Franchise Agreement

EXHIBIT 10.5


ZAP POWER SYSTEMS


FRANCHISE AGREEMENT


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ZAP POWER SYSTEMS


FRANCHISE AGREEMENT


TABLE OF CONTENTS


ARTICLE I
GRANT OF FRANCHISE....................................................6 ARTICLE II
TERM AND RENEWAL......................................................7 ARTICLE III
FEES..................................................................9 ARTICLE IV
SERVICES BY FRANCHISOR...............................................12 ARTICLE V
LIMITATIONS OF THE FRANCHISE.........................................14 ARTICLE VI
PROPRIETARY MARKS....................................................16 ARTICLE VII
LEASE AGREEMENTS.....................................................20 ARTICLE VIII
EQUIPMENT AND FURNISHINGS............................................22 ARTICLE IX
TRAINING PROGRAM.....................................................22 ARTICLE X
OPENING..............................................................23 ARTICLE XI
OBLIGATIONS OF FRANCHISEE............................................24 ARTICLE XII
ACCOUNTING AND RECORDS...............................................29 ARTICLE XIII
CONFIDENTIAL POLICIES AND PROCEDURES MANUAL..........................31 ARTICLE XIV
ADVERTISING AND PROMOTIONS...........................................32 ARTICLE XV
RENOVATION OF OUTLET, EQUIPMENT AND FURNISHINGS......................36 ARTICLE XVI
INSURANCE............................................................37 ARTICLE XVII
RELATIONSHIP OF THE PARTIES: INDEMNIFICATION.........................39


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ARTICLE XVIII
FORCE MAJEURE........................................................41 ARTICLE XIX
DEFAULT AND TERMINATION..............................................41 ARTICLE XX
RIGHTS AND DUTIES OF THE PARTIES UPON EXPIRATION OR TERMINATION......45 ARTICLE XXI
COMMENCEMENT AND HOURS OF OPERATION..................................48 ARTICLE XXII
TRANSFERABILITY OF INTEREST..........................................49 ARTICLE XXIII
OPERATION IN THE EVENT OF ABSENCE OR DISABILITY......................55 ARTICLE XXIV
RISK OF OPERATIONS...................................................56 ARTICLE XXV
TAXES, PERMITS AND INDEBTEDNESS......................................56 ARTICLE XXVI
NON-COMPETITION; CONFIDENTIALITY.....................................57 ARTICLE XXVII
MODIFICATION OF THE AGREEMENT........................................58 ARTICLE XXVIII
ENTIRE AGREEMENT.....................................................58 ARTICLE XXIX
DISPUTE RESOLUTIONS..................................................58 ARTICLE XXX
EFFECTIVE DATE.......................................................59 EXHIBIT A
GEOGRAPHIC AREA......................................................60 EXHIBIT B
OUTLET LOCATION......................................................61 EXHIBIT C
AREA OF PRIMARY RESPONSIBILITY.......................................62 EXHIBIT D
UNDERTAKING TO FIND SUITABLE LOCATION (180 DAYS).....................63 EXHIBIT E
AGREEMENT AND CONDITIONAL ASSIGNMENT OF LEASE........................68 EXHIBIT F
MINIMUM SALES QUOTA..................................................72


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ZAP POWER SYSTEMS
FRANCHISE AGREEMENT


THIS FRANCHISE AGREEMENT, ("Agreement") entered into this ____ day of _______19_, by and between ZAP Power Systems, a California Corporation doing business as ZAP Power Systems, having its principal place of business at 117 Morris Street, Sebastopol, California 95472 (hereinafter "ZAP" or "Franchisor") and ___________________________________________________________________residing at______________________________________________________________________________ __________________________________________________(hereinafter Franchisee).


WHEREAS, Franchisor has spent time, effort and money in developing a business plan and method in connection with the operation of a retail electric vehicle outlet selling electric bicycle power kits, electric bicycles and tricycles, electric scooters and other low-power electric transportation vehicles ("Proprietary Products"), and other non-proprietary products, utilizing certain standards, specifications, methods, procedures, designs, techniques, management systems, identification schemes and proprietary marks, copyrights and information (collectively, the ASystem"); all of which may be changed, improved and further developed from time to time by Franchisor; and


WHEREAS, the distinguishing characteristics of the System include, but are not limited to, the trade name and trademark "ZAP", a unique and readily recognizable design, color scheme and layout for the premises wherein such business is conducted; furnishings, signs, emblems and the trade names, trademarks, copyrights, insignias, slogans, methods of preparation, and merchandising, the aforesaid Proprietary Products for utilizing certain standards, specifications, procedures, designs, management systems, techniques and identification schemes (the "Proprietary Rights"); all of which characteristics may be changed, revised, improved and further developed from time to time; and


WHEREAS, the reputation and good will with the public with respect to the quality of products available for purchase from ZAP Electric Vehicle Outlets have been and continue to be of major benefit to Franchisor and its franchisees; and


WHEREAS, Franchisee recognizes the benefits to be derived from being identified with and being a franchisee of ZAP Power Systems and being able to utilize the System and the Proprietary Rights which Franchisor makes available to its franchisees; and


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WHEREAS, Franchisee desires to own and operate a "ZAP Electric Vehicle Outlet" (hereinafter "Outlet" or "Franchised Business," at the location described in Exhibit "A" hereof upon the terms and conditions set forth herein, which terms and conditions are reasonably necessary to maintain the Franchisor's high and uniform standards of quality and service and to protect the good will and enhance the public image of the System and the Proprietary Rights; and


WHEREAS, if this Franchise Agreement is being executed pursuant to a Zone Development Agreement, then the location described in Article I of the Franchise Agreement is within the Development Area as that term is defined in the aforementioned Zone Development Agreement and has been accepted by Franchisor as a site for an Outlet pursuant to the Zone Development Agreement; and


WHEREAS, Franchisee desires to obtain a franchise to use the System and the Proprietary Rights at the location described in Exhibit "A," pursuant to the provisions hereof, and Franchisee has had a full and adequate opportunity to be advised thoroughly of the terms and conditions of this Franchise Agreement by counsel of his/her own choosing and represents and warrants that he/she has the business experience and financial ability to operate an "ZAP Electric Vehicle Outlet."


WHEREAS, Franchisee acknowledges that Franchisee has read this Agreement and Franchisor's Franchise Offering Prospectus and that Franchisee understands and accepts the terms, conditions and covenants contained in this Agreement as being reasonably necessary to maintain uniform high standards of quality at all Outlets and to protect the goodwill of the Proprietary Marks.


WHEREAS, Franchisor expressly disclaims the making of any warranty or guarantee, expressed or implied, oral or written, regarding the potential revenues, profits or success of the business venture contemplated by this Agreement. Franchisee acknowledges that Franchisee has not received or relied upon any such warranty or guarantee.


WHEREAS, Franchisee acknowledges that Franchisee has no knowledge of any representations by Franchisor, its officers, directors, shareholders or representatives about the franchise offered hereunder, about Franchisor or its franchising programs and policies that are contrary to the statements in Franchisor's Franchise Offering Prospectus or to the terms of this Agreement.


WHEREAS, Franchisee acknowledges that this Agreement places detailed and substantial obligations on Franchisee including strict adherence to Franchisor's reasonable


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present and future requirements regarding facilities, equipment, suppliers, operating procedures, management methods, merchandising strategies, sales promotion programs and related matters. Franchisee acknowledges that future improvements, changes and developments in the System may require additional expense to be undertaken by Franchisee.


BEFORE SIGNING THIS AGREEMENT, FRANCHISEE SHOULD READ IT CAREFULLY WITH ASSISTANCE OF LEGAL COUNSEL.


NOW, THEREFORE, in consideration of the foregoing and of the covenants herein contained, the parties intending to be bound legally, hereby agree as follows:


ARTICLE I


GRANT OF FRANCHISE


1.1 Franchisor hereby grants to Franchisee, upon the terms and conditions herein contained, the right and franchise, and Franchisee undertakes the obligation to operate a Outlet in conjunction with the Proprietary Rights and to use the System solely in connection therein. Franchisee shall locate the Outlet only at the location set forth in Exhibit "B" hereto. If, at the time of execution of this Agreement, a location of the Outlet has not been agreed to by the parties, then Franchisee shall execute Exhibit "D" hereof, which will obligate Franchisee to find a suitable location within one hundred and eighty (180) days from the date of this Agreement. In the event however, that a location for the Outlet has been selected as of the date hereof, Franchisee must submit to Franchisor for its approval, which approval shall not be unreasonably withheld, the address of the location Franchisee wishes to use for the Outlet which shall be within the geographic area described in Exhibit "A" of this Agreement; and after Franchisor has approved the Outlet's location, a written description of such location shall be attached to this Agreement as Exhibit "B," and shall form a part hereof, and Franchisee shall deliver a form of lease for such location, which form shall contain the conditional lease assignment language set forth in Exhibit "E" hereof. Franchisee shall not relocate the Outlet without the prior written approval of the Franchisor, which approval may be reasonably withheld.


1.2 During the term of this Agreement, the Franchisor agrees not to establish or operate a company-owned Outlet, nor will it grant a franchise to others to operate Outlets under the System at a location within the area described in Exhibit "C" hereto ("Area of Primary Responsibility" or "APR"). Except as specified in the preceding sentence, this franchise is nonexclusive.


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1.3 Franchisee acknowledges the Franchisor's right to develop, operate and franchise other similar or different systems outside Franchisee's Area of Primary Responsibility, without offering same to Franchisee.


1.4 Franchisee further acknowledges the right of Franchisor to sell or market the Proprietary Products on a wholesale basis to other franchisees of Franchisor, bicycle dealers, utility companies, institutions, and in other distribution channels and to commence selling and marketing the Proprietary Products on a wholesale basis to franchisees of Franchisor, bicycle dealers, and to institutions outside Franchisee's Area of Primary Responsibility, under the Proprietary Marks outside the Area of Primary Responsibility and under a different name within Franchisee's Area of Primary Responsibility. However, nothing contained herein shall preclude or prevent Franchisee from selling the Proprietary Products on a wholesale basis within his or her APR.


1.5 This Agreement is not a development agreement and does not grant to Franchisee any development rights within the area described in Exhibit "A" hereto, except for his/her particular Outlet.


1.6 Franchisee accepts the franchise set forth above and agrees to undertake the obligation to operate the Outlet in conformity with the System and under the conditions set forth in this Agreement for the entire term, subject to its termination provisions.


ARTICLE II


TERM AND RENEWAL


2.1 Unless sooner terminated as hereinafter provided, this Agreement shall expire one (1) year from the date Outlet opened for business. The term will automatically renew for one year if Franchisee meets the Minimum Sales Quotas (the "Minimum Sales Quotas") as set forth in Exhibit F. In the event Franchisee fails to meet the Minimum Sales Quotas, this Agreement shall expire as provided herein unless renewed by Franchisor in its sole discretion.


2.2 Franchisee may, but shall have no obligation to, renew the franchise to own and operate the Outlet and the right to use the System and the Proprietary Rights at the Outlet for successive terms of one year, provided that prior to the expiration of the initial term and each successor term, the following conditions are first met:


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A. Franchisee gives Franchisor written notice of election to renew not less than twelve (12) months, nor more than eighteen (18) months, prior to the end of the initial term and each successive term thereafter.


B. Franchisee is not, when notice is given, in default of any provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor, including any other Franchise Agreement, lease or sublease and has substantially complied with the terms and, conditions of all such agreements during the term of this Agreement, and has not failed to remedy any breach specified by Franchisor in any default notice then outstanding.


C. All monetary obligations owed by Franchisee to Franchisor, its subsidiaries or affiliates, the advertising fund, as hereinafter defined, have been satisfied prior to renewal and paid when due throughout the initial and all prior renewal terms of this Agreement.


D. Franchisee executes, within thirty (30) days of receipt, the Franchisor's standard form of Franchise Agreement being executed by other franchisees renewing their franchises on the renewal date, which may contain certain terms and conditions substantially different from those set forth herein, including, without limitation, a different continuing weekly service fee and different advertising expenditure requirements (and new methods computing same) and different fees for Proprietary Products.


E. Franchisee executes, within thirty (30) days of receipt, a general release under seal, in a form satisfactory to Franchisor, of any and all claims it may have against Franchisor and its officers, directors, shareholders and employees, in their corporate and individual capacities, including without limitation, all claims arising under any federal, state or local law, rule or ordinance, provided however, that all Rights enjoyed by the Franchisee and any causes of action arising in favor from the provisions of the Franchise Investment Law of the State of California and the regulations issued thereunder shall remain in force; it being the intent of this proviso to the nonwaiver provisions.


F. Franchisee and any other person who has an interest in Franchisee (if Franchisee is a group of individuals or a corporation, partnership, unincorporated association or similar entity) attends and satisfactorily completes such retraining or refresher training program as Franchisor may require, in its sole discretion, at such time and place, prior to expiration of this Agreement, as Franchisor may reasonably designate.


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G. Franchisee provides Franchisor with evidence that Franchisee has the right to remain in possession of the location of the Outlet or other premises acceptable to Franchisor for the new term.


H. Franchisee performs, at its own expense, such remodeling, repairs, replacements and redecorating as Franchisor may reasonably require to cause the Outlet equipment, fixtures, furnishings and furniture to conform to the plans and specifications being used for new or remodeled Outlet as of the renewal date however, same shall be reasonable and will not place a significant economic burden on the Franchisee.


2.3 Renewal of the Franchise Agreement shall be conditioned upon Franchisee's compliance with such requirements and continued compliance with all the terms and conditions of the Franchise Agreement up to the date of renewal. If Franchisor decides not to renew, it shall give Franchisee written notice thereof as soon as reasonably practical under the circumstances, but in any event not less than thirty (30) days prior to expiration. Such notice shall specify the reasons for non-renewal. Under such circumstances, Franchisee may request extension of the term for a reasonable period of time not to exceed six (6) months during which period Franchisee may pursue the sale of its business as a franchised Outlet. Franchisor shall grant such extension so long as Franchisee exercises best efforts to sell and complies with the Franchise Agreement.


ARTICLE III


FEES


3.1 In consideration of the franchise granted herein, Franchisee shall pay to Franchisor the following fees once Franchisor has fulfilled and performed all of its initial obligations to Franchisee:


A. Upon the opening of the Franchisee=s unit, Franchisee shall pay to the Franchisor the initial franchise fee of twelve thousand five hundred dollars ($12,500), which shall be paid upon execution of this Agreement and which shall be deemed fully earned and non-refundable upon receipt thereof and which shall be in consideration of expenses incurred by Franchisor in furnishing assistance and services to Franchisee and for Franchisor's lost or deferred opportunity to grant franchises to others within Franchisee's designated exclusive area.


B. During the term of this Agreement, if Franchisor so elects at its sole discretion to stop selling Proprietary Products then Franchisee agrees to pay to Franchisor a "Continuing Monthly Service Fee" of two percent (2%) of gross sales ("CMSF") on all


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sales generated by, from or through the Outlet during each month. The CMSF shall be payable from the date the Outlet is opened or upon the election of Franchisor to stop selling Proprietary Products, whichever last occurs. Such CMSF shall be based upon the gross sales of the Outlet during each month of operation. Payment of the CMSF shall be made by the fifth day of the following month.


C. On the fifth day following each reporting month, Franchisee shall report to Franchisor by facsimile transmission a true and correct statement of Franchisee's total gross receipts (as defined below) for the reporting week. Further, on or before the fifth day following each reporting month, Franchisee will submit to Franchisor on a form approved by Franchisor, a correct statement, signed by Franchisee of Franchisee's total gross receipts for the previous month. Franchisee will make available for reasonable inspection and copying at reasonable times by Franchisor, all original books and records that Franchisor may deem necessary to ascertain Franchisee's total gross receipts.


D. Franchisee shall give Franchisor authorization (in the form attached at Exhibit C or such other form as Franchisor shall accept) for prearranged payments (debits) from Franchisee's business operating account. Under this procedure, Franchisee shall authorize Franchisor to initiate debit entries and/or credit correction entries to a designated checking or savings account for the monthly payment of CMSF and Advertising Fees payable hereunder and any delinquent charges due thereon. Franchisee shall make the funds available for withdrawal by electronic transfer by Franchisor no later than the fifth day of the following month. The electronic transfer debit shall be based on the monthly total gross receipts orally reported to Franchisor by Franchisee on such day as required above. In the event that for any reporting month Franchisee has not electronically faxed reported total gross receipts to Franchisor, then Franchisor shall be authorized to debit Franchisee's account in an amount equal to the fees debited to Franchisee's account for the previous reporting month for which a report of Franchisee's total gross receipts was provided to Franchisor as required hereunder.


E. If, following Franchisor's receipt of any written monthly gross receipts report, such report discloses an underpayment of CMSF or Advertising Fees, Franchisor shall be authorized to initiate a debit to Franchisee's account in the appropriate amount in accordance with the foregoing procedure. Any overpayment shall be credited to Franchisee's account.


3.2 Franchisee shall pay to the Franchisor's Advertising Fund the amount required to be paid pursuant to Article XIV hereof.


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3.3 As used in this Agreement, the term "gross sales" shall mean the amount of sales of all electric vehicles and parts, merchandise, services and Proprietary Products sold in, on, about or from the Outlet by Franchisee, whether for cash, cash equivalents, redeemed gift certificates, check, charge account, credit or time basis, including but not limited to such sales and services:


(i) Where orders originate and/or are accepted by Franchisee in the Outlet, but delivery or performance thereof is made from or at any place other than the Outlet;


(ii) Pursuant to telephone or other similar orders received or filled at or in the Outlet; or


There shall be deductible from gross sales:


(i) The amount of over-rings, refunds, allowances or discounts to customers (including coupon sales), provided they have been included in gross sales;


(ii) The amount of an excise or sales tax levied upon retail sales and payable over to the appropriate government authority; and


(iii) Isolated sales of non-inventory items or the bulk sale of the business itself, if the same have been included in gross sales.


3.4 In addition to any other remedies Franchisor may have, if Franchisee is more than three (3) days late making any of the payments referenced in this Article III, an annual interest rate of eighteen percent (18%), shall be payable on the unpaid CMSF from the date such payment was due.


Franchisee acknowledges that this paragraph shall not constitute agreement by Franchisor or its affiliates to accept such payments after same are due or a commitment by Franchisor to extend credit to, or otherwise finance Franchisee's operation hereunder. The foregoing remedy shall be in addition to any other remedy Franchisor may have, including termination of this Agreement.


3.5 Notwithstanding any designation by Franchisee, Franchisor shall have the sole discretion to apply any payments by Franchisee to any past due indebtedness of Franchisee for CMSF, advertising fees, purchases from Franchisor and or Franchisor's Proprietary Suppliers.


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ARTICLE IV


SERVICES BY FRANCHISOR


4.1 Franchisor or its designated Zone Development Agent agrees to use its best efforts to maintain the excellent reputation of all Outlets and, in connection therewith, to make available to Franchisee the following:


A. Such standard prototypical construction plans, specifications and layouts for the leasehold improvements, equipment, furniture, decor and signs identified with Outlets as Franchisor makes available to all new franchisees from time to time.


B. Review of Franchisee's site proposal and approve or disapprove same, review the lease and approve and disapprove same, review Franchisee's site plans and final construction plans and specifications of the System upon Franchisor's receipt of Franchisee's written request for approval thereof.


C. Initial training in the System, including standards, methods, procedures and techniques, at such times and places as Franchisor may designate for its training program in its discretion and subject to Article IX hereof.


D. Such opening assistance from Franchisor's personnel, including planning and developing opening and promotional programs, as Franchisor determines is necessary or appropriate.


E. The use of Franchisor's confidential standard business policies and operations manuals (here collectively called the "Manual") and training aids as may be revised, updated or replaced from time to time by Franchisor.


F. Such special parts, techniques, assembly instructions, new products and other merchandising, new services, standardized cost and portion control system, marketing and other data and advice as may from time to time be developed by Franchisor and deemed by it to be helpful in the operation of the Outlet by Franchisee.


G. Such periodic individual or group advice, consultation and assistance, rendered by telephone, or by newsletter or bulletins made available from time to time to all franchisees of Franchisor, as Franchisor may, from time to time deem necessary or appropriate, in its discretion.


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H. Such bulletins, brochures and reports as may from time to time be published by Franchisor in its discretion regarding its plans, policies, research, developments and activities.


I. Such other resources and assistance as may hereafter be developed and offered from time to time by Franchisor to its franchisees.


J. The Franchisor may provide Franchisee with advertising, marketing and other promotional materials created and developed by Franchisor for Franchisee's use at cost, and guidance and advice regarding local advertising and promotion for the grand opening of the Outlet.


K. The Franchisor shall inspect, from time to time, Franchisee's Outlet in order to evaluate the proper execution of the System, and confer with Franchisee and Franchisee's employees in connection therewith in order to assist in the proper business operation of Franchisee's Outlet, and to insure Franchisee's compliance with this Agreement and with the System. The Franchisor, at its discretion, shall have the right to make inspections at such times and frequencies during normal business hours, without prior notice to Franchisee.


L. The Franchisor shall use its best efforts to require maintenance ...