Exhibit 10.1
Securities Purchase Agreement dated August 6, 2009

 

 

 

 
SECURITIES PURCHASE AGREEMENT
 
Dated as of August 6, 2009
 
by and among
 
ZAP, a California corporation

 
and

 
Cathaya Capital, L.P., a Cayman Islands exempted limited partnership
 

 

 
 

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TABLE OF CONTENTS

   
Page
SECTION I Purchase and Sale of Securities
1
Section 1.1
Issuance of Common Stock and Warrant
1
Section 1.2
Issuance of Note and Warrant
2
Section 1.3
Purchase Price and Closing
2
Section 1.4
Reservation of Note and Warrant Shares
2
SECTION II Representations and Warranties of Company
2
Section 2.1
Organization and Qualification
2
Section 2.2
Authorization; Enforcement; Validity
2
Section 2.3
Issuance of Securities
3
Section 2.4
No Conflicts
3
Section 2.5
Consents
3
Section 2.6
Acknowledgment Regarding Investor’s Purchase of Securities
4
Section 2.7
No General Solicitation; Placement Agent’s Fees
4
Section 2.8
No Integrated Offering
4
Section 2.9
Dilutive Effect
4
Section 2.10
Application of Takeover Protections; Rights Agreement
4
Section 2.11
SEC Documents; Financial Statements
5
Section 2.12
Absence of Certain Changes
5
Section 2.13
No Undisclosed Events, Liabilities, Developments or Circumstances
5
Section 2.14
Conduct of Business; Regulatory Permits
6
Section 2.15
Foreign Corrupt Practices
6
Section 2.16
Sarbanes-Oxley Act
6
Section 2.17
Transactions With Affiliates
6
Section 2.18
Equity Capitalization
6
Section 2.19
Indebtedness and Other Contracts
7
Section 2.20
Absence of Litigation
7
Section 2.21
Insurance
8
Section 2.22
Employee Relations.
8
Section 2.23
Title
8
Section 2.24
Intellectual Property Rights
8
Section 2.25
Environmental Laws
9
Section 2.26
Subsidiary Rights
9
Section 2.27
Tax Status
9
Section 2.28
Internal Accounting Controls
9
Section 2.29
U.S. Real Property Holding Corporation
9
Section 2.30
Manipulation of Price
9
Section 2.31
Disclosure
9
SECTION III Representations and Warranties of Investor
10
Section 3.1
Organization; Authority
10
Section 3.2
No Public Sale or Distribution
10
Section 3.3
Accredited Investor Status
10
Section 3.4
Reliance on Exemptions
10
Section 3.5
Information
11

 
 
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Section 3.6
No Governmental Review
11
Section 3.7
Transfer or Resale
11
Section 3.8
Legends
11
Section 3.9
Validity; Enforcement
12
Section 3.10
No Conflicts
12
SECTION IV Covenants
12
Section 4.1
Form D and Blue Sky
12
Section 4.2
Reporting Status
13
Section 4.3
Use of Proceeds
13
Section 4.4
Financial Information
13
Section 4.5
Listing
13
Section 4.6
Fees
13
Section 4.7
Pledge of Securities
14
Section 4.8
Disclosure of Transaction
14
Section 4.9
Maintenance of Existence
14
Section 4.10
Payment of Obligations
14
Section 4.11
Maintenance of Properties
14
Section 4.12
Insurance
14
Section 4.13
Investments
14
Section 4.14
Restricted Payments
15
Section 4.15
Additional Issuances of Securities
15
Section 4.16
Incurrence of Indebtedness
15
Section 4.17
Existence of Liens
15
Section 4.18
Payments on Other Indebtedness
15
Section 4.19
Reservation of Shares
15
Section 4.20
Conduct of Business
15
Section 4.21
Controlled Account
15
Section 4.22
Additional Investor Covenants
16
Section 4.23
Board of Directors
16
Section 4.24
Stock Option Grant to Priscilla Lu
16
Section 4.25
Stock Option Grant to Steven Schneider
17
SECTION V Conditions to Closing of the Investor
17
Section 5.1
Representations and Warranties
17
Section 5.2
Consents, Permits and Waivers
17
Section 5.3
Shareholder Approval
17
Section 5.4
Option Grant
17
Section 5.5
Legal Requirements
17
Section 5.6
Proceedings and Documents
18
Section 5.7
Transaction Documents
18
Section 5.8
Voting Agreement
18
Section 5.9
Legal Opinion
18
Section 5.10
Corporate Documents
18
Section 5.11
Board of Directors.
18
Section 5.12
Indemnification Agreement.
18
SECTION VI Conditions to Closing of the Company
18
Section 6.1
Representations and Warranties
19

 
 
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Section 6.2
Consents, Permits and Waivers
19
Section 6.3
Legal Requirements
19
Section 6.4
Purchase Price
19
Section 6.5
Transaction Documents
19
SECTION VII Definitions
19
SECTION VIII Miscellaneous
23
Section 8.1
Governing Law; Jurisdiction
23
Section 8.2
Entire Agreement; Amendment
23
Section 8.3
Notices, etc
23
Section 8.4
Delays or Omissions
24
Section 8.5
Public Disclosure
24
Section 8.6
Titles; Subtitles
24
Section 8.7
Successors and Assigns
24
Section 8.8
No Third Party Beneficiaries
24
Section 8.9
Survival
25
Section 8.10
Counterparts
25
Section 8.11
Severability
25
Section 8.12
SPECIFIC PERFORMANCE
25
Section 8.13
Consents
25
Section 8.14
Construction of Agreement
25
Section 8.15
Variations of Pronouns
25

 
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SECURITIES PURCHASE AGREEMENT
 
This SECURITIES PURCHASE AGREEMENT (as amended, restated, modified or otherwise
supplemented from time to time, this “Agreement”) is entered into as of August
6, 2009, by and between ZAP, a California corporation (the “Company”), and
Cathaya Capital, L.P., a Cayman Islands exempted limited partnership (the
“Investor”).
 
RECITALS

A.           On the terms and subject to the conditions set forth herein, the
Investor is willing to purchase from the Company, and the Company is willing to
sell to the Investor, twenty million (20,000,000) shares of the Company’s common
stock, no par value per share (the “Common Stock”), at a price per share equal
to $0.25 for an aggregate purchase price of five million U.S. dollars
($5,000,000.00), together with a related warrant to acquire shares of Common
Stock.
 
B.           In addition, on the terms and subject to the conditions set forth
herein, the Investor is willing to purchase from the Company a Secured
Convertible Promissory Note in the principal amount of up to ten millions U.S.
dollars ($10,000,000.00), together with a related warrant to acquire shares of
Common Stock.
 
C.           Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement, substantially in the form attached hereto as Exhibit 10.6 (the
“Registration Rights Agreement”), pursuant to which the Company has agreed to
provide certain registration rights with respect to the Shares (as defined
below), the Note Shares (as defined below) and the Warrant Shares (as defined
below) under the Securities Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
 
D.           Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Voting Agreement,
substantially in the form attached hereto as Exhibit 10.7 (the “Voting
Agreement”), for the purpose of setting forth the terms and conditions pursuant
to which the parties to the Voting Agreement shall vote their shares of the
Company’s voting stock in favor of certain designees to the Company’s Board of
Directors.
 
AGREEMENT

NOW THEREFORE, in consideration of the foregoing, and the representations,
warranties, and conditions set forth below, the parties hereto, intending to be
legally bound, hereby agree as follows:
 
SECTION I

 
Purchase and Sale of Securities
 
Section 1.1 Issuance of Common Stock and Warrant.  Upon the following terms and
conditions, the Company shall issue and sell to the Investor, and the Investor
shall purchase from the Company: (a) twenty million (20,000,000) shares of
Common Stock (the “Shares”) at a price per Share equal to $0.25 for an aggregate
purchase price of five million U.S. dollars ($5,000,000.00) (the “Share Purchase
Price”); and (b) a warrant, in the form attached hereto as Exhibit 10.4 (the
“First Warrant”) to purchase up to a number of shares of Common Stock as set
forth therein.  The Company and the Investor are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded by Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder, including Regulation D (“Regulation D”),
and/or
 
 
 

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upon such other exemption from the registration requirements of the Securities
Act as may be available with respect to any or all of the investments to be made
hereunder.
 
Section 1.2 Issuance of Note and Warrant.  Subject to all of the terms and
conditions hereof, the Company agrees to issue and sell to the Investor, and the
Investor agrees to purchase, a secured convertible promissory note in the form
attached hereto as Exhibit 10.2 (the “Note”) in the principal amount of up to
ten million U.S. dollars ($10,000,000.00) (the “Note Principal Amount”), which
Note will be convertible into Common Stock (the “Note Shares”).  The Note
Principal Amount will be available to the Company on the terms and conditions
set forth in the Note.  The Company’s initial drawdown of the Note Principal
Amount may only occur on or after ninety (90) days following the Closing.
Concurrently with the issuance of the Note, the Company will issue to the
Investor a warrant in the form attached hereto as Exhibit 10.5 (the “Second
Warrant” and together with the First Warrant, the “Warrants”) to purchase up to
a number of shares of Common Stock as set forth therein.  The Note will be
secured by a first priority, perfected security interest in, subject to
Permitted Liens, certain accounts receivable, inventory and other property of
the Company as evidenced by the security agreement attached hereto as Exhibit
10.3 (the “Security Agreement”).
 
Section 1.3 Purchase Price and Closing.  The sale and purchase of the Shares,
the Note and the Warrants shall take place at a closing (the “Closing”) to be
held at such place and time as the Company and the Investor may determine (the
“Closing Date”).  At the Closing, the Company will deliver to the Investor a
certificate representing the Shares, the Note and the Warrants to be purchased
by the Investor, against receipt by the Company of the Share Purchase
Price.  Each of the Shares, the Note and the Warrants will be registered in the
Investor’s name in the Company’s records.
 
Section 1.4 Reservation of Note and Warrant Shares.  The Company has authorized
and has reserved and covenants to continue to reserve a number of its authorized
but unissued shares of Common Stock equal to the aggregate number of shares of
Common Stock necessary to permit the conversion of the Note and the exercise of
the Warrants, so long as the Note or either of the Warrants are
outstanding.  Any shares of Common Stock issuable upon exercise of the Warrants
(and such shares when issued) are herein referred to as the “Warrant
Shares”.  The Shares, the Note, the Note Shares, the Warrants and the Warrant
Shares are sometimes collectively, individually, or in some combination thereof,
referred to herein as the “Securities”.
 
SECTION II

 
Representations and Warranties of Company
 
The Company hereby represents and warrants that:
 
Section 2.1 Organization and Qualification.  The Company and its Subsidiaries
are entities duly organized and validly existing in good standing under the laws
of the jurisdiction in which they are formed, and have the requisite power and
authorization to own their properties and to carry on their business as now
being conducted.  Each of the Company and its Subsidiaries is duly qualified as
a foreign entity to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good
 
 
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standing would not have a Material Adverse Effect.  The Company has no
Subsidiaries except as set forth on Schedule 2.1.
 
Section 2.2 Authorization; Enforcement; Validity.  The Company has the requisite
corporate power and authority to enter into and perform its obligations under
each Transaction Document and to issue the Securities in accordance with the
terms hereof and thereof.  The execution and delivery of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Shares, the Note and the Warrants, the reservation for issuance and the
issuance of the Note Shares issuable upon conversion of the Note, the
reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants, and the granting of a security interest in the
Collateral (as defined in the Security Agreement) have been duly authorized by
the Company’s Board of Directors (the “Board”) and (other than (i) the filing of
appropriate UCC financing statements with the appropriate states and other
authorities pursuant to the Security Agreement, and (ii) the filing with the
Securities and Exchange Commission (the “SEC”) of one or more registration
statements in accordance with the requirements of the Registration Rights
Agreement) no further filing, consent, or authorization is required by the
Company, the Board or its shareholders.  This Agreement and the other
Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.
 
Section 2.3 Issuance of Securities.  The issuance of the Shares, the Note and
the Warrants are duly authorized and upon issuance of the Shares, the Note and
the Warrants in accordance with the terms of the Transaction Documents, they
shall be free from all taxes, liens and charges with respect to the issue
thereof.  As of the Closing, a number of shares of Common Stock shall have been
duly authorized and reserved for issuance which equals the maximum number of
shares of Common Stock issuable upon conversion of the Note and upon exercise of
the Warrants.  Upon conversion in accordance with the Note or exercise in
accordance with the Warrants, as the case may be, the Note Shares and the
Warrant Shares, respectively, will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, and upon issuance
of the Note Shares and Warrant Shares, respectively, in accordance with the
terms of the Transaction Documents, they shall be free from all taxes, liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock.  The offer and issuance by the
Company of the Securities is exempt from registration under the Securities Act.
 
Section 2.4 No Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation, the
issuance of the Shares, the Note and the Warrants, the granting of a security
interest in the Collateral and reservation for issuance and issuance of the Note
Shares and the Warrant Shares) will not (i) result in a violation of the
Articles of Incorporation (as defined in Section 2.18) of the Company, any
capital stock of the Company or Bylaws (as defined in Section 2.18) of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its
 
 
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Subsidiaries is a party or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the OTC Bulletin Board
(the “Principal Market”)) applicable to the Company or any of its Subsidiaries
or by which any property or asset of the Company or any of its Subsidiaries is
bound or affected.
 
Section 2.5 Consents.  Except as set forth on Schedule 2.5, the Company is not
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof.  All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the Closing Date, and the Company and its Subsidiaries
are unaware of any facts or circumstances which might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant
to the preceding sentence.  The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts which
would reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future.
 
Section 2.6 Acknowledgment Regarding Investor’s Purchase of Securities.  The
Company acknowledges and agrees that the Investor is acting solely in the
capacity of arm’s length purchaser with respect to the Transaction Documents and
the transactions contemplated hereby and thereby and that no Investor is (i) an
officer or director of the Company, (ii) an “affiliate” of the Company (as
defined in Rule 144) or (iii) to the knowledge of the Company, a “beneficial
owner” of more than 10% of the shares of Common Stock (as defined for purposes
of Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the “1934
Act”)).  The Company further acknowledges that no Investor is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to the Transaction Documents and the transactions contemplated hereby
and thereby, and any advice given by a Investor or any of its representatives or
agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby is merely incidental to the Investor’s purchase
of the Securities.  The Company further represents to the Investor that the
Company’s decision to enter into the Transaction Documents has been based solely
on the independent evaluation by the Company and its representatives.
 
Section 2.7 No General Solicitation; Placement Agent’s Fees.  Neither the
Company, nor any of its affiliates, nor any Person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D) in connection with the offer or sale of the
Securities.  The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than, in
each case, for persons engaged by any Investor or its investment advisor)
relating to or arising out of the transactions contemplated hereby.  The Company
shall pay, and hold the Investor harmless against, any liability, loss or
expense (including, without limitation, attorney’s fees and out-of-pocket
expenses) arising in connection with any such claim.  The Company has not
engaged any placement agent or other agent in connection with the sale of the
Securities.
 
Section 2.8 No Integrated Offering.  None of the Company, its Subsidiaries, any
of their affiliates, and any Person acting on their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the Securities Act or
 
 
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cause this offering of the Securities to be integrated with prior offerings by
the Company for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated.  None of the Company, its
Subsidiaries, their affiliates and any Person acting on their behalf will take
any action or steps referred to in the preceding sentence that would require
registration of any of the Securities under the Securities Act or cause the
offering of the Securities to be integrated with other offerings.
 
Section 2.9 Dilutive Effect.  The Company understands and acknowledges that its
obligation to issue the Note Shares upon conversion of the Note in accordance
with this Agreement and the Note and its obligation to issue the Warrant Shares
upon exercise of the Warrants in accordance with this Agreement and the Warrants
is, in each case, absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interests of other shareholders of
the Company, subject to the provisions of the Transaction Documents and
applicable law.
 
Section 2.10 Application of Takeover Protections; Rights Agreement.  The Company
and the Board have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or the laws of the
jurisdiction of its formation which is or could become applicable to any
Investor as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company’s issuance of the Securities and the
Investor’s ownership of the Securities.
 
Section 2.11 SEC Documents; Financial Statements.  During the two (2) years
prior to the date hereof, the Company has filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior
to the date hereof and all exhibits included therein and financial statements,
notes and schedules thereto and documents incorporated by reference therein
being hereinafter referred to as the “SEC Documents”).  The Company has
delivered to the Investor or its representatives true, correct and complete
copies of each of the SEC Documents not available on the EDGAR system that have
been requested by the Investor.  As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.  As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto as in effect as of the time of
filing.  Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).  No other
information provided by or on behalf of the Company to the Investor which is not
included in the SEC Documents contains any untrue statement of a material fact
or omits to state any material fact
 
 
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necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading.
 
Section 2.12 Absence of Certain Changes.  Except as disclosed in Schedule 2.12
or in the SEC Documents listed in Schedule 2.12, since December 31, 2008, there
has been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company or its Subsidiaries.  Except as disclosed
in Schedule 2.12 or in the SEC Documents listed in Schedule 2.12, since December
31, 2008, the Company has not (i) declared or paid any dividends, (ii) as of the
date hereof, sold any assets, individually or in the aggregate, in excess of
$100,000 outside of the ordinary course of business or (iii) as of the date
hereof, had capital expenditures, individually or in the aggregate, in excess of
$100,000.  The Company has not taken any steps to seek protection pursuant to
any bankruptcy law nor does the Company have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do
so.  The Company is not as of the date hereof, and after giving effect to the
transactions contemplated hereby to occur at the Closing, will not be Insolvent
(as defined below).
 
Section 2.13 No Undisclosed Events, Liabilities, Developments or
Circumstances.  Except as set forth on Schedule 2.13, no event, liability,
development or circumstance has occurred or exists, or is contemplated to occur
with respect to the Company or its Subsidiaries or their respective business,
properties, prospects, operations or financial condition, that would be required
to be disclosed by the Company under applicable securities laws on a
registration statement on Form S-1 filed with the SEC relating to an issuance
and sale by the Company of its Common Stock and which has not been publicly
announced.
 
Section 2.14 Conduct of Business; Regulatory Permits.  Neither the Company nor
its Subsidiaries is in violation of any term of or in default under its Charter
Documents.  Neither the Company nor any of its Subsidiaries is in violation of
any judgment, decree or order or any statute, ordinance, rule or regulation
applicable to the Company or its Subsidiaries, and neither the Company nor any
of its Subsidiaries will conduct its business in violation of any of the
foregoing.  Without limiting the generality of the foregoing, the Company is not
in violation of any of the rules, regulations or requirements of the Principal
Market and has no knowledge of any facts or circumstances which would reasonably
lead to delisting or suspension of the Common Stock by the Principal Market in
the foreseeable future.  Since November 1, 2006, (i) the Common Stock has been
designated for quotation on the Principal Market, (ii) trading in the Common
Stock has not been suspended by the SEC or the Principal Market and (iii) the
Company has received no communication, written or oral, from the SEC or the
Principal Market regarding the suspension or delisting of the Common Stock from
the Principal Market.  The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate regulatory
authorities necessary to conduct their respective businesses, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.
 
Section 2.15 Foreign Corrupt Practices.  Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other Person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company (i) used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; (ii) made any direct or indirect unlawful payment
 
 
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to any foreign or domestic government official or employee from corporate funds;
(iii) violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.
 
Section 2.16 Sarbanes-Oxley Act.  The Company is in compliance with any and all
applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as
of the date hereof, and any and all applicable rules and regulations promulgated
by the SEC thereunder that are effective as of the date hereof.
 
Section 2.17 Transactions With Affiliates.  Except as set forth in the SEC
Documents and other than the grant of stock options disclosed on Schedule 2.17,
none of the officers, directors or employees of the Company is presently a party
to any transaction with the Company or any of its Subsidiaries that would
require disclosure pursuant to Item 404 of Regulation S-K promulgated under the
Securities Act (other than for ordinary course services as employees, officers
or directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.
 
Section 2.18 Equity Capitalization.  As of the date hereof, the authorized
capital stock of the Company consists of (i) 400,000,000 shares of Common Stock,
of which 82,676,400 shares were issued and outstanding as of the date hereof,
10,579,000 shares were subject to outstanding options granted pursuant to the
Company’s stock option and purchase plans as of the date hereof, 29,324,918
shares were reserved for issuance pursuant to the Company’s stock option and
purchase plans as of the date hereof, 2009 and 48,489,122 shares are reserved
for issuance pursuant to securities (other than the Note and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 50,000,000 shares of preferred stock, no par value, of which as of the date
hereof, none are issued and outstanding.  All of such outstanding shares have
been, or upon issuance will be, validly issued and are fully paid and
nonassessable.  Except as disclosed in Schedule 2.18: (i) none of the Company’s
share capital is subject to preemptive rights or any other similar rights or any
liens or encumbrances suffered or permitted by the Company; (ii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any share capital of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional share capital of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any share capital of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit agreements, credit facilities or other agreements,
documents or instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may become
bound; (iv) there are no Liens existing on or against any property of the
Company or any of its subsidiaries; (v) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the Securities Act (except the
Registration Rights Agreement); (vi) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or
 
 
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arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries; (vii)
there are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Securities; (viii) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements or any similar plan or agreement; and (ix) the Company and its
Subsidiaries have no liabilities or obligations required to be disclosed in the
SEC Documents but not so disclosed in the SEC Documents.  The Company has
furnished to the Investor true, correct and complete copies of the Company’s
Articles of Incorporation, as amended and as in effect on the date hereof (the
“Articles of Incorporation”), and the Company’s Bylaws, as amended and as in
effect on the date hereof (the “Bylaws”), and the terms of all securities
convertible into, or exercisable or exchangeable for, shares of Common Stock and
the material rights of the holders thereof in respect thereto.
 
Section 2.19 Indebtedness and Other Contracts.  Except as disclosed in Schedule
2.19, neither the Company nor any of its Subsidiaries (i) is a party to or has
any obligation with respect to any outstanding Indebtedness, (ii) is a party to
any contract, agreement or instrument, the violation of which, or default under
which, by the other party(ies) to such contract, agreement or instrument would
result in a Material Adverse Effect, (iii) is in violation of any term of or in
default under any contract, agreement or instrument relating to any
Indebtedness, or (iv) is a party to any contract, agreement or instrument
relating to any Indebtedness, the performance of which, in the judgment of the
Company’s officers, has or is expected to have a Material Adverse
Effect.  Schedule 2.19 provides a detailed description of the material terms of
any such outstanding Indebtedness.
 
Section 2.20 Absence of Litigation.  There is no action, suit, proceeding,
inquiry or investigation before or by the Principal Market, any court, public
board, government agency, self-regulatory organization or body pending or, to
the knowledge of the Company, threatened against or affecting the Company, the
Common Stock or any of the Company’s Subsidiaries or any of the Company’s or the
Company’s Subsidiaries’ officers or directors in their capacities as such, that
could, individually or in the aggregate, reasonably be expected to result in a
Material Adverse Effect.
 
Section 2.21 Insurance.  The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged.  Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
 
Section 2.22 Employee Relations.
 
(a) Except as set forth on Schedule 2.22, neither the Company nor any of its
Subsidiaries is a party to any collective bargaining agreement or employs any
member of a union.  The Company and its Subsidiaries believe that their
relations with their employees are good.  No executive officer of the Company
(as defined in Rule 501(f) of the Securities Act) has notified the Company that
such officer intends to leave the Company or otherwise terminate such officer’s
employment with the Company.  No executive officer of the Company, to the
knowledge of the Company, is, or is now
 
 
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expected to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to
any of the foregoing matters.
 
(b) The Company and its Subsidiaries are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours.
 
Section 2.23 Title.  Except as set forth on Schedule 2.23, the Company and its
Subsidiaries have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them which is
material to the business of the Company and its Subsidiaries, in each case free
and clear of all Liens (other than Permitted Liens) or other encumbrances and
defects except such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and any of its Subsidiaries.   Any real property and facilities held
under lease by the Company and any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Subsidiaries.
 
Section 2.24 Intellectual Property Rights.  The Company and its Subsidiaries own
or possess adequate rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and other intellectual property rights
(“Intellectual Property Rights”) necessary to conduct their respective
businesses as now conducted.  Except as set forth in Schedule 2.24, none of the
Company’s Intellectual Property Rights have expired or terminated, or are
expected to expire or terminate, within three years from the date of this
Agreement.  The Company does not have any knowledge of any infringement by the
Company or its Subsidiaries of Intellectual Property Rights of others.  There is
no claim, action or proceeding being made or brought, or to the knowledge of the
Company, being threatened, against the Company or its Subsidiaries regarding its
Intellectual Property Rights.  The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings.  The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their intellectual properties.
 
Section 2.25 Environmental Laws.  The Company and its Subsidiaries (i) are in
compliance with any and all Environmental Laws (as hereinafter defined), (ii)
have received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval.  The term “Environmental Laws” means all federal, state, local or
foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses,
 
 
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notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.
 
Section 2.26 Subsidiary Rights.  Except as set forth in Schedule 2.26, the
Company or one of its Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.
 
Section 2.27 Tax Status.  The Company and each of its Subsidiaries (i) has made
or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply
or otherwise payable in respect of the taxable periods covered by such
returns.  There are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.
 
Section 2.28 Internal Accounting Controls.  The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any differences.
 
Section 2.29 U.S. Real Property Holding Corporation.  The Company is not, nor
has ever been, a U.S. real property holding corporation within the meaning of
Section 897 of the Internal Revenue Code of 1986, as amended, and the Company
shall so certify upon Investor’s request.
 
Section 2.30 Manipulation of Price.  The Company has not, and to its knowledge
no one acting on its behalf has, (i) taken, directly or indirectly, any action
designed to cause or to 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
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company.
 
Section 2.31 Disclosure.  The Company confirms that neither it nor, to its
knowledge, any other Person acting on its behalf has provided the Investor or
its agents or counsel with any information that constitutes or could reasonably
be expected to constitute material, nonpublic information.  The Company
understands and confirms that the
 
 
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Investor will rely on the foregoing representations in effecting transactions in
securities of the Company.  All disclosure provided to the Investor regarding
the Company, its business and the transactions contemplated hereby, including
the Schedules to this Agreement, furnished by or on behalf of the Company is
true and correct and does not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.  Each press release issued by the Company during the twelve (12)
months preceding the date of this Agreement which contained results of
operations or financial condition information of the Company for a completed
quarterly or annual fiscal period did not, at the time of release, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.  No event
or circumstance has occurred or information exists with respect to the Company
or any of its Subsidiaries or its or their business, properties, prospects,
operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which
has not been so publicly announced or disclosed.
 
SECTION III

 
Representations and Warranties of Investor
 
Investor hereby represents and warrants that:
 
Section 3.1 Organization; Authority.  The Investor is an entity duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization with the requisite power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents and
otherwise to carry out its obligations hereunder and thereunder.
 
Section 3.2 No Public Sale or Distribution.  The Investor is (i) acquiring the
Shares, the Note and the Warrants and (ii) upon conversion of the Note and
exercise of the Warrants will acquire the Note Shares issuable upon conversion
of the Note and the Warrant Shares issuable upon exercise of the Warrants, for
its own account and not with a view towards, or for resale in connection with,
the public sale or distribution thereof, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, the Investor does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act.  The Investor
is acquiring the Securities hereunder in the ordinary course of its
business.  The Investor does not presently have any agreement or understanding,
directly or indirectly, with any Person to distribute any of the Securities.
 
Section 3.3 Accredited Investor Status.  At the time the Investor was offered
the Securities, it was, and as of the date hereof, it is an “accredited
investor” as that term is defined in Rule 501(a) of Regulation D.
 
Section 3.4 Reliance on Exemptions.  The Investor understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that
 
 
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the Company is relying in part upon the truth and accuracy of, and the
Investor’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of the Investor set forth herein in order to
determine the availability of such exemptions and the eligibility of the
Investor to acquire the Securities.
 
Section 3.5 Information.  The Investor and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Securities
which have been requested by the Investor.  The Investor and its advisors, if
any, have been afforded the opportunity to ask questions of the
Company.  Neither such inquiries nor any other due diligence investigations
conducted by the Investor or its advisors, if any, or its representatives shall
modify, amend or affect the Investor’s right to rely on the Company’s
representations and warranties contained herein.  The Investor understands that
its investment in the Securities involves a high degree of risk.  The Investor
has sought such accounting, legal and tax advice as it has considered necessary
to make an informed investment decision with respect to its acquisition of the
Securities.
 
Section 3.6 No Governmental Review.  The Investor understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
 
Section 3.7 Transfer or Resale.  The Investor understands that except as
provided in the Registration Rights Agreement: (i) the Securities have not been
and are not being registered under the Securities Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) the Investor shall have delivered to the
Company an opinion of counsel, selected by the Investor and reasonably
acceptable to the Company, the form and substance of which shall be reasonably
satisfactory to the Company, to the effect that such Securities to be sold,
assigned or transferred may be sold, assigned or transferred pursuant to an
exemption from such registration, or (C) the Investor provides the Company with
reasonable assurance that such Securities can be sold, assigned or transferred
pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, as
amended, (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale
of the Securities made in reliance on Rule 144 may be made only in accordance
with the terms of Rule 144 and further, if Rule 144 is not applicable, any
resale of the Securities under circumstances in which the seller (or the Person
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in the Securities Act) may require compliance with some other
exemption under the Securities Act or the rules and regulations of the SEC
thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.
 
Section 3.8 Legends.  The Investor understands that the certificates or other
instruments representing the Share, the Note and the Warrants and, until such
time as the resale of the Shares, the Note Shares and the Warrant Shares have
been registered under the Securities Act as contemplated by the Registration
Rights Agreement, the stock certificates representing the Shares, the Note
Shares and the Warrant Shares, except as set forth below, shall bear any legend
as required by the “blue sky” laws of any state and a restrictive legend in
 
 
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substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates, certificates or other instruments):
 
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OR EXERCISABLE
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
(B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED TO AN “ACCREDITED INVESTOR” (AS SUCH TERM IS DEFINED IN THE RULES AND
REGULATIONS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.
 
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
securities are sold pursuant to an effective registration statement covering the
resale of such Securities under the Securities Act, or (ii) in connection with a
sale, assignment or other transfer, such holder provides the Company with an
opinion of counsel, selected by the Investor and reasonably acceptable to the
Company, the form and substance of which shall be reasonably satisfactory to the
Company, to the effect that such sale, assignment or transfer of the Securities
may be made without registration under the applicable requirements of the
Securities Act and that such Securities are no longer restricted securties.
 
Section 3.9 Validity; Enforcement.  This Agreement, the Registration Rights
Agreement, the Voting Agreement and the Security Agreement to which the Investor
is a party have been duly and validly authorized by all necessary action on the
part of the Investor, executed and delivered on behalf of the Investor and shall
constitute the legal, valid and binding obligations of the Investor enforceable
against the Investor in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or to applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.
 
Section 3.10 No Conflicts.  The execution, delivery and performance by the
Investor of this Agreement and the other Transaction Documents to which the
Investor is a party and the consummation by the Investor of the transactions
contemplated hereby and thereby will not (i) result in a violation of the
organizational documents of the Investor or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or
 
 
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cancellation of, any agreement, indenture or instrument to which the Investor is
a party, or (iii) result in a violation of any law, rule, regulation, order,
judgment  or decree (including federal and state securities laws) applicable to
the Investor, except in the case of clauses (ii) and (iii) above, for such
conflicts, defaults, rights or violations which would not, individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
ability of the Investor to perform its obligations hereunder.
 
SECTION IV

 
Covenants
 
Section 4.1 Form D and Blue Sky.  The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to the Investor promptly after such filing.  The Company shall, on or
before the Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Investor at the Closing pursuant to this Agreement
under applicable securities or “Blue Sky” laws of the states of the United
States (or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to the Investor on or prior to the Closing
Date.  The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or “Blue Sky” laws
of the states of the United States following the Closing Date.
 
Section 4.2 Reporting Status.  Until the date on which the Investor shall have
sold all the Shares, the Note Shares and the Warrant Shares and neither the Note
or the Warrants are outstanding (the “Reporting Period”), the Company shall (i)
file with the SEC within the time periods prescribed by its rules and
regulations, and (ii) furnish to the Investor within 15 days after the date on
which the Company would be required to file the same with the SEC pursuant to
its rules and regulations, all quarterly and annual financial information
(without exhibits) required to be contained in a filing with the SEC on Forms
10-Q and 10-K, including a “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and, with respect to the annual
consolidated financial statements only, a report thereon by the Company’s
independent auditors.  The Company shall not be required to file any report or
other information with the SEC if the SEC does not permit such filing, although
such reports or other information will be required to be furnished to the
Investor.  In addition, the Company will furnish to Investor, beneficial owners
of the Shares, the Note or the Warrants and prospective purchasers of the
Shares, the Note, the Warrant, the Note Shares or the Warrant Shares, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4) of
the Securities Act.
 
Section 4.3 Use of Proceeds.  The Company will use the proceeds from the sale of
the Securities for working capital and general corporate purposes, and not (i)
for the repayment of any other outstanding Indebtedness of the Company or any of
its Subsidiaries, or (ii) for the redemption or repurchase of any of its equity
securities.
 
Section 4.4 Financial Information.  The Company agrees to send the following to
each Investor during the Reporting Period (i) unless the following are filed
with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day after the filing thereof with the SEC, a
copy of its Annual Reports on Form 10-K or 10-KSB, any interim reports or any
consolidated balance sheets, income statements,
 
 
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shareholders’ equity statements and/or cash flow statements for any period other
than annual, any Current Reports on Form 8-K and any registration statements
(other than on Form S-8) or amendments filed pursuant to the Securities Act,
(ii) on the same day as the release thereof, copies of all press releases issued
by the Company or any of its Subsidiaries via electronic mail, and (iii) copies
of any notices and other information made available or given to the shareholders
of the Company generally, contemporaneously with the making available or giving
thereof to the shareholders.
 
Section 4.5 Listing.  The Company shall promptly secure the listing of all of
the Registrable Securities (as defined in the Registration Rights Agreement)
upon each national securities exchange and automated quotation system, if any,
upon which the Common Stock is then listed (subject to official notice of
issuance) and shall maintain such listing of all Registrable Securities from
time to time issuable under the terms of the Transaction Documents.  The Company
shall use its best efforts to maintain the Common Stocks’ authorization for
quotation on the Principal Market.  Neither the Company nor any of its
Subsidiaries shall take any action which would be reasonably expected to result
in the delisting or suspension of the Common Stock on the Principal Market.  The
Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 4.5.
 
Section 4.6 Fees.  At the Closing, the Company shall pay the reasonable legal
fees and expenses incurred by Investor in connection with this Agreement and the
Transaction Documents.  Up to a maximum of one hundred five thousand U.S.
dollars ($105,000.00) shall be deducted from the Share Purchase Price and wired
directly by Investor to Wilson Sonsini Goodrich & Rosati, P.C. and up to a
maximum of ten thousand U.S. dollars ($10,000.00) shall be deducted from the
Share Purchase Price and wired directly by Investor to other legal counsel.
 
Section 4.7 Pledge of Securities.  The Company acknowledges and agrees that the
Securities may be pledged by the Investor in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities.  The pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and the Investor shall not be
required to provide the Company with any notice thereof or otherwise make any
delivery to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, Section 3.7 hereof; provided that the
Investor and its pledgee shall be required to comply with the provisions of
Section 3.7 hereof in order to effect a sale, transfer or assignment of
Securities to such pledgee.  The Company hereby agrees to execute and deliver
such documentation as a pledgee of the Securities may reasonably request in
connection with a pledge of the Securities to such pledgee by the Investor.
 
Section 4.8 Disclosure of Transaction.  On or before 8:30 a.m., Eastern Standard
Time, on the first business day following the date of this Agreement, the
Company shall file a Current Report on Form 8-K describing the terms of the
transactions contemplated by the Transaction Documents in the form required by
the 1934 Act and attaching the material Transaction Documents (including,
without limitation, this Agreement (and all schedules to this Agreement), the
form of the Note, the form of Warrant, the Registration Rights Agreement, the
Voting Agreement and the Security Agreement) (including all attachments, the
“8-K Filing”).
 
 
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Section 4.9 Maintenance of Existence.  So long as the Investor beneficially owns
any Securities, the Company will do or cause to be done all things necessary to
obtain, preserve, renew and keep in full force and effect (a) its legal
existence and (b) the rights, licenses, permits, privileges, franchises and
Intellectual Property Rights material to the conduct of its business.
 
Section 4.10 Payment of Obligations.  So long as any Obligations are
outstanding, the Company will, and will cause each of its Subsidiaries to, pay
its material obligations, including tax liabilities, before the same shall
become delinquent or in default, except where (a) the validity or amount thereof
is being contested in good faith by appropriate proceedings, (b) the Company or
such Subsidiary has set aside on its books adequate reserves with respect
thereto in accordance with GAAP, (c) such contest effectively suspends
collection of the contested obligation and the enforcement of any Lien securing
such obligation and (d) the failure to make payment pending such contest could
not reasonably be expected to result in a Material Adverse Effect.
 
Section 4.11 Maintenance of Properties.  So long as any Obligations are
outstanding, the Company will, and will cause each of its Subsidiaries to, keep
and maintain all of its respective property in good working order and condition,
ordinary wear and tear excepted, except to the extent the failure to so keep and
maintain such property could not, individually or in the aggregate, reasonably
be expected to result in a Material Adverse Effect.
 
Section 4.12 Insurance.  So long as any Obligations are outstanding, the Company
will, and will cause each of its Subsidiaries to, maintain, with financially
sound and reputable insurance companies, (a) insurance in such amounts (after
giving effect to any self-insurance reasonable and customary for similarly
situated Persons in engaged in the same or similar businesses as the Company and
its Subsidiaries) and against such risks as is (i) customarily maintained by
companies of established repute engaged in the same or similar businesses
operating in the same or similar locations and (ii) considered adequate by the
Company and (b) all other insurance as may be required by law.
 
Section 4.13 Investments.  So long as any Obligations are outstanding, neither
Company nor any of its Subsidiaries shall make any Investment except for
Permitted Investments.
 
Section 4.14 Restricted Payments.  So long as any Obligations are outstanding,
the Company will not, and will not permit any of its Subsidiaries to, make any
Restricted Payment.
 
Section 4.15 Additional Issuances of Securities.  So long as the Investor
beneficially owns any Securities, the Company will not issue any other
securities that would cause a breach or default under the Note.  Additionally,
so long as the Investor beneficially owns any Securities, the Company shall not,
without the prior written consent of the Investor, issue or obligate itself to
issue any securities with rights, preferences, privileges, powers, or
restrictions provided for the benefit of the purchaser of such securities,
senior to or more favorable than the rights, preferences, privileges, powers,
and restrictions provided for the benefit of the Investor, of the Shares, the
Note and the Warrants issued to Investor pursuant to the Transaction Documents.
 
 
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Section 4.16 Incurrence of Indebtedness.  So long as any Obligations are
outstanding, the Company shall not, and the Company shall not permit any of its
Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to
exist any Indebtedness, other than Permitted Indebtedness.
 
Section 4.17 Existence of Liens.  So long as any Obligations are outstanding,
the Company shall not, and the Company shall not permit any of its Subsidiaries
to, directly or indirectly, allow or suffer to exist any Lien other than
Permitted Liens.
 
Section 4.18 Payments on Other Indebtedness.  So long as any Obligations are
outstanding, the Company shall not, and the Company shall not permit any of its
Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or
make any payments in respect of, by the payment of cash or cash equivalents (in
whole or in part, whether by way of open market purchases, tender offers,
private transactions or otherwise), all or any portion of any Permitted
Indebtedness (excluding the Note), whether by way of payment in respect of
principal of (or premium, if any) or interest on, such Indebtedness if at the
time such payment is due or is otherwise made or, after giving effect to such
payment, an event constituting, or that with the passage of time and without
being cured would constitute, an Event of Default (as defined in the Note) has
occurred and is continuing.
 
Section 4.19 Reservation of Shares.  The Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, after
the Closing Date, the number of shares of Common Stock issuable upon conversion
of the Note and issuable upon exercise of the Warrants.
 
Section 4.20 Conduct of Business.  So long as the Investor beneficially owns any
Securities, the business of the Company and its Subsidiaries shall not be
conducted in violation of any law, ordinance or regulation of any governmental
entity, except where such violations would not result, either individually or in
the aggregate, in a Material Adverse Effect.
 
Section 4.21 Controlled Account.  Prior to requesting an Advance (as defined in
the Note), the Company shall open an account at a bank reasonably acceptable to
the Company and the Investor and cause such account to be subject to a control
agreement in favor of, and in form and substance satisfactory to, the Investor
(the “Controlled Account”).  The Company shall cause the proceeds of all
Approved Purchase Orders (as defined in the Note) to be deposited into the
Controlled Account.  The Company shall not be permitted to make any withdrawals
from the Controlled Account unless the Company has delivered to the Investor
true and complete copies of firm purchase orders and the Investor shall have
determined that such purchase orders are from creditworthy purchasers and are
otherwise on terms and conditions reasonably acceptable to the Investor (such
purchase orders, the “Additional Approved Purchase Orders”).  The Company shall
cause the proceeds of all Additional Purchase Orders to be deposited into the
Controlled Account.
 
 
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Section 4.22 Additional Investor Covenants.  Investor shall use reasonable
efforts to the extent that Investor deems it to be in its interest to do the
following:
 
(a) facilitate obtaining an agreement between the Company and a hub motor
manufacturer regarding the Company’s electric car design on such terms and
conditions as shall be mutually agreed to by the parties;
 
(b) incorporate a company formed for the purpose of distributing the Company’s
products in Europe and provide to the Company twenty percent (20%) of such
company’s outstanding capital stock as determined immediately following such
incorporation on such terms and conditions, as shall be mutually agreed to by
the parties; provided, however, that such terms and conditions shall contain the
right to the exclusive distribution of the Company’s products in Europe for a
period of two (2) years beginning on the later of (x) the date the Company’s
products are made compliant and certified for use in the European market, and
(y) January 1, 2010;
 
(c) offer to Company ten percent (10%) of the Investor’s equity in the E-Charge
Network joint venture in China subject to the successful formation of such joint
venture and on such terms and conditions as shall be mutually agreed to by the
parties; and
 
(d) offer to enter into a joint venture with Youngman Automotive Group., an
electric car company in China, on such terms and conditions as shall be mutually
agreed to by the parties.
 
Section 4.23 Board of Directors. Effective as of the Closing, the Company shall
appoint Priscilla Lu to serve on the Company’s Board of Directors.  In addition,
effective as of the Closing, the Company shall appoint Priscilla Lu to serve on
the compensation committee of the Company’s Board of Directors to serve until
such time as Priscilla Lu is no longer a member of the Company’s Board of
Directors.  If at any time Priscilla Lu is not a member of the Company’s Board
of Directors and so long as the Investor beneficially owns any Securities, the
Company shall (i) permit Priscilla Lu or another representative designated by
the Investor (each, a “Representative”) to attend all meetings of the Board and
all committees thereof as an observer; (ii) provide the Representative advance
notice of each such meeting, including such meeting’s time and place, at the
same time and in the same manner as such notice is provided to the members of
the Board (or such committee thereof); (iii) provide the Representative with
copies of all materials, including notices, minutes and consents, distributed to
the members of the Board (or such committee thereof) at the same time as such
materials are distributed to the Board (or such committee thereof); and (iv)
permit the Representative to discuss the affairs, finances and accounts of the
Company with, and to make proposals and furnish advice with respect thereto, to
the Board, without voting, and the Board and the Company’s officers shall take
such proposals or advice seriously and give due consideration thereto.  In
addition, so long as the Investor beneficially owns any Securities, (i) prior to
any meeting of the shareholders where the election of directors will take place,
the Company shall nominate one (1) Person designated by the Investor to serve on
the Board and include such information as is necessary to support their election
in any materials delivered to the shareholders, and (ii) Investor shall have the
right to approve the appointment of any Person to fill a vacancy on the Board,
and the Investor shall have the right to approve any Person the Board nominates
for election by the shareholders of the Company to the Board.
 
Section 4.24 Stock Option Grant to Priscilla Lu.  The Company will grant to
Priscilla Lu a stock option exercisable for one million (1,000,000) shares of
the Company’s Common Stock at the price per share of the fair market value of
the Company’s Common Stock on the date of grant (the “First Option”).  The First
Option shall be immediately exercisable.  In
 
 
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addition, the Company will grant to Priscilla Lu a stock option to purchase that
number of shares of the Company’s Common Stock equal to three percent (3%) of
the Fully-Diluted Capitalization after the Closing at the price per share equal
to the fair market value of the Company’s Common Stock on the date of grant,
which will vest in three equal installments on the first, second and third
anniversary of the Closing (each a “Vesting Date” and such option, the “Second
Option”); provided that Priscilla Lu continues to provide services to the
Company as a director, consultant or in some other capacity through each such
date; provided; further, that if on any such Vesting Date, one-third (1/3rd) of
the number of shares of the Company’s Common Stock that the Second Option is
exercisable for is less than one percent (1%) of the Fully-Diluted
Capitalization of the Company on such Vesting Date, then the Company shall grant
to Priscilla Lu an additional stock option to purchase that number of shares of
the Company’s Common Stock equal to the difference between one percent (1%) of
the Fully-Diluted Capitalization of the Company on such Vesting Date and
one-third (1/3rd) of the number of shares of the Company’s Common Stock that the
Second Option is exercisable for at the price per share equal to the fair market
value of the Company’s Common Stock on the date of grant, which will vest
immediately on the date of grant.
 
Section 4.25 Stock Option Grant to Steven Schneider.  At the Closing or as soon
as practicable after the Closing, the Company will grant to the Company’s Chief
Executive Officer, Steven Schneider, a stock option exercisable for that number
of shares of the Company’s Common Stock equal to five percent (5%) of the
Fully-Diluted Capitalization of the Company at the price per share equal to the
fair market value of the Company’s Common Stock on the date of grant (the
“Schneider Option”).  One million (1,000,000) of the shares subject to the
Schneider Option shall be immediately exercisable, and the remaining shares
subject to the Schneider Option shall vest in three equal installments on the
first, second and third anniversary of the Closing; provided that Steven
Schneider continues to provide services to the Company as an employee, director,
consultant or in some other capacity through each such date.
 
SECTION V

 
Conditions to Closing of the Investor
 
The Investor’s obligations at the Closing are subject to the fulfillment, on or
prior to the Closing Date, of all of the following conditions, any of which may
be waived in whole or in part by the Investor:
 
Section 5.1 Representations and Warranties.  The representations and warranties
made by the Company in Section 2 hereof shall have been true and correct as of
the Closing Date, except to the extent such representations and warranties
address matters as of a particular date or period, in which case such
representations and warranties shall be true and correct as of such date or
period and with the same force and effect as if they had been made as of that
date.
 
Section 5.2 Consents, Permits and Waivers.  Except for any notices required or
permitted to be filed after the Closing Date with certain federal and state
securities commissions, the Company shall have obtained all consents, permits,
waivers, and governmental or regulatory approvals required, necessary or
appropriate for consummation of the transactions contemplated by this Agreement.
 
Section 5.3 Shareholder Approval.  The Company shall have obtained the consent
of the Company’s shareholders required, necessary or appropriate for
consummation of the transactions contemplated by this Agreement.
 
 
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Section 5.4 Option Grant.  The Company shall have granted the stock options
described in Section 4.24 to Priscilla Lu.
 
Section 5.5 Legal Requirements.  At the Closing, the sale and issuance by the
Company, and the purchase by the Investor, of the Shares, the Note and the
Warrants shall be legally permitted by all laws and regulations to which the
Investor or the Company are subject.
 
Section 5.6 Proceedings and Documents.  All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all documents
and instruments incident to such transactions shall be reasonably satisfactory
in substance and form to the Investor.
 
Section 5.7 Transaction Documents.  The Company shall have duly executed and
delivered to the Investor the following documents:
 
(a) this Agreement;
 
(b) a certificate representing the Shares, the Note and the Warrants issued
hereunder;
 
(c) that certain Registration Rights Agreement, in the form attached hereto as
Exhibit 10.6;
 
(d) that certain Voting Agreement, in the form attached hereto as Exhibit 10.7;
and
 
(e) that certain Security Agreement, in the form attached hereto as Exhibit
10.3.
 
Section 5.8 Voting Agreement.  Each of the directors and officers of the Company
and certain principal shareholders described therein shall have entered into
that certain Voting Agreement in the form attached hereto as Exhibit 10.7.
 
Section 5.9 Legal Opinion.  The Company’s outside legal counsel shall have
delivered to the Investor a legal opinion.
 
Section 5.10 Corporate Documents.  The Company shall have delivered to the
Investor each of the following:
 
(a) a certificate of the Secretary of the Company, dated as of the Closing Date,
certifying (i) that the Articles of Incorporation, certified as of a recent date
by the Secretary of State of the State of California and attached thereto, is in
full force and effect and has not been amended, supplemented, revoked or
repealed since the date of such certification; (ii) that attached thereto is a
true and correct copy of the Bylaws of the Company as in effect on the Closing
Date; and (iii) that attached thereto are true and correct copies of resolutions
duly adopted by the Board and continuing in effect, which authorize the
execution, delivery and performance by the Company of the Transaction Documents
and the consummation of the transactions contemplated hereby and thereby; and
 
(b) a Certificate of Good Standing or comparable certificate as to the Company,
certified as of a recent date prior to the Closing Date by the Secretary of
State of California.
 
Section 5.11 Board of Directors..  The Company shall have taken all necessary
corporate action to satisfy its obligation to appoint Priscilla Lu to the
Company’s Board of Directors pursuant to Section 4.23 such that effective as of
the Closing, Priscilla Lu shall be a member of the Company’s Board of Directors.
 
 
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Section 5.12 Indemnification Agreement..  The Company shall have entered into an
indemnification agreement with Priscilla Lu, in a form that is satisfactory to
Investor.
 
SECTION VI

 
Conditions to Closing of the Company
 
The Company’s obligations at the Closing are subject to the fulfillment, on or
prior to the Closing Date, of the following conditions, any of which may be
waived in whole or in part by the Company:
 
Section 6.1 Representations and Warranties.  The representations and warranties
made by the Investor in Section 3 hereof shall be true and correct when made,
and shall be true and correct as of the Closing Date.
 
 
Section 6.2 Consents, Permits and Waivers.  Except for any notices required or
permitted to be filed after the Closing Date with certain federal and state
securities commissions, the Company shall have obtained all consents, permits,
waivers, and governmental approvals required, necessary or appropriate for
consummation of the transactions contemplated by this Agreement.
 
 
Section 6.3 Legal Requirements.  At the Closing, the sale and issuance by the
Company, and the purchase by the Investor, of the Shares, the Note and the
Warrants shall be legally permitted by all laws and regulations to which the
Investor or the Company are subject.
 
 
Section 6.4 Purchase Price.  The Investor shall have delivered to the Company
the Share Purchase Price.
 
 
Section 6.5 Transaction Documents.  The Investor shall have duly executed and
delivered to the Company the following documents:
 
(a) this Agreement;
 
(b) that certain Registration Rights Agreement, in the form attached hereto as
Exhibit 10.6;
 
(c) that certain Voting Agreement, in the form attached hereto as Exhibit 10.7;
and
 
(d) that certain Security Agreement, in the form attached hereto as Exhibit
10.3.

 
SECTION VII

 
Definitions
 
“Capital Lease Obligations” of any Person means the obligations of such Person
to pay rent or other amounts under any lease of (or other arrangement conveying
the right to use) real or personal
 
 
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property, or a combination thereof, which obligations are required to be
classified and accounted for as capital leases on a balance sheet of such Person
under GAAP, and the amount of such obligations shall be the capitalized amount
thereof determined in accordance with GAAP.
 
“Charter Documents” means, with respect to any Person, its charter, certificate
or articles of incorporation, bylaws, articles of organization, limited
liability agreement, operating agreement, members agreement, shareholders
agreement, partnership agreement, certificate of partnership, certificate of
formation, voting trust agreement, or similar agreement or instrument governing
the formation or operation of such Person.
 
“Collateral” has the meaning set forth in the Security Agreement.
 
“Equity Securities” of any means (a) all common stock, preferred stock,
participations, shares, partnership interests or other equity interests in and
of such Person (regardless of how designated and whether or not voting or
non-voting) and (b) all warrants, options and other rights to acquire any of the
foregoing.
 
“Fully-Diluted Capitalization” means all outstanding common stock, all
outstanding preferred stock on an as-converted basis, and all outstanding
options, warrants and other convertible securities as if fully exercised or
converted.
 
“GAAP” means generally accepted accounting principles in the United States of
America.
 
“Guarantee” of or by any Person (the “guarantor”) means any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness or other obligation of any other Person
(the “primary obligor”) in any manner, whether directly or indirectly, and
including any obligation of the guarantor, direct or indirect, (a) to purchase
or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation or to purchase (or to advance or supply funds
for the purchase of) any security for the payment thereof, (b) to purchase or
lease property, securities or services for the purpose of assuring the owner of
such Indebtedness or other obligation of the payment thereof, (c) to maintain
working capital, equity capital or any other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay such
Indebtedness or other obligation or (d) as an account party in respect of any
letter of credit or letter of guaranty issued to support such Indebtedness or
obligation, provided that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business or customary and
reasonable indemnity obligations (other than any such obligations with respect
to Indebtedness).  The amount of any Guarantee shall be deemed to be the lower
of (i) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Guarantee is made and (ii) the maximum
amount for which such guaranteeing Person may be liable pursuant to the terms of
the instrument embodying such Guarantee, or, if such Guarantee is not an
unconditional guarantee of the entire amount of the primary obligation and such
maximum amount is not stated or determinable, the amount of such guaranteeing
Person’s maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith.
 
“Indebtedness” of any Person means, without duplication, (a) all obligations of
such Person for borrowed money, (b) all obligations of such Person evidenced by
bonds, debentures, notes or similar instruments, (c) all obligations of such
Person upon which interest charges are customarily paid, (d) all obligations of
such Person under conditional sale or other title retention agreements relating
to property acquired by such Person, (e) all obligations of such Person in
respect of the deferred purchase price of property or services (excluding
accounts payable and intercompany charges of expenses (including expenses
related to research and development and information technology) and other
accrued obligations,
 
 
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in each case incurred in the ordinary course of business), (f) all Indebtedness
of others secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien on property
owned or acquired by such Person, whether or not the Indebtedness secured
thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of
others, (h) all Capital Lease Obligations of such Person, (i) all obligations,
contingent or otherwise, of such Person as an account party in respect of
letters of credit and letters of guaranty and (j) all obligations, contingent or
otherwise, of such Person in respect of bankers’ acceptances.  The Indebtedness
of any Person shall include the Indebtedness of any other entity (including any
partnership in which such Person is a general partner) to the extent such Person
is liable therefor as a result of such Person’s ownership interest in or other
relationship with such entity, except to the extent the terms of such
Indebtedness provide that such Person is not liable therefor.  The amount of
Indebtedness of any Person for purposes of clause (f) above shall (unless such
Indebtedness has been assumed by such Person) be deemed to be equal to the
lesser of (i) the aggregate unpaid amount of such Indebtedness and (ii) the fair
market value of the property encumbered thereby as determined by such Person in
good faith.
 
“Insolvent” means (i) the present fair saleable value of the Company’s assets is
less than the amount required to pay the Company’s total Indebtedness, (ii) the
Company is unable to pay its debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured, (iii) the
Company intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) the Company has
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.
 
“Investment” of any Person means any loan or advance of funds by such Person to
any other Person (other than advances to employees of such Person for moving and
travel expense, drawing accounts and similar expenditures in the ordinary course
of business), any purchase or other acquisition of any Equity Securities or
Indebtedness of any other Person, any capital contribution by such Person to or
any other investment by such Person in any other Person (including, without
limitation, any Guarantee); provided, however, that Investments shall not
include accounts receivable or other indebtedness owed by customers of such
Person which are current assets and arose from sales or non-exclusive licensing
in the ordinary course of such Person’s business.
 
“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien,
pledge, hypothecation, encumbrance, charge or security interest in, on or of
such asset, (b) the interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating
to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.
 
“Material Adverse Effect” means any material adverse effect on the business,
properties, assets, operations, results of operations or condition (financial or
otherwise) of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and by the other Transaction Documents or by
the agreements and instruments to be entered into in connection herewith or
therewith, or on the authority or ability of the Company to perform its
obligations under the Transaction Documents.
 
“Notice of Borrowing” has the meaning set forth in the in the Note.
 
“Obligations” means all loans, advances, debts, liabilities and obligations,
howsoever arising, owed by the Company to the Investor of every kind and
description (whether or not evidenced by any note or instrument and whether or
not for the payment of money), now existing or hereafter arising under the Note
or the Security Agreement, including, all interest, fees, charges, expenses,
attorneys’ fees and
 
 
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costs and accountants’ fees and costs chargeable to and payable by the Company
thereunder, in each case, whether direct or indirect, absolute or contingent,
due or to become due, and whether or not arising after the commencement of a
proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et
seq.), as amended from time to time (including post-petition interest) and
whether or not allowed or allowable as a claim in any such proceeding.
 
“Permitted Indebtedness” means (a) Indebtedness of the Company evidenced by the
Note, (b) Indebtedness arising from the endorsement of instruments in the
ordinary course of business, (c) Indebtedness existing on the date hereof and
set forth on Schedule 2.19 and any extension, renewal or refinancing thereof;
provided that any such extension, renewal or refinancing shall not be in a
principal amount that exceeds the principal amount of the Indebtedness being
extended, renewed or refinanced, (d) Indebtedness in a principal amount equal to
the aggregate principal amount of any requested Advances satisfying all of the
terms and conditions of Section 1 of the Note for which a Notice of Borrowing
has been delivered and with respect to which the Investor has failed to make
such Advance during the thirty (30) day period following the date the Notice of
Borrowing is furnished to Investor; provided that if the Notice of Borrowing was
made under Facility A (as defined in the Note), such Indebtedness may be pari
passu in right of payment and security to the Obligations; provided, further,
that if the Notice of Borrowing was made under Facility B (as defined in the
Note) the lender of such Indebtedness enters into an agreement with the Investor
subordinating such Indebtedness to the Obligations on terms and conditions
acceptable to the Investor, (e) in the event that Advances in the aggregate
amount of Ten Million Dollars ($10,000,000) have been made, Indebtedness
incurred in excess of such Ten Million Dollars ($10,000,000); provided that (i)
the Company shall have delivered to the Investor true and complete copies of
firm purchase orders with respect to which Indebtedness is being incurred and
such purchase orders must be with creditworthy purchasers and otherwise on terms
and conditions reasonably acceptable to the Investor and (ii) the lender of such
Indebtedness enters into an agreement with the Investor subordinating such
Indebtedness to the Obligations on terms and conditions acceptable to the
Investor, and (f) other Indebtedness in an aggregate principal amount at any
time outstanding not to exceed One Million Dollars ($1,000,000).
 
“Permitted Investments” means: (a) deposits accounts of the Company with
commercial banks organized under the laws of the United States or a state
thereof to the extent such deposits are fully insured by the Federal Deposit
Insurance Corporation; (b) Investments in marketable obligations issued or fully
guaranteed by the United States and maturing not more than one (1) year from the
date of issuance; (c) Investments in open market commercial paper rated at least
“A-l “ or “P-1” or higher by a national credit rating agency and maturing not
more than 270 days from the creation thereof; (d) Investments pursuant to or
arising under currency agreements or interest rate agreements entered into in
connection with bona fide hedging arrangements; (e) deposit accounts of
Subsidiaries maintained in the ordinary course of business; and (f) other
Investments aggregating not in excess of One Million Dollars ($1,000,000) at any
time.
 
“Permitted Liens” means (a) Liens for taxes not yet delinquent or Liens for
taxes being contested in good faith and by appropriate proceedings for which
adequate reserves have been established; (b) Liens in respect of property or
assets imposed by law which were incurred in the ordinary course of business,
such as carriers’, warehousemen’s, materialmen’s and mechanics’ Liens and other
similar Liens arising in the ordinary course of business which are not
delinquent or remain payable without penalty or which are being contested in
good faith and by appropriate proceedings; (c) Liens incurred or deposits made
in the ordinary course of business in connection with workers’ compensation,
unemployment insurance and other types of social security, and mechanic’s Liens,
carrier’s Liens and other Liens to secure the performance of tenders, statutory
obligations, contract bids, government contracts, performance and return of
money bonds and other similar obligations, incurred in the ordinary course of
business, whether pursuant to statutory requirements, common law or consensual
arrangements,
 
 
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(d) Liens in favor of Investor, and (e) Liens incurred to secure Indebtedness
permitted by clause (d) of the definition of Permitted Indebtedness but solely
with respect to Advances requested under Facility A (as defined in the Note).
 
“Person” means an individual, a partnership, a corporation, a business trust, a
joint stock company, a limited liability company, an unincorporated association
or other entity and any domestic or foreign national, state or local government,
any political subdivision thereof, and any department, agency, authority or
bureau of any of the foregoing.
 
“Restricted Payment” means (a) any dividend or other distribution on account of
any shares of any class of stock of Company now or hereafter outstanding, except
a dividend payable solely in shares of that class of stock to the holders of
that class; (b) any redemption, retirement, sinking fund or similar payment,
purchase or other acquisition for value of any shares of any class of stock of
Company now or hereafter outstanding; or (c) any payment made to retire, or to
obtain the surrender of, any outstanding warrants, options or other rights to
acquire shares of any class of stock of Company now or hereafter outstanding.
 
“Securities Act” shall mean the Securities Act of 1933, as amended.
 
“Subsidiary” means, with respect to any Person (the “parent”) at any date, any
corporation, limited liability company, partnership, association or other entity
the accounts of which would be consolidated with those of the parent in the
parent’s consolidated financial statements if such financial statements were
prepared in accordance with GAAP, as well as any other corporation, limited
liability company, partnership, association or other entity (a) of which
securities or other ownership interests representing more than 50% of the equity
or more than 50% of the ordinary voting power or, in the case of a partnership,
more than 50% of the general partnership interests are, as of such date, owned,
controlled or held, or (b) that is, as of such date, otherwise controlled, by
the parent or one or more subsidiaries of the parent or by the parent and one or
more subsidiaries of the parent.
 
“Transaction Documents” means this Agreement, the Registration Rights Agreement,
the Voting Agreement, the Note, the Security Agreement, the Warrants and each
other agreement entered into by the parties hereto in connection with the
transactions contemplated hereby.
 
SECTION VIII

 
Miscellaneous
 
Section 8.1 Governing Law; Jurisdiction.  This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
California without giving effect to the principles of conflicts of laws.  Any
legal action or other legal proceeding relating to this Agreement or the
enforcement of any provision of this Agreement may be brought or otherwise
commenced in any state or federal court located in the State of
California.  Each party hereto agrees to the entry of an order to enforce any
resolution, settlement, order or award made pursuant to this Section 8.1 by the
state and federal courts located in the State of California and in connection
therewith hereby waives, and agrees not to assert by way of motion, as a
defense, or otherwise, any claim that such resolution, settlement, order or
award is inconsistent with or violative of the laws or public policy of the laws
of the State of California or any other jurisdiction.
 
 
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Section 8.2 Entire Agreement; Amendment.  This Agreement and the other
Transaction Documents constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.  Any
previous agreements among the parties relative to the specific subject matter
hereof are superseded by this Agreement.  Neither this Agreement nor any
provision hereof may be amended, changed, waived, discharged or terminated other
than by a written instrument signed by the party against who enforcement of any
such amendment, change, waiver, discharge or termination is sought.
 
Section 8.3 Notices, etc.  All notices and other communications required or
permitted hereunder shall be effective upon receipt and shall be in writing and
may be delivered in person, by telecopy, electronic mail, express delivery
service or U.S. mail, in which event it may be mailed by first-class, certified
or registered, postage prepaid, addressed, to the party to be notified, at the
respective addresses set forth below, or at such other address which may
hereinafter be designated in writing:
 
(a) If to the Investor, to:
 
Cathaya Capital, L.P.
In care of Priscilla Lu
Hong Kong,  China
 
with a copy to:
 
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
Attention: Jon Layman, Esq.
Fax No.:  (650) 493-6811
 
(b) If to the Company, to:
 
ZAP
Attention: Chief Financial Officer
501 4th Street
Santa Rosa, CA 95401
Attention: Chief Executive Officer
Phone: (707) 525-8658
Fax No.: (707) 525-8692

Section 8.4 Delays or Omissions.  It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party upon any breach or
default of any other party under this Agreement shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring.  It is further agreed that any waiver, permit, consent or approval of
any kind or character of any breach or default under this Agreement, or any
waiver of any provisions or conditions of this Agreement must be in writing and
shall be effective only to the extent specifically set forth in writing, and
that all remedies, either under this Agreement, by law or otherwise, shall be
cumulative and not alternative.
 
 
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Section 8.5 Public Disclosure.  The parties shall consult with each other, and
to the extent practicable, agree, before issuing any press release or otherwise
making any public statement with respect to the transactions contemplated by the
Transaction Documents.
 
Section 8.6 Titles; Subtitles.  The titles of the Sections of this Agreement are
for convenience of reference only and in no way define, limit, extend, or
describe the scope of this Agreement or the intent of any of its provisions.
 
Section 8.7 Successors and Assigns.  Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors and assigns of the parties hereto.  The Investor shall have
the right to assign any and all of Investor’s rights, duties and obligations
hereunder at any time without the prior written consent of the Company.
 
Section 8.8 No Third Party Beneficiaries.  This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
 
Section 8.9 Survival.  The representations and warranties of the Company and the
Investor contained herein shall not survive the Closing except as specifically
stated in such representations and warranties.
 
Section 8.10 Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
 
Section 8.11 Severability.  If any provision of this Agreement shall be
judicially determined to be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
 
Section 8.12 SPECIFIC PERFORMANCE.  THE PARTIES HERETO AGREE THAT IRREPARABLE
DAMAGE WOULD OCCUR IN THE EVENT THAT ANY OF THE PROVISIONS OF THIS AGREEMENT
WERE NOT PERFORMED IN ACCORDANCE WITH ITS SPECIFIC INTENT OR WERE OTHERWISE
BREACHED.  IT IS ACCORDINGLY AGREED THAT THE PARTIES SHALL BE ENTITLED TO AN
INJUNCTION OR INJUNCTIONS, WITHOUT BOND, TO PREVENT OR CURE BREACHES OF THE
PROVISIONS OF THIS AGREEMENT AND TO ENFORCE SPECIFICALLY THE TERMS AND
PROVISIONS HEREOF, THIS BEING IN ADDITION TO ANY OTHER REMEDY TO WHICH THEY MAY
BE ENTITLED BY LAW OR EQUITY, AND ANY PARTY SUED FOR BREACH OF THIS AGREEMENT
EXPRESSLY WAIVES ANY DEFENSE THAT A REMEDY IN DAMAGES WOULD BE ADEQUATE.
 
 
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Section 8.13 Consents.  Any permission, consent, or approval of any kind or
character under this Agreement shall be in writing and shall be effective only
to the extent specifically set forth in such writing.
 
Section 8.14 Construction of Agreement.  No provision of this Agreement shall be
construed against either party as the drafter thereof.
 
Section 8.15 Variations of Pronouns.  All pronouns and all variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, singular or
plural, as the context in which they are used may require.
 
[Remainder of page intentionally left blank.  Signature pages to follow]
 

 

 
 
 
 
 
 
 
 
 
 

 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the date first above
written.
 

 
ZAP
a California corporation
 
By: /s/ Steven Schneider

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Name: Steven Schneider

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Title:  Chief Executive Officer

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Signature Page to Securities Purchase Agreement
 
 
 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the date first above
written.
 
 

 
CATHAYA CAPITAL, L.P.
a Cayman Islands exempted limited partnership

By: Cathaya Capital, G.P.
Its General Partner

By: Cathaya Capital Co., Ltd.
Its General Partner

By:  /s/ Priscilla Lu

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Name: Priscilla Lu

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Title:   Director

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Signature Page to Securities Purchase Agreement
 
 
 

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SCHEDULE I
 
SCHEDULE OF INVESTORS
 

 
Name
 
 
Shares of Common Stock Purchased
 
 
Share Purchase Price
 
 
Note Principal Amount
 
Cathaya Capital, L.P.
In care of Priscilla Lu
Hong Kong, China
 
 
 
20,000,000
 
$5,000,000.00
 
$10,000,000.00

 

 
 
 

 
 
 

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