer agrees that it shall comply forthwith with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section XXV hereof. F. Developer expressly agrees that the existence of any claim it may have against the Company, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by the Company of the covenants in this Section XI. G. Developer acknowledges that any failure to comply with the requirements of this Section XI would cause the Company irreparable injury for which no adequate remedy at law may be available, and Developer hereby accordingly consents to the Company seeking injunctive relief prohibiting any conduct by Developer in violation of the terms of this Section XI. The Company may further avail itself of any other legal or equitable rights and remedies which it may have under this Agreement or otherwise. H. At the Company's request, Developer shall require and obtain the execution of covenants similar to those set forth in this Section XI (including covenants applicable upon the termination of a person's relationship with Developer) from any or all of the following persons: 1. All Outlet managers of Developer and any other personnel employed by Developer who have received training from the Company; 2. All officers, directors and holders of a beneficial interest of five percent (5%) or more of the securities of Developer and or any corporation directly or indirectly controlling Developer if Developer is a corporation; and 3. The general partners and any limited partners (including any corporation, and the officers, directors and holders of a beneficial interest of five percent (5%) or more of the securities of any corporation which controls directly or indirectly any general or limited partner) if Developer is a partnership. Each covenant required by this Subsection H. shall be in a form satisfactory to the Company, including, without limitation, specific identification of the Company as a third party beneficiary of such covenants with the independent right to enforce them. Failure by Developer to obtain execution of a covenant required by this Subsection H. shall constitute a default under Section VIII hereof. I. During the term of this Agreement, an officer or agent of the Company shall have the right to inspect any Outlet in which Developer has an interest at reasonable times during normal business hours to the extent reasonably necessary to determine whether conditions of this Section XI are being satisfied. If, by reason of such inspections or otherwise, the Company has reason to believe that Developer is not in full compliance with the terms of this Section, the Company shall give notice of such default to Developer specifying the nature such default. If Developer denies that it is in default hereunder, as specified by the Company, it shall have burden of establishing that such default does not exist and shall give notice to the Company of its position within ten (10) days of receipt of the notice from the Company. Unless Developer so denies such 15 default, it shall immediately take all steps to cure said default in a manner satisfactory to the Company. SECTION XII SUBSTITUTION OF OUTLET Except where substitution may conflict with third party contracts, Developer may, with Franchisor's prior written consent, close any Outlet opened hereunder and substitute therefor another Outlet of the same type at a location within the Development Zone approved by Franchisor. The new Outlet must open within one (1) year following the closing of the old Outlet. Upon Franchisor's approval of the location for the new Outlet, Developer shall execute a new Franchise Agreement and related agreements for the new unit on the form of Franchise and related agreements then required by Franchisor. Before the new Outlet opens, Developer shall reimburse Franchisor for Franchisor's out of pocket expenses, if any, incurred in assisting Developer to develop the new unit and in approving the new Outlet. lithe term of the Franchise Agreement for the new Outlet shall be the unexpired term of the Franchise Agreement for the closed Outlet with no increase in fees; however, Developer must spend the $5,000 grand opening advertising budget. If Franchisor, at the request Developer, in Franchisor's sole and absolute discretion, grants Developer a new Franchise Agreement for a term longer than the unexpired term of the Franchise Agreement for the closed Outlet, Developer shall pay to Franchisor, upon the execution of the new Franchise Agreement, Franchisor's then current Initial Franchise Fee prorated for the extended term. SECTION XIII LIMITED EXCLUSIVITY A. In the event Developer opens each Outlet in accordance with the Development Schedule set forth in Schedule A. and additionally, has complied with and has not breached or defaulted under provisions of this Agreement and, additionally, Developer has complied with and has not breached or defaulted under the provisions of the Franchise Agreement and other agreements, if any, for each unit and continues to be qualified for expansion under Franchisor's then current Guidelines for Multi-Unit Development and operations then, during the term of this Agreement, Franchisor shall not operate or franchise any new ZAP Electric Vehicle Outlets within the Development Zone Area, except as set forth in Paragraph XIII B. below. B. From time to time during the term of this Agreement, special distribution opportunities (excluding short term special athletic and outdoor recreational event opportunities) may arise within the Development Area that are not available to Developer. Examples of such special distribution opportunities include, but are not limited to, utility company promotions, donations, etc. Franchisor shall have the right to pursue such special distribution opportunities either directly or by franchising to Developer or to others. If however, any such opportunity is available for Franchisor to franchise to Developer, and if Developer meets the conditions set forth in Paragraph XIII A above, then Franchisor shall first offer Developer the right to enter into Franchise and other agreements required by Franchisor with respect to such opportunity. Such right of first refusal shall expire forty-five (45) days after Franchisor offers the same to Developer in the event all such required documents have not been executed by Developer and delivered to Franchisor within such forty-five (45) day period. The rights reserved to Franchisor hereunder are 16 intended to ensure that distribution within the Development Zone Area is maximized. C. If, during the term of this Agreement, Franchisor grants a franchise to a third party within the Development Zone Area or operates directly within the Development Zone Area pursuant to the rights reserved to Franchisor under Paragraph XIII B., then Franchisor will offer to Developer one or more alternatives depending on the extent, if any, to which Franchisor, in its sole and absolute discretion, determines that the potential number of Shop available for Developer to develop within the Development Zone Area has been or is likely to be diminished by reason of Franchisor's activities within the Development Zone Area Such alternatives may include extending the term of the Development Schedule, reducing the initial franchise fees payable by Developer for Outlet, changing the number of Outlet, expanding the Development Zone Area or such other alternative, as Franchisor determines to be appropriate under the circumstances. If Developer does not accept the alternative offered by Franchisor, Developer may request that the issue be reviewed by the Franchisor. If Developer accepts the alternative offered by Franchisor, Developer shall execute agreements prepared by Franchisor to implement the arrangement within thirty (30) days after the agreements have been submitted to Developer; otherwise, Franchisor's offer shall be deemed withdrawn. Franchisor shall be under no obligation to offer alternatives to Developer if Developer has failed to open units in accordance with the Development Schedule set forth in Schedule A. or is not in compliance with this Agreement and the Franchise Agreement and other agreements, if any, for each unit. SECTION XIV NOTICES Any and all notices required or permitted under this Agreement shall be in writing and shall be personally delivered or mailed by certified or registered mail, return receipt requested, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to the Company: ZAP POWER SYSTEMS ATTENTION: Gary Starr 117 Morris Street Sebastopol, CA 95472 Notice to the Developer: _________________________________________ _________________________________________ _________________________________________ Any notice by certified or registered mail shall be deemed to have been given at the date and time of mailing. SECTION XV INDEPENDENT CONTRACTOR AND INDEMNIFICATION A. It is understood and agreed by the parties hereto that this Agreement does not create a fiduciary relationship between them, and that nothing in this Agreement is intended to constitute either party an agent, legal representative, subsidiary, joint venturer, partner, employee or servant of the other for any 17 purpose whatsoever. Each party to this Agreement is an independent contractor, and neither shall be responsible the debts or liabilities incurred by the other. B. Developer shall hold itself out to the public to be an independent contractor operating pursuant to this Agreement. Developer agrees to take such actions as shall be necessary to that end. C. Developer understands and agrees that nothing in this Agreement authorizes Developer to make any contract, agreement, warranty or representation on the Company's behalf, or to incur any debt or other obligation in the Company's name, and that the Company assumes no liability for, nor shall it be deemed liable by reason of, any act or omission of Developer or any claim or judgment arising therefrom. Developer shall indemnify and hold the Company and the Company's officers, directors, and employees harmless against and all such claims arising directly or indirectly from, as a result of, or in connection with Developer's activities hereunder, as well as the cost, including reasonable attorney's fees, of defending against them, except that the foregoing shall not apply to infringement actions regarding the Proprietary Marks which are caused solely by actions of the Company or actions caused by the negligent acts of the Company or its agents. SECTION XVI APPROVALS A. Whenever this Agreement requires the prior approval or consent of the Company, Developer shall make a timely written request to the Company therefor, and, except as otherwise provided herein, any approval or consent granted shall be in writing. B. The Company makes no warranties or guarantees upon which Developer may rely and assumes no liability or obligation to Developer or any third party to which it would not otherwise be subject, by providing any waiver, approval, advise, consent or services to Developer in connection with this Agreement, or by reason of any neglect, delay or denial of any request therefor. SECTION XVII NON-WAIVER No failure of the Company to exercise any power reserved to it under this Agreement or to insist upon compliance by Developer with any obligation or condition in this Agreement, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of the Company's rights to demand exact compliance with the terms of this Agreement. Waiver by the Company of any particular default shall not affect or impair the Company's right with respect to any subsequent default of the same or of a different nature; nor shall any delay, forbearance or omission of the Company to exercise any power or right arising out of any breach or default by Developer of any of the terms, provisions or covenants of this Agreement affect or impair the Company's rights; nor shall such constitute a waiver by the Company of any rights hereunder or rights to declare any subsequent breach or default. 18 SECTION XVIII SEVERABILITY AND CONSTRUCTION A. Each covenant and provision of this Agreement shall be construed as independent of any other covenant or provision of this Agreement. The provisions of this Agreement shall be deemed severable. B. If all or any portion of a covenant or provision of this Agreement is held unreasonable or unenforceable by a court or agency having valid jurisdiction in a decision to which the Company is a party, Developer expressly agrees to be bound by any lesser covenant or provision imposing the maximum duty permitted law which is subsumed within the terms of such covenant or provision, as if that lesser covenant or provision were separately stated in and made a part of this Agreement. C. Nothing in this Agreement shall confer upon any person or legal entity other than the Company or Developer, and such of their respective successors and assigns as may be contemplated by Section X hereof any rights or remedies under or by reason of this Agreement. D. All captions in this Agreement are intended solely for the convenience of the parties, and none shall be deemed to affect the meaning or construction of any provision hereof. E. All references herein to gender and number shall be construed to include the masculine, feminine, neuter, or plural, where applicable, and all acknowledgments, promises, covenants, agreements, and obligations herein made or undertaken by Developer shall be deemed jointly and severally undertaken by those executing this Agreement on behalf of Developer. F. This Agreement may be executed in triplicate and each copy so created shall be deemed to be an original. SECTION XIX ENTIRE AGREEMENT APPLICABLE LAW This Agreement, the documents referred to herein and the Exhibits attached hereto, constitute the entire, full and complete agreement between the Company and Developer concerning the subject matter hereof and supersede any and all prior agreements. No amendment, change or variance from this Agreement shall be binding on either party unless mutually agreed to by the parties and executed by their authorized officers or agents in writing. This Agreement shall be interpreted and construed under the laws of the State of California, and the parties hereto submit to the jurisdiction of all courts located within the State of California. SECTION XX TIMELY PERFORMANCE Developer hereby acknowledges that its timely development of the Outlet in the Development Zone in accordance with the Development Schedule is of material importance to the Company and Developer. Developer agrees, as a condition of the 19 continuance of the rights granted hereunder, to develop and open Outlet within the Development Zone in accordance with the Development Schedule, to operate such Outlet pursuant to the terms of the Franchise Agreements and to maintain all such Outlet in operation continuously. The Company agrees to diligently act upon any request of or approval from Developer and any material delay in Developer's ability to meet the Development Schedule which is directly caused by the Company's failure to act diligently upon a request for approval shall not constitute a default hereunder. Further, a failure or delay in performance by any party to this Agreement shall not be a default hereunder if such failure or delay arises out of or results from a force majeure, which for purposes of this Agreement shall be defined as fire, earthquake or other natural disasters or acts of a public enemy, war, rebellion or sabotage. SECTION XXI ARBITRATION A. In the event any party is required to employ legal counsel or to incur other reasonable expenses to enforce any obligation of another party hereunder, or to defend against any claim, demand, action, or proceeding by reason of another party's failure to perform any obligation imposed upon such part by this Agreement, and provided that legal action is filed by or against the first party and such action or the settlement thereof establishes the other party's default hereunder, then the prevailing party shall be entitled to recover from the other party the amount of all reasonable attorney's fees of such counsel and all other expenses reasonably incurred in enforcing such obligation or in defending against such claim, demand, action, or proceeding, whether incurred prior to or in preparation for or contemplation of the filing of such action thereafter. Nothing contained in this Paragraph shall relate to arbitration proceedings pursuant to this Agreement. B. Except as otherwise specifically provided in this Agreement, the parties agree that all contract disputes that cannot be amicably settled shall be determined solely and exclusively by arbitration under the Federal Arbitration Act as amended and in accordance with the rules of the American Arbitration Association or any successor thereof. Arbitration shall take place at an appointed time and place in the State of California. C. Each party shall select one arbitrator (who shall not be counsel for the party), and the two so designated shall select a third arbitrator. If either party shall fail to designate an arbitrator within seven (7) days after arbitration is requested, or if the two arbitrators shall fail to select a third arbitrator within fourteen (14) days after arbitration is requested, then an arbitrator shall be selected by the American Arbitration Association or any successor thereto upon application of either party. Judgment upon any award of the majority of the arbitrators shall be binding and shall be entered in a court of competent jurisdiction. The award of the arbitrators may grant any relief which might be granted by a court of general jurisdiction, including, without limitation by reason of enumeration, award of damages (but excluding injunctive relief), and may, in the discretion of the arbitrators, assess, in addition, the costs of arbitration, including the reasonable fees of the arbitrators and reasonable attorney's fees, against either or both parties, in proportions as the arbitrators shall determine. D. Nothing herein contained shall bar the right of either party to seek and obtain temporary and permanent injunctive relief from a court of competent jurisdiction consistent in accordance with applicable law against threatened 20 conduct that will in all probability cause loss or damage to Developer or Franchisor. E. It is the intent of the parties that any arbitration between the Developer and the Company regarding claim of Developer shall be of Developer's individual claim and that no such claim subject to arbitration shall be arbitrated on a class-wide basis. F. Developer shall not assert any claim or cause of action against Franchisor, its officers, directors, shareholders, employees or affiliates after one year following the event giving rise to such claim or cause of action. SECTION XXII ACKNOWLEDGMENTS A. Developer acknowledges that the success of the business venture contemplated by this agreement involves substantial business risks and will be totally and completely dependent upon the ability of Developer as an independent business person. The Company expressly disclaims the making of, and Developer acknowledges not having received, any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business venture contemplated by this Agreement. B. Developer acknowledges having received, read and understood this Agreement, the Exhibits attached hereto and agreements relating hereto, if any, and the Offering Prospectus delivered simultaneously herewith, and the Company has accorded Developer ample time and opportunity to consult with advisors of Developer's own choosing about the potential risks of entering into this Agreement. C. Developer acknowledges that he, she or it, whichever the case, received a complete copy of this Agreement, the Exhibits hereto and agreements relating hereto, if any, at least five (5) business days prior the date on which this Agreement was executed. Developer further acknowledges having received the disclosure, document required by the Trade Regulation Rule of the Federal Trade Commission entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" least ten (10) business days prior to the date on which this Agreement was executed. SECTION XXIII EFFECTIVE DATE This Agreement shall be effective as of the date it is executed by the Company IN WITNESS WHEREOF, the parties hereto have duty executed, sealed and delivered Agreement in triplicate on the day and year first above written. - ---------------------------------------- --------------------------- ZAP POWER SYSTEMS WITNESS By: ____________________________________ Date: __________________________________ - ---------------------------------------- --------------------------- DEVELOPER WITNESS 21 ZAP POWER SYSTEMS EXHIBIT "A" DEVELOPMENT SCHEDULE THE AGREEMENT authorizes and obliges Franchisee to establish and operate ( ) Outlet pursuant to a Franchise Agreement for each Outlet. The following Developer's Development Schedule: Cumulative Total Number of Outlets for which Developer Shall have an Executed Franchise Agreement By: _______________________________________ ___________________________________________ (Date) (Refer to Sections I A., III A. and III B. of Agreement) 22 ZAP POWER SYSTEMS EXHIBIT "B" DEVELOPMENT ZONE The following describes the Development Area within which Developer may locate Outlet under this Agreement: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Refer to Section I.A. of Agreement) 23 ZAP POWER SYSTEMS EXHIBIT "C" DEVELOPMENT FEE A. Number of Units: B. Initial Franchise Fees: UNITS PER UNIT # OF UNITS TOTAL TOTAL INITIAL FRANCHISE FEES Total Initial Franchise Fees are a payable in full even if some or all of the units to which they relate do not open. Initial Franchise Fee Payment Schedule One full Franchise Fee payable for the first ten stores and a percentage of the then current franchise fee to be negotiated of each additional Franchise Fee upon execution of Agreement: The remaining installment of each initial franchise fee shall be payable upon the earlier of the date of execution of the franchise agreement for each such Outlet or the required opening date for each such Outlet as set forth below, but only to the extent applicable for the number of Outlet set forth in 1. A. above. In any event, however, such installment must be signed before commencement of construction of any such Outlet. 1). Notwithstanding the provisions of "B" and "C" above, until the Franchisor had five (5) open and operating franchises, the fees provided above shall not be payable until the opening of each respective stores in a Zone arrangement. After the Franchisor has at least five (5) open and operating franchises, the Zone franchise fees shall be paid upon the execution of the Zone Agreement, unless said agreement provides otherwise. The initial franchise fee is not due until Franchisor has fulfilled and performed all of its initial obligations to the Franchisee. 24 ZAP POWER SYSTEMS EXHIBIT D FRANCHISE AGREEMENT SEE ATTACHED FORM OF AGREEMENT 25 ZAP POWER SYSTEMS EXHIBIT E TRANSFER OF A FRANCHISE TO A CORPORATION The undersigned, an Officer, Director and Owner of a majority of the issued and outstanding voting stock of the corporation set forth below and the Franchisee of the Outlet under a Franchise Agreement executed on the date set forth below, between himself or herself and ZAP POWER SYSTEMS, as a Franchisor, granting him or her a franchise to operate at the location set forth below and the other undersigned Directors, Officers, and Shareholders of the Corporation, who together with Franchisee constitute all of the Shareholders of the Corporation, in order to induce Franchisor to consent to the assignment of the Franchise Agreement to the Corporation in accordance with the provisions of Article XXI of the Franchise Agreement, agree as follows: 1. The undersigned Franchisee shall remain personally liable in all respects under the Franchise Agreement and all the other undersigned Officers, Directors and Stockholders of the Corporation intending to be legally bound hereby, agree jointly and severally to be personally bound by the provisions of the Franchise Agreement including the restrictive covenants contained in Article XVI thereof, to the same extent as if each of them were the Franchisee set forth in the Franchise Agreement and they jointly and severally personally guarantee all of the Franchisee's obligations set forth in said Agreement. 2. The undersigned agree not to transfer any stock in the Corporation without the prior written approval of the Franchisee and agree that all stock certificates representing shares in the Corporation shall bear the following legend: "The shares of stock represented by this certificate are subject to the terms and conditions set forth in a Franchise Agreement dated _________________ between ______________________ and ZAP Power Systems" 3. _______________________________ or his designee shall devote his best efforts to the day to day operation and development of the Outlet. 4. ________________________________ hereby agrees to become a party to and to be bound by all of the provisions of the Franchise Agreement executed on the date set forth below between Franchise Agreement executed on the date set forth below between Franchise Agreement executed on the date set forth below between Franchisee and ZAP Power Systems. Date of Franchise Agreement: ___________________________________________________ Location of Outlet: ____________________________________________________________ WITNESS: _______________________________________________________________________ Name of Corporation: ___________________________________________________________ ATTEST: ________________________________________________________________________ By: ___________________________________________________ (SEAL) In consideration of the execution of the above Agreement ZAP Power Systems, hereby consents to the above referred to assignment on this _____ day of ___________________. 26 ZAP POWER SYSTEMS EXHIBIT F CERTIFICATION OF DEVELOPER The undersigned, personally and as an officer or partner of Developer, as applicable, does hereby certify that he has conducted an independent investigation of the business contemplated by the ZAP Power Systems Zone Development Agreement, and The ZAP Power Systems Franchise Agreement, and that the decision to execute the Development Agreement was based entirely upon the independent investigation by the undersigned; and the undersigned further certifies that he has not relied upon, in any way, any claims regarding potential sales, income, or earnings to be derived from the business contemplated by the Franchise Agreement and Zone Development Agreement, and has not relied upon any claims regarding past or current sales, income or earnings of company operated Zap Electric Vehicle Outlet. The undersigned further certifies that he understands the risks involved in this investment and that ZAP Power Systems makes no representation or guaranty, explicit or implied, that the Developer will be successful or will recoup his investment. IN WITNESS WHEREOF, the undersigned has signed, sealed and delivered this Certificate this _____ day of __________________________________. WITNESS ______________________________ ___________________________ WITNESS ______________________________ ___________________________ Each of the undersigned owns a five percent (5%) or greater beneficial interest in Developer; each has read this Development Agreement; and each agrees to be individually bound by all obligations of Developer hereunder. WITNESS ______________________________ ___________________________ WITNESS ______________________________ ___________________________ 27 ZAP POWER SYSTEMS EXHIBIT G AUDITED BALANCE SHEET 28 EX-19.1 13 EXHIBIT 19.1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission file number 333-05744-LA ------------ ZAP POWER SYSTEMS - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) CALIFORNIA 94-3210624 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 117 Morris Street, Sebastopol, California 95472 - -------------------------------------------------------------------------------- (Address of principal executive offices) (707) 824-4150 - --------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- (APPLICABLE ONLY TO CORPORATE ISSUERS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 2,345,335 shares of common stock as of October 7, 1997 Transitional Small Business Disclosure Format Yes [ ] No [x] Part I. FINANCIAL INFORMATION Item 1. Financial Statements ZAP POWER SYSTEMS CONDENSED BALANCE SHEETS (Unaudited) September 30, 1997 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 129,385 Receivables 203,734 Inventories 270,151 Prepaid expenses and other assets 86,285 ----------- Total current assets 689,555 ----------- PROPERTY AND EQUIPMENT 140,200 ----------- OTHER ASSETS Investment in joint venture 66,381 Intangibles, net of accumulated amortization 18,905 of $3,132 Deposits 21,956 ----------- 107,242 ----------- Total assets $ 936,997 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 193,437 Accrued liabilities and other expenses 35,475 Customer Deposits 176,050 Notes payable 144,362 Current maturities of long-term debt 8,067 Current maturities of obligations under capital leases 3,583 ----------- Total current liabilities 560,974 ----------- OTHER LIABILITIES Obligations under capital leases, less current maturities 26,928 ----------- STOCKHOLDERS' EQUITY Common stock, no par value; 10,000,000 shares authorized, 2,343,135 shares issued and outstanding 2,087,361 Accumulated deficit (1,738,266) ----------- Total stockholders' equity 349,095 ----------- Total liabilities and stockholders' equity $ 936,997 =========== The accompanying notes are an integral part of these financial statements 2 ZAP POWER SYSTEMS CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Quarter ended September 30, Nine Months ended September 30, 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------- NET SALES $ 501,025 $ 403,618 $ 1,327,148 $ 852,634 COST OF GOODS SOLD 328,443 278,047 1,035,096 618,225 ----------- ----------- ----------- ----------- GROSS PROFIT 172,582 125,571 292,052 234,409 ----------- ----------- ----------- ----------- OPERATING EXPENSES Selling 159,516 152,186 424,887 340,038 General and administrative 136,652 156,776 500,873 362,592 Research and development 66,475 28,239 185,002 58,386 ----------- ----------- ----------- ----------- 362,643 337,201 1,110,762 761,016 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (190,061) (211,630) (818,710) (526,607) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (6,356) (3,607) (22,217) (6,517) Other 4,185 2,856 9,537 10,278 ----------- ----------- ----------- ----------- (2,171) (751) (12,680) 3,761 ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (192,232) (212,381) (831,390) (522,846) PROVISION FOR INCOME TAXES -- -- -- -- ----------- ----------- ----------- ----------- NET LOSS $ (192,232) $ (212,381) $ (831,390) $ (522,846) =========== =========== =========== =========== NET LOSS PER COMMON SHARE $ (0.08) $ (0.11) $ (0.37) $ (0.28) =========== =========== =========== =========== WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 2,319,328 1,972,094 2,233,385 1,848,479 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements
3 ZAP POWER SYSTEMS CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 1997 1996 - -------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (831,390) $ (522,791) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 46,024 32,400 Allowance for doubtful accounts (2,538) 4,700 Issuance of common stock for services rendered 67,770 56,000 Changes in: Receivables (140,286) (28,000) Inventories (23,581) (86,067) Prepaid expenses 29,155 -- Deposits 165,981 (1,658) Accounts payable (107,753) 116,187 Accrued liabilities and other expenses (27,453) 54,034 ----------- ----------- Net cash used by operating activities (824,071) (375,195) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment (80,618) (74,639) Investment in subsidiaries (13,882) -- Patent Defense (13,113) -- ----------- ----------- Net cash used by investing activities (107,613) (74,639) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 30,000 83,362 Proceeds from long-term debt 25,000 Decrease in restricted cash 10,000 Sale of common stock, net of stock offering costs 1,000,405 420,942 Principal repayments on long-term debt (9,409) (4,600) Payments on obligations under capital leases (9,509) (3,380) Principal repayments on note payable (122,000) 10,000 ----------- ----------- Net cash provided by financing activities 899,487 531,324 ----------- ----------- NET INCREASE/(DECREASE) IN CASH (32,197) 81,490 CASH, beginning of period 161,582 21,800 ----------- ----------- CASH, end of period $ 129,385 $ 103,290 =========== =========== The accompanying notes are an integral part of these financial statements
4 ZAP POWER SYSTEMS NOTES TO THE INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS (1) Basis of Presentation The financial statements included in this Form 10-QSB have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to such rules and regulations, 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 financial statements and related notes included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. The financial statements presented herein as of September 30, 1997 and September 30, 1996, and for the interim results of operations for the three months and nine months ended September 30, 1997 and September 30, 1996 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. Common stock equivalents associated with stock options have been excluded from the weighted average shares outstanding since the effect of these securities would be anti-dilutive. (2) - RECEIVABLES September 30, 1997 ------------------ Trade accounts receivable $ 217,596 Less allowance for doubtful accounts (13,862) --------- $ 203,734 ========= (3) - INVENTORIES September 30, 1997 ------------------ Raw materials $ 181,834 Work-in-process 68,536 Finished goods 19,781 --------- $ 270,151 ========= (4) - PROPERTY AND EQUIPMENT September 30, 1997 ------------------ Demonstration items $ 79,638 Machinery and equipment 45,122 Equipment under capital leases 45,940 Office furniture and fixtures 37,985 Computers 19,135 Leasehold improvements 10,432 Vehicle 4,300 --------- 242,552 Less accumulated depreciation and amortization (102,352) --------- $ 140,200 ========= 5 (5) - NOTES PAYABLE September 30, 1997 ------------------ Notesto stockholders, with interest at 12%; interest and principal due when the notes mature in November and December, 1997. The note holders have been issued warrants to purchase, in the aggregate, 21,800 shares of common stock at $5.25 per share through October, 1999. $ 109,000 Notesto a stockholder, with interest at 10%; principal and interest is due when the notes mature in December, 1997; unsecured 35,362 ----------- $ 144,362 =========== (6) - COMMON STOCK In November 1996, the Company began offering for sale, directly to the public, 500,000 shares of common stock at $5.25 per share. The net proceeds from the sale are to be used to retire certain debt, increase manufacturing capacity, and provide working capital for new product development and general purposes. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Special Note Regarding Forward-Looking Statements Certain statements in this Form 10-QSB, including information set forth under this Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "ACT"). ZAP Power Systems (the "Company") desires to avail itself of certain "safe harbor" provisions of the Act and is therefore including this special note to enable the Company to do so. Forward-looking statements included in this Form 10-QSB or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. Overview The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, and other low-power electric transportation vehicles. Historically, unit sales have been approximately 65% kits and 35% electric bicycles. Dollar sales have been 50% kits and 50% electric bicycles. The Company sells its electric bicycles and kits to retail customers, police departments, electric utility companies, bicycle dealerships and mail order catalogs. Net revenue is net of returns. The Company sells to the mail order catalogs and selected customers on credit with net 30-day terms. Many of the bicycle dealerships are sold cash on delivery. The retail sales are primarily paid for with a credit card or personal check before shipment of the product. The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bicycle. The Company also installs the motor system on bicycles that the Company buys. The Company then sells the complete electric bicycle to the customer. The Company purchases complete bicycles from various bicycle manufacturers for use with the Company's electric motor system. The Company manufactures the electric motor kit, which has approximately 62 unique parts. The manufacturing of the electric motor kit and the 6 installation of the motor systems to the bicycles are done at its Sebastopol location. The electric motors are purchased from an original equipment manufacturer (OEM) in the auto and air-conditioning industry. The Company is using one vendor for its motors, although there are other companies that could be used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer and security industries for power interrupt systems. The electronic system uses standard electronic components. U.P.S. and Federal Express usually ship the electric motor kits and electric bicycles sold by ZAP. Larger quantity orders to wholesale distributors are shipped common carrier. The Company has developed long term purchase arrangements with its key vendors. The Company has no contractual relationships with any of its vendors. The Company recently began manufacturing an electric scooter known as the "Zappy". The patent on this product is currently pending. Sixty orders have been received on this product which is expected to be available some time in December. The Company as of September 30, 1997 had a $180,949 sales backlog. The company expects to fill these orders within the next 60 days. Additionally, a contract with Central and South West Services, Inc., is in progress subject to SEC approval. The finalized documentation with the effective date will determine if and when SEC approval is granted. The contract is for $500,000 in products beginning in the fourth quarter of 1997 and extending out through the middle of 1998. The company also has purchase orders in hand in excess of $1Million. Although these purchase orders are in hand, no assurance can be made that either the Central and South West or the others will be less than their orders. The Company's growth strategy is to increase net sales by augmenting its marketing and sales force, and by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas. The company is also working on setting up franchise stores to assist in the retail sales arena. Currently California and Florida have been the only states with approval for this venture. The Company will continue to increase its production capability to meet the increasing demand for its product. The Company will continue to develop the product so that it is the low cost leader in the industry. Product improvements and new product introductions will continue to enlarge ZAP's presence in the electric vehicle industry. Results of Operations The following table sets forth, as a percentage of net sales, certain items included in the Company's Income Statements (see Financial Statements and Notes) for the periods indicated:
Quarter ended September 30, Nine months ended September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Statements of Income Data: Net sales........................................ 100.0% 100.0% 100.0% 100.0% Cost of sales.................................... 65.6 68.9 78.0 72.5 Gross profit (Loss).............................. 34.4 31.1 22.0 27.5 Operating expenses.............................. 72.4 83.5 83.7 89.3 Loss from operations............................. (38.0) (52.4) (61.7) (61.8) Other income (expense).......................... (0.4) ( 0.2) (1.0) 0.5 Loss before income taxes......................... (38.4) (52.6) (62.7) (61.3) Provision for income taxes....................... 0.0 0.0 0.0 0.0 Net loss......................................... (38.4) (52.6) (62.7) (61.3)
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30, 1996 Net sales for the quarter ended September 30, 1997, were $501,025 compared to $403,618 in the prior year, an increase of $97,407 or 24%. The increase in sales is primarily attributed to sales of complete electric bicycles, electric motor kits, and scooters. Gross profit (loss). Gross profit increased as a percentage of net sales to 34% from 31%. The total gross profit increased $47,011 or 37%. This increase is due to improved cost efficiency and stronger inventory controls. 7 Selling expenses in the quarter ended September 30, 1997 were $159,519 as compared to $152,186 for the quarter ended September 30, 1996. This was an increase of $7,333 or 5% from 1996 to 1997. As a percentage of sales, selling expenses decreased from 38% of sales to 32% of sales. This was due to an increase in sales compared to the 1996 period. General and administrative expenses for the quarter ended September 30, 1997 were $136,652. This is a decrease of $20,124 or 13% from 1996. As a percentage of sales, general and administrative expense decreased to 27% from 39% of net sales. Expense decreases during the 3rd quarter of 1997 as compared to the 3rd quarter of 1996 resulted from reduced personnel needs and greater cost controls. Research and development increased $38,236 or 135% in the 3rd quarter of 1997 as compared to the 3rd quarter of 1996. As a percentage of net sales it increased to 13% of sales in the 3rd quarter of 1997 as compared to 7% of sales in the 3rd quarter of 1996. The expense increase in the 3rd quarter of 1997 was due to increased efforts to create new products including the new "Zappy" to be introduced in December as well as products for the China Market. Additionally, the company is renting a second building for the Research and Development group. Other income (expense) decreased $1,420 or 189% in the 3rd quarter of 1997 as compared to 1996. This decrease was due to interest expense increasing $2,749 in the third quarter of 1997 as compared to 1996. Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996 Net sales for the nine months ended September 30, 1997, were $1,327,148 compared with $852,634 in the nine months ended September 30, 1996, an increase of $474,514 or 56%. The increase in sales is attributed to sales of both complete electric bicycles and electric motor kits to a large bicycle company. The company has also increased its sales impact overseas. Gross profit (loss). Gross profit decreased as a percentage of net sales, from 27% to 22%. The total gross profit increased $57,643 or 25%. The gross profit as a percentage of sales decrease was due to the earlier liquidation of the 1996 models in January of 1997, additional manufacturing costs associated with the startup of the 1997 models, and the additional assembly costs associated with the production of the new single motor bicycle. Selling expenses in the nine months ended September 30, 1997 were $424,887. This was an increase of 84,849 or 25% from the same period in 1996. As a percentage of sales, selling expenses decreased from 40% of sales to 32% of sales. This was due to a greater percentage of increased sales in comparison to the dollars spent on selling costs. General and administrative expenses for the nine months ended September 30, 1997 were $500,873. This is an increase of $138,281 or 38% from 1996. As a percentage of sales, general and administrative expenses decreased from 43% to 38% of net sales. Expense increases during the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996 resulted from the expense increases in accounting and administration to support the Company's sales growth, increases in sales and corporate development, and legal fees associated with opening ZAP electric vehicle franchise outlet stores. Research and development increased $122,616 or 217% in the nine months ended September 30, 1997, as compared to the nine months ended September 30, 1996. As a percentage of net sales it increased to 14% of sales in the nine months ended September 30, 1997 as compared to 7% of sales in the nine months ended September 30, 1996. The expense increase in the nine months ended September 30, 1997 was related to development of the "Zappy" that will be introduced in December, the new single motor electricruizer, the new worldbike, and vehicles for the China market. Other income (expense) decreased $16,441 or 437% in the nine months ended September 30, 1997 compared to the nine months ended September 30, 1996. This decrease was due to interest expense increasing $15,700 in the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996. 8 Liquidity and Capital Resources In the nine months ended September 30, 1997 the Company had a cash deficit of $831,390 from operations as compared to a cash deficit of $522,791 in the nine months ended September 30, 1996. In order to meet all of the Company's operating expenses the Company relied on the sales of common stock and issuing notes payable. In the nine months ended September 30, 1997 the Company raised a total of $1,000,405 from common stock sales and $30,000 from the issuance of notes payable. In the nine months ended September 30, 1996 the Company raised $420,942 from stock sales and $83,362 from the issuance of notes payable. The Company was cleared by the SEC to sell public shares on November 29, 1996. The funds received from this direct public offering in the nine months ended September 30, 1997 were utilized to pay down accounts payable and accrued expenses and to pay the Company's operating expenses. At September 30, 1997 and 1996, the Company had a working capital of $128,581 and ($46,308) respectively. As of September 30, 1997, the Company had total current assets of $689,555, including cash of $129,385, accounts receivable of $203,784, inventories of $270,151, and prepaid expenses of $86,285. The Company's current liabilities as of September 30, 1997 were $560,974, including accounts payable and accrued expenses of $228,912, notes payable of $144,362 and $11,650 of current maturity of long-term debt and leases. The balance of notes payable issued in November and December of 1996 in the amount of $109,000 are due in November and December of 1997. These note holders were granted a total of 21,800 warrants. The proceeds from this placement went to fund increased inventory levels, accounts receivables, capital expenditures and the Company's public stock offering expenses. The balance of notes payable $35,362, was an unsecured note with an interest rate of 10%. This note is due in December of 1997. Deposits from customers as of September 30, 1997 include a prepayment from a large bicycle manufacturer paid to the Company per the terms of the purchase order from them. The Company had net cash provided by financing activities of $899,487 for the nine months ended September 30, 1997, and $531,324 for the nine months ended September 30, 1996. Net cash provided by financing activities for the nine months ended September 30, 1996 was from notes payable proceeds of $83,362, a bank loan of $25,000, and sale of common stock of $420,942. Net cash provided by financing activities for the nine months ended September 30, 1997 was $30,000 from notes payable, $1,000,405 from the sale of common stock, less $122,000 of repayments of notes payable, bank debt and lease obligations and the elimination of restricted cash required on the notes payable. The bank loan with Wells Fargo Bank (March 1996) had an initial principal balance of $25,000 amortized over 2 years at an interest rate of 15%. The note, with a balance of $8,067 as of September 30, 1997, will be paid off by March of 1998. The equipment leases with AT&T Credit Corporation (July 1996 & May 1997) had an total balance of $45,930 for all three leases with monthly payments of $1,654 for three years. The new lease with AT&T that began in May was for a forklift used by the production area. The Company's primary capital needs are to fund its growth strategy, which includes increasing its net sales, increasing distribution channels, introducing new products, improving existing product lines and development of strong corporate infrastructure. Recent Accounting Pronouncements During October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established a fair value-based method of accounting for stock-based compensation plans. The Company is currently following the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Seasonality and Quarterly Results The Company's business is subject to seasonal influences similar to the bike industry. Sales volumes in the bicycle industry typically slow down during the winter months, November to March, in the U.S. 9 Inflation The Company's raw materials are sourced from stable cost competitive industries. As such, the Company does not foresee any material inflationary trends for its raw material sources. PART II - OTHER INFORMATION Item 1. Legal Proceedings There were no material proceedings pending in which the Registrant was named as a party. Item 2. Changes in Securities There were no changes in rights of securities holders. Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the vote of security holders. Item 5. Other Information There were no major contracts signed during the period. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the quarter. 10 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZAP POWER SYSTEMS - ---------------------------------- (Registrant) Date ______________ __________________________________________ James McGreen - President and Director Date ______________ __________________________________________ Gary Starr - Managing Director 11 EX-23 14 CONSENT OF MOSS ADAMS LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated February 14, 1997, except for Note 2, which is as of March 21, 1997, on our audit of the financial statements of Zap Power Systems, included in the registration statement on Form SB-2 in connection with the offering of common stock of Zap Power Systems. We also consent to the reference to our Firm under the caption "Experts". /s/ MOSS ADAMS LLP Santa Rosa, California November 24, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ZAP POWER SYSTEMS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 129,385 0 217,596 (13,862) 270,151 689,555 242,552 (102,352) 936,997 560,974 8,067 0 0 2,087,361 (1,738,266) 936,997 1,327,148 1,336,685 1,035,096 1,110,762 0 (2,538) 22,217 (831,390) 0 (831,390) 0 0 0 (831,390) (0.37) 0.00
EX-19.2 16 EXHIBIT 19.2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 ------------- [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________ Commission file number 333-05744-LA -------------------------- ZAP POWER SYSTEMS ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) CALIFORNIA 94-3210624 - ----------------------------------- ------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 117 Morris Street, Sebastopol, California 95472 - -------------------------------------------------------------------------------- (Address of principal executive offices) (707) 824-4150 - -------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- (APPLICABLE ONLY TO CORPORATE ISSUERS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 2,296,420 shares of common stock as of July 7, 1997 ----------------------------------------------------- Transitional Small Business Disclosure Format Yes [ ] No [x] Part I. FINANCIAL INFORMATION Item 1. Financial Statements ZAP POWER SYSTEMS CONDENSED BALANCE SHEETS (Unaudited) June 30, 1997 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 195,952 Receivables 217,384 Inventories 278,956 Prepaid expenses and other assets 101,424 ----------- Total current assets 793,716 ----------- PROPERTY AND EQUIPMENT 130,427 ----------- OTHER ASSETS Investment in joint venture 66,380 Intangibles, net of accumulated amortization 6,841 of $2,083 Deposits 15,986 ----------- 89,207 ----------- Total assets $ 1,013,350 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 370,624 Accrued liabilities and other expenses 28,420 Customer Deposits 105,966 Notes payable 144,362 Current maturities of long-term debt 11,321 Current maturities of obligations under capital leases 6,526 ----------- Total current liabilities 667,219 ----------- OTHER LIABILITIES Obligations under capital leases, less current maturities 23,671 ------ STOCKHOLDERS' EQUITY Common stock, no par value; 10,000,000 shares authorized, 2,200,196 shares issued and outstanding 1,868,494 Accumulated deficit (1,546,034) ----------- 342,460 ----------- Total liabilities and stockholders' equity $ 1,013,350 =========== The accompanying notes are an integral part of these financial statements 2 ZAP POWER SYSTEMS CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Quarter ended June 30, Six Months ended June 30, 1997 1996 1997 1996 - -------------------------------------------------------------------------------------------------------- NET SALES $ 568,223 $ 245,218 $ 826,123 $ 449,016 COST OF GOODS SOLD 484,853 227,338 706,653 340,178 ----------- ----------- ----------- ----------- GROSS PROFIT 83,370 17,880 119,470 108,838 ----------- ----------- ----------- ----------- OPERATING EXPENSES Selling 172,571 101,108 265,371 187,852 General and administrative 188,021 115,449 364,221 205,816 Research and development 69,527 17,775 118,527 30,146 ----------- ----------- ----------- ----------- 430,119 234,332 748,119 423,814 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (346,749) (216,452) (628,649) (314,976) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (6,961) (1,350) (15,861) (2,910) Other 7,876 2,876 5,276 7,422 ----------- ----------- ----------- ----------- 915 1,526 (10,585) 4,512 ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (345,834) (214,926) (639,234) (310,464) PROVISION FOR INCOME TAXES -- -- -- -- ----------- ----------- ----------- ----------- NET LOSS $ (345,834) $ (214,926) $ (639,234) $ (310,464) =========== ============ =========== =========== NET LOSS PER COMMON SHARE $ (0.15) $ (0.12) $ (0.29) $ (0.18) =========== ============ =========== =========== WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 2,254,931 1,724,864 2,190,415 1,684,624 =========== ============ =========== =========== The accompanying notes are an integral part of these financial statements
3 ZAP POWER SYSTEMS CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 1997 1996 - -------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(639,234) $(310,410) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 27,024 18,400 Allowance for doubtful accounts 390 2,700 Issuance of common stock for services rendered 10,589 25,000 Changes in: Receivables (156,863) (18,400) Inventories (32,356) (54,966) Prepaid expenses 14,015 Customer Deposits 105,480 (1,362) Accounts payable 69,424 61,850 Accrued liabilities and other expenses (37,996) 42,357 --------- --------- Net cash used by operating activities (639,621) (234,831) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment (56,734) (21,247) Investment in subsidiaries (13,882) --------- --------- Net cash used by investing activities (70,616) (21,247) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 30,000 88,362 Proceeds from long-term debt 25,000 Decrease in restricted cash 10,000 Sale of common stock, net of stock offering costs 838,705 300,802 Principal repayments on long-term debt (6,179) (2,726) Payments on obligations under capital leases (6,003) Principal repayments on note payable (122,038) --------- --------- Net cash provided by financing activities 744,485 411,438 --------- --------- NET INCREASE IN CASH 34,352 155,360 CASH, beginning of period 161,600 21,800 --------- --------- CASH, end of period $ 195,952 $ 177,160 ========= ========= The accompanying notes are an integral part of these financial statements
4 ZAP POWER SYSTEMS NOTES TO THE INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS (1) Basis of Presentation The financial statements included in this Form 10-QSB have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to such rules and regulations, 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 financial statements and related notes included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. The financial statements presented herein as of June 30, 1997 and June 30, 1996, and for the interim results of operations for the three months and six months ended June 30, 1997 and June 30, 1996 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. Common stock equivalents associated with stock options have been excluded from the weighted average shares outstanding since the effect of these potentially dilutive securities would be antidilutive. (2) - RECEIVABLES June 30, 1997 -------------- Trade accounts receivable $ 234,174 Less allowance for doubtful accounts (16,790) ------------ $ 217,384 ============ (3) - INVENTORIES June 30, 1997 -------------- Raw materials $ 159,994 Work-in-process 43,719 Finished goods 75,243 ------------- $ 278,956 ============= (4) - PROPERTY AND EQUIPMENT June 30, 1997 -------------- Demonstration bicycles $ 60,514 Machinery and equipment 47,723 Equipment under capital leases 42,100 Office furniture and fixtures 30,835 Computers 19,135 Leasehold improvements 10,221 Vehicle 4,300 -------------- 214,828 Less accumulated depreciation and amortization (84,401) -------------- $ 130,427 ============= 5 (5) - NOTES PAYABLE June 30, 1997 ------------- Notes to stockholders, with interest at 12%; interest and principal due when the notes mature in November and December, 1997. The note holders have been issued warrants to purchase, in the aggregate, 21,800 shares of common stock at $5.25 per share through October, 1999. $ 109,000 Notes to a stockholder, with interest at 10%; principal and interest is due when the notes mature in December, 1997; unsecured 35,362 --------- $ 144,362 ========= (6) - COMMON STOCK In November 1996, the Company began offering for sale, directly to the public, 500,000 shares of common stock at $5.25 per share. The net proceeds from the sale are to be used to retire certain debt, increase manufacturing capacity, and provide working capital for new product development and general purposes. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Special Note Regarding Forward-Looking Statements Certain statements in this Form 10-QSB, including information set forth under this Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "ACT"). ZAP Power Systems (the "Company") desires to avail itself of certain "safe harbor" provisions of the Act and is therefore including this special note to enable the Company to do so. Forward-looking statements included in this Form 10-QSB or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. Overview The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, and other low-power electric transportation vehicles. Historically, unit sales have been approximately 65% kits and 35% electric bicycles. Dollar sales have been 50% kits and 50% electric bicycles. The Company sells its electric bicycles and kits to retail customers, police departments, electric utility companies, bicycle dealerships and mail order catalogs. Net revenue is net of returns. The Company sells to the mail order catalogs and selected customers on credit with net 30 day terms. Many of the bicycle dealerships are sold cash on delivery. The retail sales are primarily paid for with a credit card or personal check before shipment of the product. The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bicycle. The Company also installs the motor system on bicycles that the Company buys. The Company then sells the complete electric bicycle to the customer. The Company purchases complete bicycles from various bicycle manufacturers for use with the Company's electric motor system. The Company manufactures the electric motor kit, which has approximately 62 unique parts. The manufacturing of the electric motor kit and the installation 6 of the motor systems to the bicycles are done at its Sebastopol location. The electric motors are purchased from an original equipment manufacturer (OEM) in the auto and air-conditioning industry. The Company is using one vendor for its motors, although there are other companies that could be used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer industry for power interrupt systems. The electronic system uses standard electronic components. U.P.S. and Federal Express usually ship the electric motor kits and electric bicycles sold by ZAP. Larger quantity orders to wholesale distributors are shipped common carrier. The Company has developed long term purchase arrangements with its key vendors. The Company has no contractual relationships with any of its vendors. The Company recently began selling an electric scooter manufactured by an Italian company through a joint marketing agreement where they have rights to sell the Company's products in Italy and Austria, and the Company has the right to sell their product in Northern America. Subsequent to this agreement the company has sold approximately 70 units. The Company as of June 30,1997 had a $359,913 sales backlog. The company expects to fill these orders within the next 60 days. The Company's growth strategy is to increase net sales by augmenting its marketing and sales force, and by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas. The Company will continue to increase its production capability to meet the increasing demand for its product. The Company will continue to develop the product so that it is the low cost leader in the industry. Product improvements and new product introductions will continue to enlarge ZAP's presence in the electric vehicle industry. Results of Operations The following table sets forth, as a percentage of net sales, certain items included in the Company's Income Statements (see Financial Statements and Notes) for the periods indicated:
Quarter ended June 30, Six months ended June 30, 1997 1996 1997 1996 ---- ---- ---- ---- Statements of Income Data: Net sales........................................ 100.0% 100.0% 100.0% 100.0% Cost of sales.................................... 85.3 92.7 85.5 75.8 Gross profit (Loss).............................. 14.7 7.3 14.5 24.2 Operating expenses.............................. 75.7 95.5 90.6 94.4 Loss from operations............................. (61.0) (88.2) (76.1) (70.2) Other income (expense).......................... (0.2) 0.6 (1.2) 1.0 Loss before income taxes......................... (60.8) (87.6) (77.3) (69.2) Provision for income taxes....................... 0.0 0.0 0.0 0.0 Net loss......................................... (60.8) (87.6) (77.3) 69.2
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1997 Net sales for the quarter ended June 30, 1997, were $568,223 compared to $245,218 in the prior year, an increase of $323,005 or 132%. The increase in sales is primarily attributed to sales of both complete electric bicycles and electric motor kits to a large bicycle company. The Company also sold $15,755 of the imported Italian scooter through its distributor agreement with Movity S.r.l. Gross profit (loss). Gross profit increased as a percentage of net sales, from 7% to 15%. The total gross profit increased $65,490 or 366%. This increase is due to increased production volume increasing thus lower the cost per unit manufactured. 7 Selling expenses in the quarter ended June 30, 1997 were $172,571 as compared to $101,100 for the quarter ended June 30, 1996. This was an increase of $71,463 or 71% from 1996 to 1997. As a percentage of sales, selling expenses decreased from 41% of sales to 30% of sales. This was due to an increase in sales compared to the 1996 period. General and administrative expenses for the quarter ended June 30, 1997 were $188,021. This is an increase of $72,572 or 63% from 1996. As a percentage of sales, general and administrative expense decreased from 47% to 33% of net sales. Expense increases during the 2nd quarter of 1997 as compared to the 2nd quarter of 1996 resulted from the increased accounting, auditing and administration expense to support the Company's public offering and the increase in sales activity. Research and development increased $51,752 or 291% from the 2nd quarter of 1996 as compared to the 2nd quarter of 1997. As a percentage of net sales it increased to 12% of sales in the 1st quarter of 1997 as compared to 7% of sales in the 1st quarter of 1996. The expense increase in the 2nd quarter of 1997 was related to the electric scooter products that will be introduced in the second half of 1997. Other income (expense) decreased $611 or 40% from the 2nd quarter of 1996 to 1997. This decrease was due to interest expense increasing $5,600 in the second quarter of 1997 as compared to the second quarter of 1996. Six Months Ending June 30, 1996 Compared to Six Months Ending June 30, 1997 Net sales for the six months ended June 30, 1997, were $826,123 compared to $449,016 in the six months ended June 30, 1996, an increase of $377,107 or 84%. The increase in sales is attributed to sales of both complete electric bicycles and electric motor kits to a large bicycle company. The Company sold $15,755 of the imported Italian scooter through its distributor agreement with Movity S.r.l. in the first half of 1997. Gross profit (loss). Gross profit decreased as a percentage of net sales, from 24% to 14%. The total gross profit increased $10,632 or 10%. The gross profit as a percentage of sales decrease was due to the liquidation of the 1996 models in January of 1997, additional manufacturing costs associated with the startup of the 1997 models, and the additional initial costs associated with the large bicycle manufacturer order in the second quarter of 1997. Selling expenses in the six months ended June 30, 1997 were $265,371. This was an increase of 77,519 or 41% from the same period in 1996. As a percentage of sales, selling expenses decreased from 42% of sales to 32% of sales. This was due to a decrease in marketing to auto dealerships and an increase in direct retail sales and other dealer outlets as compared to the 1996 period. General and administrative expenses for the six months ended June 30, 1997 were $364,221. This is an increase of $158,405 or 77% from 1996. As a percentage of sales, general and administrative expense decreased from 46% to 44% of net sales. Expense increases during the six months ended June 30, 1997 as compared to the six months ended June 30, 1996 resulted from the expense increases in, accounting, auditing and administration to support the Company's public offering, increases in sales and corporate development. Research and development increased $88,381 or 293% from the six months ended June 30, 1996 as compared to the six months ended June 30, 1997. As a percentage of net sales it increased to 14% of sales in the six months ended June 30, 1997 as compared to 7% of sales in the six months ended June 30, 1996. The expense increase in the six months ended June 30, 1997 was related to development of the electric scooter products that will be introduced in the second half of 1997, and new products to be introduced in foreign markets. Other income (expense) decreased $15,097 or 334% from the six months ended June 30, 1996 to the six months ended June 30, 1997. This decrease was due to interest expense increasing $12,951 in the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. 8 Liquidity and Capital Resources In the six months ended June 30, 1997 the Company had a cash deficit of $639,621 from operations as compared to a cash deficit of $234,831 in the six months ended June 30, 1996. In order to meet all of the Company's operating expenses, the Company relied on the sales of common stock and the issuance of notes payable. In the six months ended June 30, 1997 the Company raised a total of $838,705 from common stock sales and $30,000 from the issuance of notes payable. In the six months ended June 30, 1996 the Company raised $300,802 from stock sales and $88,362 from the issuance of notes payable. The Company was cleared by the SEC to sell public shares on November 29, 1996. The funds received from this direct public offering in the six months ended June 30, 1997 were utilized to pay the Company's operating expenses and capital expenditures. At June 30, 1996 and 1997, the Company had a working capital of $70,800 and $126,497 respectively. As of June 30, 1997, the Company had total current assets of $793,716, including cash of $195,957, accounts receivable of $217,384, inventories of $278,956, and prepaid expenses of $101,424. The Company's current liabilities as of June 30,1997 were $667,219, including accounts payable and accrued expenses of $399,044, notes payable of $144,362 and $17,847 of current maturity of long-term debt and leases. The balance of notes payable issued in November and December of 1996 in the amount of $109,000 are due in November and December of 1997. These note holders were granted a total of 21,800 warrants. The proceeds from this placement went to fund increased inventory levels, accounts receivables, capital expenditures and the Company's public stock offering expenses. The balance of notes payable $35,362, was an unsecured note with an interest rate of 10%. This note is due in December of 1997. Deposits from customers as of June 30, 1997 is a prepayment from the large bicycle manufacturer paid to the Company per the terms of the purchase order from them. The Company had net cash provided by financing activities of $411,438 for the six months ended June 30, 1996, and $744,485 for the six months ended June 30, 1997. Net cash provided by financing activities for the six months ended June 30, 1996 was from notes payable proceeds of $88,362, a bank loan of $25,000, and sale of common stock of $300,802. Net cash provided by financing activities for the six months ended June 30,1997 was $30,000 from notes payable, $838,705 from the sale of common stock, less $124,220 of repayments of notes payable, bank debt and lease obligations and the elimination of restricted cash required on the notes payable. The bank loan with Wells Fargo Bank, (March 1996), had an initial principal balance of $25,000 amortized over 2 years at an interest rate of 15%. The note, with a balance of $11,321 as of June 30, 1997, will be paid off March of 1998. The equipment leases are with AT&T Credit Corporation, (July 1996), had an initial balance of $43,076 with monthly payments of $1,186 for three years. The Company's primary capital needs are to fund its growth strategy, which includes increasing its net sales, increasing distribution channels, introducing new products, improving existing product lines and development of strong corporate infrastructure. Recent Accounting Pronouncements During October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established a fair value-based method of accounting for stock-based compensation plans. The Company is currently following the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", but includes the disclosures required by SFAS 123 in the annual report. Seasonality and Quarterly Results The Company's business is subject to seasonal influences similar to the bike industry. Sales volumes in the bicycle industry typically slow down during the winter months, November to March, in the U.S. Inflation The Company's raw materials are sourced from stable cost competitive industries. As such, the Company does not foresee any material inflationary trends for its raw material sources. PART II - OTHER INFORMATION 9 Item 1. Legal Proceedings There were no material proceedings pending in which the Registrant was named as a party. Item 2. Changes in Securities There were no changes in rights of securities holders. Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the vote of security holders. Item 5. Other Information There were no major contracts signed during the period. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the quarter. 10 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZAP POWER SYSTEMS - ----------------------------------------------- (Registrant) Date --------------- ---------------------------------------- Gary Starr - Managing Director Date --------------- ---------------------------------------- James McGreen - President and Director 11 EX-27 17 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ZAP POWER SYSTEMS FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JUN-30-1997 195,952 0 234,174 (16,790) 278,956 793,716 214,828 (84,401) 1,013,350 667,219 11,321 1,868,494 0 0 (1,546,034) 1,013,350 826,123 831,399 706,653 748,119 0 390 15,861 (639,234) 0 (639,234) 0 0 0 (639,234) (0.29) 0
EX-19.3 18 EXHIBIT 19.3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 -------------- [ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 333-05744-LA ------------ ZAP POWER SYSTEMS - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) CALIFORNIA 94-3210624 - ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 117 Morris Street, Sebastopol, California 95472 - -------------------------------------------------------------------------------- (Address of principal executive offices) (707) 824-4150 - --------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- (APPLICABLE ONLY TO CORPORATE ISSUERS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 2,200,196 shares of common stock as of March 31, 1997 ----------------------------------------------------- Transitional Small Business Disclosure Format Yes [ ] No [x] Part I. FINANCIAL INFORMATION Item 1. Financial Statements ZAP POWER SYSTEMS CONDENSED BALANCE SHEETS (Unaudited)
March 31, 1997 1996 - --------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $ 169,300 $ 72,300 Receivables 112,900 38,500 Inventories 253,100 76,800 Prepaid expenses and other assets 114,300 ----------- ----------- Total current assets 649,600 187,600 ----------- ----------- PROPERTY AND EQUIPMENT 114,400 71,600 ----------- ----------- OTHER ASSETS Investment in joint venture 57,500 Cash restricted to payment of long-term debt 50,000 Intangibles, net of accumulated amortization of $1,860 and $967, respectively 7,000 8,000 Deposits 22,700 6,000 ----------- ----------- 137,200 14,000 ----------- ----------- Total assets $ 901,200 $ 273,200 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 275,000 $ 108,300 Accrued liabilities and other expenses 17,400 7,800 Notes payable 179,363 55,400 Current maturities of long-term debt 14,337 Current maturities of obligations under capital leases 9,600 ----------- ----------- Total current liabilities 495,700 171,500 ----------- ----------- OTHER LIABILITIES Obligations under capital leases, less current maturities 23,700 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, no par value; 10,000,000 and 3,000,000 shares authorized, 2,200,196 and 1,644,384 shares issued and outstanding, respectively 1,582,000 250,200 Accumulated deficit (1,200,200) (148,500) ----------- ----------- 381,800 101,700 ----------- ----------- Total liabilities and stockholders' equity $ 901,200 $ 273,200 =========== =========== The accompanying notes are an integral part of these financial statements
2 ZAP POWER SYSTEMS CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three months ended March 31, 1997 1996 - -------------------------------------------------------------------------------- NET SALES $ 257,900 $ 203,800 COST OF GOODS SOLD 221,800 112,800 ----------- ----------- GROSS PROFIT 36,100 91,000 ----------- ----------- OPERATING EXPENSES Selling 92,800 86,700 General and administrative 176,200 90,400 Research and development 49,000 12,400 ----------- ----------- 318,000 189,500 ----------- ----------- LOSS FROM OPERATIONS (281,900) (98,500) ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (8,900) Other (2,600) 2,900 ----------- ----------- (11,500) 2,900 ----------- ----------- LOSS BEFORE INCOME TAXES (293,400) (95,600) PROVISION FOR INCOME TAXES -- -- ----------- ----------- NET LOSS $ (293,400) $ (95,600) NET LOSS PER COMMON SHARE $ (0.14) $ (0.06) =========== =========== WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 2,146,500 1,600,000 =========== =========== The accompanying notes are an integral part of these financial statements 3 ZAP POWER SYSTEMS CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 1997 1996 - --------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(293,400) $ (95,600) Adjustments to reconcile net loss to net cash used by operating activities Depreciation and amortization 12,700 7,400 Allowance for doubtful accounts 5,300 1,300 Issuance of common stock for services rendered 15,700 25,000 Changes in: Receivables (57,300) (9,100) Inventories (2,800) (18,400) Prepaid expenses 1,200 Deposits (7,600) Accounts payable (32,600) 14,100 Accrued liabilities and other expenses (42,200) (4,800) --------- --------- Net cash used by operating activities (401,000) (80,100) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment (30,400) (4,800) Investment in subsidiaries (5,000) --------- --------- Net cash used by investing activities (35,400) (4,800) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 30,000 58,400 Increase in restricted cash (40,000) Sale of common stock, net of stock offering costs 547,100 51,900 Principal repayments on long-term debt (3,000) Payments on obligations under capital leases (3,000) Principal repayments on note payable (87,000) 25,000 --------- --------- Net cash provided by financing activities 444,100 135,300 --------- --------- NET INCREASE IN CASH 7,700 50,500 CASH, beginning of period 161,600 21,800 --------- --------- CASH, end of period $ 169,300 $ 72,300 ========= ========= The accompanying notes are an integral part of these financial statements
4 ZAP POWER SYSTEMS NOTES TO THE INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS (1) Basis of Presentation The financial statements included in this Form 10-QSB have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations, 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 financial statements and related notes included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996. The financial statements presented herein as of March 31, 1997 and for the three months ended March 31, 1997 and 1996 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. Common stock equivalents associated with stock options have been excluded from the weighted average shares outstanding since the effect of these potentially dilutive securities would be antidilutive. (2) - RECEIVABLES March 31, 1997 1996 ------------- ------------- Trade accounts receivable $ 134,200 $ 47,500 Less allowance for doubtful accounts (21,300) (9,000) ------------- ------------- $ 112,900 $ 38,500 ============= ============== (3) - INVENTORIES March 31, 1997 1996 ------------- ------------- Raw materials $ 190,000 $ 47,000 Work-in-process 41,900 11,500 Finished goods 21,200 18,300 ------------- ------------- $ 253,100 $ 76,800 ============= ============== (4) - PROPERTY AND EQUIPMENT March 31, 1997 1996 ----------- ------------ Demonstration bicycles $ 50,800 $ 17,700 Machinery and equipment 44,800 33,300 Equipment under capital leases 42,100 - Office furniture and fixtures 22,500 15,400 Computers 13,100 13,200 Leasehold improvements 6,900 6,600 Vehicle 4,300 - ----------- ------------ 184,500 86,200 Less accumulated depreciation and amortization (70,100) (14,600) ----------- ------------ $ 114,400 $ 71,600 =========== ============ 5 (5) - NOTES PAYABLE March 31, 1997 1996 ----------- ----------- Notes to stockholders, with interest at 12%; interest and principal due when the notes mature in November and December, 1997; the Company is allocating 50% of the proceeds received from the Company's Direct Public Offering towards repayment of the loans until fully repaid; the note holders have been issued warrants to purchase, in the aggregate, 28,800 shares of common stock at $5.25 per share through October, 1999. $ 144,000 $ - Notes to a stockholder, with interest at 10%; principal and interest is due when the notes mature in December, 1997; unsecured 35,363 45,400 Notes, with interest at 10%; principal and interest is due when the notes mature in January and February, 1997; unsecured 5,000 Note, with interest at 10%; the note was converted to 3,000 shares of common stock in 1996 5,000 ----------- ---------- $ 179,363 $ 55,400 =========== =========== (6) - COMMON STOCK In November 1996, the Company began offering for sale, directly to the public, 500,000 shares of common stock at $5.25 per share. The net proceeds from the sale are to be used to retire certain debt, increase manufacturing capacity, and provide working capital for new product development and general purposes. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Special Note Regarding Forward-Looking Statements Certain statements in this Form 10-QSB, including information set forth under this Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "ACT"). ZAP Power Systems (the "Company") desires to avail itself of certain "safe harbor" provisions of the Act and is therefore including this special note to enable the Company to do so. Forward-looking statements included in this Form 10-QSB or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve known and unknown risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward looking statements. Such future results are based upon management's best estimates based upon current conditions and the most recent results of operations. Overview The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, and other low-power electric transportation vehicles. Historically, unit sales have been approximately 65% kits and 35% electric bicycles. Dollar sales have been 50% kits and 50% electric bicycles. 6 The Company sells its electric bicycles and kits to retail customers, police departments, electric utility companies, bicycle dealerships and mail order catalogs. Net revenue is net of returns. The Company sells to the mail order catalogs and selected customers on credit with net 30 day terms. Many of the bicycle dealerships are sold cash on delivery. The retail sales are primarily paid for with a credit card or personal check before shipment of the product. The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bicycle. The Company also installs the motor system on bicycles which the Company buys. The Company then sells the complete electric bicycle to the customer. The Company purchases complete bicycles from various bicycle manufacturers for use with the Company's electric motor system. The Company manufactures the electric motor kit, which has approximately 62 unique parts. The manufacturing of the electric motor kit and the installation of the motor systems to the bicycles is done at its Sebastopol location. The electric motors are purchased from an original equipment manufacturer (OEM) in the auto and air-conditioning industry. The Company is using one vendor for its motors, although there are other companies that could be used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer industry for power interrupt systems. The electronic system uses standard electronic components. The electric motor kits and electric bicycles sold by ZAP are usually shipped by U.P.S. and Federal Express. Larger quantity orders to wholesale distributors are shipped common carrier. The Company has developed long term purchase arrangements with its key vendors. The Company has no contractual relationships with any of its vendors. The Company recently began selling an electric scooter manufactured by an Italian company through a joint marketing agreement where they have rights to sell the Company's products in Italy and Austria, and the Company has the right to sell their product in Northern America. Subsequent to this agreement the company has sold approximately 40 units. The Company as of March 31,1997 had a $322,000 sales backlog. The company expects to fill these orders within the next 60 days. The Company's growth strategy is to increase net sales by augmenting its marketing and sales force, and by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas. The Company will continue to increase its production capability to meet the increasing demand for its product. The Company will continue to develop the product so that it is the low cost leader in the industry. Product improvements and new product introductions will continue to enlarge ZAP's presence in the electric vehicle industry. Results of Operations The following table sets forth, as a percentage of net sales, certain items included in the Company's Income Statements (see Financial Statements and Notes) for the periods indicated: Three months ended March 31, 1997 1996 ---- ---- Statements of Income Data: Net sales............................. 100.00% 100.00% Cost of sales......................... 86.00 55.35 Gross profit (Loss)................... 14.00 44.65 Operating expenses................... 123.00 92.98 Loss from operations.................. (109.00) (48.33) Other income (expense)............... (4.50) 1.42 Loss before income taxes.............. (113.50) (46.91) Provision for income taxes............ 0.00 0.00 Net loss.............................. (113.50) (46.91) 7 Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1997 Net sales for the quarter ended March 31, 1997, were $257,900 compared to $203,800 in the prior year, an increase of $54,100 or 27%. The increase in sales is attributed to the Company's development of distributor sales and the increased retail sales from year end clearance programs the company executed to sell off the 1996 models in January 1997. Gross profit (loss). Gross profit decreased as a percentage of net sales, from 45% to 14%. The total gross profit decreased $54,900 or 60%. The year end clearance in the 1st quarter 1997 and the subsequent price reduction of the 1997 models is the primary reason for the decrease. The transition to the new 1997 model resulted in lower production volumes and associated higher initial production costs in the 1st quarter of 1997. Selling expenses in the quarter ended March 1997 were $92,800. This was an increase of $6,100 or 7% from 1996 to 1997. As a percentage of sales, selling expenses decreased from 43% of sales to 36% of sales. This was due to a decrease in marketing to auto dealerships and an increase in direct retail sales and other dealer outlets as compared to the 1996 period. General and administrative expenses for the quarter ended March 31, 1997 were $176,200. This is an increase of $85,800 or 95% from 1996. As a percentage of sales, general and administrative expense increased from 44% to 68% of net sales. Expense increases during the 1st quarter of 1997 as compared to the 1st quarter of 1996 resulted from the expenses of the implementation of computer systems, and increased accounting, auditing and administration expense to support the Company's public offering and the increase in sales activity. Research and development increased $36,600 or 295% from the 1st quarter of 1996 as compared to the 1st quarter of 1997. As a percentage of net sales it increased to 19% of sales in the 1st quarter of 1997 as compared to 6% of sales in the 1st quarter of 1996. The expense increase in the 1st quarter of 1997 was related to the electric scooter products that will be introduced in the second half of 1997. Other income (expense) decreased $14,400 or 497% from the 1st quarter of 1996 to 1997. This decrease was due to interest expense increasing $8,900 in the first quarter of 1997 as compared to the first quarter of 1996. Liquidity and Capital Resources In the first quarter of 1997 the Company had a cash deficit of $401,000 from operations as compared to a cash deficit of $80,000 in the first quarter of 1996. In order to meet all of the Company's operating expenses the Company relied on the sales of common stock and issuing notes payable. In the first quarter of 1997 the Company raised a total of $547,100 from common stock sales and $30,000 from the issuance of notes payable. In the first quarter of 1996 the Company raised $51,900 from stock sales and $83,400 from the issuance of notes payable. The Company was cleared by the SEC to sell public shares on November 29, 1996. The funds received from this direct public offering in the first quarter of 1997 were utilized to pay down accounts payable and accrued expenses and to pay the Company's operating expenses. At March 31, 1996 and 1997, the Company had a working capital of $16,100 and $158,600 respectively. As of March 31, 1997, the Company had total current assets of $649,600, including cash of $169,300 unrestricted, accounts receivable of $112,900, inventories of $253,100, and prepaid expenses of $114,300. The Company's current liabilities as of March 31,1997 were $491,000, including accounts payable and accrued expenses of $292,400, notes payable of $179,363 and $19,237 of current maturity of long-term debt and leases. The balance of notes payable issued in November and December of 1996 in the amount of $144,000 had preferential repayment rights of the public stock offering proceeds. The notes are due in November and December of 1997. These note holders were also granted a total of 37,800 warrants. The proceeds from this placement went to fund increased inventory levels, accounts receivables, capital expenditures and the Company's public stock offering expenses. The balance of notes payable $35,363, were unsecured notes with an interest rate of 10%. This note is due in December of 1997. 8 The Company had net cash provided by financing activities of $135,200 for the Quarter ended March 31, 1996, and $444,100 for the quarter ended March 31, 1997. Net cash provided by financing activities for the quarter ended March 31, 1996 was from notes payable proceeds of $58,400, a bank loan of $25,000, and sale of common stock of $51,900. Net cash provided by financing activities for the quarter ended March 31,1997 was $30,000 from notes payable, $547,100 from the sale of common stock, less $93,000 of repayments of notes payable, bank debt and lease obligations. The bank loan with Wells Fargo Bank, (March 1996), had an initial principal balance of $25,000 amortized over 2 years at an interest rate of 15%. The note, with a balance of $14,337 as of March 31, 1997, will be paid off March of 1998. The equipment lease is with AT&T Credit Corporation, (July 1996), and had an initial balance of $43,076 with monthly payments of $1,186 for three years. The Company's primary capital needs are to fund its growth strategy, which includes increasing its net sales, increasing distribution channels, introducing new products, improving existing product lines and development of strong corporate infrastructure. Recent Accounting Pronouncements During October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established a fair value-based method of accounting for stock-based compensation plans. The Company is currently following the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Seasonality and Quarterly Results The Company's business is subject to seasonal influences similar to the bike industry. Sales volumes in the bicycle industry typically slow down during the winter months, November to March, in the U.S. Inflation The Company's raw materials are sourced from stable cost competitive industries. As such, the Company does not foresee any material inflationary trends for its raw material sources. PART II - OTHER INFORMATION Item 1. Legal Proceedings There were no material proceedings pending in which the Registrant was named as a party. Item 2. Changes in Securities There were no changes in rights of securities holders. Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the vote of security holders. Item 5. Other Information There were no major contracts signed during the period. Item 6. Exhibits and Reports on Form 8-K No reports on Form 8-K were filed during the quarter. 9 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZAP POWER SYSTEMS - ------------------------------- (Registrant) Date ______________________ ______________________________________________ Gary Starr - Managing Director Date ______________________ ______________________________________________ James McGreen - President and Director Date ______________________ ______________________________________________ David Workman - Vice President of Operations, Chief Financial Officer, and Principal Accounting Officer 10 EX-27 19 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ZAP POWER SYSTEMS FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1997 MAR-31-1997 169,300 0 134,200 (21,300) 253,100 649,600 184,500 (70,100) 901,200 495,700 23,700 1,582,000 0 0 (1,200,200) 381,800 257,900 257,900 221,800 221,800 293,900 5,300 8,900 (293,400) 0 (293,400) 0 0 0 (293,400) (0.14) 0.00
EX-19.4 20 EXHIBIT 19.4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB (Mark One) X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from __________ to ____________ Commission file number _________________ ZAP POWER SYSTEMS - ------------------------------------------------------------------------------- (Name of small business issuer in its charter) CALIFORNIA 94-3210624 - ----------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 117 Morris Street, Sebastopol, California 95472 - ----------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Issuer's telephone number (707) 824-4150 --------------- Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None - ------------------------------------ ----------------------------------------- - ------------------------------------ ----------------------------------------- Securities registered under Section 12(g) of the Exchange Act: None - -------------------------------------------------------------------------------- (Title of class) - -------------------------------------------------------------------------------- (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10KSB. . State issuer's revenues for its most recent fiscal year. $1,170,900 ----------- State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). Note: If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated. There is no public market for the Company's common stock. (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes No . (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 2,076,500 shares of common stock as of December 31, 1996 2 TABLE OF CONTENTS PART I Item 1. Description of Business Item 2. Description of Property Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Common Equity and Related Stockholder Matters Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7. Consolidated Financial Statements Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Item 10. Executive Compensation Item 11. Security Ownership and Certain Beneficial Owners and Management Item 12. Certain Relationships and Related Transactions Item 13. Exhibits and Reports on Form 8-k 3 Part I Item 1. Description of Business A. Business Development The Company was incorporated under the laws of the state of California, on September 23, 1994. The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, and other low-power electric transportation vehicles. During 1994 the Company began to develop an electric bicycle system for the consumer market. The Company entered into a contract with a High Technology Development, a Singapore based company, to develop an electric bicycle for the country of Thailand. The Company, in cooperation with Systronics a U.S. Company, developed a product that would be built and sold in Thailand. The Company was paid for a technology transfer and ongoing research and development work on the product. The Thailand project was terminated in the middle of 1995. On February 13, 1996, the Company was issued a United States Patent on its electric bicycle motor system (Patent #5,491,390). During the second half of 1995 the Company began to develop a marketing and production strategy for the United States. It signed a sales agreement to sell bicycles through Real Goods Trading Company's mail order catalog. In the first quarter of 1996 the Company developed a Web Site on the World Wide Web allowing customers to buy the bicycles through the internet. In the second quarter of 1996 the Company entered into a contract with Power Biking Inc., an entity formed to sell electric bicycles through auto dealerships, to enroll auto dealers in North America to sell the Company's bicycles. In April the Company began selling electric bicycles and electric motor kits through the Sharper Image mail order catalog. The Company signed a joint marketing agreement with Movity S.r.l. to sell their electric scooter in the North American market and for Movity S.r.l. to sell the Company's products in Italy and Austria. In January 1997 ZAP China, a subsidiary of which the Company owns 50% , signed an agreement with Forever Company to sell up to 5,000 motor units. Forever Company will assemble these motors on their bicycles and then sell the completed bicycle in China. In March 1997 the Company signed a letter of intent to purchase the assets of Movity S.r.L. for a combination of common stock and cash totaling $500,000. Movity manufactures and sells an electric motor scooter into the European market. Although the Company is registered with the Securities and Exchange Commission, there was no trading in the Company's stock through the end of 1996. The Company initiated an Direct Public Offering of its public shares November 29, 1996 at a price of $5.25 per share. The Company is currently not traded on an exchange. B. Business of Issuer The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bicycle. The Company also installs the motor system on bicycles which the Company buys. The Company then sells the complete electric bicycle to the customer. The Company purchases complete bicycles from various bicycle manufacturers for use with the Company's electric motor system. The Company manufactures the electric motor kit which has approximately 62 unique parts. The electric motor kit manufacturing and installation of the motor systems to the bicycles is done at its Sebastopol location. The electric motors are purchased from an original equipment manufacturer (OEM) in the auto and air-conditioning industry. The Company is using one company for its motors, although there are other companies that could be 4 used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer industry for power interrupt systems. The electronic system uses standard electronic components. The electric motor kits and electric bicycles sold by ZAP are usually shipped by U.P.S. and Federal Express. Larger quantity orders to wholesale distributors are shipped common carrier. Overseas shipments are shipped by Ocean carrier or air freight. The Company has developed long term purchase arrangements with its key vendors. The Company has no contractual relationships with any of its vendors. The Company's growth strategy is to increase net sales by augmenting its marketing and sales force, and by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas. The Company will continue to increase its production capability to meet the increasing demand for its product. The Company will continue to develop the product so that it is the low cost leader in the industry. Product improvements and new product introductions will continue to enlarge ZAP's presence in the electric vehicle industry. The electric bicycle industry has three major manufacturers (3) and a large group of small manufacturers (30 plus). The major manufacturers are Honda, Suzuki, and Yamaha. They mainly sell products into Japan and China. The other group of manufacturers are much smaller in size and sales volume. These manufacturers have products that sell into the U.S., European, and Asian markets. The Company does not consider electric bicycle industry sales numbers very accurate at this point in time. As such, the Company's position in terms of sales volumes is impossible to determine. Item 2. Description of Property The Company leases its manufacturing and office facility at 117 Morris Street, Sebastopol, Ca. The Company's property consists primarily of manufacturing equipment and office computer systems. The monthly lease payment is $4,400 per month. The landlords are Daniel O. Davis and Robbin H. Davis. It is management's opinion that the Company's insurance policies covers all insurance requirements of the landlord. The lease expires June 1, 1998 with a renewal option for two additional five year periods. As of December 31, 1996 the Company has 30 full-time and 5 part-time employees. All these employees work at the Company's Sebastopol, California location. Item 3. Legal Proceedings There were no material proceedings pending in 1996 in which the Registrant was named as a party. Item 4. Submission of Matters to a Vote of Security Holders The Company called a special shareholders meeting October 8, 1996. A total of 1,754,490 shares (82.5%) were present or represented by proxy at the meeting to vote on the following issues; Election of James McGreen, Gary Starr, Nancy Cadigan, Lee Sannella and Jessalyn Nash to the board of directors. For 1,754,490 Against 0 Abstained 0 Amend the Articles of Incorporation to increase authorized shares from one million to ten million shares of common stock. For 1,745,490 Against 7,500 Abstained 1,500 Authorize a three for one stock split. For 1,754,490 Against 0 Abstained 0 Authorize the 1996 Stock Option Plan. For 1,676,490 Against 7,500 Abstained 70,500 5 Approve the appointment of Moss Adam LLP as the independent auditors for the Company for 1996. For 1,715,490 Against 7,500 Abstained 31,500 Waive the notice and meeting requirements set forth in the Bylaws prior to the meeting of October 8, 1996. For 1,702,490 Against 8,010 Abstained 43,500 Ratify all actions previously taken by the Board of Directors. For 1,703,490 Against 7,500 Abstained 43,500 Part II Item 5. Market for Common Equity and Related Stockholder Matters Although the Company is registered with the Securities and Exchange Commission, there was no trading in the Company's stock through the end of 1996. The Company initiated a Direct Public Offering of its public shares November 29, 1996 at a price of $5.25 per share. The Company is currently not traded on an exchange. The number of shares issued of record as of December 31, 1996 is 2,076,500. No dividends of cash or stock have been paid by the Company in the past. The payment of dividends will depend entirely upon the Company's ability to generate sufficient earnings, its financial needs and other unpredictable factors. It is not anticipated that common dividends will be paid in the foreseeable future. During 1995, a private placement was executed for 144,000 shares of common stock for an average price of $0.94 per share. During 1996 the Company sold 365,100 shares of common stock for an average price of $1.59. In addition the Company issued 57,400 shares for payment of current and future services at an average price of $3.15 per share. In October of 1996 the Company started a Direct Public Offering of 500,000 shares of common stock at $5.25 per share. In December of 1996 the Company issued 10,000 shares to a joint venture (ZAP (China) LLC), of which the Company owns 50%. As of December 31, 1996 the Company had 202 stockholders. Item 6. Management's Discussion and Analysis of Plan of Financial Condition and Results of Operations. Overview The Company designs, assembles, manufactures and distributes electric bicycle power kits, electric bicycles and tricycles, and other low-power electric transportation vehicles. Historically, unit sales have been approximately 65% kits and 35% electric bicycles. Dollar sales have been 50% kits and 50% electric bicycles. The Company sells its electric bicycles and kits to retail customers, auto dealerships, bicycle dealerships and mail order catalogs. Net revenue is net of returns. The Company sells to the mail order catalogs and selected customers on credit with net 30 day terms. The car dealerships and bicycle dealerships are sold cash on delivery. The retail sales are primarily paid for with a credit card or personal check before shipment of the product. During 1994 and 1995 the Company was paid by governmental agencies and private foundations to further develop the electric bicycle to fit into various roles in the US and overseas markets. During this period the Company developed electric motor systems for offshore sales and manufacturing. The Company's work to develop 6 offshore manufacturing abilities for the domestic and foreign markets involved private and public foundations in Thailand and other Asian countries. In addition, the Company worked on the development of an electric police bicycle. Late in the fourth quarter of 1995 the Company began to sell bicycles to retail and wholesale customers as its core business. The Company manufactures an electric motor system that is sold as a kit to be installed by the customer on their own bicycle. The Company also installs the motor system on bicycles which the Company buys. The Company then sells the complete electric bicycle to the customer. The Company purchases complete bicycles from various bicycle manufacturers for use with the Company's electric motor system. The Company manufactures the electric motor kit, which has approximately 62 unique parts. The manufacturing of the electric motor kit and the installation of the motor systems to the bicycles is done at its Sebastopol location. The electric motors are purchased from an original equipment manufacturer (OEM) in the auto and air-conditioning industry. The Company is using one Company for its motors, although there are other companies that could be used with slight modifications to the motor support brackets. The batteries are standard batteries used in the computer industry for power interrupt systems. The electronic system uses standard electronic components. The electric motor kits and electric bicycles sold by ZAP are usually shipped by U.P.S. and Federal Express. Larger quantity orders to wholesale distributors are shipped common carrier. The Company has developed long term purchase arrangements with its key vendors. The Company has no contractual relationships with any of its vendors. The Company's growth strategy is to increase net sales by augmenting its marketing and sales force, and by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas. The Company will continue to increase its production capability to meet the increasing demand for its product. The Company will continue to develop the product so that it is the low cost leader in the industry. Product improvements and new product introductions will continue to enlarge ZAP's presence in the electric vehicle industry. Results of Operations The following table sets forth, as a percentage of net sales, certain items included in the Company's Income Statements (see Financial Statements and Notes thereto elsewhere in this Prospectus) for the periods indicated: Years Ended December 31, 1994 1995 1996 ----------- -------- ------ Statements of Income Data: Net sales....................... 100.00% 100.00% 100.00% Cost of sales................... 109.00 67.00 74.00 Gross profit (Loss)............. (9.00) 33.00 26.00 Operating expenses............. 110.00 69.00 96.00 Loss from operations............ (119.00) (36.00) (70.00) Other income (expense)......... 0.00 34.00 0.00 Loss before income taxes........ (119.00) (2.00) (70.00) Provision for income taxes...... 1.00 1.00 0.00 Net loss........................ (120.00) (2.00) (70.00) Year Ended December 31, 1995 Compared to Year Ended December 31, 1996 Net sales for the year ended December 31, 1996, were $1,170,900 compared to $650,800 in the prior year, an increase of $520,100 or 80%. The increase in sales is attributed to the Company's development of the retail sales of its electric bicycles and kits through Auto dealers, Mail order catalogs, Electric Utilities companies and bicycle retail outlets. The Company established sales agreements with The Sharper Image Catalog, Power Biking Corporation, Merry Sales, and the Beverly Hills Motorcycle Catalog in the USA. Through Power Biking Corporation the Company signed up 8 Auto dealerships to sell the ZAP product line. During 1996 the Company developed a program with forty Electric Utilities to promote the use of electric bicycles. Through this program the Company has sold approximately 160 electric bicycles, electric kits and electric police bicycles in 1996. The 7 Company established sales/distribution agreements with Harvey Moore Motoring in Australia, and Movity S.R.L, in Italy. The Company expanded its internet marketing and sales effort in 1996 by expanding the existing ZAP Web page. The net sales increase resulted from increased bicycle and kit sales through expanded distribution channels both domestically and off shore. The Company also increased the sales price to distributors and retail customers an average of 25% in the same period. Gross profit (loss). Gross profit decreased as a percentage of net sales, from 33% to 26%. The transition from research and development projects to electric bicycle and electric kit sales resulted in a lower total gross profit percentage. The total gross profit increased $92,800 or 43% because of the increase in net sales from 1995 to 1996. Selling expenses in 1996 were $476,800. This was an increase of $386,500 or 428% from 1995 to 1996. As a percentage of sales, selling expenses increased from 14% of sales to 41% of sales. This was due to an increase in marketing to auto dealerships and other dealer outlets for the 1996 period as compared to the 1995 period as well as a realignment of sales and marketing efforts towards the sale of electric bicycles and kits versus research and development work. General and administrative expenses for 1996 were $554,800. This is an increase of $272,600 or 97% from 1995. As a percentage of sales, general and administrative expense increased from 43% to 47% of net sales. Expenses during 1996 included the cost of developing computer systems and implementation, accounting and administration to support the Company's public offering and to support increases in sales volume. Research and development increased $25,700 or 34% from 1995 to 1996. As a percentage of net sales it decreased from 12% to 9% respectively. This expense decreased as a percentage of net sales due to the Company's manufacturing of the products it had developed in the prior years. The expense in 1996 was primarily on the scooter products that will be introduced in 1997. Other income (expense) decreased $201,200 or 96% from 1995 to 1996. This decrease was due to the Company directing its resources to manufacturing and sales of electric bicycles and electric kits and away from royalty, research and development type revenue. Year Ended December 31, 1994 Compared to Year Ended December 31, 1995 Net sales. The Company was formed September 23, 1994. Sales during the three months to the end of 1994 were for electric bicycles and kits developed by the Company. The sales were to retail customers, wholesale customers and distributors. Net sales increased $589,500 or 962% from 1994 to 1995 due to a full year of activity in 1995 as compared to only 3 months of activity in 1994. During 1995, in addition to sales of electric bicycles and kits, the Company entered into contracts to perform research and product development for two U.S. agencies and one foreign company. High Technology Holdings Group, a Singapore Company, paid the Company $300,000 to develop an electric bicycle for the Singapore, Malaysian and Thailand markets and to assist in the set up of an manufacturing facility in Thailand for electric bicycles. This contract also included a technology licensing agreement and payment (see "Other income (expense)" below). The contract with High Technology Holdings Group was terminated in October 1995. The Company also performed research for The Electric Power Research Institute and the California Energy Commission totaling $75,000. Both of these contracts were completed in 1995. Gross profit (loss). Gross profit increased as a percentage of net sales, from (9%) to 33%. The increase in bicycle and kit sales volume resulted in reducing manufacturing cost on a per unit basis. The contract work the Company performed in 1995 relied on data developed by James McGreen, the current president of the Company, in 1994 and the years prior to the formation of the Company. Selling. Selling expense increased from 8% of sales to 14% of sales. In 1995 the Company increased its marketing and sales expenditures to launch its new products into the marketplace. General and administrative expense. General and administrative expenses decreased as a percentage of net sales from 69.0% in 1994 to 43% in 1995. This result was due to allocating fixed salary and rent expenses over more sales dollars than in the prior start-up year. 8 Research and development expense. Research and development expense decreased as a percentage of net sales from 32% in 1994 to 11% in 1995. The Company expenditures for development of their products was significant in 1994 and the first half of 1995. As sales volume increased in the second half of 1995 research and development expenditures did not increase at the same rate. Other income (expense). Other income (expense) increased significantly in 1995, 34% of net sales, as a result of the technology licensing agreement with High Technology Holdings Group, (see Net sales above). The licensing agreement allowed High Technology Holdings Group to use the Company's technology in Singapore, Malaysia and Thailand. High Technology Holdings Group paid $210,000 for this license. The Company received a $20,000 grant from the Environmental Protection Agency for work it performed in 1995. Liquidity and Capital Resources During 1995 and 1996 the Company operated with modest cash resources. In 1996 the Company had a cash deficit of $618,000 from operations as compared to a cash deficit of $14,000 in 1995. In order to meet all of the Company's operating expenses the Company relied on the sales of common stock and issuing notes payable. In 1996 the Company raised a total of $841,300 from common stock sales, issuances of notes payable and long-term debt. In 1995 the Company raised $111,500 from stock sales and issuance of notes payable. The Company was cleared by the SEC to sell public shares on November 29, 1996. These funds were utilized to pay down accounts payable and to fund the Company's increases in inventory, accounts receivable, operating costs and research and development expenditures. The Company also issued $52,500 of common stock to ZAP (China) LLC, of which 50% is owned by the Company. At December 31, 1995 and 1996, the Company had a working capital deficit of ($20,100) and ($44,800) respectively. As of December 31, 1996, the Company had total current assets of $584,600, including cash of $161,600, accounts receivable of $60,900, inventories of $246,600, and prepaid expenses of $115,500. The Company's current liabilities as of December 31,1996 were $629,400, including accounts payable and accrued expenses of $367,700, notes payable of $236,400 and current maturity of long-term debt and leases. Notes payable issued in November and December of 1996 in the amount of $189,000 had preferential repayment rights of the public stock offering proceeds. The notes are due in November and December of 1997. These note holders were also granted a total of 37,800 warrants. The proceeds from this placement went to fund increased inventory levels, accounts receivables, capital expenditures and the Company's public stock offering expenses. The balance of notes payable $47,400, were unsecured notes with an interest rate of 10%. These notes are due in January, February, March and December of 1997. The Company had net cash provided by financing activities of $92,200 for the year ended December 31, 1995, and $838,900 for the year ended December 31, 1996. Net cash provided by financing activities for the year ended December 31, 1996 was from notes payable $271,900, a bank loan $25,000, and sale of common stock $544,400. Net cash used in financing activities for the year ended December 31,1996 was $12,400 for repayments of bank debt and lease obligations. The bank loan with Wells Fargo Bank is for $25,000 amortized over 2 years at an interest rate of 15%. The equipment lease is with AT&T Credit Corporation and is for $43,076 with monthly payments of $1,186 for three years. The Company's primary capital needs are to fund its growth strategy, which includes increasing its net sales, increasing distribution channels, introducing new products, improving existing product lines and development of strong corporate infrastructure. Recent Accounting Pronouncements During October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established a fair value-based method of accounting for stock-based compensation plans. The Company is currently following the requirements of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." 9 Seasonality and Quarterly Results The Company's business is subject to seasonality influences. Sales volumes in the bicycle industry typically slows down during the winter months, November to March in the U.S. The Company is selling worldwide and is not impacted 100% by the U.S. seasonality in the bicycle industry. Inflation The Company's raw materials are sourced from stable cost competitive industries. As such the Company does not foresee any material inflationary trends for its raw material sources. 10 Item 7. - Consolidated Financial Statements - ------------------------------------------------------------------------------- ZAP POWER SYSTEMS AND SUBSIDIARY INDEPENDENT AUDITOR'S REPORT AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 - ------------------------------------------------------------------------------- 11 - ------------------------------------------------------------------------------- CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT.................................................1 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets..........................................................2 Statements of operations................................................4 Statements of stockholders' equity......................................5 Statements of cash flows................................................6 Notes to consolidated financial statements..............................8 - ------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT To the Board of Directors ZAP Power Systems and Subsidiary We have audited the accompanying consolidated balance sheets of ZAP Power Systems and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the 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 generally accepted auditing standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in all material respects, the financial position of ZAP Power Systems and Subsidiary as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Moss Adams LLP Santa Rosa, California February 14, 1997 except for Note 2, which is as of March 21, 1997 Page 1 ZAP POWER SYSTEMS AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, 1996 1995 - -------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash $161,600 $ 21,800 Receivables 60,900 30,700 Inventories 246,600 58,400 Prepaid expenses and other assets 115,500 -- -------- -------- Total current assets 584,600 110,900 -------- -------- PROPERTY AND EQUIPMENT 100,300 66,300 -------- -------- OTHER ASSETS Investment in joint venture 52,500 -- Cash restricted to payment of long-term debt 10,000 -- Intangibles, net of accumulated amortization of $1,600 and $700, respectively 7,300 8,200 Deposits 15,500 6,000 -------- -------- 85,300 14,200 -------- -------- Total assets $770,200 $191,400 ======== ======== The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 2 ZAP POWER SYSTEMS AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Continued)
- -------------------------------------------------------------------------------------------- December 31, 1996 1995 - -------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 301,200 $ 94,200 Accrued liabilities and other expenses 66,500 12,600 Income taxes payable -- 2,700 Notes payable 236,400 21,500 Current maturities of long-term debt 12,800 -- Current maturities of obligations under capital leases 12,500 -- ----------- ----------- Total current liabilities 629,400 131,000 ----------- ----------- OTHER LIABILITIES Long-term debt, less current maturities 4,700 -- Obligations under capital leases, less current maturities 23,700 -- ----------- ----------- 28,400 -- ----------- ----------- STOCKHOLDERS' EQUITY Common stock, no par value; 10,000,000 shares authorized, 2,076,500 and 1,644,000 shares issued and outstanding, respectively 1,019,200 149,900 Accumulated deficit (906,800) (89,500) ----------- ----------- 112,400 60,400 ----------- ----------- Total liabilities and stockholders' equity $ 770,200 $ 191,400 =========== =========== The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------- Page 3 ZAP POWER SYSTEMS AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- NET SALES $ 1,170,900 $ 650,800 COST OF GOODS SOLD 862,700 435,400 ----------- ----------- GROSS PROFIT 308,200 215,400 ----------- ----------- OPERATING EXPENSES Selling 476,800 90,300 General and administrative 554,800 282,200 Research and development 100,400 74,700 ----------- ----------- 1,132,000 447,200 ----------- ----------- LOSS FROM OPERATIONS (823,800) (231,800) ----------- ----------- OTHER INCOME (EXPENSE) Interest expense (11,400) (2,700) Miscellaneous 19,500 (8,000) Grant income -- 20,000 Royalty income -- 210,000 ----------- ----------- 8,100 219,300 ----------- ----------- LOSS BEFORE INCOME TAXES (815,700) (12,500) PROVISION FOR INCOME TAXES 1,600 3,500 ----------- ----------- NET LOSS $ (817,300) $ (16,000) =========== =========== NET LOSS PER COMMON SHARE $ (0.45) $ (0.01) =========== =========== WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 1,805,317 1,582,656 =========== =========== The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 4 ZAP POWER SYSTEMS AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 1996 and 1995 - -------------------------------------------------------------------------------------
Common Stock ---------------------- Accumulated Shares Amount Deficit Total ---------- ---------- ---------- ---------- Balance, December 31, 1994 1,500,000 $ 15,000 $ (73,500) $ (58,500) Sale of common stock 97,500 94,900 -- 94,900 Conversion of notes payable 46,500 40,000 -- 40,000 Net loss -- -- (16,000) (16,000) ---------- ---------- ---------- ---------- Balance, December 31, 1995 1,644,000 149,900 (89,500) 60,400 Sale of common stock 362,100 574,500 -- 574,500 Conversion of notes payable 3,000 5,000 -- 5,000 Stock issued for current and future services 57,400 181,000 -- 181,000 Stock issued to joint venture 10,000 52,500 -- 52,500 Warrants issued for finance fees -- 56,300 -- 56,300 Net loss -- -- (817,300) (817,300) ---------- ---------- ---------- ---------- Balance, December 31, 1996 2,076,500 $1,019,200 $ (906,800) $ 112,400 ========== ========== ========== ========== The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------- Page 5 ZAP POWER SYSTEMS AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(817,300) $ (16,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 47,400 11,100 Allowance for doubtful accounts 7,400 1,000 Issuance of common stock for services rendered 127,400 24,900 Changes in: Receivables (37,600) (21,800) Inventories (188,200) (41,400) Prepaids expenses (6,400) -- Deposits (9,500) (6,000) Accounts payable 207,000 71,000 Accrued liabilities and other expenses 53,900 (39,500) Income taxes payable (2,700) 2,700 --------- --------- Net cash used by operating activities (618,600) (14,000) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment (80,500) (61,700) Purchase of patent and trademark -- (8,900) --------- --------- Net cash used by investing activities (80,500) (70,600) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable 271,900 41,500 Proceeds from long-term debt 25,000 -- Sale of common stock, net of stock offering costs 544,400 70,000 Principal repayments on long-term debt (7,500) -- Payments on obligations under capital leases (4,900) -- Cash restricted to payment of certain notes payable 10,000 -- Principal repayments on note payable -- (19,300) --------- --------- Net cash provided by financing activities 838,900 92,200 --------- --------- NET INCREASE IN CASH 139,800 7,600 CASH, beginning of year 21,800 14,200 --------- --------- CASH, end of year $ 161,600 $ 21,800 ========= ========= The accompanying notes are an integral part of these financial statements.
- -------------------------------------------------------------------------------- Page 6 ZAP POWER SYSTEMS AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) - -------------------------------------------------------------------------------- Years Ended December 31, 1996 1995 - -------------------------------------------------------------------------------- SUPPLEMENTAL CASH-FLOW INFORMATION: Cash paid during the year for: Interest $ 11,400 $ 100 Income taxes $ 1,600 $ 800 Non-cash investing and financing activities: Conversion of notes payable to common stock $ 5,000 $ 40,000 Stock issued for future services $ 53,600 $ -- Stock issued to joint venture $ 52,500 $ -- Stock issued for current services $127,400 $ -- Warrants issued for financing fees $ 56,300 $ -- The accompanying notes are an integral part of these financial statements. - -------------------------------------------------------------------------------- Page 7 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of operations - ZAP Power Systems, (ZAP), was incorporated in California in September, 1994. ZAP and its wholly-owned subsidiary, Electricycle Corporation, 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. Principles of consolidation - Electricycle Corporation (Electricycle) was incorporated in June 1995, with the sole stockholder also a founding stockholder of ZAP Power Systems (ZAP). The activities of Electricycle were fully incorporated within the activities of ZAP, including common management, location and employees. In December 1995, the outstanding shares of stock in Electricycle were acquired at no cost by ZAP. Because of the common ownership and the interrelated activities of Electricycle and ZAP, the accounts of both companies in 1995 were consolidated from Electricycles' incorporation date rather than from the date of acquisition by ZAP. All material intercompany balances and transactions were eliminated. There was no activity within Electricycle during 1996. 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. 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 betterment's are capitalized. Estimated useful lives are as follows: Machinery and equipment 7 years Equipment under capital leases 5 years Demonstration bicycles 2 years Office furniture and equipment 7 years Vehicle 5 years Leasehold improvements 15 years Intangibles - Intangibles consist of costs expended to perfect certain patents and are amortized over an estimated useful life of ten years. Income taxes - ZAP and Electricycle file separate tax returns. Income taxes are recognized using enacted tax rates, and are composed of taxes on financial accounting income that is adjusted for requirements of current tax law and deferred taxes. Deferred taxes are the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax basis of existing assets and liabilities. A valuation allowance is recognized to offset a deferred tax asset if the eventual realization of all or a portion of the asset is uncertain. - -------------------------------------------------------------------------------- Page 8 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Research and development - Research and development costs are expensed as incurred. Concentrations of risk - Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of trade receivables. This credit risk is limited due to the large number of customers comprising the Company's customer base. Advertising - Advertising costs are expensed as incurred and totaled $38,300 and $8,600 for the years ended December 31, 1996 and 1995, respectively. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires the Company make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses, and disclosure of contingent assets and liabilities. The amounts estimated could differ from actual results. Fair value of financial instruments - The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. For certain of the Company's financial instruments, including cash, accounts receivable and accounts payable, the carrying amount approximates fair value because of the short maturities. The carrying amount of notes payable approximates fair value because current interest rates available to the Company for similar debt are approximately the same. Net loss per common share - The net loss per common share is based on the weighted average number of common shares outstanding in each period. Common stock equivalents associated with stock options have been excluded from the weighted average shares outstanding since the effect of these potentially dilutive securities would be antidilutive. Stock-based compensation - The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This standard became effective for the year ended December 31, 1996. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under the current accounting standard, compensation cost is the excess, if any, of the quoted market price of the stock at a measurement date over the amount that must be paid to acquire the stock. The standard allows the Company to continue to account for stock-based compensation under the current standard, with disclosure of the effect of the standard, or adopt a fair value based method of accounting. The company will continue to apply current accounting rules. Common stock - All share and per share data, including stock options, have been adjusted retroactively to reflect a three-for-one stock split. - -------------------------------------------------------------------------------- Page 9 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 2 - MANAGEMENT PLANS The Company's loss from operations is attributable to costs associated with augmenting its marketing and sales force; implementing a new computer system; and increasing its administrative and accounting staff to support the planned increases in sales volume. Management believes the Company will generate sufficient cash flows from operations, and from equity infusions related to its direct public offering, to meet its expected cash requirements. Through March 21, 1997, more than $600,000 has been generated through the public offering. NOTE 3 - RECEIVABLES 1996 1995 ----------------- ----------------- Trade accounts receivable $ 77,300 $ 39,700 Less allowance for doubtful accounts 16,400 9,000 ----------------- ----------------- $ 60,900 $ 30,700 ================= ================= NOTE 4 - INVENTORIES 1996 1995 ----------------- ----------------- Raw materials $ 99,900 $ 25,900 Work-in-process 95,500 24,900 Finished goods 51,200 7,600 ----------------- ----------------- $ 246,600 $ 58,400 ================= ================= - -------------------------------------------------------------------------------- Page 10 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 5 - PROPERTY AND EQUIPMENT 1996 1995 -------- -------- Machinery and equipment $ 41,600 $ 35,600 Equipment under capital leases 42,100 -- Demonstration bicycles 33,500 15,400 Office furniture and equipment 30,000 20,000 Leasehold improvements 6,600 6,600 Vehicle 4,300 -- -------- -------- 158,100 77,600 Less accumulated depreciation and amortization 57,800 11,300 -------- -------- $100,300 $ 66,300 ======== ======== NOTE 6 - NOTES PAYABLE 1996 1995 -------- -------- Notesto stockholders, with interest at 12%; interest and principal due when the notes mature in November and December, 1997; the Company is allocating 50% of the proceeds received from the Company's Direct Public Offering towards repayment of the loans until fully repaid; the noteholders have been issued warrants to purchase, in the aggregate, 37,800 shares of common stock at $5.25 per share through October, 1999 $189,000 $ -- Notes to a stockholder, with interest at 10%; principal and interest is due when the notes mature in March and December, 1997; unsecured 35,400 16,500 Notes, with interest at 10%; principal and interest is due when the notes mature in January and February, 1997; unsecured 12,000 -- Note, with interest at 10%; the note was converted to 3,000 shares of common stock in 1996 -- 5,000 -------- -------- $236,400 $ 21,500 ======== ======== - -------------------------------------------------------------------------------- Page 11 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 7 - LONG-TERM DEBT 1996 1995 ------- ------ Note to bank, with interest at 15%; principal and interest due in monthly installments and maturing in March, 1998; secured by an interest in other checking or savings accounts in the bank and held by the Company $17,500 $ -- Less current maturities 12,800 -- ------- ------ $ 4,700 $ -- ======= ====== NOTE 8 - CAPITAL LEASES Minimum future lease payments under capital lease obligations for computer equipment are as follows: Year Ending December 31, ------------------------ 1997 $17,900 1998 17,900 1999 9,200 --------- Total minimum lease payments 45,000 Less amounts representing interest 8,800 --------- Present value of minimum lease payments 36,200 Less current maturities 12,500 --------- $23,700 ========= - -------------------------------------------------------------------------------- Page 12 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 9 - PROVISION FOR INCOME TAXES 1996 1995 --------- --------- Current tax liability Federal $ -- $ 1,700 State 1,600 1,800 --------- --------- $ 1,600 $ 3,500 ========= ========= Deferred tax assets (liabilities) Federal tax loss carryforward $ 297,000 $ 25,900 State tax loss carryforward 79,000 4,700 Other, net (19,600) (500) --------- --------- 356,400 30,100 Less valuation allowance 356,400 30,100 --------- --------- $ -- $ -- ========= ========= ZAP Power Systems has available for carryforward approximately $876,000 and $850,000 of federal and state net operating losses, respectively, expiring through 2011. 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 utilizations, based upon the Company's past performance, a full valuation allowance is recorded against these deferred tax assets. NOTE 10 - COMMON STOCK In April, the Company, through a private placement memorandum, offered for sale 300,000 shares of common stock at $1.67 per share. In November 1996, the Company began offering for sale, directly to the public, 500,000 shares of common stock at $5.25 per share. The net proceeds from the sale are to be used to retire certain debt, increase manufacturing capacity, and provide working capital for new product development and general purposes. Stock issuance costs through December 31, 1996, of $41,500 have been offset against $616,000 of sale proceeds from both the direct public offering and the private placement memorandum. - -------------------------------------------------------------------------------- Page 13 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 10 - COMMON STOCK (Continued) In September, 1996, the Board of Directors authorized a three-for-one stock split. After giving effect to the split, the number of shares outstanding at December 31, 1995 increased from 548,000 to 1,644,000 shares. The number of shares the Company is authorized to issue was also increased from 1 million to 10 million shares. NOTE 11 - STOCK OPTIONS AND WARRANTS Options to purchase common stock are granted by the Board of Directors under two Stock Option 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 that may be optioned and sold under the 1996 and 1995 Plans are 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, and expire from five to ten years after the grant. Options totaling 365,000 shares were vested under both Plans at December 31, 1996. Options activity under the two plans is as follows:
1996 Plan 1995 Plan ---------------------------------- --------------------------------- Number Exercise Price Number Exercise Price of Shares Per Share of Shares Per Share --------- --------- ---------- -------- Outstanding at December 31, 1994 -- $ -- -- $ -- Granted -- $ -- 237,000 $ 0.40 Canceled -- $ -- -- $ -- ------- ------- Outstanding at December 31, 1995 -- $ -- 237,000 $ 0.40 Granted 501,000 $ 1.00 318,000 $ 0.40 Canceled -- $ -- -- $ -- ------- ------- Outstanding at December 31, 1996 501,000 $ 1.00 555,000 $ 0.40 ======= =======
Warrants to acquire stock were issued to certain stockholders as additional consideration for providing financial assistance, in the form of notes, to the Company (see Note 6). The fair value of the warrants at time of issuance $56,300, are reported as financing fees to be amortized over the life of the related debt. - -------------------------------------------------------------------------------- Page 14 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued) 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 1996 and 1995. Had compensation cost for the Company's options been based on the fair value of the awards at the grant date consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have approximated the following proforma amounts: 1996 1995 ------------------ -------------------- Net loss - as reported $ (817,300) $ (16,000) Net loss - pro forma $ (981,000) $ (36,600) Loss per share - as reported $ (0.45) $ (0.01) Loss per share - pro forma $ (0.54) $ (0.02) 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: 1996 1995 -------- -------- Dividends None None Expected volatility 30% 30% Risk free interest rate 6.28% 5.43% Expected life 10 years 10 years Volatility is a measure of the amount by which a price is expected to fluctuate during a period. The higher the volatility the more the returns on the stock can be expected to vary. Factors in estimating volatility include the length of time stock has been publicly traded. The volatility used is an estimate since the Company is currently offering stock to the public and it does not yet have a history of volatility. The effects of applying SFAS 123 in this proforma disclosure are not indicative of the effect on income in future years because options vest over several years and additional awards are expected to be authorized. NOTE 12 - JOINT VENTURE In December 1996, the Company joined with MW McWong International, Inc., to form ZAP (China), a limited liability corporation registered in California. The Company is a 50% owner of ZAP (China) LLC. ZAP (China) LLC entered into a joint venture with a Shanghai Forever Company Ltd., a bicycle manufacturing company in China. The joint venture is registered and incorporated in Shanghai as ZAP Forever Electric Vehicles Company, Ltd., and is 50% owned by ZAP (China). There were no material transactions with this joint venture at December 31, 1996. In 1997, the Company intends to account for its investment in the joint venture by the equity method. - -------------------------------------------------------------------------------- Page 15 ZAP POWER SYSTEMS AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 1996 and 1995 - -------------------------------------------------------------------------------- NOTE 13 - COMMITMENTS The Company rents warehouse and office space under an operating lease that expires in June 1998. The monthly rent of $4,400 is adjusted annually to reflect the average percentage increase in the Consumer Price Index. An option exists to extend the lease for two periods of five years each. Future minimum lease payments are $52,800 in 1997 and $22,000 in 1998. Rent expense under this lease was $52,800 and $24,000 in 1996 and 1995, respectively. A marketing agreement with a Broker requires the Company pay, commencing March 1, 1997, a 3% fee on all Company sales in the United States and Canada that are not generated by the Broker. This contingent brokerage fee is subject to the Broker meeting certain sales targets. - -------------------------------------------------------------------------------- Page 16 Item 8. - Changes in and Disagreements with Accountants and Financial Disclosure. The Company has retained Moss Adams LLP as the Company's Accountants for the years 1994, 1995 and 1996. Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. MANAGEMENT Name Age Position ---------------------- ----- ------------------------- Gary Starr 41 Managing Director James McGreen 43 President and Director Dave Workman 43 Vice President, Operations Jessalyn Nash 37 Director Lee S. Sannella, M.D. 80 Director Nancy K. Cadigan 38 Director and Secretary Gary Starr is Managing Director of the Company. He founded the Company with James McGreen in September 24, 1994. He has been building and driving electric cars for more than 20 years. In addition to overseeing the marketing of more than 3,000 electric bicycles and vehicles, Mr. Starr has invented several solar electric products and conservation devices. Mr. Starr founded U.S. Electricar's electric vehicle operations in 1983. That Company grew from 3 to more than 300 employees and raised more than $40 million. Mr. Starr also serves as an advisor to Zebra Motors, Inc., a designer of an electric sports car, and has been a technical advisor to UCLA's Lewis Center for Regional Policy Studies. He's been a member of the California Environmental Technology Advisory Council and has been a guest lecturer at Stanford University Graduate School of Business. In 1993, Mr. Starr earned a Private Industry Council Recognition Award for creating job opportunities in the EV industry and was named as one of the ten most influential electric car authorities by Automotive News. More recently, he was honored by the American Lung Association of San Francisco with a Clean Air Award in Technology and was recognized by U.S. Senator Barbara Boxer for his contribution towards clean air. Mr. Starr has several publications: Electric Cars: Your Guide to Clean Motoring, The Shocking Truth of Electric Cars, and The True Cost of Oil. In addition, he has appeared on more than 300 radio and television talk and news shows (including Larry King Live, The Today Show, Inside Edition, CNN Headline News, Prime Time Live, and the CBS Evening News and the McNeil Lehrer News Hour) as a recognized authority in the field of electric vehicles. James McGreen, President, has over 25 years experience in design, development, engineering, manufacturing and marketing. He has brought over 100 successful consumer products from conception to the mass market. He has been a pioneer in the ultralight aircraft, personal watercraft, and motorcycle racing fields. He is the founder and/or former president of Protopipe Exhaust Systems, Inc., McGreen Metalworking, Kanemoto Racing and McGreen Development. His commitment to electric transportation began in 1991 with successful competition in Electrathon racing. He holds several records and winning times for this lightweight electric vehicle class. He has been a racer of motorcycles and has built motor parts, frames, chassis and other specialty parts for both manufacturers and other racers. Mr. McGreen has also designed and built composite racing sail boats. A skilled machinist, welder, and tool and die maker, he has designed and built nearly every kind of lightweight motorized vehicle. A prolific inventor McGreen has filed five patents, (1 granted, 2 pending, 2 expired), in the resource 12 conservation and transportation fields. He also managed the World Championship team that won the World Solar Bicycle Races, in Akita, Japan in 1995. In 1996, McGreen was selected as an honored member of the Who's Who of American Inventors for his positive impact on society. David Workman, M.B.A., is Vice President of Operations of the Company. He has been involved with start-up and rapid growth companies for the last twenty years. From 1980 to 1991, he worked for California Energy Company, Inc. an alternative energy company, that had 12 employees and five-hundred thousand dollars sales when he started and now is listed on the New York Stock Exchange with a market capitalization of over $1 billion. He held the position of Corporate Controller when he left the company in 1991. In the past five years, he has worked for Precision Wood Manufacturing, Inc. (8/92-6/93 and 8/95-12/95), U.S. Electricar (7/93-4/95) and as a consultant (6/91-8/92 and 1/96-4/96). Mr. Workman's experience in the electric vehicle industry came from his work at U.S. Electricar where he held various management positions. Jessalyn Nash, Masters in Business, is an environmental and business consultant to rapid growth entrepreneurial companies. She has specialized in marketing, distributor relations and sales programs. Ms. Nash previously held positions with NeXT, Inc. and in National Sales and Marketing with Apple Computer, Inc. Ms. Nash has been an environmental advocate for over 20 years. She has operated her consulting business since 1989. Lee Sannella, M.D. has been an active researcher in the fields of alternative transportation, energy and medicine for more than 25 years. Dr. Sannella has been a founding shareholder in many start up high tech companies. He was a Director of U.S. Electricar from 1983 to 1992. A graduate of Yale University, he maintained an active medical practice for many years in ophthalmology and psychiatry. He worked with the Sonoma Medical Society on improving radiation standards and is a best-selling author. He has served on advisory boards of the City of Petaluma, California, on the Board of Directors of the San Andreas Health Council of Palo Alto, the Veritas Foundation of San Francisco, and the AESOP Institute. Nancy K. Cadigan assisted Jim McGreen in managing McGreen Development, the research organization that developed the original ZAP Power System. She has broad experience in sales, trade show events, and office management. With an educational background in Recreation and Leisure, Ms. Cadigan has worked in public and commercial recreation for more than twenty years. She has also worked on women's health issues and has counseled women in crisis situations. She has conducted public education classes on recycling, reuse and composting practices. Currently, Ms. Cadigan is involved in organic farming. In all of her work, she looks for environmentally sound solutions to ordinary problems and has been a strong advocate of the ZAP mission since its inception. In the past five years she has worked for the Oakland Parks and Recreation Department (1990-92), Alameda Waste Management Authority (1992-93), Urban Ore (1993-94), McGreen Development (1994), ZAP Power Systems (1994-present), and Women's Health Specialists (1995-present). Indemnification of Directors and Officers The Company's Articles of Incorporation provide that the liability of the directors for monetary damages shall be limited to the fullest extent permissible under California law. Insofar as indemnification for liabilities arising under the federal securities laws may be permitted to directors, officers and controlling persons of the Company pursuant to that provision, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in those laws and is, therefore, unenforceable. Director Term of Office and Compensation All directors terms of office expire at the next annual meeting of shareholders. The Company's directors do not receive any cash compensation for their service on the Board of Directors, but directors may be reimbursed for certain expenses in connection with their attendance at Board meetings. 13 Item 10. EXECUTIVE COMPENSATION
Summary Compensation Table Long Term Compensation ----------------------------------------- Annual Compensation Awards Payouts ------------------------------------------------------------------------ (a) (b) (c) (d) (e) (f) (g) (h) (I) Other Rest- Secur- Name Annual ricted ities All other and Compen- Stock Underlying LTIP Compensa- Principal Salary Bonus sation Award(s) Options/ Payouts tion Position Year ($) ($) ($) ($) SARs (#) ($) ($) - -------------------------------------------------------------------------------------------------------------- Gary Starr 1994 $ 0 Managing 1995 $21,000 72,000 Director 1996 $31,000 $3,750 60,000 James McGreen 1994 $ 0 President 1995 $33,000 72,000 1996 $33,000 $3,750 60,000
Option/SAR Grants in Last Fiscal Year Individual Grants - -------------------------------------------------------------------------------- (a) (b) (c) (d) (e) Number of % of Total securities Options/SARs Underlying Granted to Exercise Options/SARs Employees or Base Name Granted (#) in Fiscal Year Price ($/sh) Expiration Date - ---- ----------- -------------- ------------ --------------- Gary Starr 60,000 13% $1.00 7/31/2006 James McGreen 60,000 13% $1.00 7/31/2006 Item 11. Security Ownership and Certain Beneficial Owners and Management The following table sets forth certain information known to the Company regarding the beneficial ownership of the Company's Common Stock as of February 28, 1997 for each shareholder known by the Company to own beneficially 5% or more of the outstanding shares of its Common Stock. The Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by them, have sole investment and voting power with respect to their shares, subject to community property laws where applicable. 14 Shares Percentage of Common Shares Beneficially at February 28, 1997 5% Shareholders: Owned (2,546,220 shares) - ------------------------------------------------------------------------------ James McGreen 674,702* 27% Gary Starr 519,752** 20% David Workman 197,905*** 8% All directors and executive 1,490,137 59% officers as a group * Includes 74,252 shares of Common Stock issuable upon exercise of currently exercisable incentive stock options but excludes 57,748 shares of Common Stock issuable under options but not currently exercisable. ** Includes 74,252 shares of Common Stock issuable upon exercise of currently exercisable incentive stock options but excludes 57,748 shares of Common Stock issuable under options but not currently exercisable. *** Includes 47,424 shares of Common Stock issuable upon exercise of currently exercisable incentive stock options but excludes 84,576 shares of Common Stock issuable under options but not currently exercisable. CERTAIN TRANSACTIONS On September 23, 1994, the date the Company commenced business, James R. McGreen, the Company's President, transferred various assets, subject to certain liabilities, to the Company, receiving in exchange 900,000 shares (post split) of the Company's common stock. The net amount recorded on the Company's accounting records was $9,000. Mr. McGreen's net cost of those assets, less prior amortization of cost for tax purposes, was $10,691. On the same date, Gary Starr paid $6,000 for 600,000 shares (post split) of the Company's common stock. There have been no other transactions, nor are any transactions proposed, in which the Company was or is to be a party, in which any member of its management or director had any direct or indirect material interest. Item 13. Exhibits and Reports on Form 8-k Exhibit 11. Statement regarding computation of per share loss Loss per share was calculated based on the weighted average common shares outstanding during 1996. The Company had a Loss for the year so common stock options were not used to calculate fully dilutive earnings per share. Exhibit 21. Subsidiaries of the Company Electricycle Incorporated ZAP (China) LLC Exhibit 27. Financial Data Schedule 15 99. Additional Exhibits - Subsequent events January 1997 ZAP China signed an agreement with Forever Company to sell up to 5,000 motor units. Forever Company will assemble these motors on their bicycles to be sold in China. March 1997 the Company signed a letter of intent to purchase the assets of Movity S.r.L. for a combination of common stock and cash totaling $500,000. Movity manufactures and sells an electric motor scooter into the European market. 16 EX-27 21 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ZAP POWER SYSTEMS FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 161,600 0 77,300 (16,400) 246,600 528,300 158,100 57,800 713,200 629,400 28,400 1,019,200 0 0 (906,800) 112,400 1,170,900 1,170,900 862,700 862,700 1,092,382 20,118 11,400 (815,700) 1,600 (817,300) 0 0 0 (817,300) (0.45) 0.00
EX-23.1 22 CONSENT OF MOSS ADAMS, LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated August 28, 1996, on our audits of the financial statements of ZAP Power Systems and Subsidiary, included in the registration statement on Form SB-2 in connection with the offering of common stock of ZAP Power Systems and Subsidiary. We also consent to the reference to our Firm under the caption "Experts". /s/ Moss Adams LLP Santa Rosa, California October 3, 1996 EX-23.2 23 CONSENT OF EVERS & ANDELIN, LLP Phyllis E. Andelin Evers & William D. Evers Andelin, LLP Jay P. Hendrickson Lawyers and Counselors At Law Paul E. Manasian - -------------------------------------- Philip J. Nicholsen, PC November 19, 1997 ---------- Rafael Aguirre-Sacasa Kevin F. Barrett Kenneth A. Brunetti William L. Lowery Phone (415) 391-4294 Fax (415) 391-4292 James McGreen President and Director ZAP Power Systems 117 Morris Street Sebastopol, California 95472 Dear Mr. McGreen: This law firm consents to the incorporation of its name and its opinion letter re the legality of the securities being cleared for registration with the Securities and Exchange Commission pursuant to filing of the Form SB-2 Registration Statement on November 24, 1997. Sincerely, EVERS & ANDELIN, LLP /s/ EVERS & ANDELIN, LLP ------------------------ /s/ William D. Evers ------------------------ By: William D. Evers, Partner WDE:alm 155 Montgomery Street, 12th Floor San Francisco California 94104 415 391 4291 EX-99.1 24 SHARE PURCHASE AGREEMENT SHARE PURCHASE AGREEMENT To ZAP Power Systems, 117 Morris Street, Sebastopol, California 95472: I have received and had an opportunity to read the Prospectus by which the shares are offered. I represent that I am purchasing for investment. Signature:_________________________________ ____________________________ Date Enclosed is payment for _____ shares, at $6.00 per share, totaling $___________. Name(s):_____________________________________ Number of shares ______________ as (check one): Individual _____ Joint Tenants _____ Trust ______ Tenants in Common ____ Corporation _____ Other ______ For the person(s) who will be registered shareowner(s): Mailing Address: ____________________________________________________________ City, State & Zip Code: _____________________________________________________ Telephone Number: Business ( )______________ Home: ( )______________ Social Security or Taxpayer ID Number: _________________________________________ (Please attach any special mailing instructions other than shown above) NO SHARE PURCHASE AGREEMENT IS EFFECTIVE UNTIL ACCEPTANCE (You will be mailed a signed copy of this agreement to retain for your records.) Subscription accepted by ZAP Power Systems: _____________________________________ _________________________ James McGreen, President Date -----END PRIVACY-ENHANCED MESSAGE-----