-----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, MFkGKtXuRR7DOvbTdgCzhYjwDSht4BS0BeZ/7J1KWsw916Wm4VEnpz7HG8tLFvoA 5Wd1gpQM1/z6/wBu0cIn8A== 0000950005-98-000461.txt : 19980515 0000950005-98-000461.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950005-98-000461 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19980514 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 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-41411 FILM NUMBER: 98620232 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/A 1 FORM SB-2/A As Filed with the Securities and Exchange Commission on May 14, 1998 Registration No.333-41411 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- POST-EFFECTIVE AMENDMENT NO. 1 TO 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 & Hendrickson, 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. 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 nonexclusive selling agent of the Offering on a best-efforts basis. The Selling Agent will receive a total commission, in cash, equal to 8% of the gross proceeds from this Offering that the Selling Agent sells. Selling Agent will also receive warrants to purchase up to 50,000 shares of the Company's Common Stock at $6.00 per share. (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 May 14, 1998. 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 Change in Accounts 22 Additional Information 23 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. The summary financial data for the year ended December 31, 1997 has been derived from the Financial Statements and Notes to Financial Statements audited by Grant Thornton, LLP, independent certified public accountants, whose report thereon is also inlcuded.
September 23 Through Year Ended Year Ended Year Ended December 31, 1994 December 31, December 31, December 31, 1995 1996 1997 Statements of Income Data: Revenue $ 61,300 $650,800 $1,170,900 $1,640,200 Cost of goods sold 67,100 435,400 862,700 1,274,700 -------- -------- ---------- ---------- Gross profit (loss) (5,800) 215,400 308,200 365,500 Operating 67,200 447,200 1,132,000 1,699,500 Operating Income (loss) (73,000) (231,800) (823,800) (1,334,000) Other Income 300 222,000 19,500 11,100 Interest Expense - (2,700) (11,400) (84,800) Income before provision for taxes (72,700) (12,500) (815,700) (1,407,700) Provision for taxes on income 800 3,500 1,600 1,600 Net income (loss) $(73,500) $(16,000) $(817,300) $(1,409,300)
Balance Sheet Data: Dec. 31, Dec. 31, Sept. 30, Dec. 31, 1994 1995 1996 1997 ---- ---- ---- ---- Working capital $39,591 $20,100 $(46,308) $726,800 Total assets 80,988 191,400 415,125 1,342,000 Long-term debt, less current portion 311,701 0 43,408 70,900 Shareowners' equity (32,267) 60,400 21,652 852,800
Results of Operations The following table set forth, as a percentage of net sales, certain issues included in the Company's Income Statement (see Financial Statements and Notes thereto elsewhere in this Prospectus) for the periods indicated: Years Ended December 31, ---------------------------------- 1994 1995 1996 1997 ---- ---- ---- ---- Statement of Income Data: Net sales 100% 100% 100% 100% Cost of sales 109 67 74 78 Gross Profit (9) 33 26 22 Operating expenses 110 69 97 104 Loss from operations (119) (36) (71) (82) Other income (expense) 0 34 1 (4) Profit (Loss) before income taxes (119) (2) (70) (86) Provision for income taxes 1 1 9 -- Net profit (loss) (120) (2) (70) (86) 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 as of December 31, 1997, as adjusted to give effect to the sale of the 500,000 shares offered hereby at a price of $6 per share less commissions of $.60 per share and estimated offering costs of $160,000.
December 31, 1997 ------------------------ Actual As Adjusted ------ ----------- Short-term debt: Short-term debt.......................................... $ 51,600 $ 51,600 Current maturities of long-term debt..................... 16,000 16,000 ---------- ---------- Total short-term debt ........................... 67,600 67,600 ---------- ---------- Long-term debt: Total long-term debt, less current maturities............ 70,900 70,900 ---------- ---------- Shareowners' equity: Common stock, no par value, 10,000,000 shares authorized; 2,542,700 shares outstanding actual, and 3,042,700, as adjusted .............................. 3,168,900 5,708,900 Accumulated Deficit .......................................... (2,316,100) (2,316,100) ---------- ---------- Shareowners' equity ..................................... 852,800 3,392,800 ---------- ---------- Total capitalization ........................... $ 991,300 $3,531,300 ========== ==========
8 DILUTION On December 31, 1997 the Company had a net tangible book value of $832,600, or $0.33 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 December 31, 1997, would have been $3,372,600 or $1.11 per share. This represents an immediate increase in net tangible book value of $0.78 per share to existing shareowners and an immediate dilution of $4.89 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 December 31, 1997.......................... $0.33 Increase in net tangible book value per share attributed to new investors................... $0.78 ----- Pro forma net tangible book value per share As of December 31, 1997, after this Offering.... $1.11 ----- Net tangible book value dilution per share to new investors................................ $4.89 ===== The following table sets forth on a pro forma basis as of December 31, 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...... 2,542,700 84.00% $3,168,900 51.00% $ 1.25 New Investors............. 500,000 16.00 3,000,000 49.00 6.00 --------- ------- ----------- ------- ------ Total.................. 3,042,700 100.00% $6,168,900 100.00% ========= ======= =========== =======
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 and tricycles, and other low-power electric transportation vehicles. Historically, unit sales have been approximately 55% kits and 45% electric bicycles. Dollar sales have been 50% kits and 50% electric bicycles. The Company sells its electric bicycles and kits to retail customers; international distributors, law enforcement agencies, 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. 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. In addition, the Company worked on the development of an electric police bicycle. The Company's work to develop offshore manufacturing abilities for the domestic and foreign markets involved private and public foundations in Thailand and other Asian countries. Late in the fourth quarter of 1995 the Company began to sell bicycles to retail and wholesale customers as its core business. The Company's growth strategy is to increase net sales by increasing distribution channels through retail organizations and wholesale distributors both domestically and overseas as well as setting up Company and franchise stores to assist in the retail sales arena. 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 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 Year Ended December 31, 1996 Compared to Year Ended December 31, 1997 Net sales for the year ended December 31, 1997 were $1,640,200 compared to $1,170,900 in the prior year, an increase of $469,300 or 40%. The increase in sales is attributed to an increased demand for complete electric bicycles, electric motor kits, and scooters. Much of the increase was in dealer and international sales. During the year ended December 31, 1997, $430,000 in sales representing 26% of total net sales were with one customer. The company ceased selling products to this customer in late 1997 and is not expected to have any material sales to this customer in 1998. The loss of this one customer is not expected to have a material adverse affect on the company's results of operations in future periods. In 1996, no one customer accounted for 10% of more of the company's net sales. 10 Gross profit. Gross profit decreased as a percentage of net sales, from 26% to 22%. Early year liquidation of 1996 models and up-front costs incurred in developing the new ZAPPY(TM) scooter resulted in a lower gross-margin percentage. The total gross profit increased $57,300 or 19% due to the increase in net sales from 1996 to 1997. Selling. Selling expenses in 1997 were $633,000. This was an increase of $156,200 or 33% from 1996 to 1997. As a percentage of sales, selling expenses decreased from 41% of sales to 39% of sales. This was due to an increase in sales dollars as well as a reduction in marketing efforts towards auto dealerships and other dealer outlets. There was minimal change in sales and marketing personnel. General and administrative expense. General and administrative expenses in 1997 were $820,400. This was an increase of $265,600 or 48% from 1996 to 1997. As a percentage of net sales, General and Administrative expenses increased from 47% in 1996 to 50% in 1997. This result was due to added employees in General and Administrative areas and administrative supplies. Research and development expense. Research and development expenses in 1997 were $246,100, an increase of 145,700 or 145% from 1996 to 1997. As a percentage of sales, research and development expenses increased from 9% to 15% respectively. These increases were due to the heightened efforts in developing the new ZAPPY(TM) Scooter, the single speed lower cost motor-system for bicycles, and a low cost "Z-Bike" for overseas markets. Also, additional patents were filed. In 1997, the increase in funds available for research resulting from the Company's Direct Public Offering also contributed to the increase in research and development expenses in 1997 over 1996 levels. Other income (expense). Interest expense increased to $84,800 in 1997, an increase of $73,400 over 1996. The increase can be attributed to 1) the amortization of the fair value of warrants issued in connection with previous debt financings of $56,300 and, 2) the increase in interest expense on outstanding loans in 1997 of approximately $17,000. Such increase results from the loans being outstanding for a longer time period in 1997 as compared to 1996. 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 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 Company established sales/distribution agreements with three foreign distributors. 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. 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. 11 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 were 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. Liquidity and Capital Resources The Company used cash from operations of $1,263,000 and $618,600 during the years ended December 31, 1997 and 1996 respectively. Cash used in operations in 1997 was the result of the net loss incurred for the year of $1,409,300, offset by net non cash expenses of $231,200, and the net change in operating assets and liabilities resulting in a further use of cash of $84,900. Cash used in operations in 1996 was the result of the net loss incurred for the year of $817,300, offset by non cash expenses of $182,200, and the net change in operating assets and liabilities resulting in a source of cash of $16,500. Investing activities used cash of $143,500 and $80,500 during the years ended December 31, 1997 and 1996 respectively. The uses of cash were for the purchase of fixed assets and additional capitalized patent costs. Financing activities provided cash of $1,935,400 and $838,900 during the years ended December 31, 1997 and 1996 respectively. In both years, the cash provided by financing activities resulted from the sales of common stock and issuance of notes payable, $2,037,300 and $861,400 for the years ended December 31, 1997 and 1996 respectively, offset by principal payments on outstanding debt. At December 31, 1997 the Company had cash and cash equivalents of $690,500 as compared to $161,600 at December 31, 1996. At December 31, 1997, the Company had working capital of $726,800, as compared to a working capital deficit of $44,800 at December 31, 1996. The increases in both cash and cash equivalents and working capital in 1997 over 1996 are primarily due to the proceeds received from the Company's direct public offering which more than offset the Company's net loss for the year. The Company, at present, does not have a credit facility in place with a bank or other financial institution. The Company does have in process a second direct public offering of its common stock with a maximum potential gross proceeds of $3,000,000 before expenses. The Company believes that the cash and cash equivalents on hand at December 31, 1997, along with the expected proceeds from the Company's direct public offering, will be sufficient to allow the Company to continue its expected level of operations for at least 12 months. 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. Dates following December 31, 1999 and beyond (the "Year 2000 Problem") Many existing computer systems and applications, and other devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. Such systems and applications could fail or create erroneous results unless corrected. The Company relies on its internal financial systems and external systems of business enterprises such as customers, suppliers, creditors, and financial organizations both domestically and globally, directly and indirectly for accurate exchange of data. The Company has evaluated such systems and believes the cost of addressing the Year 2000 Problem will not have a material adverse affect on the result of operations or financial position of the Company. However, even though the internal systems of the Company are not materially affected by the Year 2000 issue the Company could be affected through disruption in the operation of the enterprises with which the Company interacts. Seasonality and Quarterly Results The Company's business is subject to seasonality influences. Sales volumes in the bicycle industry typically slow 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. 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 1997 studies by the Bicycle Market Research Institute (BMRI) and the Bicycle Manufacturers Association (BMA), approximately 15.5 million bicycles were sold in the United States in 1996, representing approximately $5.2 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. Legal Proceedings Recently the Company has become aware that an individual named Joseph Stevenson has started advertising and selling an electric system for bicycles called EROS (electric regenerative operating system). After analyzing the technical capabilities and features of the EROS system and comparing EROS to the U.S. patented system the Company is selling, the Company's management, in consultation with patent counsel, has determined that the EROS system infringes the Company's patents. As a result, the Company's counsel has informed Mr. Stevenson and his advertisers and distributors that the EROS system infringes the Company's patents and that they must immediately discontinue such activity. In response, Mr. Stevenson has denied that EROS infringes and further contends that the Company's patents are invalid. Despite Mr. Stevenson's position, several of his advertisers and distributors have agreed to voluntarily discontinue any further EROS sales. The Company is presently engaged in informal discussions with Mr. Stevenson in an attempt to resolve the patent infringement and validity disputes without resorting to legal proceedings. If those informal discussions do not resolve the disputes, however, the Company intends to take all appropriate legal action to enforce and defend its patents, and to recover monetary damages. Although the Company believes its claims are meritorious and the patents are valid, it is possible, as in any suit, that the Company may be unable to prove infringement or that Mr. Stevenson may establish, either in litigation or in a re-examination proceeding before the Patent Office that the Company's patents are not valid. If the Company's patents are held to be invalid, the Company's ability to prevent competitors from manufacturing or selling bicycles with the patented system will be significantly reduced. If the Company does not prevail, it is also possible that ZAP could be held liable for the alleged infringer's damages, including loss of profits and interference with business relations. The loss of the patents or a significant damage award against the Company could have a material adverse effect upon the business and financial condition and prospects of the Company. 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 Controller Andrew Hutchins 37 General Manager William H. Watson, III 40 Vice President of Finance and Director 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. James McGreen and Nancy K. Cadigan are married. Sanford Theodore, 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. William H. Watson, III, Vice President of Finance has seventeen years of experience in the securities industry. Mr. Watson is a co-founder, executive vice president and director of Centennial Capital Management, Inc., the Company's best efforts underwriter. He is also a director of Meyers Aircraft Company and Scanis, Inc., in addition to being an advisor to Kelmoore Investments. Mr. Watson is a Certified Financial Planner and attended college at Iowa State University in Ames, Iowa. 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). Nancy K. Cadigan and James McGreen are married. 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 1997, Gary Starr and James McGreen, the Company's executive officers, received compensation of $35,000 and $38,000 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 (2,542,700 shares) (3,042,700 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. William H. Watson, III is an officer and director of the Company. Mr. Watson is also an executive vice-president, director and twenty-five percent shareholder of Centennial Capital Management, Inc., which is acting as a best efforts underwriter for the Company in this offering. 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 2,542,700 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 3,042,700 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 2,180,810 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 30,427 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. The Company has engaged Centennial Capital Management, Inc. ("Centennial") to act as a best efforts underwriter for this Offering. The Company has granted to Centennial a warrant to purchase up to 50,000 shares of the Company's common stock with an exercise price of $6.00 per share. The warrant shall be assignable, shall contain net exercise and anti-dilutive provisions, and shall expire no sooner than five (5) years after the listing of the Company's common stock on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ System. The warrant will be granted pro rata to the sale of the Shares by Centennial. Assuming all 500,000 Shares available for sale are sold by Centennial then a warrant(s) for 50,000 shares of the Company's common stock will be issued to Centennial. If less than 500,000 Shares are sold by Centennial, warrant(s) will be issued on a pro rata basis in accordance with the actual number of Shares sold. For example, should 117,500 Shares be sold by Centennial, Centennial will be entitled to warrant(s) representing 11,750 shares of common stock at a price of $6.00 per Share. In addition to the eight percent (8%) commission, there will be a due diligence fee of one percent (1%) of the amount of the dollar value of Shares actually sold by Centennial. 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 & Hendrickson, LLP, San Francisco, California. EXPERTS The Financial Statements of the Company as of and for the year ended December 31, 1997 have been included herein and in the Registration Statement in reliance on the report of Grant Thornton, LLP, San Jose, California, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 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 accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS On January 15, 1998, the Company dismissed Moss Adams, LLP, Certified Public Accountants, as the Company's principal accountants. On the same date, the Company engaged Grant Thornton, LLP as its new principal accountants to audit its financial statements for the fiscal year ended December 31, 1997. These decisions were made with the approval of the Company's Board of Directors. The Company believes, and has been advised by Moss Adams, LLP that it concurs is such belief that (a) Moss Adams, LLP's report on the Company's financial statements for the fiscal year ended December 31, 1996 did not contain any adverse opinion or disclaimer of opinion, nor was it modified as to uncertainty, audit scope or accounting principles, and (b) there was no disagreement between the Company and Moss Adams, LLP on any matter of accounting principles or practices, financial statement disclosure, or accounting scope or procedure which, if not resolved to the former accountant's satisfaction, would have caused it to make reference to the subject matter of the disagreement in such report. 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 ZAP POWER SYSTEMS AND SUBSIDIARY Financial Statements and Report of Independent Certified Public Accountants December 31, 1997 and 1996 C O N T E N T S Page REPORT OF GRANT THORNTON, LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS......3 REPORT OF MOSS ADAMS, LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS..........4 FINANCIAL STATEMENTS Consolidated Balance Sheet.............................................5 Consolidated Statements of Operations..................................6 Consolidated Statement of Stockholders' Equity.........................7 Consolidated Statements of Cash Flows..................................8 Notes to Consolidated Financial Statements.............................10 Report of Grant Thornton, LLP Independent Certified Public Accountants ------------------------------------------------------------------------ To the Board of Directors ZAP Power Systems and Subsidiary We have audited the accompanying consolidated balance sheet of ZAP Power Systems and Subsidiary as of December 31, 1997, and the related consolidated statement of operations, stockholders' equity and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ZAP Power Systems and Subsidiary as of December 31, 1997, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. San Jose, California March 27, 1998 REPORT OF MOSS ADAMS, LLP INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT To the Board of Directors ZAP Power Systems and Subsidiary We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of ZAP Power Systems and Subsidiary for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion of these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ZAP Power Systems and Subsidiary for the year ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ MOSS ADAMS LLP Santa Rosa, California February 14, 1997 -4- ZAP Power Systems and Subsidiary CONSOLIDATED BALANCE SHEET December 31, 1997
ASSETS CURRENT ASSETS Cash $ 690,500 Accounts receivable, net of allowance for doubtful accounts of $5,000 121,700 Inventories 267,300 Prepaid expenses and other assets 65,600 ----------- Total current assets 1,145,100 PROPERTY AND EQUIPMENT 163,200 OTHER ASSETS Intangibles, net of accumulated amortization of $3,600 20,200 Deposits 13,500 ----------- 33,700 ----------- Total assets $ 1,342,000 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 161,600 Accrued liabilities and customer deposits 189,100 Notes payable 51,600 Current maturities of obligations under capital leases 16,000 ----------- Total current liabilities 418,300 OTHER LIABILITIES Long-term debt 60,000 Obligations under capital leases, less current maturities 10,900 ----------- 70,900 STOCKHOLDERS' EQUITY Common stock, no par value; 10,000,000 shares authorized, 2,542,700 shares issued and outstanding 3,168,900 Accumulated deficit (2,316,100) ----------- 852,800 ----------- Total liabilities and stockholders' equity $ 1,342,000 =========== The accompanying notes are an integral part of this statement.
-5- ZAP Power Systems and Subsidiary CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997 1996 ----------- ----------- NET SALES $ 1,640,200 $ 1,170,900 COST OF GOODS SOLD 1,274,700 862,700 ----------- ----------- GROSS PROFIT 365,500 308,200 OPERATING EXPENSES Selling 633,000 476,800 General and administrative 820,400 554,800 Research and development 246,100 100,400 ----------- ----------- 1,699,500 1,132,000 ----------- ----------- LOSS FROM OPERATIONS (1,334,000) (823,800) OTHER INCOME (EXPENSE) Interest expense (84,800) (11,400) Miscellaneous 11,100 19,500 ----------- ----------- (73,700) 8,100 ----------- ----------- LOSS BEFORE INCOME TAXES (1,407,700) (815,700) PROVISION FOR INCOME TAXES 1,600 1,600 ----------- ----------- NET LOSS $(1,409,300) $ (817,300) =========== =========== NET LOSS PER COMMON SHARE Basic $ (0.62) $ (0.45) =========== =========== Diluted $ (0.62) $ (0.45) =========== =========== WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 2,289,165 1,805,317 =========== =========== The accompanying notes are an integral part of these statements. -6- ZAP Power Systems and Subsidiary CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Years ended December 31, 1997 and 1996
Common Stock ------------------------ Accumulated Shares Amount Deficit Total --------- ----------- ----------- ----------- Balance, January 1, 1996 1,644,000 $ 149,900 $ (89,500) $ 60,400 Issuance of common stock through private placement at $1.66 per share net of expenses of $41,500 328,300 504,600 -- 504,600 Issuance of common stock in connection with direct public offering at $5.25 per share 3,800 19,900 -- 19,900 Conversion of notes payable into common stock at $1.66 per share 33,000 55,000 -- 55,000 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 Issuance of common stock in connection with direct public offering at $5.25 per share, net of expenses of $188,400 415,100 1,990,900 -- 1,990,900 Exercise of stock options 21,600 12,600 -- 12,600 Conversion of notes payable and accrued interest into common stock at $5.25 per share 14,800 77,800 -- 77,800 Recission of shares issued to joint venture (5,000) (26,300) -- (26,300) Stock issued for current and future services 19,700 94,700 -- 94,700 Net loss -- -- (1,409,300) (1,409,300) --------- ----------- ----------- ----------- Balance, December 31, 1997 2,542,700 $ 3,168,900 $(2,316,100) $ 852,800 ========= =========== =========== =========== The accompanying notes are an integral part of this statement.
-7- ZAP Power Systems and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31,
1997 1996 ----------- ----------- Cash flows from operating activities: Net loss $(1,409,300) $ (817,300) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 67,700 47,400 Allowance for doubtful accounts (11,400) 7,400 Issuance of common stock for services rendered 92,400 127,400 Loss on abandonment of subsidiary 26,200 -- Amortization of fair value of warrants 56,300 -- Changes in: Receivables (49,400) (37,600) Inventories (20,700) (188,200) Prepaid expenses and other (4,100) (6,400) Deposits 2,000 (9,500) Accounts payable (139,600) 207,000 Accrued liabilities and customer deposits 126,900 53,900 Income taxes payable -- (2,700) ----------- ----------- Net cash used in operating activities (1,263,000) (618,600) Cash flows from investing activities: Purchases of equipment (128,600) (80,500) Patent costs capitalized (14,900) -- ----------- ----------- Net cash used in investing activities (143,500) (80,500) Cash flows from financing activities: Proceeds from issuance of notes payable 33,800 336,900 Sale of common stock, net of stock offering costs 2,003,500 524,500 Principal repayments on notes payable (98,800) (7,500) Payments on obligations under capital leases (13,100) (5,000) Cash restricted to payment of certain notes payable 10,000 (10,000) ----------- ----------- Net cash provided by financing activities 1,935,400 838,900 ----------- ----------- NET INCREASE IN CASH 528,900 139,800 Cash, beginning of year 161,600 21,800 ----------- ----------- Cash, end of year $ 690,500 $ 161,600 =========== =========== The accompanying notes are an integral part of these statements.
-8- ZAP Power Systems and Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997 1996 -------- -------- Supplemental cash flow information: Cash paid during the year for: Interest $ 84,763 $ 11,400 Income taxes 1,600 1,600 Non-cash investing and financing activities: Conversion of notes payable and accrued interest into common stock 77,800 55,000 Stock issued for future services 2,400 53,600 Stock issued (cancelled) to joint venture (26,300) 52,500 Warrants issued for financing fees -- 56,300 The accompanying notes are an integral part of these statements. -9- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. The Company consolidates the accounts of its wholly-owned subsidiary, Electricycle Corporation ("Electricycle"). All material intercompany balances and transactions are eliminated. 1. 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. 2. Property and Equipment Property and equipment are stated at cost and depreciated using straight-line and accelerated methods over the assets' estimated useful lives. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows: Machinery and equipment 7 years Equipment under capital leases 5 years Demonstration bicycles 2 years Office furniture and equipment 7 years Vehicle 5 years Leasehold improvements 15 years or life of lease, whichever is shorter 3. Intangibles Intangibles consist of costs expended to perfect certain patents and are amortized over an estimated useful life of ten years. 4. Income Taxes The Company accounts for income taxes using an asset and liability approach for financial accounting and reporting purposes. -10- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 5. Recent Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, which requires that an entity report, by major components and as a single total, the change in its net assets from non-shareholder sources during the period; and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, which establishes annual and interim reporting standards for an entity's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted. 6. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results. 7. Fair Value of Financial Instruments The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. For certain of the Company's financial instruments, including cash, accounts receivable and accounts payable, the carrying amount approximates fair value because of the short maturities. The carrying amount of the bank note payable approximates fair value as current interest rates available to the Company for similar debt are approximately the same. The fair value of related party debt is impracticable to determine. 8. Net Loss Per Common Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share. The Company has adopted SFAS 128 for all periods presented. The adoption of SFAS 128 did not impact previously reported loss per share for the year ended December 31, 1996. SFAS 128 replaces current earnings per share ("EPS") reporting requirements and requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. In 1997 and 1996, outstanding stock options to purchase 875,000 and 1,179,000 shares, respectively, with weighted average exercise prices per share of $1.12 and $.74, respectively, plus warrants to purchase 13,900 and 37,800 shares in 1997, and 1996, respectively, at $5.25 per share, have been omitted from the diluted computation as their inclusion would be anti-dilutive. -11- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE B - INVENTORIES Inventories consist of the following at December 31, 1997: Raw materials $ 144,100 Work-in-process 70,200 Finished goods 53,000 ----------- $ 267,300 =========== NOTE C - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1997: Machinery and equipment $ 54,300 Equipment under capital leases 45,900 Demonstration bicycles 77,500 Office furniture and equipment 57,900 Leasehold improvements 14,900 Vehicle 34,400 ----------- 284,900 Less accumulated depreciation and amortization 121,700 ----------- $ 163,200 =========== NOTE D - NOTES PAYABLE Unsecured notes to stockholders, with interest at 12%; due on demand. The noteholders have been issued warrants to purchase, in the aggregate, 2,500 shares of common stock at $5.25 per share through October, 1999. $ 46,900 Note to bank, with interest at 15%; principal and interest due in monthly installments and maturing in March, 1998; collateralized by an interest in other checking or savings accounts in the bank and held by the Company. 4,700 ----------- $ 51,600 =========== -12- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE E - LONG-TERM DEBT Unsecured note to a stockholder, with interest at 10%; principal and interest is due when the notes mature in December 1999. The noteholder has been issued warrants to purchase 11,400 shares of common stock at $5.25 per share through December 1999. $ 60,000 =========== NOTE F - CAPITAL LEASES Minimum future lease payments under capital lease obligations for computer and other equipment are as follows: Year ending December 31, 1998 $ 19,900 1999 10,900 2000 900 ----------- Total minimum lease payments 31,700 Less amounts representing interest 4,800 ----------- Present value of minimum lease payments 26,900 Less current maturities 16,000 ----------- $ 10,900 =========== NOTE G - PROVISION FOR INCOME TAXES 1997 1996 ---------- ----------- Current tax liability Federal $ - $ - State 1,600 1,600 ---------- ----------- $ 1,600 $ 1,600 ========== =========== Deferred tax assets (liabilities) Federal tax loss carryforward $ 695,000 $ 297,000 State tax loss carryforward 132,600 79,000 Other, net - (19,600) ---------- ----------- 827,600 356,400 Less valuation allowance (827,600) (356,400) ---------- ----------- Net deferred tax asset $ - $ - ========== ============ -13- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE G - PROVISION FOR INCOME TAXES (continued) The Company has available for carryforward approximately $2,176,000 and $1,500,000 of federal and state net operating losses, respectively, expiring through 2012. The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose restrictions on the utilization of net operating losses in the event of an "ownership change" as defined by Section 382 of the Internal Revenue Code. There has been no determination whether an ownership change, as defined, has taken place. Therefore, the extent of any limitation has not been ascertained. A valuation allowance is required for those deferred tax assets that are not likely to be realized. Realization is dependent upon future earnings during the period that temporary differences and carryforwards are expected to be available. Because of the uncertain nature of their ultimate utilization, a full valuation allowance is recorded against these deferred tax assets. NOTE H - COMMON STOCK 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 January 1, 1996 increased from 548,000 to 1,644,000 shares. All share and per share data, including stock options, have been adjusted retroactively to reflect the three-for-one stock split. The number of shares the Company is authorized to issue was also increased from 1 million to 10 million shares. NOTE I - STOCK OPTIONS AND WARRANTS Options to purchase common stock are granted by the Board of Directors under two Stock Option Plans, referred to as the 1996 and 1995 plans. Options granted may be incentive stock options (as defined under Section 422 of the Internal Revenue Code) or nonstatutory stock options. The number of shares available for grant under the 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 over a two year period, and expire ten years after the date of grant. Options totaling 769,285 shares were vested under both plans at December 31, 1997. -14- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE I - STOCK OPTIONS AND WARRANTS (continued) Options activity under the two plans is as follows:
1996 Plan 1995 Plan ------------------------ -------------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price ------ ----- ------ ----- Outstanding at December 31, 1995 501,000 $1.00 360,000 $0.40 Granted - - 318,000 $0.73 Exercised - - - - Canceled - - - - ----------- ----------- Outstanding at December 31, 1996 501,000 $1.00 678,000 $0.55 Granted 110,500 $4.39 - $0.40 Exercised (7,300) $1.00 (15,000) $0.40 Canceled (174,700) $1.13 (216,700) $0.55 ----------- ----------- Outstanding at December 31, 1997 429,500 $1.70 446,300 $0.56 =========== ===========
The weighted average fair value of options granted during the years ending December 31, 1997 and 1996 was $3.23 and $.42, respectively. The following information applies to options outstanding at December 31, 1997:
Range of exercise prices $.40 - $1.00 $3.68 - $5.25 ------------ ------------- Options outstanding 787,800 88,000 Weighted average exercise price $.75 $4.42 Weighted average remaining contractual life (years) 8 9 Options exercisable 748,527 20,758 Weighted average exercise price $.74 $3.98
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 1997 and 1996. 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: -15- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE I - STOCK OPTIONS AND WARRANTS (continued) 1997 1996 --------------- -------------- Net loss - as reported $ (1,409,300) $ (817,300) Net loss - pro forma (1,696,300) (981,000) Loss per share - as reported (.62) (.45) Loss per share - pro forma (.73) (.54) 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: 1997 1996 ---------- ----------- Dividends None None Expected volatility 30% 30% Risk free interest rate 6.38% 6.28% Expected life 10 years 10 years Warrants to acquire stock were issued to certain stockholders as additional consideration for providing financial assistance, in the form of notes, to the Company. The fair value of the warrants at time of issuance $56,300, have been amortized to operations during 1997. NOTE J - JOINT VENTURE In December 1996, the Company joined with MW McWong International, Inc. ("McWong"), to form ZAP (China), a limited liability corporation registered in California. The Company issued 10,000 shares of its common stock at $5.25 per share to McWong as its investment in the joint venture. The Company became a 50% owner of ZAP (China) LLC. During 1997, by mutual agreement between the parties, the joint venture was dissolved prior to the commencement of any business activity. In settlement, the Company cancelled 5,000 of the original 10,000 shares issued to McWong and wrote off the balance of the investment, $26,250. NOTE K - MAJOR CUSTOMER During 1997, one customer accounted for $430,000 or 26% of the Company's net sales. The Company ceased selling to this customer in late 1997 and is not expected to have any material sales to this customer in 1998. The loss of this customer is not expected to have a material impact on the Company's financial position and results of operations for the coming year. No one customer accounted for 10% or more of the Company's net sales for 1996. -16- ZAP Power Systems and Subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 and 1996 NOTE L - COMMITMENT 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 $22,000 in 1998. Rent expense under this lease was $63,300 and $52,800 in 1997 and 1996, respectively. NOTE M - SUBSEQUENT EVENTS In January 1998, the Company commenced its second direct public offering of its common stock. The Company has offered 500,000 shares at $6.00 per share. The offering is being conducted on a best efforts basis directly by the Company. The proceeds from the offering will be used to increase manufacturing capacity, expand marketing efforts and for general working capital. On March 11, 1998, the Company's common stock commenced trading on the OTC Bulletin Board under the stock symbol ZAPP. -17- 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. 42 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 10.6 Best Efforts Underwriting Agreement with Centennial Capital Management, Inc. 43 23.1 Consent of Moss Adams, LLP 23.2 Consent of Evers & Hendrickson, LLP 23.3 Consent of Grant Thornton, LLP 99.1* Share Purchase Agreement (as revised) - ------------- *Previously filed. 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. 44 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 (post-effective amendment no. 1) to be signed on its behalf by the undersigned in the City of Sebastopol, on May ____, 1998. 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 (post-effective amendment no. 1) has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date ________________________ Managing Director May ___, 1998 Gary Starr ________________________ President and Director May ___, 1998 James McGreen ________________________ Secretary and Director May ___, 1998 Nancy K. Cadigan ________________________ Controller Sanford Theodore May ___, 1998 ________________________ Vice President of Finance William H. Watson, III and Director May ___, 1998 ________________________ Director May ___, 1998 Lee S. Sannella, M.D ________________________ Director May ___, 1998 Jessalyn Nash 45 EX-10.6. 2 BEST EFFORTS UNDERWRITING 500,000 SHARES ZAP POWER SYSTEMS, INC. Common Stock BEST EFFORTS UNDERWRITING San Jose, California April 1, 1998 Centennial Capital Management, Inc. 999 Peachtree Street, N.E. Suite 2670 Atlanta, Georgia 30309 Dear Sirs: ZAP Power Systems, Inc., a California corporation (the "Company"), proposes to issue and sell an aggregate of 500,000 shares of Common Stock, no par value per share (the "Common Stock") of the Company (such 500,000 shares of the Company being referred to herein as the "Shares"). The Company will be offering its common stock pursuant to an SB-2 registered offering. Five hundred thousand (500,000) of the Shares will be offered to the public by the Company at a price of $6.00 per share (the "Offering"). The purpose of this Agreement is to set forth the understanding of the parties relating to the right of Centennial Capital Management, Inc., a Georgia corporation ("Centennial") to participate in the sale of the remaining Shares as the underwriter exercising its best efforts to sell the Shares. Section 1. Representations and Warranties of the Company . The Company represents and warrants to and agrees with Centennial that: (a) A registration statement on Form SB-2 (File No. 333-41411) with respect to the Shares has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the applicable rules and regulations (the "1933 Act Regulations") of the Securities and Exchange Commission (the "Commission"), and has been filed with the Commission; and such amendments to such registration statement as may have been required prior to the date hereof have been filed with the Commission, and such amendments have been similarly prepared. Such registration statement went effective with the Commission on January 16, 1998. Copies of such registration statement and amendment or amendments of each related preliminary prospectus, and the exhibits, financial statements and schedules, as finally amended and revised, have been delivered to you. The term "Registration Statement" as used in this Agreement shall mean such registration statement at the time such registration statement became effective and, in the event any post-effective amendment thereto becomes effective prior to the closing of the Offering, shall also mean such registration statement as so amended. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares in the form in which it is first filed with the Commission pursuant to Rule 424(b) of the 1933 Act Regulations or, if no filing pursuant to Rule 424(b) of the 1933 Act Regulations is required, shall mean the form of final prospectus included in the Registration Statement at the time such Registration Statement becomes effective. (b) When the Registration Statement became effective, when the Prospectus was first filed pursuant to Rule 424(b) of the 1933 Act Regulations, when any amendment to the Registration Statement becomes effective, and when any supplement to the Prospectus is filed with the Commission, (i) the Registration Statement, the Prospectus and any amendments thereof and supplements thereto will conform in all material respects with the applicable requirements of the 1933 Act and the 1933 Act Regulations, and (ii) neither the Registration Statement, the Prospectus nor any amendment or supplement thereto will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by Centennial expressly for use in the Registration Statement. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the state of California with all requisite corporate power and authority to own, lease and operate its properties and the properties it proposes to own, lease and operate as described in the Registration Statement and the Prospectus and to conduct its business as now conducted and as proposed to be conducted as described in the Registration Statement and the Prospectus. The Company has been duly qualified to do business and is in good standing as a foreign corporation in each other jurisdiction in which the ownership or leasing of its properties or the nature or conduct of its business as now conducted or proposed to be conducted as described in the Registration Statement and the Prospectus requires such qualification, except where the failure to do so would not have a material adverse effect on the Company. (d) The Company has full legal right, power and authority to enter into this Agreement, to issue, sell and deliver the Shares as provided herein and to consummate the transactions contemplated herein. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors, rights, or by general equity principles and except to the extent the indemnification provisions set forth in Section 5 of this Agreement may be limited by federal or state securities laws or the public policy underlying such laws. (e) Each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body necessary for the valid authorization, issuance, sale and delivery of the Shares, the execution, delivery and 2 performance of this Agreement and the consummation by the Company of the transactions contemplated hereby, has been made or obtained and is in full force and effect. (f) Neither the issuance, sale and delivery by the Company of the Shares, nor the execution, delivery and performance of this Agreement nor the consummation of the transactions contemplated hereby by the Company will conflict with or result in a breach or violation of any of the terms and provisions of, or (with or without the giving of notice or the passage of time or both) constitute a default under, the charter, by-laws of the Company; any indenture, mortgage, deed of trust, loan agreement, note, bond or other agreement or instrument to which the Company, is a party or to which it, any of its properties or other assets; or any applicable statute, law, judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to the Company or its property; or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company. (g) The Shares to be issued and sold hereunder have been validly authorized by the Company. When issued and delivered against payment therefor, the Shares will be duly and validly issued, fully paid and non-assessable. No preemptive rights of shareholders exist with respect to any of the Shares. No person or entity holds a right to require or participate in the registration under the 1933 Act of the Shares pursuant to the Registration Statement; and, except as set forth in the Prospectus, no person holds a right to require registration under the 1933 Act of any shares of Common Stock of the Company at any other time. No person or entity has a right of participation or first refusal with respect to the sale of the Shares by the Company. The form of certificates evidencing the Shares complies with all applicable requirements of California law. (h) The Common Stock to be issued upon exercise of the common stock purchase warrants to be issued to Centennial (the "Warrants") are duly authorized, and when issued and delivered pursuant to this Agreement, will be duly authorized, validly issued, fully paid and non-assessable and free of pre-emptive rights of any security holder of the Company. Neither the filing of the Registration Statement nor the offering or sale of the Shares gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock, except as described in the Registration Statement. (i) This Agreement has been duly and validly authorized, executed and delivered by the Company. The Company has full power and lawful authority to issue and sell the shares of Common Stock to be sold by it upon exercise of the Warrants (the "Warrant Shares") on the terms and conditions set forth herein, and no consent, approval, authorization or other order of any governmental authority is required in connection with such authorization, execution and delivery or with the authorization, issue and sale of the Warrant Shares or the Warrants, except such as may be required under the 1933 Act or state securities laws. 3 (j) The Company has 2,571,909 shares of issued and outstanding shares of Common Stock. The Company has no other issued and outstanding capital stock. The Company's authorized capitalization is as set forth in the Prospectus under the caption "CAPITAL STOCK." Except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company. (k) The financial statements of the Company in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the dates indicated and the results of operations and cash flows for the periods specified, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods specified. The financial statement schedule included in the Registration Statement and the amounts in the Prospectus under the captions "Prospectus Summary - Summary Selected Financial Information", and "Selected Financial Information" fairly present the information shown therein and have been compiled on a basis consistent with the financial statements included in the Registration Statement and the Prospectus. No other financial statements or schedules are required by Form SB-2 or otherwise to be included in the Registration Statement or the Prospectus. The unaudited pro forma combined financial information (including the related notes) included in the Prospectus complies as to form in all material respects to the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations and management of the Company believes that the assumptions underlying the pro forma adjustments are reasonable. Such pro forma adjustments have been properly applied to the historical amounts in the compilation of the information and such information fairly presents with respect to the Company the pro forma financial position, results of operations and other information purported to be shown therein at the respective dates and for the respective periods specified. (l) Moss Adams, LLP, who have examined and are reporting upon the audited financial statements and schedules included in the Registration Statement, are, and were during the periods covered by their Reports included in the Registration Statement and the Prospectus, independent public accountants, as required by the 1933 Act and the 1933 Act Regulations. (m) The Company has not sustained, since January 15, 1998, any material loss or interference with its business from fire, explosion, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or arbitrators' or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as otherwise stated in the Registration Statement and Prospectus, there has not been (i) any material change in the capital stock or partnership interests, as applicable, long-term debt, obligations under capital leases or short-term borrowings of the Company, (ii) any material adverse change, or any development which could reasonably be seen as involving a prospective material adverse change, in or affecting the business prospects, properties, assets, results of operations or condition (financial or other) of the Company, (iii) any liability or obligation, direct or contingent, incurred or undertaken by the Company, which is material to the business or condition (financial or other) of the Company, except for liabilities or obligations incurred in the ordinary course of business, (iv) any declaration or payment of any dividend or distribution of any kind on or with respect to the capital stock of the Company, or (v) 4 any transaction that is material to the Company except transactions in the ordinary course of business or as otherwise disclosed in the Registration Statement and the Prospectus. (n) The Company is not in violation of its charter or by-laws, and no default exists, and no event has occurred, nor state of facts exists, which, with notice or after the lapse of time to cure or both, would constitute a default in the due performance and observance of any obligation, agreement, term, covenant, consideration or condition contained in any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument to which the Company is a party or by which it or any of its properties is subject. The Company is not in violation of, or in default with respect to, any statute, law, rule, regulation, order, judgment or decree, except as may be properly described in the Prospectus or such as is in the aggregate does not now have and will not in the future have a material adverse effect on the financial position, results of operations or business of the Company. (o) Except as described in the Prospectus, there is not pending or, to the knowledge of the Company, threatened any action, suit, proceeding, inquiry or investigation against the Company, its officers and directors or to which the properties, assets or rights of the Company are subject, before or brought by any court or governmental agency or body or board of arbitrators, which could result in any material adverse change in the business, prospects, properties, assets, results of operations or condition (financial or otherwise) of the Company. (p) The descriptions in the Registration Statement and the Prospectus of the contracts, leases and other legal documents therein described present fairly the information required to be shown, and there are no contracts, leases, or other documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required. To the best knowledge of the Company, there are no statutes or regulations applicable to the Company or certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by the Company of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and properly described therein. All agreements between the Company and third parties expressly referenced in the Prospectus are legal, valid and binding obligations of the Company enforceable in accordance with their respective terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights and by general equitable principles. (q) The Company owns, possesses or has obtained all material permits, licenses, franchises, certificates, consents, orders, approvals and other authorizations of governmental or regulatory authorities as are necessary to own or lease, as the case may be, and to operate its properties and to carry on its business as presently conducted, or as contemplated in the Prospectus to be conducted, and the Company has not received any notice of proceedings relating to revocation or modification of any such licenses, permits, certificates, consents, orders, approvals or authorizations. 5 (r) The Company owns or possesses adequate license or other rights to use all patents, trademarks, service marks, trade names, copyrights, software and design licenses, trade secrets, manufacturing processes, other intangible property rights and know-how (collectively "Intangibles") necessary to entitle it to conduct its business now, and as proposed to be conducted or operated as described in the Prospectus, and the Company has not received notice of infringement or of conflict with (and knows of no such infringement of or conflict with) asserted rights of others with respect to any Intangibles which could materially and adversely affect its business, prospects, properties, assets, results of operation or condition (financial or otherwise). (s) The Company has not directly or indirectly, at any time (i) made any contribution to any candidate for political office, or failed to disclose fully any such contribution, in violation of law or (ii) made any payment to any state, federal or foreign, governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. To the best knowledge of the Company, the Company's internal accounting controls and procedures are sufficient to cause such entities to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (t) To the best of the Company's knowledge, the Company's systems of internal accounting controls taken as a whole are sufficient to meet the broad objectives of internal accounting control insofar as those objectives pertain to the prevention or detection of errors or irregularities in amounts that would be material in relation to the Company's financial statements; and, to the best of the Company's knowledge, neither the Company, nor any employee or agent thereof, has made any payment of funds of the Company or received or retained any funds and no funds of the Company have been set aside to be used for any payment, in each case in violation of any law, rule or regulation. (u) The Company has filed on a timely basis all necessary federal, state, local and foreign income and franchise tax returns required to be filed through the date hereof and have paid all taxes shown as due thereon; and no tax deficiency has been asserted against the Company, nor does the Company know of any tax deficiency which is likely to be asserted against the Company which if determined adversely to the Company, could materially adversely affect the business, prospects, properties, assets, results of operations or condition (financial or otherwise) of any such entity, respectively. All tax liabilities are adequately provided for on the respective books of such entities. (v) The Company maintains insurance (issued by insurers of recognized financial responsibility) of the types and in the amounts generally deemed adequate for their respective businesses and, to the best of the Company's knowledge, consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (w) To the best of the Company's knowledge, no general labor problem exists or is imminent with the employees of the Company which would have a material adverse effect on the financial position, results of operations or business of the Company. 6 (x) The Company and its officers, directors or affiliates have not taken and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in or constitute the stabilization or manipulation of any security of the Company or to facilitate the sale or resale of the Shares in violation of any law, rule or regulation. (y) The Company has not incurred any liability for a fee, commission or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement other than as contemplated hereby. (z) Except as otherwise disclosed in the Prospectus, the Company has not authorized or conducted nor has knowledge of the generation, transportation, storage, presence, use, treatment, disposal, release, or other handling of any hazardous substance, hazardous waste, hazardous material, hazardous constituent, toxic substance, pollutant, contaminant, asbestos, radon, polychlorinated biphenyls ("PCBs"), petroleum product or waste (including crude oil or any fraction thereof), natural gas, liquefied gas, synthetic gas or other material defined, regulated, controlled or potentially subject to any remediation requirement under any environmental law (collectively, "Hazardous Materials"), on, in, under or affecting any real property currently leased or owned or by any means controlled by the Company (the "Real Property") except as in material compliance with applicable laws; to the knowledge of the Company, the Real Property and the Company's operations with respect to the Real Property are in compliance with all federal, state and local laws, ordinances, rules, regulations and other governmental requirements relating to pollution, control of chemicals, management of waste, discharges of materials into the environment, health, safety, natural resources, and the environment (collectively, "Environmental Laws"), and the Company has, and is in compliance with, all licenses, permits, registrations and government authorizations necessary to operate under all applicable Environmental Laws. Except as otherwise disclosed in the Prospectus, the Company has not received any written or oral notice from any governmental entity or any other person and there is no pending or threatened claim, litigation or any administrative agency proceeding that: alleges a violation of any Environmental Laws by the Company; alleges that the Company is a liable party or a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. S 9601, et seq., or any state superfund law; has resulted in or could result in the attachment of an environmental lien on any of the Real Property; or, alleges that the Company is liable for any contamination of the environment, contamination of the Real Property, damage to natural resources, property damage, or personal injury based on their activities or the activities of their predecessors or third parties (whether at the Real Property or elsewhere) involving Hazardous Materials whether arising under the Environmental Laws, common law principles or other legal standards. (aa) The Company will not become as a result of the transactions contemplated hereby or will not conduct its business in a manner in which it would become, "an investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"). (bb) No relationship, direct or indirect, exists between or among any of the Company or any affiliate of the Company, on the one hand, and any director, officer, stockholder, customer 7 or supplier of the Company or any affiliate of the Company, on the other hand, that is required by the 1933 Act or by the 1933 Act Regulations to be described in the Registration Statement or the Prospectus which is not so described or is not adequately described. (cc) All offers and sales by the Company of the Company's securities prior to the date hereof were at all relevant times duly registered under or exempt from the registration requirements of the 1933 Act and were duly registered in accordance with or the subject of an available exemption from registration under the applicable blue sky laws. The Company has not effected any sales of securities that would be required to be disclosed in response to Item 701 of Regulation S-K that are not disclosed in the Registration Statement. Any certificate signed by any officer of the Company on behalf of the Company and delivered to you or to counsel for the Representative shall be deemed a representation and warranty of the Company to the Representative as to the matters covered thereby. Section 2. Certain Covenants of the Company. The Company covenants and agrees with Centennial, to use its best efforts to cause the Company to perform as follows: (a) The Company will use its best efforts to cause the Registration Statement to become effective (if not yet effective at the date and time that this Agreement is executed and delivered by the parties hereto). The Company will notify you immediately, and confirm the notice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement, shall have become effective, or any supplement to the Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission to amend the Registration Statement or amend or supplement the Prospectus or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the institution or threatening of any proceeding for any such purposes. The Company will use every reasonable effort to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain the withdrawal thereof at the earliest possible moment. (b) The Company will not at any time file or make any amendment to the Registration Statement, or any amendment or supplement to the Prospectus if you shall not have previously been advised and furnished a copy thereof a reasonable time prior to the proposed filing, or if you or your counsel reasonably object to such amendment or supplement. (c) The Company will deliver to you, at the Company's expense, from time to time as requested, such number of copies of the Prospectus (as supplemented or amended) as you may reasonably request. If the delivery of a Prospectus is required at any time prior to the expiration of nine months after the time of issue of the Prospectus in connection with the offering or sale of the Shares and if at such time any events shall have occurred as result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made when such Prospectus is delivered not misleading, or, if for any 8 reason it shall be necessary during such same period to amend or supplement the Prospectus in order to comply with the 1933 Act, the Company will notify you and upon your request prepare and furnish without charge to you and to any dealer in securities as many copies as you may from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus which will correct such statement or omission or effect such compliance. (d) The Company will use its best efforts to qualify the Shares for offering and sale under the applicable securities laws of such states and other jurisdictions as you may designate and to maintain such qualifications in effect for as long as may be necessary to complete the distribution of the Shares; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified or to make any undertakings in respect of doing business in any jurisdiction in which it is not otherwise so subject. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided. (e) The Company will make generally available to its security holders as soon as practicable, but in any event not later than the end of the fiscal quarter first occurring after the first anniversary of the "effective date of the Registration Statement" (as defined in Rule 158(c) of the 1933 Act Regulations), an earnings statement (in reasonable detail but which need not be audited) complying with the provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder and covering a period of at least 12 months beginning after the effective date of the Registration Statement. (f) The Company will use the net proceeds received by it from the sale of the Shares substantially in the manner specified in the Prospectus under the caption "Use of Proceeds." (g) The Company will furnish to its security holders of record, as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year. During a period of five years after the date hereof, the Company will furnish to you: (i) concurrently with furnishing such reports to its security holders, statements of operations of the Company for each of the first three quarters in the form furnished to the Company's security holders; (ii) concurrently with furnishing to its security holders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of cash flows and of security holders, equity of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent public accountants; (iii) as soon as they are available, copies of all reports (financial or otherwise) mailed to security holders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD; (v) every material press release in respect of the Company or its affairs which is released or prepared by the Company, and (vi) any additional information of a public nature concerning the Company or its business that you may reasonably request. During such five-year period, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company are consolidated with any subsidiaries, and shall be accompanied by similar financial statements for any significant subsidiary that is not so consolidated. 9 (h) Except as contemplated by or described in the Prospectus, for a period of one year from the date hereof, the Company will not, without your prior written consent, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any shares of Common Stock or securities convertible into Common Stock or long-term debt, other than to you pursuant to this Agreement. (i) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (j) The Company will use its best efforts to acquire the inclusion of its shares of Common Stock on the Pacific Stock Exchange, or Chicago Exchange within six months from the date hereof. (k) The Company is familiar with the Investment Company Act and the rules and regulations thereunder, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner so as to ensure that the Company was not and will not be an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act. (l) The Company will not, and will use its best efforts to cause its officers, directors and affiliates not to, (i) take, directly or indirectly prior to termination of the distribution of the Shares contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which may cause or result in, or which might in the future reasonably be expected to cause or result in, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Shares, (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of the Shares or (iii) pay or agree to pay to any person any compensation for soliciting any order to purchase any other securities of the Company which, in any such case, is in violation of any law, rule or regulation. (m) The Company will file timely and accurate reports on Form SR with the Commission in accordance with Rule 463 of the 1933 Act Regulations or any successor provision. (n) Prior to the closing of the Offering, the Company will not, and will use its best efforts to cause any affiliate of the Company not to issue a press release or other official communication directly or indirectly, nor hold a press conference with respect to the Company or with respect to the financial condition, results of operations, business, properties, assets or liabilities of the Company, or the offering of the Shares, without your prior written input within 72 hours which consent shall not be unreasonably withheld. (o) The Company will notify you promptly of any material adverse change affecting any of its representations, warranties, agreements and indemnities herein at any time prior to the closing of the Offering and take such steps as may be reasonably requested by you either to remedy or publicize the same, or both. 10 (p) The Company will reserve and keep available that maximum number of its authorized but unissued shares of Common Stock which are issuable upon exercise of the Warrants outstanding from time to time. (q) On the last day of the each month after the execution hereof, the Company shall execute and deliver to you the Warrants earned for the month. The Warrants will be substantially in the form of the Stock Purchase Warrant filed as an exhibit to the Registration Statement, a copy of which is attached hereto as Exhibit "A". (r) For a period of five years from the Effective Date, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit and without issuing any opinion thereon) the Company's financial statements for each of the first three (3) fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q quarterly report and the mailing of quarterly financial information to Stockholders. (s) As promptly as practicable after the closing of the Offering, the Company will prepare, at its own expense, hard cover "bound volumes" relating to the offering, and will distribute such volumes to the individuals designated by you. Section 3. Engagement, Compensation and Payment of Expenses. (a) (i) Subject to the terms and conditions of this Agreement, the Company hereby engages Centennial, on a "best efforts" basis, as the Company's nonexclusive agent in connection with the sale of the Shares. Centennial will keep precise records of all purchases of stock, including the amount of the purchase, the exact title in which the Shares are to be issued and the address of the purchaser. The Shares will be issued promptly by the Company and, in no event, later than fifteen (15) days after notification by Centennial of the purchase with the information set forth above. The minimum amount of each sale shall be 100 shares. (ii) As to residents of the State of California who wish to purchase in excess of $2,500 worth of the Shares, Centennial will take appropriate measures to assure that the purchaser is "suitable" by having a minimum net worth (excluding home equity, home furnishings and automobiles) of at least $75,000 and a minimum gross income of $50,000 during the current tax year; or, in the alternative, a minimum net worth of $150,000. In either case, the amount of a purchaser's investment may not exceed ten percent (10%) of the purchaser's net worth. (iii) Centennial shall use its best efforts to assist the Company in making sales of the shares pursuant to the Offering. Centennial makes no representations as to the amount of Shares it will be able to sell. There is no firm commitment to sell any certain amount of the Shares by Centennial. (iv) Centennial will only offer the Company's stock in those states in which Centennial and its brokers are registered. 11 (v) Centennial agrees to become a market maker for the Company when legally permitted by its restrictive agreement with the NASD and the SEC and when approved by the Centennial Board of Directors. At such time, Centennial agrees to assist with any filing requirements. Centennial does not currently act as a market maker and has no immediate plans to act as a market maker. (b) Centennial shall offer the Shares pursuant to the Prospectus. Payment for the Shares shall be made by the Purchaser directly to the Company. The Company shall pay the commission and any other amounts due to Centennial hereunder every Friday. All amounts due shall be calculated as of the close of business on the immediately prior Thursday. If the Company or any other entity makes sales without Centennial, no commission will be due to Centennial on such sales. (c) As an incentive for Centennial to perform its services in a timely manner, Warrants in the form attached hereto as Exhibit "A" shall be issued to Centennial or its designees as follows: (i) A warrant to purchase up to 50,000 shares of stock with an exercise price of $6.00 per share. The warrant shall be in standard form (see Exhibit A) and shall be assignable, shall contain net exercise and anti-dilutive provisions, and shall expire no sooner than five (5) years after the listing of the common stock of the Company on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ System. (ii) In both instances as set forth above, the Warrants will be granted pro rata to the sale of the Shares by Centennial. Assuming all 500,000 Shares available for sale are sold by Centennial, 50,000 Warrants will be issued. If less than 500,000 Shares are sold by Centennial, Warrants will be issued on a pro rata basis in accordance with the actual number of Shares sold. For example, should 117,500 Shares be sold, Centennial will be entitled to 11,750 Warrants at a price of $6.00 per Share. The warrant shall be in standard form (see Exhibit A) and shall be assignable, shall contain net exercise and anti-dilutive provisions, and shall expire no sooner than five (5) years after the listing of the common stock of the Company on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ System. The Shares obtained upon exercise of the Warrants will be "restricted" stock subject to the trading provisions of Rule 144 promulgated by the Commission. (iii) In addition to the eight percent (8%) commission, there will be a due diligence fee of 1 percent (1%) of the amount of the dollar value of Shares actually sold by Centennial. (d) In the event the Company determines it is in its best interest to have a further public offering of its securities (a "Secondary"), the Company will use its best efforts to arrange for Centennial to participate in no less than 10% of the securities offering on terms no less favorable 12 than that of other members of any syndicate formed as for the purpose of underwriting the offering (on a best efforts or firm commitment basis). Should Centennial's ability to participate in the Secondary be limited because of net capital requirements for a firm underwriting, Centennial may substitute its clearing firm in its place. (e) The Company will pay and bear all costs, fees and expenses incident to the performance of its obligations under this Agreement (excluding fees and expenses of your counsel, except as specifically set forth below), including (a) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits), as originally filed and as amended, the Prospectus and any amendments or supplements thereto, and the cost of furnishing copies thereof to you, (b) the preparation of any Selected Dealers Agreement, the certificates representing the Shares, the Blue Sky Memoranda and any instruments relating to any of the foregoing, (c) the issuance and delivery of the Shares to the purchasers, including any transfer taxes payable upon the sale of the Shares, (d) the fees and disbursements of the Company's counsel and accountants, (e) the qualification of the Shares under the applicable securities laws in accordance with Section 2(e) of this Agreement and any filing for review of the offering with the National Association of Securities Dealers, Inc., including filing fees and fees and disbursements of your counsel in connection therewith and in connection with the Blue Sky Memoranda, (f) all costs, fees and expenses in connection with the application for inclusion of the Shares on the Pacific Stock Exchange, (g) costs related to travel and lodging incurred by the Company and its representatives relating to meetings with and presentations to prospective purchasers of the Shares reasonably determined by you to be necessary or desirable to effect the sale of the Shares to the public and (i) all other costs and expenses incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for in this section. Section 4. Opinion of Counsel and Accountants and other Conditions. (a) As a condition to the performance of your duties and obligations hereunder, you shall have received a favorable opinion of Evers & Hendrickson, LLP ("Evers & Hendrickson") counsel for the Company in form and substance satisfactory to counsel for you, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California with all requisite corporate power and authority to own, lease and operate its properties and the properties it proposes to own, lease and operate as described in the Registration Statement and the Prospectus and to conduct its business as now conducted and as proposed to be conducted as described in the Registration Statement and the Prospectus. To the best of such counsel's knowledge, there are no other jurisdictions in which the ownership or leasing of the Company's properties or the nature or conduct of its business as now conducted or proposed to be conducted as described in the Registration Statement and the Prospectus requires such qualification, except where the failure to do so would not have a material adverse effect on the Company. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity (other than any indirect control that may be implied by virtue of Mr. Starr and certain other officers of the Company serving as officers and/or directors of other companies). 13 (ii) The Company has full legal right, power and authority to enter into, deliver and perform this Agreement, to issue, sell and deliver the Shares as provided herein and to consummate the transactions contemplated herein. This Agreement has been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the other parties hereto, constitutes a valid and binding agreement of the Company, enforceable in accordance with its terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights and by general equity principles and except to the extent that enforcement of the indemnification provisions set forth in Section 5 of this Agreement may be limited by federal or state securities laws or the public policy underlying such laws. (iii) Each consent, approval, authorization, order, license, certificate, permit, registration, designation or filing by or with any governmental agency or body necessary for the valid authorization, issuance, sale and delivery of the Shares and the execution, delivery and performance of this Agreement has been made or obtained and is in full force and effect. (iv) Neither the issuance, sale and delivery by the Company of the Shares to purchasers thereof, nor the execution, delivery and performance of this Agreement, nor the consummation of the transactions contemplated hereby or thereby by the Company will violate any of the terms and provisions of, or constitute a default under, any of the charter or by-laws of the Company, or, to such counsel's knowledge, under any material indenture, mortgage, trust, deed of trust, loan agreement, note, lease or other agreement or instrument to which the Company is a party or to which any of its properties or other assets is subject; or, to such counsel's knowledge, violate any applicable statute, judgment, decree, order, rule or regulation of any court or governmental agency or body; or, to such counsel's knowledge, result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of any of the foregoing. (v) The description of the Company's authorized capital stock contained in the Registration Statement and the Prospectus under the caption "Capital Stock" meets the requirements of Item 12 of Form SB-2 under the 1933 Act, and the Common Stock conforms in all material respects as to legal matters to the description thereof contained in the Registration Statement and the Prospectus. (vi) The Shares to be issued pursuant to the Offering have been validly authorized by the Company. When issued and delivered, the Shares will be validly issued, fully paid and nonassessable. No preemptive rights of shareholders exist with respect to any of the Shares. To such counsel's knowledge, no person or entity holds a right to require or participate in the registration under the 1933 Act of the Shares pursuant to the Registration Statement; and, except as set forth in the Prospectus, no person holds a right to require registration under the 1933 Act of any shares of Common Stock of the Company at any other time. To such counsel's knowledge, no person or entity has a right of participation or first refusal with respect to the sale of the Shares by the Company. The form of certificates evidencing the Shares comply with all applicable requirements of California law. 14 (vii) The Company has an authorized capitalization as set forth in the Prospectus under the caption "Capital Stock" as of the date therein. At the date of this Agreement, the Company has 2,571,909 issued and outstanding shares of capital stock, all of which are Common Stock. The Common Stock conforms in all material respects to the description of the Common Stock contained in the Prospectus. To the knowledge of such counsel, except as disclosed in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, and no commitment, plan or arrangement to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company. (viii) To the knowledge of such counsel, the Company is not in violation of its charter or by-laws, and no material default exists and no event has occurred which, with notice or after the lapse of time to cure or both, would constitute a material default in the due performance and observance of any obligation, agreement, term, covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement, note, lease or other agreement or instrument known to such counsel to which any such entity is a party or by which any such entity or any of its properties is subject. To the knowledge of such counsel, the Company is not in violation of, or in default with respect to, any statute, rule, regulation, order, judgment or decree, except as may be properly described in the Prospectus or such as in the aggregate does not now have and will not in the future have a material adverse effect on the financial position, results of operations or business of each such entity, respectively. (ix) To such counsel's knowledge and except as described in the Prospectus, there is not pending or threatened, any action, suit, proceeding, inquiry or investigation against the Company or any of its officers and directors or to which the properties, assets or rights of the Company or such persons are subject, which, if determined adversely to the Company or any such persons, would individually or in the aggregate have a material adverse effect on the financial position, results of operations or business of any such entity, respectively. (x) The descriptions in the Registration Statement and the Prospectus of the contracts, leases and other legal documents therein described present fairly the information required to be shown and there are no contracts, leases or other documents known to such counsel of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required. There are no statutes or regulations applicable to the Company or certificates, permits or other authorizations from governmental regulatory officials or bodies required to be obtained or maintained by the Company, known to such counsel, of a character required to be disclosed in the Registration Statement or the Prospectus which have not been so disclosed and properly described therein. To such counsel's knowledge, all agreements between the Company, and third parties expressly referenced in the Prospectus are legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except to the extent enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general applicability relating to or affecting creditors' rights and to general equitable principles. 15 (xi) The Registration Statement has become effective under the 1933 Act and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending or contemplated under the 1933 Act. Other than financial statements and other financial and operating data and schedules contained therein, as to which counsel need express no opinion, the Registration Statement, the Prospectus and any amendment or supplement thereto, appear on their face to conform as to form in all material respects with the requirements of Form SB-2 under the 1933 Act Regulations. (xii) The Registration Statement, or any further amendment thereto made prior to the date hereof, on its effective date, contained or contains no untrue statement of a material fact and did not omitted or does not omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading, or neither the Prospectus nor any amendment or supplement thereto, as of its issue date, contained or contains any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements and related schedules and other financial data contained in the Registration Statement, any amendment thereto, or the Prospectus, or any amendment or supplement thereto). (xiii) The Company is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act. (xiv) The descriptions in the Prospectus of statutes, regulations, legal or governmental proceedings are accurate and present fairly a summary of the information required to be shown under the 1933 Act and the 1933 Act Regulations. The information in the Prospectus under the caption "Shares Available for Future Sale," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel, is correct and presents fairly the information required to be disclosed therein under the 1933 Act and the 1933 Act Regulations. (xv) To such counsel's knowledge, no relationship, direct or indirect, exists between or among any of the Company or any affiliate of the Company, on the one hand, and any director, officer, stockholder, customer or supplier of the Company or any affiliate of the Company, on the other hand, that is required by the 1933 Act or by the 1933 Act Regulations to be described in the Registration Statement or the Prospectus which is not so described or is not adequately described. (xvi) All sales by the Company of the Company's securities prior to the date hereof were at all relevant times duly registered under or, to the knowledge of such counsel, effected in a manner which was exempt from the registration requirements of the 1933 Act and were duly registered in accordance with or the subject of an available exemption from the registration requirements of the applicable blue sky laws. To the knowledge of such counsel, the Company has not effected any sales of securities that would be required to be disclosed in response to Item 701 of Regulation S-K that are not disclosed in the Registration Statement. In rendering the foregoing opinion, such counsel may rely on the following: 16 (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel familiar with the applicable laws, (B) as to matters of fact, to the extent they deem appropriate, on certificates of responsible officers of the Company and certificates or other written statements of officers or departments of various jurisdictions having custody of documents respecting the existence or good standing of the Company provided that copies of all such opinions, statements or certificates shall be delivered to your counsel. The opinion of counsel for the Company shall state that the opinion of any other counsel, or certificate or written statement, on which such counsel is relying is in form satisfactory to such counsel and that you and they are justified in relying thereon. (b) At the time that this Agreement is executed by the Company, you shall have received from Moss Adams, LLP a letter, dated the date hereof, in form and substance satisfactory to you, confirming that they are independent public accountants with respect to the Company within the meanings of the 1933 Act and 1933 Act Regulations, and stating in effect that: (i) in their opinion, the financial statements and any supplementary financial information and schedule included in the Registration Statement and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations; (ii) on the basis of limited procedures (set forth in detail in such letter and made in accordance with such procedures as may be specified by you) not constituting an audit in accordance with generally accepted auditing standards, consisting of (but not limited to) a reading of the latest available internal unaudited financial statements of the Company, a reading of the minute books of the Company, inquiries of officials of the Company responsible for financial and accounting matters, and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements and supporting schedule and other unaudited financial data of the Company included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or are not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statement; (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited financial statements included in the Prospectus; 17 (C) any unaudited pro forma financial information included in the Prospectus does not comply as to form in all material respects with the applicable accounting requirements of the 1933 Act and the 1933 Act Regulations or the pro forma adjustments have not been properly applied to historical amounts in the compilation of that information; and (D) at a specified date not more than five days prior to the date of delivery of such letter, there was any change in the capital stock or long-term debt or obligations under capital leases of the Company, or there were any decreases in net current assets or net assets, or shareholders' equity, from that set forth in the Company's balance sheet at ________________, 199__, except as described in such letter; and (iii) in addition to the procedures referred to in clause (ii) above and the examination referred to in their Reports included in the Registration Statement, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by you which are derived from the general accounting records of the Company, which appear in the Registration Statement or the exhibits or schedules thereto and are specified by you, and have compared such amounts, percentages and financial information with the accounting records of the Company and with material derived from such records and have found them to be in agreement. (c) At the time of the closing of the Offering, you shall have received from Moss Adams, LLP, a letter, in form and substance satisfactory to you and dated as of the date of the closing of the Offering, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (b) above, except that the specified date referred to shall be a date not more than five days prior to the date of closing of the Offering. (d) The NASD, upon review of the terms of the public offering of the Shares, shall not have objected to such offering, such terms or your participation in the same. Section 5. Indemnification and Contribution. (a) The Company will indemnify and hold harmless Centennial and each person, if any, who controls Centennial within the meaning of the 1933 Act or the 1934 Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all attorneys' fees), to which it or such controlling person may become subject under the 1933 Act, the 1934 Act or insofar as such losses, claims, damages or liabilities in respect thereof arise out of or are based upon any breach of any warranty or covenant of the Company herein contained or by reason of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and will reimburse Centennial for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, 18 claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by Centennial expressly for use therein. In addition to its other obligations under this Section 5 (a), the Company agrees that, as an interim measure during the pendency of any such claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 5 (a), it will reimburse Centennial on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse Centennial for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. Any such interim reimbursement payments that are not made to Centennial within 30 days of a request for reimbursement shall bear interest at the prime rate (or reference rate or other commercial lending rate for borrowers of the highest credit standing) published from time to time by The Wall Street Journal (the "Prime Rate") from the date of such request. The Company will not, without the prior written consent of Centennial, settle or compromise or consent to the entry of any judgment in any pending or threatened action or claim or related cause of action or portion of such cause of action in respect of which indemnification may be sought hereunder (whether or not Centennial is a party to such action or claim), unless such settlement, compromise or consent includes an unconditional release of Centennial from all liability arising out of such action or claim (or related cause of action or portion thereof). The indemnity agreement in this Section 5(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls Centennial within the meaning of the 1933 Act or the 1934 Act to the same extent as such agreement applies to Centennial. (b) Centennial will indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement or the Prospectus or any such amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by such Underwriter expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action. In addition to its other obligations under this Section 5(b), Centennial agrees that, as an interim measure during the pendency of any such claim, action, investigation, inquiry or other 19 proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 5(b), it will reimburse the Company on a monthly basis for all reasonable legal and other expenses incurred in connection with investigating or defending any such claim, action investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of its obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. Any such interim reimbursement payments that are not made to the Company within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement shall be in addition to any liabilities that Centennial may otherwise have. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; no indemnification provided for in Section 5(a) or 5(b) shall be available to any party who shall fail to give notice as provided in this Section 5(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability that it may have to any indemnified party otherwise than under Section 5. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, except that if the indemnified party has been advised by counsel in writing that there are one or more defenses available to the indemnified party which are different from or additional to those available to the indemnifying party, then the indemnified party shall have the right to employ separate counsel and in that event the reasonable fees and expenses of such separate counsel for the indemnified party shall be paid by the indemnifying party; provided, however, that if the indemnifying party is the Company, the Company shall only be obligated to pay the reasonable fees and expenses of a single law firm (and any reasonably necessary local counsel) employed by all of the indemnified parties and the persons referred to in Section 5(a) hereof. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Section 5(a) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by 20 arbitration conducted pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses that is created by the provisions of Sections 5(a) and 5(b). (e) In order to provide for just and equitable contribution in circumstances under which the indemnity provided for in this Section 5 is for any reason judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the right of appeal) to be unenforceable by the indemnified parties although applicable in accordance with its terms, the Company on the one hand, and Centennial on the other shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity incurred by the Company and Centennial, as incurred, in such proportions that (a) Centennial is responsible pro rata for that portion represented by the commission percentage appearing on the cover page of the Prospectus bears to the initial public offering price (before deducting expenses) appearing thereon, and (b) the Company is responsible for the balance, provided, however, that no person guilty of fraudulent misrepresentations (within the meaning of Section 12(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation; provided, further, that if the allocation provided above is not permitted by applicable law, the Company, on the one hand and Centennial on the other shall contribute to the aggregate losses in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company on the one hand, and Centennial on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company on the one hand, or by Centennial on the other hand, and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Centennial agree that it would not be just and equitable if contributions pursuant to this Section 5(e) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 5(e). The amount paid or payable by a party as a result of the losses, claims, damages or liabilities referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending such action or claim. Section 6. Representations, Warranties and Agreements to Survive Delivery. The representations, warranties, indemnities, agreements and other statements of the Company or their respective officers set forth in or made pursuant to this Agreement will remain operative and in full force and effect will survive the termination of this Agreement. 21 Section 7. Effective Date of Agreement and Termination. (a) This Agreement shall become effective immediately and shall remain in effect for a period of 180 days from the date that copies of the Prospectus for distribution to potential purchasers of the Shares are received at the office of Centennial in San Jose, California (unless extended by the mutual agreement of the Company and Centennial). Section 8. Notices. All notices or communications required or permitted hereunder shall be in writing and shall be mailed or delivered as follows: If to the Company: ZAP Power Systems 117 Morris Street Sebastopol, CA 95472 Attention: James McGreen If to Centennial: (a) Centennial Capital Management, Inc. Almaden Expressway, Suite 230 San Jose, CA 95120 Attention: William H. Watson, III (b) Centennial Capital Management, Inc. 999 Peachtree Street, N.E., Suite 2695 Atlanta, GA 30309 Attention: Rodger Rees Section 9. Miscellaneous. This Agreement contains and constitutes the entire agreement between the parties hereto and supersedes all prior written or oral and all contemporaneous agreements or negotiations with respect to the subject matter hereof. The Agreement may only be amended, modified or waived in writing signed by both parties hereto. This Agreement shall be governed in accordance with the laws of the State of California; without reference to the conflict of law provisions thereof. This Agreement may be executed in counterparts. Section 10. Governing Law and Time. This Agreement shall be governed by the laws of the State of California. Specified time of the day refers to United States Pacific Time. Time shall be of the essence of this Agreement. Section 11. Counterparts. This Agreement may be executed in one or more counterparts and when a counterpart has been executed by each party, all such counterparts taken together shall constitute one and the same agreement. 22 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement among the Company and Centennial in accordance with its terms. Very truly yours, ZAP POWER SYSTEMS By: ------------------------ Name: James McGreen ---------------------- Title: President -------------------- Confirmed and accepted as of the date first above written: CENTENNIAL CAPITAL MANAGEMENT, INC. By: ---------------------------- Name: William H. Watson, III -------------------------- Title: Executive Vice President ------------------------- 23 EX-23.1 3 CONSENT OF INDEPENDENT CPA CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated February 14, 1997, on our audit of the consolidated statements of operations, stockholders' equity and cash flows of ZAP Power Systems and Subsidiary for the year ended December 31, 1996, which is included in the registration statement on Form SB/2A 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 May 12, 1998 EX-23.2 4 CONSENT OF EVERS & HENDRICKSON, LLP Evers & Hendrickson, LLP Lawyers and Counselors At Law - ------------------------------------ May 1, 1998 William D. Evers Jay P. Hendrickson Paul E. Manasian Philip J. Nicholsen, PC --------- Rafael Aguirre-Sacasa Kevin F. Barrett Kenneth A. Brunetti Antoine M. Devine Darcy M. Pertcheck --------- Of Counsel Frederick K. Koenen Phone (415) 352-0694 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 (Post-effective Amendment No. 1) on May 5, 1998. Sincerely, EVERS & HENDRICKSON, LLP By: William D. Evers, Partner 155 Montgomery Street, 12th Floor San Francisco California 94104 415 391 4291 EX-23.3 5 CONSENT OF INDEPENDENT CPA CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated March 27, 1998 on our audit of the consolidated financial statements of Zap Power Systems and Subsidiary as of and for the year ended December 31, 1997 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" and "Summary of Financial Data." /s/ GRANT THORNTON LLP San Jose, California May 11, 1998 F-2 -----END PRIVACY-ENHANCED MESSAGE-----