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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number 0-303000
ZAP
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(Name of small business issuer in its charter)
California 94-3210624
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
501 Fourth Street, Santa Rosa California 95401
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (707) 525-8658
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, no par value NYSE Arca
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Title of Each Class Name Exchange on Which Registered
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. Yes [_] No [x]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
State issuer's revenues for its most recent fiscal year. $3,602,000
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant's as of March 24, 2006 was $35,353,000 computed
by reference to the price at which the registrant's Common Stock was last traded
on that date.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 32,870,849 shares of Common Stock, no
par value, outstanding as of March 24, 2006.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [_]
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Form 10-KSB, other than Item 13, is
incorporated by reference, to the Company's Definitive Proxy Statement for the
Company's 2006 Annual Meeting of Shareholders.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS.............................................4
ITEM 2. DESCRIPTION OF PROPERTY............................................21
ITEM 3. LEGAL PROCEEDINGS..................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................23
PART II
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ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES ....................23
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..........30
ITEM 7. FINANCIAL STATEMENTS...............................................36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................66
ITEM 8A. CONTROLS AND PROCEDURES............................................66
ITEM 8B. OTHER INFORMATION..................................................66
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT ...............66
ITEM 10. EXECUTIVE COMPENSATION ............................................67
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ...................................67
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................67
ITEM 13. EXHIBITS...........................................................67
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................70
PART 1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report of Form 10-KSB and the documents incorporated by
reference herein contain forward-looking statements that are not statements of
historical fact and may involve a number of risks and uncertainties. These
statements relate to analyses and other information that are based on forecasts
of future results and estimates of amounts not yet determinable. These
statements may also relate to our future prospects, developments and business
strategies.
We have used the words "anticipate," "believe," "could," "estimate,"
"expect," "intend," "may," "will," "plan," "predict," "project" and similar
terms and phrases, including references to assumptions, in this annual report of
Form 10-KSB and our incorporated documents to identify forward-looking
statements. These forward-looking statements are made based on expectations and
beliefs concerning future events affecting us and are subject to uncertainties
and factors relating to our operations and business environment, all of which
are difficult to predict and many of which are beyond our control, that could
cause our actual results to differ materially from those matters expressed in or
implied by these forward-looking statements. The following factors are among
those that may cause actual results to differ materially from our
forward-looking statements:
o general economic and industry conditions;
o our history of losses, deficits and negative operating cash flows;
o our limited operating history;
o industry competition;
o environmental and government regulation;
o whether the alternative energy and gas-efficient vehicle market for
our products continues to grow and, if it does, the pace at which it
may grow;
o our ability to attract and retain the personnel qualified to implement
our growth strategies;
o our ability to obtain approval from government authorities for our
products;
o our ability to protect the patents on our proprietary technology;
o our ability to fund our short-term and long-term financing needs; and
o other factors including those discussed in "Risk Factors" in this
annual report on Form 10-KSB and incorporated documents.
You should keep in mind that any forward-looking statement made by us in
this annual report or elsewhere speaks only as of the date on which we make it.
New risks and uncertainties arise from time to time, and it is impossible for us
to predict these events or how they may affect us. We have no duty to, and do
not intend to, update or revise the forward-looking statements in this annual
report after the date of filing, except as may be required by law. In light of
these risks and uncertainties, you should keep in mind that any forward-looking
statement made in this annual report or elsewhere might not occur.
In this annual report on Form 10-KSB the terms "ZAP," "Company," "we," "us"
and "our" refer to ZAP and its subsidiaries.
GENERAL
ZAP stands for Zero Air Pollution(R). ZAP was founded on September 23,
1994, during an era when government and industry were debating how to solve the
country's growing transportation problems. ZAP began to invent, design,
manufacture, and market innovative products like its zero-emission
ZAP(R)electric bicycle and ZAPPY(R) electric scooter that were cost-effective
and practical for world markets. Today, ZAP is moving forward with a campaign to
stay at the forefront of fuel-efficient transportation with new technologies,
including energy efficient gas systems, hydrogen, electric and other innovative
power systems. ZAP is also investing in advanced energy solutions, utilizing
advanced batteries, hybrid technology and innovative fuel cell designs.
In the process of building ZAP, the Company has pioneered a growing niche
for alternative transportation. In 1995, ZAP began marketing electric
transportation on the Internet through the website at www.zapworld.com. From
1996 through 1998, we continued to add to our product line; in 1999, ZAP added
electric motorbikes; in 2001 it added electric dive scooters; in 2003, ZAP
announced its first electric automobiles, including the first-ever production
electric automobile imported from its manufacturing partner in China; in 2004
ZAP introduced electric all-terrain vehicles and the fuel-efficient Smart Car;
and in 2005 ZAP introduced multi-fuel vehicles, capable of running on ethanol
and/or gasoline.
Today, ZAP is a one-stop portal for a diverse lineup of quality, affordable
advanced automotive technologies. ZAP has delivered more than 90,000 vehicles to
customers in more than 75 different countries. Our goal is to become the largest
and most complete distribution portal in the United States for advanced
technology vehicles. We are focused on creating a distribution channel for our
automobile and consumer products by establishing qualified automobile-dealers
and developing relationships with specialty dealers throughout the United
States. We currently market and sell our automobile products through qualified
automotive dealers including our subsidiary, Voltage Vehicles. We currently
market and sell our consumer products directly to consumers through our Internet
Web site, independent representatives, retail outlets and qualified automobile
dealers. We continue to develop new products independently and through
development and acquisition agreements with companies and manufacturers, and by
the purchase of products manufactured to our specifications. We have grown from
a single product line to a full product line of electric vehicle and advanced
transportation products. Most of our domestic manufacturing has been transferred
to lower-cost overseas contract manufacturers.
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ZAP was incorporated under the laws of the State of California, on
September 23, 1994, as "ZAP Power Systems." The name of the Company was changed
to "ZAPWORLD.COM" on May 16, 1999 in order to increase our visibility in the
world of electronic commerce. We subsequently changed our name to ZAP on June
18, 2001 in order to reflect our growth and entry into larger, more traditional
markets. Our principal executive offices are located at 501 Fourth Street Santa
Rosa, California, 95401. Our telephone number is (707) 525-8658.
SUBSIDIARIES
We have the following wholly owned subsidiaries : RAP Group, Inc., a
California company ("RAP Group"), Voltage Vehicles, a Nevada company ("Voltage
Vehicles"),ZAP Rental Outlet, a Nevada company ("ZAP Rentals"), ZAP Stores,
Inc., a California company ("ZAP Stores"), ZAP Manufacturing, Inc., a Nevada
company ("ZAP Manufacturing") and ZAP World Outlet, Inc., a California company
("ZAP World"). RAP Group is engaged primarily in the sale and liquidation of
conventional automobiles; Voltage Vehicles is engaged primarily in the
distribution and sale of advanced technology and conventional automobiles; ZAP
Stores is engaged primarily in consumer sales of ZAP products and ZAP
Manufacturing is not currently an operating subsidiary. ZAP World Outlet is not
currently operating subsidiaries. RAP Group and Voltage Vehicles were acquired
by the Company in July 2002. The RAP Group and Voltage Vehicles have active
operations and generated approximately 82% of the Company's consolidated
revenues in 2005.
BUSINESS DEVELOPMENT
Our business strategy has been to develop, acquire and commercialize
advanced transportation vehicles and technology, including electric vehicles and
electric vehicle power systems, low emission vehicles, fuel cell powered
vehicles, hybrid, ethanol and fuel-efficient vehicles. Such vehicles have
fundamental, practical and environmental advantages over conventional internal
combustion modes of transportation and can be produced commercially on an
economically competitive basis.
In 2005, we continued to enhance and broaden our electric vehicle product
line. ZAP entered into an exclusive manufacturing contract with a Chinese
automaker to produce a unique car aimed at filling the need for gas-free,
all-electric cars that are practical and affordable. Based on this relationship,
we introduced the Xebra, the nation's only production all-electric vehicle with
top speeds greater than 25 mph. We introduced the ZAPPY Express Scooter, a more
powerful electric scooter with a comfortable seat. Further, we introduced
electric all-terrain vehicles (ATVs). We also entered into an exclusive
distribution agreement with Obvio !, a Brazilian manufacturer of flex-fuel
vehicles capable of running on ethanol, gasoline, or any blend of the two. In an
effort to become the largest distributor of advanced technology vehicles in the
United States, we are actively developing a network of automobile dealers that
will be qualified to sell our automobile and consumer products. We have already
established dealers in California, Colorado, Pennsylvania, New York, Nevada,
Florida, New Hampshire and Washington.
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PRODUCT SUMMARY
We market many forms of advanced transportation vehicles, including
electric automobiles, fuel-efficient vehicles, motorcycles, bicycles, scooters,
neighborhood electric vehicles and all terrain vehicles. We market products
designed solely by us, as well as products we design together with other
companies. Most of our products are manufactured in China. Our automobiles are
assembled outside of the United States, but made to comply with United States
laws. The Smart Car Americanized by ZAP is manufactured and made compliant for
sale in the United States by a registered importer. We also make the Xebra
compliant for the United States market. Our automobile products require
registration with state vehicle registration departments and must be sold
through licensed dealers, while our consumer vehicles can be sold directly to
consumers without registration.
Our automobile vehicles are subject to environmental and safety compliance
with various Federal and State governmental regulations, including regulations
promulgated by the Environmental Protection Agency, National Highway Traffic
Safety Administration and Air Resource Board of the State of California (CARB).
The costs of these compliance activities can be substantial.
Our existing product line, which includes completed, market ready products
and planned introductions, is as follows:
AUTOMOTIVE LINE
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The Company possesses exclusive licenses, know-how, and technology that
enable the Company to import various foreign made vehicles.
SMART CAR AMERICANIZED BY ZAP. The Smart Car Americanized by ZAP, which is
assembled by Mercedes Benz, is imported through a registered importer and made
compliant for sale in the United States. Smart Cars must be modified to meet
applicable U.S. laws before they can be sold in the U.S. As of this date and to
our knowledge, through proprietary recalibration technology and through
compliance contractor, G & K Automotive, which has clearances from the
Department of Transportation and letters of conformity from the Enviromental
Protection Agency, that allows models of the Smart Car, as modified, to be sold
in the U.S. Additional clearances will be needed to sell this vehicle in volumes
and to sell other models of the Smart Car. The California Air Resources Board
must certify the car before it could be sold in California and four other
states. ZAP will need to set up large contractors to handle the demand for this
vehicle. The current EPA and DOT clearances gives ZAP the opportunity to be the
first to market and distribute Smart Cars as Americanized for ZAP in the U.S.
ZAP is not affiliated with, or authorized by, SMART GMBH, the manufacturer of
SMART automobiles, or the SmartUSA division of Mercedes-Benz LLC, the exclusive
authorized U.S. importer and distributor of those vehicles.
The Smart Car has a gas turbo engine. The car is a two-passenger coupe
eight feet in length that provides ample room for two adult passengers. Other
"smart" features and options of the Smart Car Americanized by ZAP include a
61-hp, 3-cyclinder turbocharged engine, equipped with an advanced electronic
stabilization program, or ESP, an anti-skid design that throttles the engine
torque along with an anti-lock braking system. The unique 6-speed automatic gear
transmission with kick down function allows the user to switch between
"automatic" and "manual" gear shifting via a control program that changes gears
in response to varying driving characteristics. These cars are and will be sold
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through Voltage Vehicles to qualified ZAP dealers.
ZAP XEBRA. This electric vehicle is the only production Electric Vehicle
("EV") offered in the U.S. with a top speed of 40 miles per hour. It will also
be the first vehicle imported from China. There will initially be two models
offered, a 4 passenger vehicle with its niche focused on city/commuter use, and
a 1 seat industrial vehicle with a pickup bed focused on municipalities,
maintenance, universities and warehouses. The Xebra passenger will have an MSRP
of less than $10,000.
OBVIO!. OBVIO ! Automotoveiculos S.P.E. Ltda of Rio de Janeiro, Brasil has
assembled a network of suppliers to incorporate the latest advances in
automotive engineering into a new generation of automobiles that meets the
challenges of today's urban driving. Cars imported from OBVIO! will have trybrid
technology meaning the cars can run on gasoline, electricity, and alcohol.
OBVIO! is anticipated to be available in fall 2007, and will be available in two
models - an economy 828 model, and a full-performance 012 model.
PERSONAL TRANSPORTATION
-----------------------
ZAPPY(R). This electric scooter is a stand-up, portable, lightweight
scooter featuring a 12-volt battery with a built-in charger and a collapsible
frame. The design includes a unique folding mechanism and proprietary circuitry,
which increases the efficiency and range of the vehicle. In the fourth quarter
of 2003, we introduced a new ZAPPY(R) Scooter which offered significant upgrades
over the previous design with respect to performance, construction and
appearance.
ZAPPY 3. The ZAPPY 3 is a three-wheeled scooter that uses a wheel-motor
drive technology built into the hub of the front wheel to enable increased
stability while enhancing maneuverability. The riding platform has two smaller
wheels on either side with the larger wheel motor in front, so a person can ride
in standing position with both feet placed side-by-side, rather than
skateboard-style standing sideways which was the design of the original
ZAPPY(R). We exclusively own the design of this vehicle. This vehicle is not
subject to state vehicle registration laws, and may be sold directly to
consumers.
ZAPPY EXPRESS. The ZAPPY Express scooter is a powerful two-wheeled scooter
with a comfortable seat. This model is more powerful, has greater speed, and
more range per charge than any other of our scooter lines. This vehicle is also
not subject to state vehicle registration laws, and may be sold directly to
consumers.
POWERBIKE(R). The Powerbike resembles a mountain bicycle with an electric
motor attached. It was designed to appeal to the low cost mass merchant. This
vehicle is not subject to state vehicle registration laws and may be sold
directly to consumers.
OTHER ELECTRIC AND FUEL-EFFICIENT VEHICLES. Under various distribution
agreements, we have the right to distribute a wide spectrum of personal and
industrial electric vehicles. In 2004, we announced the introduction of our
electric all-terrain vehicles, which we began selling at the end of 2004.
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ENERGY PRODUCTS
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ZAP PORTABLE ENERGY(TM). This is a portable lithium energy power source and
battery charger for low-voltage consumer electronic products. This device uses a
"smart" microprocessor control system to power multiple hand-held electronic
devices or to charge batteries. The ZAP Portable Energy can be used to power
avariety of mobile consumer electronic devices, such as PDAs, digital
cameras,cellular telephones, MP3 players, laptops and equivalent low-voltage
devices. We manufacture the ZAP Portable Energy in China for distribution and
sale in the United States under our name. We are marketing and planning to sell
this product through independent representatives for resale and distribution to
retail stores, as well as directly to consumers over our Internet sales portal.
MICROPROCESSOR DRIVE CONTROLLERS. We are working to develop, independently
and in collaboration with other companies, a series of low cost proprietary
controller microprocessors for all of our products. These devices will increase
efficiency and lower costs of operation by providing more efficient use of power
to charge and to power our products.
FUEL CELL TECHNOLOGIES. In August 2004, Voltage Vehicles entered into an
exclusive distribution agreement with Apollo to acquire certain exclusive rights
to purchase and market Apollo products including Alkaline Fuel Cell products,
Tri-Polar Lead-Cobalt battery technology, and certain propulsion systems,
together with related advanced technology products owned by Apollo. Our Chief
Executive Officer, Mr. Steven Schneider is a member of the Advisory Board of
Directors of Apollo. The Company demonstrated its first hybrid fuel cell vehicle
in the fourth quarter of 2005. In December 2004, we entered into an exclusive
purchase and distribution agreement with Anuvu for their patented fuel cell for
on road applications, and completed the production of a prototype fuel cell car.
DISTRIBUTION AND MARKET OUTLETS
We employ the following methods to distribute our products:
AUTO DEALER PROGRAM. The Company began establishing ZAP qualified auto
dealers in various locations in the United States in the fourth quarter of 2003.
We started to receive commitments from each qualified dealer to purchase a
minimum number of vehicles annually. In 2004, we expanded this network to
include the gas-efficient Smart Car Americanized by ZAP. Currently, we have
qualified dealers in New York, New Hampshire, Nevada, Colorado, Pennsylvania,
Florida, California and Washington. We intend to use these ZAP qualified dealers
to sell all ZAPCAR (TM) . Some dealers will also sell other vehicle products,
such as scooters and bikes, depending on demand.
RAP GROUP, INC. The Company distributes its conventional cars through RAP,
a wholly owned subsidiary, located in Fulton, California.
RETAIL OUTLETS. The Company markets its consumer products to independent
representatives and retail outlets, as well as undertaking direct marketing
activities with these entities.
ELECTRIC VEHICLE RENTAL PROGRAM. The Company established ZAP Rental Outlets
in 2002 to rent neighborhood electric vehicles in tourist locations. In
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September 2003, we acquired a fleet of electric vehicles. Some of these have
been sold and others are being rented from time to time in various locations.
INTERNET SALES. The Company markets and sells its consumer products
directly to consumers on its Web site.
ACQUISITION OF NEW BUSINESSES AND ASSETS
On March 1, 2004, we entered into an Asset Purchase Agreement with Electric
Transportation Company, LLC, a California limited liability company ("ETC"), to
purchase certain assets including electric vehicles and intellectual property.
We paid ETC for the assets by issuing 121,951 shares of our common stock valued
at $250,000 as consideration for the purchase of the assets.
The Company has acquired from Smart Automobile LLC the exclusive
distribution, marketing, and technology rights throughout the United States to
make the Smart Cars U.S. compliant, through registered importer G & K
Automotive,for a period of ten years. These rights also included the proprietary
computer technology and process for making vehicles DOT and EPA compliant. These
rights were acquired through the payment of $1 million in cash upon execution of
the agreements, $1 million in cash upon delivery of the first 1,000 Smart Cars,
and $8 million in preferred stock. A more detailed conversion agreement was
completed and signed on October 25, 2004. Under this agreement Smart Automobile,
LLC (SA) exchanged their original Preferred Shares for new Preferred Shares with
the designation of SA. These SA preferred Shares convert to ZAP common shares
under the following formula: For every 1,000 Smart vehicles delivered to ZAP in
the years 2004, 2005, and 2006 that are fully EPA compliant to sell in the
United States allow the holder of 500 preferred stock SA to convert to $500,000
of common and stock and allow the holder to receive 505,000 warrants with an
exercise price of $2.50 per share exercisable until July 7, 2009, or when all
the preferred shares have been converted. Upon EPA compliance, and the legal
right to sell the first 98 vehicles currently in inventory, the holder can
convert 500 preferred shares to $500,000 common stock immediately, and receive
505,000 warrants. This was issued in 2004. SA was also granted a $1 million
loan. This loan is currently in default. As of March 31, 2006, Smart Automobile
had delivered 96 Smart Cars Americanized by ZAP to the Company for sale in the
United States. Smart Automobile is not affiliated with Mercedes Benz.
ENVIRONMENTAL INITIATIVES AND LEGISLATION
In 1992, Federal legislation (United States Energy Policy Act of 1992) was
enacted to promote the use of alternative fuel vehicles, including electric
vehicles. Acquisition of a qualified electric vehicle entitles the owner to a
Federal tax credit equal to 10% of the cost of the vehicle. Several states have
also adopted legislation that sets mandates for the introduction of electric
vehicles. Many foreign countries have also initiated either mandates or
incentives for electric vehicles or are planning such programs in the future. As
we commercialize new transportation technology, we have been required to expend
our resources in educating legislators of the benefits of these vehicles. In
November 2002, President Bush signed into law legislation, which transfers
regulation of electric bicycles from the National Highway Traffic Safety
Administration to the Consumer Product Safety Commission. This effectively
10
changes the regulating standards for electric vehicles from motor vehicles
standards to consumer standards such as those governing bicycles, relieving the
need for regulatory compliance in connection with the sale of our bicycle
products.
Although many government agencies are concerned about rising global air
pollution, it is expected that we will need to continue to expend considerable
resources in the future in the governmental process to continue the current
favorable governmental climate for the zero emission vehicles.
RESEARCH AND PRODUCT DEVELOPMENT; PRODUCT DISTRIBUTION
We are primarily a marketer and distributor of ZAP products and products
manufactured for ZAP, such as the ZAP Xebra and the Smart Car Americanized by
ZAP. Thus, we do not currently require large expenditures for internal research
and development costs. In order to maintain our competitive advantage, we search
globally for the latest advanced technology vehicles and then assess the
feasibility of including the new item into our product lines. We look to acquire
new technologies through development agreements, licenses and distribution
agreements. We are primarily focused on developing ZAP qualified dealers
throughout the United States that will sell our automobile and consumer
products, in creating relationships with independent representatives and mass
merchandisers for the distribution and sale of our products to consumers, and in
direct sales to consumers through our Internet sales portal.
LICENSES, PATENTS AND TRADEMARKS
We have the following patents covering our electric vehicles:
---------------------------- --------------------- --------------------------
UNITED STATES PATENT DATE SUBJECT OF PATENT
---------------------------- --------------------- --------------------------
Patent No. 5,491,390 February 13,1996 Electric motor power
system for bicycles,
tricycles, and scooters
---------------------------- --------------------- --------------------------
Patent No. 5,671,821 September 30, 1997 Electric motor system
---------------------------- --------------------- --------------------------
Patent No. 5,848,660 December 15, 1998 ZAPPY scooter
---------------------------- --------------------- --------------------------
Design Patent No. 433,718 November 14, 2000 ZAPPY scooter
---------------------------- --------------------- --------------------------
Patent No. 6,059,062 Acquired in December Powered roller skates
1999 in the empower
acquisition
---------------------------- --------------------- --------------------------
Patent No. 6,050,357 Powered skateboard
---------------------------- --------------------- --------------------------
Patent No. 5,423,278 June 13, 1995 Submersible marine vessel
---------------------------- --------------------- --------------------------
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---------------------------- --------------------- --------------------------
Patent No. 5,634,423 June 3, 1997 Personal submersible
marine vehicle
---------------------------- --------------------- --------------------------
Patent No. 5,303,666 April 19, 1994 Submersible marine vessel
---------------------------- --------------------- --------------------------
Design Patent No. 347,418 May 31, 1994 Scuba scooter
---------------------------- --------------------- --------------------------
Design Patent No. 359,022 June 6, 1995 Scuba scooter
---------------------------- --------------------- --------------------------
Design Patent No. 453,726S February 19, 2002 Submersible marine vehicle
---------------------------- --------------------- --------------------------
Patent No. 6,748,892 June 15, 2004 Seascooter
---------------------------- --------------------- --------------------------
Patent No. 115,434 Powered Scooter
---------------------------- --------------------- --------------------------
We also hold several other patents in the electric vehicle industry. As
part of our acquisition of all of the assets of Electric Vehicles Systems Inc.,
we also acquired the PowerSki(R) trademark (Registration #No. 2,224,640) and two
United States Patents (Patent #No. 5,735,361) and (Patent #No. 5,913,373). We
currently have a patent pending for the ZAPPY3.
We also have several copyright registrations for various advertisements
that we use to promote our products.
We hold and utilize several trademarks: we were assigned the trademark
ZAP(R) on September 23, 1994 (Reg. No. 1,794,866); the ELECTRICRUIZER(R) mark
was registered on April 2, 1999 (Reg. No. 2,248,753); the ZAPPY(R) mark was
registered on March 21, 2000 (Reg. No. 2,330,894); the POWERBIKE(R) mark was
registered on June 1, 1999; trademark ZAPWORLD.COM(R) was registered on July 25,
2000 (Reg. No. 2,371,240); the trademark ZAP Electric Vehicle Outlet (R) was
registered on March 28, 2000 (Reg. No. 2,335,090); the mark Zero Air Pollution
(R) was registered on February 28, 2000 (Reg. No. 2,320,346); SWIMMY was
registered on July 25, 2003 (Reg. No.2,689,203). In 2004, ZAP was issued the
trademark ZAP Seascooter(R) and was registered on September 21, 2004 (Reg.
No.2,885,816). ZAP Car(R)was registered (Reg. No. 6,912,329) on December 21,
2004.
BACKLOG
As of March 30, 2006, the Company has over $1 billion in dated backlog
orders from auto-dealer purchase contracts for the Smart Cars Americanized for
ZAP. The Company still has these orders in hand, however, due to delays beyond
ZAP's control,the Company will need additional converters, and suppliers to
fulfill these orders, and continued government approvals and has no commitment
or time table to complete this number of Smart-Cars Americanized for ZAP for
sale in the U.S. market at this time. Through March 30, 2006, ZAP has delivered
or scheduled to deliver approximately $2.4 million in Smart-Cars Americanized
for ZAP. The backlog for our consumer products on the same date was $39,700. We
are planning to introduce new consumer product models shortly. We also have a
backlog of $220,000 for various electric vehicles that we anticipate shipping by
the end of second quarter of 2006.
COMPETITIVE CONDITIONS
The competition to develop and market advanced technology vehicles has been
intense and is expected to continue to increase. Our principal competitive
advantages over our competitors are our ownership of fundamental technology, our
trade name and brand recognition, our ability to be a low cost manufacturer
through domestic and international contract manufacturing arrangements and our
growing distribution network. We benefit from our high name recognition in the
12
advanced transportation vehicle industry coupled with a rapidly developing
consumer sales business on our website. In order to reduce costs, our production
activities have been transferred to lower cost contract manufacturers outside
the United States, which enables us to offer our products at competitive prices.
This also enables us to concentrate on our marketing and sales efforts and the
growth of our distribution network. We offer one of the broadest lines of
personal electric vehicles currently available, which we believe reinforces our
name recognition in the market place.
In the advanced technology vehicle market in the United States, we compete
with large manufacturers, including Honda, Toyota, and Daimler-Chrysler, who
have more significant financial resources, established market positions,
longstanding relationships with customers and dealers, and who have more
significant name recognition, technical, marketing, sales, manufacturing,
distribution and other resources than we do. Each of these companies is
currently working to develop, market and sell advanced technology vehicles in
the United States market. The resources available to our competitors to develop
new products and introduce them into the market place exceed the resources
currently available to our Company. We also face competition from smaller
companies with respect to our consumer products, such as our electric bicycle
and scooter. We expect to face competition from the makers of consumer batteries
and small electronics with respect to the ZAP PE. This intense competitive
environment may require us to make changes in our products, pricing, licensing,
services, distribution or marketing to develop, maintain and extend our current
technology and market position.
EMPLOYEES
As of March 30, 2006, the Company had a total of 31 employees. We believe
our employee relations are generally good. Our employees are not represented by
a collective bargaining unit.
BANKRUPTCY PLAN OF REORGANIZATION
On March 1, 2002, we filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court
for the Northern District of California, Santa Rosa Division. The first impact
of the Chapter 11 filing was to stay certain legal proceedings that had been
instituted against us. Management also believed that the Chapter 11 filing would
allow us to reorganize our business operations, debt and capital structure, and
revise our general business direction, and seek debtor-in-possession financing
on terms favorable to the Company.
On June 20, 2002, the Bankruptcy Court entered an order confirming a second
amended plan of reorganization (the "confirmed plan of reorganization"). On June
14, 2004, the Bankruptcy Court entered an order closing the Chapter 11 case and
officially terminating our operations under the jurisdiction of the Bankruptcy
Court.
Under the confirmed plan of reorganization we were able to: (a) alter our
equity and debt structures to permit us to emerge from the reorganization
proceedings with a viable capital structure; (b) maximize the value of the
ultimate recoveries to all creditor groups on a fair and equitable basis; and
(c) settle, compromise, or otherwise dispose of certain claims and interests on
13
terms that we believed to be fair and reasonable and in the best interests of
their respective estates, creditors, and stakeholders. Under the terms the
confirmed plan of reorganization the Company undertook and completed the
following:
o A 6 -to -1 reverse stock split of our common stock;
o The common shareholders received one warrant in Series B, C
and D to purchase common stock for each common share issued to
the claimant (post stock-split);
o The cancellation of certain indebtedness in exchange for cash,
common stock and/or warrants to purchase shares of common stock.
The warrants were issued to each claimant during 2002;
o Payment of $50,000 to a claimant of secured pre-petition debt.
$50,000 is the estimated value of the collateral, plus 5%
interest on a declining balance, payable monthly over three
years, commencing August 20, 2002;
o Conversion of 2,250 shares of our preferred stock, originally
valued at $1,000 per share, into 630,000 shares of common stock
(post the 6:1 reverse stock split). The preferred shareholders
also received 2.5 million Series A warrants, to vest in
accordance with a schedule outlined in the Plan and one warrant
in Series B, C and D to purchase common stock for each common
share issued to the claimant;
o The assumption and assignment, or rejection of executory
contracts or unexpired leases to which we were a party;
o Authorization to issue 100 million shares of common stock and 50
million shares of preferred stock.
o Authorization to issue 10 million common shares each for the
following warrants: Series A, B, C, D and K for a total of 50
million warrants, with the expiration dates for the warrants
ranging from 12 to 36 months;
o The creation of an Incentive Stock Option Plan for employees
within the meaning of Section 423 of the Internal Revenue Code of
1986, as amended, with an option by the Incentive Stock Option
Plan to purchase 10 million shares of ZAP common stock at an
exercise price equal to the closing price on the date of issue;
o Authorization to execute a $500,000 convertible debenture for the
purchase of inventory from a new supplier in exchange for a note
with interest at 6% per annum; or shares of common stock at $0.50
per share or 15% of the outstanding shares of the Reorganized
ZAP, whichever amount is greater. The supplier was also given
warrants in Series B, C and D for each common share owned (The
entire debt was converted to common stock during 2002); and
o Authorization to complete the acquisition of Voltage Vehicles and
RAP Group, Inc. effective July 1, 2002.
RISK FACTORS
We have a history of losses, and we might not achieve or maintain profitability.
Since we began operation in 1994, we have not generated a profit from operations
during any fiscal year. Our net sales decreased in 2005 to $3,602,000 from those
in 2004 ($4,772,000), and 2004 net sales were less than those for 2003
($5,828,000). We incurred net losses of $23,501,000, $27,834,000 and $5,542,000
for the years ended December 31, 2005, 2004 and 2003, respectively.
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As a consequence, we can give no assurance that we will be able to operate
profitably in the future.
In each of the 11 years since we began operations, we have not generated enough
revenue to exceed our expenditures. Since our inception, we have financed our
operations primarily through private and public offerings of our equity
securities. Our planned expenditures are based primarily on our internal
estimates of our future sales and ability to raise additional financing. If
revenues or additional financing do not meet our expectations in any given
period of time, we will have to cut our planned expenditures which could have an
adverse impact on our business and force us to cease operations. Our cash on
hand declined from $5.4 million on December 31, 2004 to $1.5 million on December
31, 2005. Failure to achieve profitable operations may require us to seek
additional financing when none is available or is only available on unfavorable
terms.
We face intense competition which could cause us to lose market share.
In the advanced technology vehicle market in the United States, we compete with
large manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have
more significant financial resources, established market positions,
long-standing relationships with customers and dealers, and who have more
significant name recognition, technical, marketing, sales, manufacturing,
distribution, financial and other resources than we do. Each of these companies
is currently working to develop, market, and sell advanced technology vehicles
in the United States market. The resources available to our competitors to
develop new products and introduce them into the marketplace exceed the
resources currently available to us. We also face competition from smaller
companies with respect to our consumer products, such as our electric bicycle
and scooter. We expect to face competition from the makers of consumer batteries
and small electronics with respect to the ZAP PE. This intense competitive
environment may require us to make changes in our products, pricing, licensing,
services, distribution, or marketing to develop, maintain, and extend our
current technology and market position.
Our Smart Car is produced and sold outside of the United States by
Daimler-Chrysler. If Daimler-Chrysler decides to sell the Smart Car in the
United States, which it has indicated it could do as early as 2007, it could
have a substantial adverse effect on the Company's Smart Car business.
Changes in the market for electric vehicles could cause our products to become
obsolete or lose popularity.
The electric vehicle industry is in its infancy and has experienced substantial
growth and change in the last few years. To-date, demand for and interest in
electric vehicles has been sporadic. As a result, growth in the electric vehicle
industry depends on many factors, including:
continued development of product technology;
the environmental consciousness of customers;
the ability of electric vehicles to successfully compete with vehicles
powered by internal combustion engines;
widespread electricity shortages and the resultant increase in electricity
prices, especially in our primary market, California, which could derail
our past and present efforts to promote electric vehicles as a practical
solution to vehicles which require gasoline;
and future regulation and legislation requiring increased use of
nonpolluting vehicles.
15
We cannot assure you that growth in the electric vehicle industry will continue.
Our business may suffer if growth in the electric vehicle industry slows down or
if we are unable to maintain the pace of industry demands.
We may be unable to keep up with changes in electric vehicle technology and, as
a result, may suffer a decline in our competitive position.
Our current products are designed for use with, and are dependent upon, existing
electric vehicle technology. As technologies change, we plan to upgrade or adapt
our products in order to continue to provide products with the latest
technology. However, our products may become obsolete or our research and
development efforts may not be sufficient to adapt to changes in or create
necessary technology. As a result, our potential inability to adapt and develop
the necessary technology may harm our competitive position.
The failure of certain key suppliers to provide us with components could have a
severe and negative impact upon our business.
We rely on a small group of suppliers to provide us with components for our
products, some of whom are located outside of the United States. If these
suppliers become unwilling or unable to provide components, there are a limited
number of alternative suppliers who could provide them. Changes in business
conditions, wars, governmental changes, and other factors beyond our control or
which we do not presently anticipate could affect our ability to receive
components from our suppliers. Further, it could be difficult to find
replacement components if our current suppliers fail to provide the parts needed
for these products. A failure by our major suppliers to provide these components
could severely restrict our ability to manufacture our products and prevent us
from fulfilling customer orders in a timely fashion.
Our Smart Car products are currently acquired overseas through retail purchases
from sales lots or from brokers in Europe and Asia. Daimler-Chrysler has refused
to sell the Smart Car to us directly, and there is no assurance that we will
continue to be able to purchase a sufficient number of Smart Cars at retail or
from brokers. Our Smart Cars must be modified to meet applicable U.S. and state
regulations. We have a contract with the only companies who are qualified to do
these modifications, Smart Automobile LLC and its compliance contractor, G&K
Automotive, which has clearances from the Department of Transportation and a
letter of conformity from the Environmental Protection Agency. We are therefore
dependent on these companies for the continued delivery of Americanized Smart
Cars.
As described elsewhere, we have entered into a contract with a Brazilian
automobile manufacturer, OBVIO, for the delivery of 50,000 multi-fuel vehicles
in two different models. OBVIO is a new developer and manufacturer of
automobiles in Brazil and there are many risks associated with its design and
manufacturing of cars for us, including, but not limited to, risks associated
with the constructing its factory, hiring personnel, acquiring equipment,
assembling a network of suppliers and developing the vehicle assembly process.
Litigation risks.
On October 28, 2005, we filed a Complaint against Daimler-Chrysler Corporation
and others in Los Angeles Superior Court. The Complaint includes claims for
intentional and negligent interference with prospective economic relations,
trade libel,
16
defamation, breach of contract/agreement to negotiate in good faith, breach of
implied covenant of good faith and fair dealing, and unfair competition. The
Complaint alleges that Daimler-Chrysler has engaged in a series of
anti-competitive tactics aimed at defaming us and disrupting our third-party
relationships. The Complaint requests damages in excess of $500 million and
other relief. Although Daimler-Chrysler has not yet filed a response to our
Complaint, we anticipate that it will vigorously defend these charges and may
file counterclaims against us. Daimler-Chrysler has significantly stronger
financial and other resources, and could force us to expend significant time and
money in a protracted legal battle. There is no assurance that we would be
successful on our claims and we may be subject to liability on any counterclaims
that Daimler-Chrysler may assert. The litigation could also be disruptive to our
business and divert the time and effort of our key executives and other
personnel.
Product liability or other claims could have a material adverse effect on our
business.
The risk of product liability claims, product recalls, and associated adverse
publicity is inherent in the manufacturing, marketing, and sale of electrical
vehicles. Although we have product liability insurance for our consumer products
for risks of up to an aggregate of $2,000,000, that insurance may be inadequate
to cover all potential product claims. We also carry liability insurance on our
automobile products. Any product recall or lawsuit seeking significant monetary
damages either in excess of our coverage, or outside of our coverage, may have a
material adverse effect on our business and financial condition. We may not be
able to secure additional product liability insurance coverage on acceptable
terms or at reasonable costs when needed. A successful product liability claim
against us could require us to pay a substantial monetary award. Moreover, a
product recall could generate substantial negative publicity about our products
and business and inhibit or prevent commercialization of other future product
candidates. Although we have experienced no product liability claims or product
recalls through March 31, 2006, there is a risk that such claims and/or recalls
could occur in the future.
The implementation of a product distribution network presents many risks.
One of our primary goals has been to increase the capacity of our product
distribution network. Unfortunately, dealers are often hesitant to provide their
own financing to contribute to this network. As a result, we have had to, and we
anticipate that we will continue to have to, provide financing for dealers who
would like to participate as our regional distribution centers.
The further expansion of our product distribution network will require a
significant capital investment and will require extensive amounts of time from
our management. A capital investment such as this presents many risks, foremost
among them being that we may not realize a significant return on our investment
if the network is not profitable. Our inability to collect receivables from our
dealers could cause us to suffer losses. Lastly, the amount of time that our
management will need to devote to this project may divert them from performing
other functions necessary to assure the success of our business.
Failure to manage our growth effectively could adversely affect our business.
17
We plan to increase sales and expand our operations substantially during the
next several years through internally-generated growth and the acquisition of
businesses and products.
To manage our growth, we believe we must continue to implement and improve our
operational, manufacturing, and research and development departments. We may not
have adequately evaluated the costs and risks associated with this expansion,
and our systems, procedures, and controls may not be adequate to support our
operations. In addition, our management may not be able to achieve the rapid
execution necessary to successfully offer our products and services and
implement our business plan on a profitable basis. The success of our future
operating activities will also depend upon our ability to expand our support
system to meet the demands of our growing business. Any failure by our
management to effectively anticipate, implement, and manage changes required to
sustain our growth would have a material adverse effect on our business,
financial condition, and results of operations. We cannot assure you that we
will be able to successfully operate acquired businesses, become profitable in
the future, or effectively manage any other change. An inability to successfully
operate recently acquired businesses and manage existing business would harm our
operations.
The loss of certain key personnel could significantly harm our business.
The Company's performance is substantially dependent upon the services of its
executive officers and other key employees, as well as on its ability to
recruit, retain, and motivate other officers and key employees. Competition for
qualified personnel is intense and there are a limited number of people with
knowledge of and experience in the advanced technology vehicle industry. The
loss of services of any of our officers or key employees, or our inability to
hire and retain a sufficient number of qualified employees, will harm our
business. Specifically, the loss of Mr. Schneider, our Chief Executive Officer,
Mr. Starr, our Chairman of the Board, or Mr. Scheder-Bieschin, our President,
whose specialized knowledge of the electric vehicle industry is essential to our
business, would be detrimental.
Regulatory requirements may have a negative impact upon our business.
While our products are subject to substantial regulation under federal, state,
and local laws, we believe that the products we have sold are materially in
compliance with all applicable laws. However, to the extent the laws change, or
if we introduce new products in the future, some or all of our products may not
comply with applicable federal, state, or local laws. Further, certain federal,
state, and local laws and industrial standards currently regulate electrical and
electronics equipment. Although standards for electric vehicles are not yet
generally available or accepted as industry standards, our products may become
subject to federal, state, and local regulation in the future. Compliance with
this regulation could be burdensome, time consuming, and expensive.
Our automobile products are subject to environmental and safety compliance with
various federal and state regulations, including regulations promulgated by the
EPA, NHTSA, and Air Resource Board of the State of California, and compliance
18
certification is required for each new model year. The cost of these compliance
activities and the delays and risks associated with obtaining approval can be
substantial. Although the Company has been marketing its Smart Car product in
the United States, the car must be certified by the California Air Resources
Board before it can be sold in California, New York, and three other states. In
addition, the two models of our OBVIO products will need to satisfy all
regulatory requirements before they can be sold in the United States. The risks,
delays, and expenses incurred in connection with such compliance could be
substantial.
International expansion may cause problems for us.
We have been shifting our manufacturing overseas, including contracting with
OBVIO, a Brazilian company, for the manufacture of 50,000 vehicles over three
years. There are many risks associated with international business. These risks
include, but are not limited to, language barriers, fluctuations in currency
exchange rates, political and economic instability, regulatory compliance
difficulties, problems enforcing agreements, and greater exposure of our
intellectual property to markets where a high probability of unlawful
appropriation may occur. A failure to successfully mitigate any of these
potential risks could damage our business.
We may not be able to protect our internet address.
We currently hold the internet address, http://www.zapworld.com, a portal
through which we sell our products. We may not be able to prevent third parties
from acquiring internet addresses that are confusingly similar to our address,
which could adversely affect our business. Governmental agencies and their
designees generally regulate the acquisition and maintenance of internet
addresses. However, the regulation of internet addresses in the United States
and in foreign countries is subject to change. As a result, we may not be able
to acquire or maintain relevant internet addresses in all countries where we
conduct business.
Our success is heavily dependent on protecting our intellectual property rights.
We rely on a combination of patent, copyright, trademark, and trade secret
protections to protect our proprietary technology. Our success will, in part,
depend on our ability to obtain trademarks and patents. We hold several patents
registered with the United States Patent and Trademark Office. These
registrations include both design patents and utility patents. In addition, we
have recently submitted provisional patents which may or may not be afforded the
limited protection associated with provisional patents. We have also registered
numerous trademarks with the United States Patent and Trademark Office, and have
several pending at this time. We cannot assure you that the trademarks and
patents issued to us will not be challenged, invalidated, or circumvented, or
that the rights granted under those registrations will provide competitive
advantages to us.
We also rely on trade secrets and new technologies to maintain our competitive
position. Although we have entered into confidentiality agreements with our
employees and consultants, we cannot be certain that others will not gain access
to these trade secrets. Others may independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets.
19
We may be exposed to liability for infringing intellectual property rights of
other companies.
Our success will, in part, depend on our ability to operate without infringing
on the proprietary rights of others. Although we have conducted searches and are
not aware of any patents and trademarks which our products or their use might
infringe, we cannot be certain that infringement has not or will not occur. We
could incur substantial costs, in addition to the great amount of time lost, in
defending any patent or trademark infringement suits or in asserting any patent
or trademark rights, in a suit with another party.
Risk of Unregistered Securities Offering.
In the past, we have had numerous sales of our securities which were not
registered under federal or state securities laws. We have strived to comply
with all applicable Federal and state securities laws in connection with our
issuances of unregistered securities. However to the extent we have not
complied, there may be liability for the purchase price of the securities sold
together with interest and the potential of regulatory sanctions
Risk of Delisting.
On December 19, 2005, we received a notice from the staff of PCX Equities,
Inc. ("PCXE"), a subsidiary of the Pacific Exchange that we had not met their
listing maintenance requirements for share bid price set forth in PCXE Rule
5.5(h)(4). In response to that notice, we developed a plan addressing the
listing deficiency and provided it to the PCXE Staff. On January 19, 2006, we
were notified by the PCXE Equity Qualification Panel that the Panel had
considered our plan for the listing deficiency and will permit us to maintain
our listing on the Archipelago Exchange, subject to regaining compliance in
accordance with the terms of the Panel's notice. Under the Panel's notice, we
must regain the one dollar minimum price per share requirement by our next
annual shareholders meeting, tentatively scheduled for June 2006 or, in the
alternative, receive shareholder approval at such meeting for a reverse stock
split in a ratio designed to regain compliance with the share bid price
requirement. On March 7, 2006, we were notified that the Archipelago Exchange
and Pacific Exchange were renamed as "NYSE Arca," In connection with their
acquisition by an affiliate of the New York Stock Exchange. On March 24,2006 the
closing sales price of our common stock was $1.35.
Our stock price and trading volume may be volatile, which could result in
substantial losses for our stockholders.
The equity trading markets may experience periods of volatility, which
could result in highly variable and unpredictable pricing of equity securities.
The market price of our common stock could change in ways that may or may not be
related to our business, our industry or our operating performance and financial
condition. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. We have experienced significant
volatility in the price of our stock over the past few years. See Item 5. Market
For Common Equity and Related Shareholder Matters. For example, on December 31,
2004, our stock had a high of $5.15 and on December 31, 2005, it had a low of
$.26. If the market price of our common stock declines significantly, you may be
unable to resell your common stock at or about its purchase price. We cannot
assure you that the market price of our common stock will not fluctuate or
decline significantly in the future. In addition, the
20
stock markets in general can experience considerable price and volume
fluctuations.
A substantial number of shares we have issued in exempt transactions are, or are
being made, available for sale on the open market, and the resale of these
securities might adversely affect our stock price.
We have on file with the SEC effective registration statements for a
substantial number of shares for resale. The selling stockholders under our
effective registration statements will be permitted to sell their registered
shares in the open market from time to time without advance notice to us or to
the market and without limitations on volume.
The sale of a substantial number of shares of our commons stock under our
registration statements, or the anticipation of such sales, could make it more
difficult for us to sell equity or equity-related securities in the future at a
time and at a price that we might otherwise wish to effect sales.
We have not paid cash dividends on our common stock and do not anticipate paying
any dividends on our common stock in the foreseeable future.
We have not achieved profitable operations and if we do realize a profit in
the future, we anticipate that we will retain all future earnings and other cash
resources for the future operation and development of our business. Accordingly,
we do not intend to declare or pay any cash dividends on our common stock in the
foreseeable future. Payment of any future dividends will be at the direction of
our board of directors after taking into account many factors, including our
operating results, financial conditions, current and anticipated cash needs and
plans for expansion.
ITEM 2. DESCRIPTION OF PROPERTY.
The chart below contains a summary of our principal facilities:
Location Use Square Feet Rent
--------------------------- ------------------- ----------- -----------
501 Fourth Street, SR Corporate Headquarters 20,000 $ - (1)
44720 Main Street,Mendocino Retail Outlet 5,507 $ - (2)
6784 Sebastopol Avenue, Seb Distribution Center 10,000 $ 6,607
6786 Sebastopol Avenue, Seb Warehouse 6,000 $ 4,162
6793 Mc Kinley Street, Seb Warehouse 4,000 $ 2,774
3362 Fulton Road, SR Office, Automobile Lot 10,000 $ 5,000
3405 Fulton Road, SR Automobile Lot 11,000 $ 5,500
(1) Under the terms of the Mortgage, dated March 7, 2003, between the Company
and Atocha Land LLC concerning the Fourth Street location, monthly payments
of principal and interest amortizing the underlying $2 million debt have
21
commenced on April 7, 2005, with the interest at the prime rate plus 2%.
The underlying debt may be converted to ZAP's common shares at Atocha's
option. See also below.
(2) In the second quarter of 2005, ZAP issued 455,442 common shares in exchange
for the purchase of real estate. ZAP recorded the common shares at the
appraised value of the real estate. Under the terms of the purchase, ZAP is
obligated to issue additional common shares for no additional consideration
if after 1 year the market price of ZAP's common shares is less than the
market price at their date of issuance.
The Company purchased the Fourth Street building in March 2003 to use as our
principal executive offices. The building was built originally in 1906 and is in
downtown Santa Rosa. Over the years it was updated and remodeled by previous
owners and the Company. The Company has renovated the building during its
ownership with new carpets, paint and remodeled to include a new showroom and
conference room. The building and contents are adequately insured in the opinion
of management. The Company occupies more than 90 percent of the building. The
property tax rate is set at 1 percent per year of the assessed value (currently
set at the 2004 appraised value of $2.9 million). The building is being
depreciated over a 30 year useful life. The Company has a $2 million convertible
note due in March 2025, with annual interest at 7.5%. The Company began making
payments in April 2005 of $15,166 per month. The note is payable with equal
principal and interest payments over the next 240 months. The noteholder has the
option to convert some or all of the unpaid principal and accrued interest to
shares of ZAP's common stock at $2.15 per share or an agreed upon conversion
price (as defined). The seller also received common stock and warrants in
connection with the transaction. The Company purchased the Mendocino California
property in May 2005 which is currently being used as a retail outlet. The net
book value of our real estate holdings at December 31, 2005 was approximately $4
million.
The rest of our facilities are leased. The property located at 3405 and
3362 Fulton Road is rented on a month-by-month basis from ZAP's Chief Executive
Officer. The lease for the property at 6784 Sebastopol Avenue expired in
February 2006 and is now monthly. The company is in the process of locating new
warehouse space. The Company plans to renew the month to month leases based on
the Company's needs. The Company believes these properties are adequate for the
Company's foreseeable needs.
It is management's opinion that our insurance policies cover all insurance
requirements of the landlords. We own the basic tools, machinery and equipment
necessary for the conduct of our repairs, our minimal research and development,
and vehicle prototyping activities. We believe that the above facilities are
generally adequate for present operations.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, we may become involved with various
litigation proceedings. Except as stated below, we know of no pending or
threatened legal proceeding to which we are or will be a party which, if
successful, might result in a material adverse change in our business,
properties or financial condition. However, as with most businesses, we are
occasionally parties to lawsuits incidental to our business, none of which are
anticipated to have a material adverse impact on our financial position, results
of operations, liquidity or cash flows.
22
A dormant complaint filed in 2002 against the RAP Group and Steve Schneider
the CEO of ZAP, individually was reactivated by the plaintiff (Jim Arnold
Trucking). The Compliant alleges breach of contract, promissory estoppel and
fraud and seeks contract damages in the amount $71,000 plus monthly storage fees
and punitive damages of $750,000. The Company has cross-claimed against
Plaintiffs seeking compensatory damages, attorneys' fees and equitable relief
for breach of oral contract, common count for goods sold and delivered,
conversion, liability of surety, violation of statue, and violation of the
Unfair Practices Act. On February 17, 2005, the court referred the matter to
non-binding arbitration. The non binding arbitration hearing was held on July
27, 2005 where the arbritrator awarded the plaintiff damages in the amount of
$68,290 plus prejudgement interest of 7%. ZAP intends to assert its defenses
vigorously and to litigate its cross-complaint aggressively. A settlement
conference is set for April 19, 2006. The Company has also requested a trial in
this matter on May 2, 2006. Management believes that the ultimate resolution of
this claim will not have a material adverse effect on our financial position or
on results of operations.
On October 28, 2005, we filed a complaint against DaimlerChrysler
Corporation and others in the Los Angeles Superior Court, under the title ZAP V.
DAIMLERCHRYSLER AG, ET AL. The complaint includes claims for intentional and
negligent interference with prospective economic relations; trade libel;
defamation; breach of contract - agreement to negotiate in good faith; breach of
implied covenant of good faith and fair dealing; and unfair competition. The
complaint alleges that DaimlerChrysler has engaged in a series of
anti-competitive tactics aimed at defaming ZAP and disrupting its third-party
business relationships. As a result of the allegations, the complaint requests
damages in excess of $500 million and such other relief as the court deems just
and proper. DaimlerChrysler has not yet filed a response to our complaint.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of our security holders during the
fourth quarter of the year-ended December 31, 2005.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL
BUSINESS PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our common stock has been listed on the NYSE Arca Exchange (previously the
Pacific Exchange and the Arca Exchange) under the symbol "ZP" since June, 2005.
Prior to that date, it was quoted for trading on the National Association of
Securities Dealers' OTC Bulletin Board. For the periods since our listing on the
NYSE Arca Exchange, following table sets forth the high and low sales prices for
the periods indicated. For the periods prior to our listing on the NYSE Arca
Exchange the table sets forth the high and low bid prices for our common stock
for the periods indicated and Quotations reflect
23
inter-dealer prices, without retail markup, markdown or commission and may not
be reflective of actual transactions
BID PRICE
-----------------------
PERIOD HIGH LOW
-------------------------------------------- ------ ------
FISCAL YEAR 2005:
DECEMBER 31, 2005 $ 1.07 $ 0.26
SEPTEMBER 30, 2005 1.40 0.96
JUNE 30, 2005 3.03 0.93
MARCH 31, 2005 3.56 2.35
FISCAL YEAR 2004:
DECEMBER 31, 2004 $ 5.15 $ 1.06
SEPTEMBER 30, 2004 2.60 0.81
JUNE 30, 2004 4.20 0.55
MARCH 31, 2004 0.95 0.53
HOLDERS
We have approximately 3,735 record holders of our common stock as of March
24, 2006, according to a shareholders' list provided by our transfer agent as of
that date. The number of registered shareholders does not include any estimate
by us of the number of beneficial owners of common shares held in street name.
The transfer agent and registrar for our common stock is Continental Trust &
Transfer Company.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our common stock, and
we do not anticipate that we will pay any dividends on our common stock in the
foreseeable future. Any future determination to declare and pay of cash
dividends will be at the discretion of our board of directors, and will be
dependent upon our financial condition, results of operations, capital
requirements and other factors as our board of directors may deem relevant at
that time.
RECENT SALES OF UNREGISTERED SECURITIES
We have sold or issued the following securities not registered under the
Securities Act by reason of the exemption afforded under Section 4(2) of the
Securities Act of 1933, during the year covered by this report. Except as stated
24
below, no underwriting discounts or commissions were payable with respect to any
of the following transactions.
COMMON STOCK ISSUED
On January 1, 2005, we issued 116,099 shares of common stock to B Warrant
Holders, in connection with its exercise of warrants.
On January 1, 2005, we issued 288 shares of common stock to C Warrant Holders,
in connection with its exercise of warrants.
On January 5, 2005, we purchased assets with value of $15,989 from Suppliers
with 5,420 shares of common stock.
On January 13, 2005, we issued 30,000 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $83,100.
On January 14, 2005, we issued 51,376 shares of common stock to B Warrant
Holders, in connection with its exercise of warrants.
On January 14, 2005, we issued 42 shares of common stock to C Warrant Holders,
in connection with its exercise of warrants.
On January 14, 2005, we purchased inventory with value of $247,500 from
Suppliers with 90,000 shares of common stock.
On January 20, 2005, we issued 10,000 shares of common stock to Consultant in
payment for professional services valued at $23,500.
On January 20, 2005, we settled an obligation with a professional organization,
for $13,600, which was paid with 5,787 shares of common stock.
On January 24, 2005, we issued 14,193 shares of common stock to B and B2 Warrant
Holders, in connection with its exercise of warrants.
On January 28, 2005, we issued 382 shares of common stock to Professional
Organization in payment for professional services valued at $1000.
On January 28, 2005, we issued 11,699 shares of common stock to Employees for
employment bonuses valued at $30,651.
On January 28, 2005, we purchased assets with value of $3,500 from
Suppliers with 1,336 shares of common stock.
On January 28, 2005, we issued 3,817 shares of common stock to Professional
Contractors in payment for professional services valued at $10,000.
On January 28, 2005, we issued 83,166 shares of common stock to B Warrant
Holders, in connection with its exercise of warrants.
On February 2, 2005, we issued 70,000 shares of common stock to B Warrant
Holders, in connection with its exercise of warrants.
On February 2, 2005, we purchased assets with value of $72.75 from Suppliers
with 25 shares of common stock.
On February 8, 2005, we issued 2,631 shares of common stock to B Warrant
Holders, in connection with its exercise of warrants.
On February 8, 2005, we issued 1,678 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $5,000.
On February 15, 2005 the Company issued 600,000 shares of common stock to
accredited investors for $1,250,125.
25
On February 15, 2005, we settled an obligation with Lessors, for $81,600, which
was paid with 29,781 shares of common stock.
On February 15, 2005, we issued 32,920 shares of common stock to various
Consultants in payment for professional services valued at $90,200.
On February 23, 2005, we issued 727 shares of common stock to B Warrant Holders,
in connection with its exercise of warrants.
On February 23, 2005, we settled an obligation with a Dealer, for $34,200, which
was paid with 12,000 shares of common stock.
On March 1, 2005, we issued 955 shares of common stock to B Warrant Holders, in
connection with its exercise of warrants.
On March 2, 2005, we purchased inventory with value of $7,250 from Suppliers
with 3,593 shares of common stock.
On March 8, 2005, we settled an obligation with Professional Organization, for
$10,000, which was paid with 2,932 shares of common stock.
On March 8, 2005, we issued 150,000 shares of common stock to B Warrant Holders,
in connection with its exercise of warrants.
On March 11, 2005, we issued 100,000 shares of common stock to B Warrant
Holders, in connection with its exercise of warrants.
On March 14, 2005, we issued 5,000 shares of common stock to B Warrant Holders,
in connection with its exercise of warrants.
On March 14, 2005, we issued 3,571 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $10,000.
On March 14, 2005, we purchased assets with value of $25,850 from Suppliers with
13,376 shares of common stock.
On March 14, 2005, we issued 929 shares of common stock to Employees for
employment bonuses valued at $2,600.
On March 17, 2005 the Company cancelled 200,000 shares of common stock to
institutional investors in connection with cancellation of a financing deal.
Money was returned to the institutional investor.
On March 23, 2005, we issued 700 shares of common stock to B Warrant Holders, in
connection with its exercise of warrants.
On March 23, 2005, we issued 19,940 shares of common stock to Professional
Contractors in payment for professional services valued at $55,035.
On March 28, 2005, we issued 30,000 shares of common stock to B2 Warrant
Holders, in connection with its exercise of warrants.
On March 28, 2005, we issued 1,544 shares of common stock to Employees for
employment bonuses valued at $4,600.
On March 28, 2005, we issued 5,369 shares of common stock to Consultant in
payment for professional services valued at $16,000.
On April 6, 2005, we issued 100,000 shares of common stock to B Warrant Holders,
in connection with its exercise of warrants.
On April 6, 2005, we issued 29,754 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $85,691.
On April 7, 2005, we issued 41,095 shares of common stock to Contractors in
payment for professional services valued at $120,000.
On April 14, 2005, we issued 16,716 shares of common stock to Employees for
commission bonuses valued at $47,141.
On April 14, 2005, we issued 3,546 shares of common stock to Contractors in
payment for professional services valued at $10,000.
On April 27, 2005, we issued 4,000 shares of common stock to Employees for
commission bonuses valued at $11,802.
On April 29, 2005, we issued 177 shares of common stock to Contractors in
payment for professional services valued at $500.
On April 29, 2005, we issued 333 shares of common stock to B Warrant Holders, in
connection with its exercise of warrants.
26
On May 3, 2005, we purchased real estate with value of $1,045,000 from Property
Owners with 355,442 shares of common stock.
On May 9, 2005, we purchased assets with value of $3,000 from Suppliers with
1140 shares of common stock.
On May 9, 2005, we issued 1826 shares of common stock to Employees for
commission bonuses valued at $4,800.
On May 18, 2005, we purchased assets with value of $1,000 from Suppliers with
377 shares of common stock.
On May 19, 2005, we issued 150,000 shares of common stock to K Warrant Holders,
in connection with its exercise of warrants.
On May 25, 2005, we issued 3,093 shares of common stock to Employees for
commission bonuses valued at $6,000.
On May 25, 2005, we issued 258 shares of common stock to Consultants in payment
for professional services valued at $500.
On June 1, 2005, we issued 19,108 shares of common stock to Contractors in
payment for professional services valued at $30,000.
On June 7, 2005, we issued 3,571 shares of common stock to Contractors in
payment for professional services valued at $3,321.
On June 7, 2005, we issued 1,000 shares of common stock to Employees for bonuses
valued at $930.
On June 7, 2005, we established a deposit reserve for real estate with value of
$93,000 from Property Owners with 100,000 shares of common stock.
On June 7, 2005, we purchased inventory with value of $785 from Suppliers with
844 shares of common stock.
On June 14, 2005, we purchased inventory with value of $3,000 from Suppliers
with 2,128 shares of common stock.
On June 17, 2005, we settled an obligation with Lessors, for $63,000, which was
paid with 42,000 shares of common stock.
On June 17, 2005, we issued 13,333 shares of common stock to Contractors in
payment for professional services valued at $20,000.
On June 27, 2005, we settled an obligation with Contractors, for $1,784, which
was paid with 1,166 shares of common stock.
On June 30, 2005, we issued 27,105 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $36,592.
On June 30, 2005, we issued 940 shares of common stock to Contractors in payment
for professional services valued at $1,270.
On June 30, 2005, we issued 1,481 shares of common stock to Contractors in
payment for professional services valued at $2,000.
On July 8, 2005, we issued 43,361 shares of common stock to Professional
Contractors in payment for professional services valued at $52,900.
On July 19, 2005, we issued 28,720 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $31,592.
On August 5, 2005, we issued 9,259 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $10,000.
On August 5, 2005, we issued 1,389 shares of common stock to Employees for
employment compensation valued at $1,500.
On August 17, 2005, we issued 6,637 shares of common stock to Professional
Contractors in payment for professional services valued at $7,500.
On August 19, 2005, we issued 18,018 shares of common stock to Consultants in
payment for professional services valued at $20,000.
On August 19, 2005, we issued 4,505 shares of common stock to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company valued at $5,000.
27
On August 23, 2005, we settled an obligation with Lessors, for $12,000, which
was paid with 11,429 shares of common stock.
On August 30, 2005, we issued 4,464 shares of common stock to Professional
Contractors in payment for professional services valued at $5,000.
On September 9, 2005, we issued 10,000 shares of common stock to Employees, in
connection with its exercise of 10,000 employee stock options.
On September 14, 2005, we issued 15,000 shares of common stock to Employees for
employment compensation valued at $15,600.
On September 15, 2005, we issued 20,214 shares of common stock to Consultant in
payment for professional services valued at $21,225.
On September 15, 2005, we issued 35,000 shares of common stock to Consultant in
payment for professional services valued at $36,750.
On September 27, 2005, we issued 8,772 shares of common stock to Professional
Contractors in payment for professional services valued at $10,000.
On October 13, 2005, we issued 27,956 shares of common stock to Professional
Contractors in payment for professional services valued at $26,000.
On October 21, 2005, we issued 31,875 shares of common stock to Professional
Contractors in payment for professional services valued at $25,500.
On October 27, 2005, we settled an obligation with Lessors for $25,296, which
was paid with 31,230 shares of common stock.
On October 27, 2005, we issued 61,728 shares of common stock to Professional
Contractors in payment for professional services valued at $50,000.
On October 28, 2005, we issued 61,728 shares of common stock to Consultants in
payment for professional services valued at $50,000.
On November 3, 2005, we purchased assets with value of $11,600 from Contractors
with 14,321 shares of common stock.
On November 3, 2005, we issued 4,938 shares of common stock to Professional
Contractors in payment for professional services valued at $4,000.
On November 9, 2005, we purchased inventory with value of $4,500 from Suppliers
with 5,625 shares of common stock.
On November 14, 2005, we issued 6,667 shares of common stock to Consultants in
payment for professional services valued at $5,000.
On November 14, 2005, we issued 3,333 shares of common stock to Professional
Contractors in payment for professional services valued at $2,500.
On November 15, 2005, we purchased inventory with value of $177,204 from
Suppliers with 192,613 shares of common stock.
On November 28, 2005, we issued 100,000 shares of common stock to Professional
Contractors in payment for professional services valued at $100,000.
On November 28, 2005, we issued 66,579 shares of common stock to Consultants in
payment for professional services valued at $25,300.
ZAP ESOP OPTIONS ISSUED
On March 14, 2005, we issued 120,000 ESOP options with $2.80 exercise price to
ZAP Employees for employment compensation.
On June 7, 2005, we issued 1,248,194 ESOP options with $0.93 exercise price to
ZAP Employees for employment compensation.
On September 14, 2005, we issued 250,000 ESOP options with $1.04 exercise price
to ZAP Employees for employment compensation.
On December 1, 2005, we issued 50,000 ESOP options with $0.65 exercise price to
ZAP Employee for employment compensation.
$1.50 WARRANTS ISSUED
On September 20, 2005, we issued 750,000 shares of $1.50 warrants to Lawyers in
connection with legal fees.
28
On October 21, 2005, we issued 75,000 shares of $1.50 warrants to Consultants in
payment for professional services.
$2.50 WARRANTS ISSUED
On February 15, 2005 the Company issued 300,000 shares of $2.50 warrants to
accredited investors in connection with an investment.
On February 15, 2005, we issued 30,000 shares of $2.50 warrants to Consultant in
payment for professional services.
$3.05 WARRANTS ISSUED
On February 15, 2005, we issued 1,125,000 shares of $3.05 warrants to
Consultants in connection to a consulting agreement.
$3.25 WARRANTS ISSUED
On January 20, 2005, we issued 200,000 shares of $3.25 warrants to Consultants
in connection to a consulting agreement.
On February 7, 2005, we issued 1,000,000 shares of $3.25 warrants to Consultants
in connection to a consulting agreement.
On February 15, 2005 the Company issued 300,000 shares of $3.25 warrants to
accredited investors in connection with an investment.
On February 15, 2005, we issued 30,000 shares of $3.25 warrants to Consultant in
payment for professional services.
On March 3, 2005, we issued 1,000,000 shares of $3.25 warrants to Lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to the Company.
On March 8, 2005, we issued 600,000 shares of $3.25 warrants to Consultants in
payment for professional services.
On April 1, 2005 the Company issued 300,000 shares of $3.25 warrants to
Consultants for serving on the Advisory Board.
On April 14, 2005, we issued 100,000 shares of $3.25 warrants to Consultant in
connection with professional services.
On April 19, 2005, we issued 500,000 shares of $3.25 warrants to Consultant in
connection with professional services.
$4.00 WARRANTS ISSUED
On February 15, 2005 the Company issued 300,000 shares of $4.00 warrants to
accredited investors in connection with an investment.
On February 15, 2005, we issued 30,000 shares of $4.00 warrants to Consultant in
payment for professional services.
$4.05 WARRANTS ISSUED
On February 15, 2005, we issued 562,500 shares of $4.05 warrants to Consultants
in connection to a consulting agreement.
$4.75 WARRANTS ISSUED
On February 15, 2005, we issued 562,500 shares of $4.75 warrants to Consultants
in connection to a consulting agreement.
K2 WARRANTS ISSUED
29
On June 7, 2005, we issued 1,450,694 shares of $3.25 warrants to Employees for
employment contracts and bonuses.
B2 WARRANTS ISSUED
On September 14, 2005, we issued 500,000 shares of B2 warrants to Consultant in
connection with professional services.
On September 14, 2005, we issued 250,000 shares of B2 warrants to Employees for
employment contracts and bonuses.
On September 15, 2005, we issued 250,000 shares of B2 warrants to Consultant in
connection with professional services.
On November 7, 2005, we issued 50,000 shares of B2 warrants to Consultant in
connection with professional services.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with, and are qualified by reference
to, our Financial Statements and related notes thereto in Item 7 of this report.
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform of 1995. Refer to Item 1 of this report. Also, for a
discussion of certain risk factors applicable to our business and operations see
"Risk Factors" in Item 1 of this report.
30
SUMMARY OF KEY ACCOMPLISHMENTS DURING 2005
The Company delivered the first U. S. Compliant Smart Cars Americanized by ZAP
to qualified dealers in seven states. The future delivery schedule has not yet
been determined. ZAP will need the support of a major manufacturer and
additional governmental approvals to be able to deliver existing customer orders
for Smart Cars.
ZAP entered into an agreement in September 2005, for a $425 million revolving
financing facility with Surge Capital II, LLC. This new facility gives ZAP the
ability to start fulfilling purchase orders it has already received for SMART
cars that will be modified to meet United States environmental and safety
standards. The facility may also be used for importation of other brands of
fuel-efficient vehicles from global manufacturers that would be distributed
through ZAP's dealer network. The financing facility has a term of one year, but
may be extended upon agreement by both parties. The financing is based on orders
ZAP receives from dealers who must be approved in advance by Surge Capital and
is secured by a first lien on substantially all of ZAP's assets.
ZAP signed an exclusive North American distribution agreement with a Brazilian
auto manufacturer OBVIO ! Automotoveiculos S.P.E. Ltda., of Rio de Janeiro. ZAP
and OBVIO ! have agreed to collaborate in the design and manufacture of high
efficiency, high performance urban cars. Prototypes of both models were
introduced in late 2005 at the San Francisco Auto Show. Under the terms of the
agreement, ZAP is ordering 50,000 vehicles from OBVIO ! during the three year
period following initial delivery.
On October 28, 2005, the Company announced that it will be proceeding with legal
action against Daimler Chrysler and others serving a complaint that seeks in
excess of $500 million in redress for more than a year-long campaign of
misconduct against ZAP by Daimler and Ulrich Walker, the then -CEO of its
subsidiary Smart gmbh. The complaint filed in Los Angeles Superior Court,
details a series of anti-competitive tactics, aimed at defaming ZAP and
disrupting its third-party business relationships. ZAP anticipates proceeding to
trial in this matter before the close of the year 2006.
ZAP established a primary listing in 2005 on the Archipelago Exchange
("ArcaEx"), a facility of the Pacific Exchange. The ticker symbol changed from
ZAPZ to ZP. Subsequently, ArcaEx completed a merger with the New York Stock
Exchange to form the New York Stock Exchange Group on March 7, 2006. The
all-electronic stock exchange Archipelago is now a wholly owned subsidiary of
the NYSE Group, Inc. The company's listing is now on NYSE Arca, and continues to
trade under the ticker symbol ZP.
31
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
NET SALES for the year ended December 31, 2005 were $3.6 million compared to
$4.8 million in 2004. RAP's net sales for 2005 were $2.5 million versus $3.6
million in 2004. Net sales for ZAP in 2005 were $1.1 million versus $1.2 million
in 2004. The decrease in sales was primarily due to less demand by consumers for
conventional gasoline automobiles sold by RAP together with competitive rebates
throughout the year by major automobile manufacturers.
GROSS PROFIT was $341,000 for the year ended December 31, 2005 compared to $1.1
million for the year ended December 31, 2004. The RAP Group accounted for
$303,000 of the gross profit for the year ended December 31, 2005 versus
$782,000 in 2004. ZAP's gross profit, excluding the RAP Group, decreased from
$258,000 in 2004 to $38,000 in 2005. The change in gross profit was due to a
lower volume of sales together with smaller profits on conventional automobile
sales.
SALES AND MARKETING EXPENSES for the year ended 2005 were $909,000 as compared
to $803,000 in 2004. RAP's expenses were $138,000 versus $143,000 in 2004. For
ZAP, the expenses were $771,000 versus $660,000 in 2004. As a percentage of
sales, total selling expenses increased from 17% in 2004 to 25% in 2005. The
increase of $106,000 was due to an increase in marketing and promotion expenses
for the Smart-Car Americanized by ZAP.
GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December 31, 2005 were
$18.3 million as compared to $18.2 million in 2004. RAP's portion of the
expenses was $735,000 versus $682,000 in 2004. For ZAP, the expenses increased
from $17.5 million to $17.6 million. As a percentage of sales, general and
administration expenses increased from 381% to 509%. RAP's increase of $53,000
was primarily due to slightly higher inflationary increases in expenses. The
major components of ZAP's General and Administration expenses for the year ended
2005 were: salaries and benefits $1.2 million, allowance for Smart-Car note
receivable of $1 million,the variable accounting adjustments to modified
warrants that total $5.2 million in credits, mostly non-cash expenses resulted
in consulting fees of $13.7 million, professional fees of $3.3 million and
amortization of $1.1 million. Although the total expenses for both 2005 and 2004
were comparable the Company did experience higher consulting and professional
fees for the year ended 2005. The increase was due to costs associated with
identifying future funding sources for the company. Also legal fees were higher
in connection with the filing of the Daimler Chrysler lawsuit. The increase in
2005 expenses were offset by favorable adjustments to non-cash employee
compensation.
RESEARCH AND DEVELOPMENT expense of $156,000 in 2005 represents expenses to
develop a hybrid fuel cell vehicle which is powered by hydrogen and electricity.
IMPAIRMENT LOSS resulted from an independent valuation of the Smart Automobile
license as of December 31, 2005 which estimated the fair value to be $3.1
million with a remaining life of two years. The fair value was less than the
$8.8 million recorded net book value of the license at year-end. Accordingly,
the Company recorded an impairment charge of $5.7 million for the year ended
December 31, 2005. Also included in the impairment loss was a provision for
estimated investment losses on a joint venture of $372,000 and goodwill
adjustments on RAP and Voltage Vehicles for $301,000.
32
LOSS ON DISPOSAL OF FIXED ASSETS in 2004 was due to the write-off of certain
leasehold improvements where the Company has never utilized certain rental
office space that was renovated by the Company. Also, adjustments were made to
various cars in the Las Vegas Rental Fleet that are not operational and are in
disrepair. Furthermore, the Company disposed of certain machinery,
equipment,computers, and furniture that were no longer being used.
INTEREST EXPENSE decreased from $1.1 million to $17,000 in 2005. The decrease in
interest expense reflects a non recurring non-cash interest expense of $1
million in 2004 for note discounts from a beneficial conversion feature, and for
warrants issued with the notes. The $1 million was charged to expense in 2004,
when the notes were converted to common stock.
GAIN (LOSS)ON REVALUATION OF WARRANT LIABILITY In 2004 a loss of $3,045,800 was
recorded due to a revaluation of a warrant liability. In 2005, a gain of
$2,215,000 was recorded due to the revaluation and settlement of one warrant
liability and the revaluation of another warrant liability.
OTHER INCOME decreased from $522,000 in 2004 to $189,000 of expense for the year
ended December 31, 2005. The other income in 2004 is primarily due to a 2004
non-recurring entry for a lawsuit settlement where the Company recognized the
accrued liability as other income. In 2005, the other income is primarily due to
a mark-to-market adjustment related to a put option liability recorded as part
of an acquisition of real property.
NET LOSS was $23.5 million for the year ended December 31, 2005 as compared to a
loss of $29.4 million for December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash from operations of $4,624,000 and $3,783,000 during the
years ended December 31, 2005 and 2004, respectively.
Cash used in operations in 2005 was the result of the net loss incurred for the
year of $23.5 million, offset by non-cash expenses of $16.3 million. Included in
the non-cash expenses were the following: the impairment write-down of the Smart
Auto license of $5.7 million, charges of $15.9 million for stock based
compensation for consulting and other services, a reversal of $5.4 million of
compensation expenses related to warrants subject to variable accounting, a gain
on revaluation of warrant liability of $2.2 million and a $1 million allowance
established for the past due Smart Automotive LLC note receivable. The net
change in operating assets and liabilities resulted in a cash increase of $2.6
million. The change was primarily due to decreases in trade receivables and
inventories to generate cash and an increase in accrued liabilities.
Investing activities used cash of $798,000 and $1.2 million during the year
ended December 31, 2005 and 2004, respectively. In 2005, the Company's investing
activities used cash for the acquisition of property and equipment. In 2004, the
Company's investing activities used cash for the acquisition of the Smart
Automobile license and acquisition of property and equipment.
Financing activities provided cash of $1,615,000 and $9.8 million during the
year ended December 31, 2005 and 2004, respectively.
At December 31, 2005 the Company had cash of $1.5 million as compared to
33
$5.4 million at December 31, 2004. The Company's working capital at December 31,
2005 was $543,000.
The Company pledged 2,941,176 shares of restricted ZAP common stock as
collateral for a loan. These shares were previously issued to Mercatus Partners
LLP in January 2003 as collateral for a loan that never funded. The shares were
reported to the Company as lost in December 2003. In December 2004,the shares
were reissued to Mercatus Partners who then assigned the shares and their
interests to Phi-Nest Fund, L.P. as collateral for a loan that has not funded.
The Company amended the Loan Agreement allowing them to purchase ans sell
500,000 shares for $1.16 per share. On March 30, 2006, the Company received
$500,000 as partial payment from the sale. The collateral was reduced to
2,441,176 shares and the loan is still pending.
In January 2005, the Company paid $1,000,000 to Smart Automobile LLC and Thomas
Heidemann (President of Smart Auto LLC) in exchange for a note receivable. The
note bears interest at 5% per annum, payable in 24 equal monthly installments
beginning January 7, 2006. The note is in default as of January 7, 2006 since
the Company has not received the required payments and is uncertain if any
payments will be received in the future and has therefore established a reserve
of $1 million in the event efforts to collect the note are unsuccessful.
In March of 2003, the Company purchased a three-story 20,000 square foot office
building in downtown Santa Rosa for $2.9 million in convertible debt, stock and
warrants. The building is the corporate headquarters of the Company. Terms of
the transaction included a convertible promissory note for $2 million payable
over 22 years with interest only for the first two years. At that time, the
payee has the option to convert some or all of the unpaid principal and accrued
interest to shares of ZAP's common stock at an agreed upon conversion price. The
seller also received a certain amount of common stock and warrants in connection
with the transaction.
Although we currently have a financing facility with Surge Capital II to
purchase vehicles, we still need additional sources of funding.
In order to finance all our working capital requirements, we are currently
seeking both debt and equity investments with several investors, but there can
be no assurances that we will obtain this capital or that it will be obtained on
terms favorable to us. There can be no assurance that any required or desired
financing will be available through bank borrowings, debt, or equity offerings,
or otherwise, on acceptable terms. If future financing requirements are
satisfied through the issuance of equity securities, investors may experience
significant dilution in the net book value per share of common stock and there
is no guarantee that a market will exist for the sale of the Company's shares.
In addition to the above working capital needs, our other capital needs are to
fund our growth strategy, which includes increasing our shopping mall presence,
improving and increasing distribution channels, establishing Company owned and
franchised ZAP stores, expanding our electric vehicle dealerships, introducing
new products, improving existing product lines, and developing a strong
corporate infrastructure.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal influences. Sales volumes of our
consumer products in this industry typically slow down during the winter months,
November to March in the U.S. The Company intends to develop a wide auto
distribution network to counter any seasonality effects.
34
INFLATION
Our raw materials and finished products are sourced from stable,
cost-competitive industries. As such, we do not foresee any material
inflationary trends for our raw materials and finished goods sources.
GOODWILL
Goodwill consists of the excess consideration paid over net assets acquired.
Impairment of goodwill is evaluated whenever a triggering event is encountered.
The impaired value is determined by reference to cash flows anticipated from
estimated proceeds from selling the related technology and/or sales of products
directly linked to the technology and assets that gave rise to the goodwill.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management of the
Company to make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as revenues and expenses during
the reporting period. The amounts estimated could differ materially from actual
results.
35
ITEM 7. FINANCIAL STATEMENTS.
Index to Financial Statements
-----------------------------
Description Page No.
----------- --------
Report of Independent Registered Public Accounting Firm.....................37
Consolidated Balance Sheet at December 31, 2005 ............................38
Consolidated Statement of Operations for the
years ended December 31, 2005 and 2004......................................39
Consolidated Statement of Shareholders' Equity for the
years ended December 31, 2005 and 2004......................................40
Consolidated Statement of Cash Flows for the
years ended December 31, 2005 and 2004......................................41
Notes to Consolidated Financial Statements...............................42-65
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of ZAP
We have audited the accompanying consolidated balance sheet of ZAP as of
December 31, 2005, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years in the two-year
period ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
include consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the consolidated financial position of ZAP at December 31,
2005, and the consolidated results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principals.
/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP
-------------------------------------------
San Francisco, California
March 24, 2006, except Note 18 which is as of March 30, 2006
37
ZAP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
(In thousands, except per share data)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,547
Accounts receivable, net of allowance of $333 185
Smart Car inventory 1,378
Inventories 1,872
Prepaid non-cash professional fees 546
Other prepaid expenses and other current assets 182
--------
Total current assets 5,710
Property and equipment, net 5,006
Other assets:
Patents and trademarks, net 124
Goodwill 175
Smart Automobile license, net 3,100
Prepaid non-cash professional fees, less current portion 284
Deposits and other 278
--------
$ 14,677
========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 104
Accounts payable 189
Accrued liabilities 1,949
Put option liability 969
License fee payable 906
Deferred revenue 1,050
--------
Total current liabilities 5,167
Long-term debt, less current portion 1,898
--------
Total Liabilities 7,065
--------
Commitments and contingencies
Shareholders' equity:
Preferred stock; 50 million shares authorized; no par value;
7,500 shares issued and outstanding 7,500
Common stock; 100 million shares authorized; no par value;
32,585,000 shares issued and outstanding 78,451
Common Stock issued as loan collateral (3,529)
Notes receivable from shareholders, net (56)
Accumulated deficit (74,754)
--------
Total shareholders' equity 7,612
--------
$ 14,677
========
See accompanying notes to consolidated financial statements.
38
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands; except per share data)
Year ended December 31
--------------------
2005 2004
-------- --------
Net sales $ 3,602 $ 4,772
Cost of goods sold (exclusive of amortization
of smart license) 3,261 3,679
-------- --------
Gross profit 341 1,093
-------- --------
Operating expenses:
Sales and marketing (non-cash of $0 and
$420 in 2005 and 2004, respectively) 909 803
General and administrative (non-cash of
$10,505 and $13,121 in 2005 and 2004, respectively) 18,352 18,180
Research and development 156 --
Loss on disposal of equipment 36 366
Loss on joint venture investment 372 --
Impairment loss on Smart Automobile license
and goodwill 6,022 --
-------- --------
Total operating expenses 25,847 19,349
-------- --------
Loss from operations (25,506) (18,256)
-------- --------
Other income (expense):
Interest expense, net (non-cash of $0 and
$1,000 in 2005 and 2004, respectively) (17) (1,129)
Other income (expense), net (189) 522
Loss on Fusion Capital stock purchase transaction -- (5,797)
Gain (Loss) on revaluation of warrant liabilities 2,215 (3,045)
Write-off of notes receivable from shareholders -- (111)
-------- --------
2,009 (9,560)
-------- --------
Loss before reorganization fees
and income taxes (23,497) (27,816)
Reorganization fees -- (13)
-------- --------
Loss before income taxes (23,497) (27,829)
Provision for income taxes (4) (5)
-------- --------
Net loss $(23,501) $(27,834)
Preferred stock deemed dividend resulting from
beneficial conversion feature -- (1,570)
-------- --------
Net loss attributable to common shareholders $(23,501) $(29,404)
======== ========
Net loss per share attributable to common shareholders:
Basic and diluted $ (0.75) $ (1.67)
Weighted average number of common shares outstanding:
Basic and diluted 31,534 17,587
See accompanying notes to consolidated financial statements.
39
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
Common Notes
Convertible stock Receivable
preferred stock Common stock issued from
-------------------- -------------------- Accumulated as loan Share-
Shares Amount Shares Amount Deficit collateral holders Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2003 0.31 $ 165 13,228 $ 26,455 $(23,419) $ -- $ (167) $ 3,034
Issuance of common stock for:
Building improvements 173 231 231
Automobile inventory 474 712 712
Other inventory and equipment 254 373 373
Consulting and other services 1,192 1,866 1,866
Employee compensation 256 252 252
Cash 1,145 2,300 2,300
Commitment and signing shares
issued to Fusion Capital 300 612 612
Exercise of warrants and options 3,617 5,316 (14) 5,302
Debt converted to common stock 2,000 1,000 1,000
Preferred stock converted to
common stock (2.74) (2,596) 3,944 2,596 --
Loan collateral 2,941 3,529 (3,529) --
Fair value of warrants issued
for:
Consulting and other services 10,097 10,097
Smart Automobile license 586 586
Intrinsic value of options issued
to employees 6,691 6,691
Notes receivable write-off 111 111
--
Beneficial conversion feature on
convertible debt 1,000 1,000
Issuance of preferred stock for:
Cash 1.12 1,123 1,123
Inventory and equipment 0.51 510 510
Consulting and other services 0.30 298 298
Smart Automobile license 8.00 8,000 8,000
Net loss -- -- -- - (27,834) -- -- (27,834)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2004 7.50 7,500 29,524 63,616 (51,253) (3,529) (70) 16,264
-------- -------- -------- -------- -------- -------- -------- --------
Issuance of common stock for:
Real property and other assets 514 1,211 1,211
Inventory 224 235 235
Consulting and other services 879 1,405 1,405
Employee compensation 38 83 83
Cash 630 1,250 1,250
Repurchased shares from Fusion Capital (200) (500) (500)
Exercise of warrants and options 886 978 978
Investment in joint venture 90 248 248
Fair value of warrants issued for
consulting and other services 9,290 9,290
Reclassification of warrant liability 6,711 6,711
Put option liability (638) (638)
Employee warrants - variable
accounting adjustment (5,438) (5,438)
Proceeds from notes receivable 14 14
--
Net loss -- -- -- -- (23,501) -- -- (23,501)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2005 7.50 $ 7,500 32,585 $ 78,451 $(74,754) $ (3,529) $ (56) $ 7,612
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
40
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year ended December 31
--------------------
2005 2004
-------- --------
Operating activities:
Net loss $(23,501) $(27,834)
Items not requiring the current use of cash:
Depreciation and amortization 1,426 1,030
Loss on disposal of fixed assets 36 366
Impairment write down of Smart Auto license 5,721 --
Impairment of goodwill 301 --
Loss on investment in joint venture 372 --
Beneficial conversion feature and warrant discount
on convertible debt -- 1,000
Loss on Fusion Capital stock purchase transaction -- 5,797
Gain on revaluation of warrant liabilities (2,215) --
Loss on revaluation of anti-dilution liability 331 --
Loss on revaluation of warrant liability -- 3,045
Allowance for doubtful accounts (215) (150)
Write-off of notes receivable from shareholders -- 111
Stock-based compensation for consulting and other
services 15,860 6,598
Stock-based employee compensation (5,355) 6,943
Amortization of note discount 10 51
Changes in other items affecting operations:
Accounts receivable 224 271
Inventories 573 483
Advance on Smart car inventory 188 (1,566)
Prepaid expenses 42 (98)
Other assets -- 40
Accounts payable 39 (387)
Accrued liabilities 1,464 (168)
Deferred revenue 75 685
-------- --------
Cash used for operating activities (4,624) (3,783)
-------- --------
Investing activities:
Acquisition of Smart Automobile license -- (1,000)
Acquisition of property and equipment (406) (169)
Acquisition of distribution license (268) --
Investment in joint venture (124) --
-------- --------
Cash used for investing activities (798) (1,169)
-------- --------
Financing activities:
Issuance of common stock 1,250 3,423
Exercise of warrants and options 978 5,302
Proceeds from debt -- 1,030
Payments on long-term debt (127) --
Payments on note receivable from shareholder 14 --
Repurchase of common stock (500) --
-------- --------
Cash provided by financing activities 1,615 9,755
-------- --------
Increase (decrease) in cash and cash equivalents (3,807) 4,803
Cash and cash equivalents at beginning of year 5,354 551
-------- --------
Cash and cash equivalents at end of year $ 1,547 $ 5,354
======== ========
See accompanying notes to consolidated financial statements.
41
ZAP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND OPERATIONS:
ZAP ("The Company" or "ZAP"), was incorporated in California in September 1994.
ZAP markets many forms of advanced transportation, including alternative energy
and fuel efficient automobiles, motorcycles, bicycles, scooters, personal
watercraft, hovercraft, neighborhood electric vehicles, commercial vehicles and
more. Additionally, the Company produces an electric scooter, known as the
ZAPPY(R), using parts manufactured by various contractors. The Company has also
established a rental program to rent neighborhood electric cars, primarily
through agencies. The Company's business strategy has been to develop, acquire
and commercialize electric vehicles and electric vehicle power systems, which
have fundamental practical and environmental advantages over available internal
combustion modes of transportation that can be produced commercially on an
economically competitive basis. The Company intends to further expand its
technological expertise through an aggressive plan of acquisitions of companies
with exciting new products in the advanced transportation industry and strategic
alliances with certain manufacturers, distributors and sales organizations. The
Company's business goal is to become the largest and most complete distribution
portal for advanced transportation (fuel efficient) and electric vehicles. In
2005, the Company continued to accelerate its market positioning in the electric
vehicle industry. The Company is now focused on creating a distribution channel
for its vehicles, with special emphasis on entrepreneurs in the power-sport and
independent auto industry.
A summary of significant accounting policies is as follows:
Basis of presentation
---------------------
Going Concern - The accompanying consolidated financial statements have been
prepared assuming we will continue as a going concern. The Company incurred net
losses attributable to common shareholders of $23.5 million and $29.4 million in
2005 and 2004, respectively. The accumulated deficit at December 31, 2005 was
$75 million. As described more completely in Note 18, Subsequent Events
(Unaudited), during March 2006, the Company has raised $1.1 million from the
exercise of warrants and the sale of common stock and $1.2 million through the
sale of Smart cars that were paid for during 2004. Management believes this will
provide adequate funds to sustain operations at expected levels, at least
through 2006. The Company may need to arrange additional financing in the
future. There can be no assurance that additional financing would be available,
or if it is available, that it would be on acceptable terms. The Company's
future liquidity and capital requirements will depend on numerous factors,
including successful development, marketing and sale of advanced technology
vehicles, protection of intellectual property rights, costs of developing its
new products, including the necessary intellectual property rights, obtaining
regulatory approvals for its new products, market acceptance of all its
products, existence of competing products in its current and anticipated
markets, and its ability to raise additional capital in a timely manner.
Management expects to be able to raise additional capital; however, the Company
may not be able to obtain additional financing on acceptable terms, or at all.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of ZAP,
RAP Group ("RAP"), Voltage Vehicles ("VV"), ZAP Rentals and ZAP Stores for the
years ended December 31, 2005 and 2004. All subsidiaries are 100% owned by ZAP.
All significant intercompany transactions and balances have been eliminated.
Revenue recognition
-------------------
The Company records revenues only upon the occurrence of all of the following
conditions:
o The Company has received a binding purchase order or similar
commitment from the customer or distributor authorized by a
representative empowered to commit the purchaser (evidence of a sale).
o The purchase price has been fixed, based on the terms of the purchase
order.
o The Company has delivered the product from its distribution center to
a common carrier acceptable to the purchaser. The Company's customary
shipping terms are FOB shipping point.
o The Company deems the collection of the amount invoiced probable.
The Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances. The Smart Cars have a three year
warranty. However, sales of Smart Cars through December 31, 2005 have not been
material.
42
Deferred revenue
-----------------
During 2005 and 2004, one of the Company's subsidiaries, VV, sold licenses to
auto dealerships under the ZAP name. The license agreements generally run for a
period of five years and call for the licensee to purchase a minimum number of
electric vehicles from ZAP each year. The Company collected $1,050,000 related
to these agreements, which is classified as deferred revenue until such time as
the Company begins delivering normal anticipated volume of electric vehicles to
these dealerships.
Allowance for doubtful accounts
-------------------------------
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at December 31, 2005 and 2004. If the
financial condition of the Company's customers should deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. The Company maintains
the majority of its cash balances with one major financial institution. At times
the balances may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Inventories
-----------
Inventories consist primarily of automobiles, parts and supplies, and finished
goods and are carried at the lower of cost (first-in, first-out method) or
market.
Property and equipment
----------------------
Property and equipment consists of building and improvements, machinery and
equipment, office furniture and equipment, vehicles, and leasehold improvements.
Property and equipment is stated at cost and is depreciated or amortized using
straight-line and accelerated methods over the asset's estimated useful life.
Costs of maintenance and repairs are charged to expense as incurred; significant
renewals and betterments are capitalized. Estimated useful lives are as follows:
Machinery and equipment 3-10 years
Computer equipment and software 3-5 years
Office furniture and equipment 3-7 years
Vehicles 5 years
Leasehold improvements 10 years or life of lease,
whichever is shorter
Building and improvements 30 years
43
Patents and trademarks
----------------------
Patents and trademarks consist of costs expended to perfect certain patents and
trademarks acquired and are amortized over ten years. For each of the years
ended December 31, 2005 and 2004, amortization expense was approximately $19,000
and $43,000, respectively.
Smart Automobile LLC license
----------------------------
The Smart Car license has been adjusted to fair value at December 31, 2005, and
is being amortized using the straight-line method over a two year term remaining
estimated life. (See Note 2).
Long-lived assets
-----------------
Long-lived assets are comprised of property and equipment and intangible assets.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An estimate of undiscounted future cash flows produced by the
asset, or by the appropriate grouping of assets, is compared to the carrying
value to determine whether impairment exists. If an asset is determined to be
impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including a discounted value of
estimated future cash flow and fundamental analysis. The Company reports an
asset to be disposed of at the lower of its carrying value or its estimated net
realizable value.
Goodwill
--------
Goodwill results from the Company's acquisition of the RAP Group Inc. and
Voltage Vehicles in 2002.
The Company tests for goodwill impairment annually in December, absent earlier
indicators of impairment. The valuation of goodwill is based on the Company's
discounted projected cash flows of RAP and VV. The valuation of goodwill related
to RAP and VV indicated that the fair value of goodwill at December 31, 2005 was
less than its carrying value. Accordingly, the Company recorded a goodwill
impairment charge of $301,000 in 2005 ($200,000 relating to RAP and $101,000
relating to Voltage Vehicles).
Goodwill consists of the following (in thousands):
December 31,
2005
--------
RAP $ --
Voltage Vehicles 175
--------
$ 175
========
44
Investment in Chinese Joint Venture
-----------------------------------
During 2005, the Company invested approximately $372,000 in a Chinese Joint
Venture for the purpose of manufacturing products. The investment consisted of
issuing 90,000 shares of common stock valued at $248,000 and $124,000 in cash.
In the fourth quarter, the Company adjusted its investment to zero and expensed
$372,000. The Company's interest in the joint venture is 80%. However, the joint
venture has not begun any manufacturing activity and the Company does not have a
date that any profits will be generated by the joint and has accordingly
established a reserve for the full amount of the investment.
Advertising
-----------
The cost of advertising is expensed as incurred. Advertising and marketing
expenses amounted to $356,000 and $377,000 in the years ended December 31, 2005
and 2004, respectively.
Warranty
--------
The Company provides 30 to 90 day warranties on its products and records the
estimated cost of the product warranties at the date of sale. The estimated cost
of warranties has not been significant to date.
Shipping and handling costs
---------------------------
Shipping and handling costs have been included in cost of goods sold.
Research and development
------------------------
Research and product development costs are expensed as incurred.
Income taxes
------------
The Company accounts for income taxes using an asset and liability method for
financial accounting and reporting purposes. Deferred income tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities, operating loss and tax credit
carryforwards and are measured using the currently enacted tax rates and laws.
The Company has made no provision for income taxes except for the minimum state
tax due in any period presented in the accompanying consolidated financial
statements because it incurred operating losses in each of these periods.
Use of estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenses during the reporting
period. The amounts estimated could differ from actual results.
Risks and uncertainties
-----------------------
The Company relies on Smart Automobile LLC and other registered importers to
supply pre-Americanized Smart (R) cars; to convert or Americanize Smart (R) cars
for sale in certain states in the United States; and to provide services under
warranties and all other maintenance and repair services. If Smart Automobile
LLC is unable to supply Americanize or service Smart (R) cars, and the Company
is unable to obtain alternative sources of supply for these products and
services, the Company might not be able to fill existing backorders and/or to
sell more Smart (R) cars.
45
Fair value of financial instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance with
U.S. generally accepted accounting principles. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties. For certain of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable
and accrued liabilities, the carrying amount approximates fair value because of
the short maturities. The fair value of debt is not determinable due to the
terms of the debt and the lack of a comparable market for such debt.
Comprehensive Loss
------------------
The Company has no components of other comprehensive loss other than its net
loss, and, accordingly, its comprehensive loss is equivalent to its net loss for
the periods presented.
Stock-based compensation
-------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, establishes a fair-value method of
accounting for stock options and similar equity instruments. The fair-value
method requires that compensation cost be measured on the value of the award at
the grant date, and recognized over the service period. SFAS No. 123 as amended
allows companies to either account for stock-based compensation to employees
under the provisions of SFAS No. 123 as amended or under the provisions of
Accounting Principles Board (APB) Opinion No. 25 and its related
interpretations. The Company accounts for its stock-based compensation to
employees in accordance with the provisions of APB Opinion No. 25.
The Company has recorded deferred compensation for the difference, if any,
between the exercise price and the deemed fair market value of the common stock
for financial reporting purposes of stock options granted to employees. The
compensation expense related to such grants is amortized over the vesting period
of the related stock options on a straight-line basis.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues
Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
Had the Company determined compensation cost based on the fair value at the
grant date for its employee stock options under SFAS No. 123, the Company's net
loss would have increased to the proforma amounts indicated below for the years
ended December 31:
46
2005 2004
-------- --------
Net loss attributable to common
shareholders, as reported $(23,501) $(29,404)
Add: Stock-based employee compensation expense
and variable accounting adjustments to modified
warrants included in reported net loss, net of
related tax effects (5,438) 7,080
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects, and variable
accounting adjustment related to modified warrants (1,609) (16,790)
-------- --------
Pro forma net loss attributable to common
shareholders $(30,548) $(39,114)
======== ========
Net loss per share attributable to common shareholders:
As reported $ (0.75) $ (1.67)
======== ========
Pro forma $ (0.97) $ (2.22)
======== ========
The vesting of all unvested employee stock options will be accelerated upon the
occurrence of a change of control of the company.
Net loss per share attributable to common shareholders
-------------------------------------------------------
Basic net loss per share is computed by dividing net loss attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic net loss per share attributable to
common shareholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of options and warrants to
the extent they are dilutive using the treasury stock method. The weighted
average shares used in computing basic and diluted net loss per share
attributable to common shareholders were the same for the two years ended
December 31, 2005 and 2004. Options, warrants and convertible debt for
59,432,000 shares and 51,875,000 shares were excluded from the computation of
loss per share at December 31, 2005 and 2004, respectively, as their effect is
anti-dilutive. Also excluded are convertible preferred shares. The number of
common shares issuable related to the convertible preferred shares are not
determinable at December 31, 2005 and 2004. Common shares issued as collateral
for a loan that has not been finalized totaling 2.941 million shares have been
excluded from the weighted average number of shares outstanding for 2004 and
2005.
Recent accounting pronouncements
--------------------------------
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, An Amendment of
ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends ARB 43, Chapter 4, to
clarify that abnormal amounts of idle facility expense, freight, handling costs
and wasted materials (spoilage) be recognized as current period charges. It also
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. SFAS
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not believe that the adoption of SFAS 151
will have a material impact on its results of operations or financial position.
47
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-based
Payment, ("SFAS 123R"). SFAS 123R addresses the accounting for share-based
payments to employees, including grants of employee stock options. Under the new
standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies
will be required to account for such transactions using a fair-value method and
recognize the expense in the consolidated statement of operations. SFAS 123R
became effective for the Company commencing January 1, 2006. The Company has not
yet determined which fair-value method and transitional provision it will
follow, however, it expects that the adoption of SFAS 123R will have a
significant impact on its results of operations. The Company does not expect the
adoption of SFAS 123R to materially impact its overall financial position. See
Stock-based Compensation earlier in this Note 1 for the pro forma impact on net
loss and net loss per share from calculating stock-based compensation costs
under the fair value alternative of SFAS 123. The determination of compensation
cost for share-based payment transactions after the effective date of SFAS 123R
may be different from the determination of compensation cost under SFAS 123;
however the Company has not yet quantified such differences.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
an Amendment of APB Opinion NO. 29 ("SFAS 153"). The guidance in APB Opinion No.
29, Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in APB Opinion No. 29, however, included
certain exceptions to that principle. SFAS 153 amends APB Opinion No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
asset exchanges in fiscal periods beginning after June 15, 2005. The adoption of
SFAS 153 has not had a material impact on our results of operations or financial
position.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations." Interpretation No. 47 clarifies that
an entity must record a liability for a "conditional" asset retirement
obligation if the fair value of the obligation can be reasonably estimated.
Interpretation No. 47 also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. Interpretation No. 47 is effective no later than the end of the
fiscal year ending after December 15, 2005. We adopted Interpretation No. 47 in
the fourth quarter of 2005. Its implementation did not have a material impact on
our results of operations or financial position.
In June 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections" ("FAS 154"), a replacement of APB No. 20, Accounting Changes and
FASB Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements. FAS 154 applies to all voluntary changes in accounting principle and
changes the requirements for accounting for and reporting of a change in
accounting principle. This statement establishes that unless impracticable,
retrospective application is the required method for reporting a change in
accounting principle in the absence of explicit transition requirements specific
to the newly adopted accounting principle. It also requires the reporting of an
error correction which involves adjustments to previously-issued financial
statements similar to those generally applicable to reporting an accounting
change retrospectively. FAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005. We
do not expect that the adoption of FAS 154 will have a material impact on our
results of operations or financial position.
48
In February 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 155 "Accounting for Certain Hybrid Financial Instruments ("FAS
155). This Statement amends FASB Statements No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets." FAS 155: (i) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation; (ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement 133,
(iii) establishes a requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation; (iv) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and (v) amends Statement 140 to
eliminate the prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. This statement is effective for
years beginning after September 15, 2006. The Company does not believe this
statement will have a material impact on its results of operations or financial
position.
NOTE 2 - SMART AUTOMOBILE LICENSE
On April 19, 2004, ZAP entered into an Exclusive Purchase, License and Supply
Agreement with Smart-Automobile LLC ("SA"), a California limited liability
company, to distribute and manufacture Smart(R) cars. Smart is the brand name
for a 3-cyclinder gas turbo engine car manufactured by Daimler Chrysler AG,
which can achieve estimated fuel economy of 40 miles per gallon. SA is not
affiliated with Daimler Chrysler, but is a direct importer.
Under the agreement ZAP will be the exclusive distributor and licensee of the
right to manufacture and distribute Smart(R) cars in the United States and the
non-exclusive distributor and licensee outside of the United States for a period
of ten years from SA. Subject to the terms of the agreement, ZAP will pay SA a
license and distribution fee of $10,000,000: a $1 million payment in cash was
made upon execution of the agreement, $1 million will be payable in cash ratably
commencing with the delivery of the first 1,000 smart cars, and $8 million was
paid in ZAP preferred stock.
A more detailed agreement was signed and completed on October 25, 2004. Under
this agreement SA exchanged their original Preferred Shares for new Preferred
Shares with the designation of SA. These SA preferred shares convert to ZAP
common shares under the following formula: For every 1,000 Smart(R) vehicles
delivered to ZAP in the years 2004, 2005 and 2006 which are fully EPA compliant
to sell in the United States as new cars, the holder shall convert 500 shares of
preferred stock SA to $500,000 of common stock, and allow the holder to receive
505,000 warrants with an exercise price of $2.50 per share exercisable through
July 7, 2009, or when all the preferred have been converted. During 2004, ZAP
allowed SA to convert 500 preferred shares to $500,000 of common stock prior to
delivering any EPA compliant Smart Cars.
49
The Company recorded the cost of the Smart Automobile license at $10.6 million,
based on: 1) the $10 million the Company paid to Smart Automobile LLC as
consideration for a Purchase, License and Supply Agreement dated April 19, 2004;
and 2) the fair value of five-year warrants issued under the Agreement for the
purchase of 505,000 common shares at $2.50 per share and expiring in July 1,
2009. The warrants were valued at $1.16 per share using the Black-Scholes option
pricing model with the following assumptions: expected dividend yield of 0.0%;
risk free interest rate of 3.08%; contractual life of 4.5 years; and volatility
of 229.43%.
During the fourth quarter of 2005, the Company filed a lawsuit against Daimler
Chrysler Corporation ("Daimler Chrysler") and others alleging that Daimler
Chrysler has engaged in a series of anti-competitive tactics aimed at defaming
ZAP and disrupting its third party relationships including this arrangement (see
Note 15). Shortly thereafter, the Company commenced its annual impairment
assessment. An independent valuation of the Smart Automobile license as of
December 31, 2005 estimated the fair value to be $3.1 million with a remaining
life of two years which was less than the $10.6 million recorded cost of the
license. The carrying cost of the license was $8.8 million prior to the
impairment calculation and accordingly, the Company recorded an impairment
charge of $5.721 million for the year ended December 31, 2005. The valuation of
the license was based on the Company's discounted projected cash flows from
projected sales of Smart Cars over the estimated life of the license agreement.
The remaining value of the license is being amortized using the straight-line
method over the next two years, which is the revised estimated life of the
license. License amortization for the years ended December 31, 2005 and 2004 was
$1,058,586 and $706,000 respectively.
NOTE 3 - INVENTORIES
Inventories at December 31, 2005 are summarized as follows (thousands):
Vehicles $ 605
Parts and supplies 284
Finished goods 1,163
--------
2,052
Less - inventory reserve 180
--------
$ 1,872
========
Inventory reserve policy
------------------------
The Company records inventory at the lower of cost or market and establishes
reserves for slow moving or excess inventory, product obsolescence and valuation
impairment. In determining the adequacy of its reserves, at each reporting
period the Company analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecasted sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to the Company's estimates of its reserves are reflected in
cost of goods sold within the statement of operations during the period in which
such modifications are determined by management. Changes in the Company's
inventory reserve during the year ended December 31, 2005 are as follows (in
thousands):
Balance as of January 1, 2005 $ 176
Provision for slow moving inventory 76
Write-off of slow moving inventory (72)
--------
Balance as of December 31, 2005 $ 180
========
50
Note 4 - NOTES RECEIVABLE SMART AUTOMOBILE LLC
In January 2005, the Company advanced $1,000,000 to Smart Automobile, LLC and
Thomas Heidemann (President of Smart Automobile, LLC) in exchange for a note
receivable. The note is secured by an interest in certain equipment owned by
Smart Automobile, LLC, and bears interest at 5% per annum and is payable in 24
equal monthly installments beginning January 7, 2006. The Company had also
earlier prepaid $1.6 million to Smart Automobile, LLC as deposits on Smart cars.
The note is in default as of March 31, 2006 and to date the Company has not
received any of the required payments. At this time it is uncertain if any of
the scheduled payments will be received in the future, or if Smart Automobile
has cash resources to repay the loan. Accordingly, the Company has established a
reserve of $1 million. The Company has also named Smart Automobile LLC as a
party in its lawsuit against Daimler Chrysler AG (See Note 15).
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2005 are summarized as follows
(thousands):
Land $ 1,078
Buildings and improvements 3,319
Machinery and equipment 500
Computer equipment and software 154
Office furniture and equipment 129
Leasehold improvements 9
Vehicles 657
--------
5,846
Less - accumulated depreciation and amortization 840
--------
$ 5,006
========
The land and building and certain equipment, with a net book value of $2,897,000
at December 31, 2005, are pledged as security for certain indebtedness (see Note
7). Depreciation and amortization expense for the years ended December 31, 2005
and 2004 was approximately $256,000 and $230,000, respectively.
NOTE 6 - OTHER ACCRUED LIABILITIES
Accrued liabilities at December 31, 2005 consisted of the following (in
thousands):
Accrued professional fees $ 551
Accrued payables 133
Customer deposits 443
Warrant liabilities 194
Other accrued expenses 628
--------
$ 1,949
========
51
NOTE 7 - DEBT
The Company has a $2 million convertible note due in March 2025, with annual
interest at 2% through March of 2005, and thereafter at the prime rate (as
defined) plus 2%. Payments started on April 2005, at which time, the note is
payable with equal principal and interest payments over the next 240 months. The
noteholder has the option to convert some or all of the unpaid principal and
accrued interest to shares of ZAP's common stock at $2.15 per share or an agreed
upon conversion price (as defined). The note was issued in exchange for the
purchase of the Company's new corporate headquarters and is secured by this
property. The note has a balance of $2,002,000 at December 31, 2005.
Scheduled annual maturities for long-term debt for years ending after December
31, 2005 are as follows: $104,000 - 2006 ; $104,000 - 2007; $104,000 - 2008;
$104,000 - 2009; $104,000 - 2010 and $1,482,000 - thereafter.
NOTE 8 - Revolving Financing Facility
On September 12, 2005,the Company signed a $425 million revolving financing
facility with Surge Capital II, LLC that, subject to certain conditions, can be
used by ZAP to import Smart Cars Americanized by ZAP and other advanced
transportation vehicles for ZAP's dealers. The financing agreement has a term of
one year, but may be extended upon agreement by both parties. The financing is
based on orders ZAP receives from dealers who must be approved in advance by
Surge Capital II, LLC and is secured by a first lien on substantially all of
ZAP's assets. No funds have been drawn on the financing facility as of December
31, 2005. Each financing incurs an interest charge equal to 2% of the principal
amount for the first 30 days and thereafter at a Per Diem Rate of .067%.
NOTE 9 - INCOME TAXES
The provision for income taxes for all periods presented in the consolidated
statements of operations represents minimum California franchise taxes. Income
tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax losses as a result of the following:
2005 2004
-------- --------
Computed expected tax expense $ (7,991) $ (9,462)
Losses and credits for which no benefits have
been recognized 8,505 2,398
Stock grants and warrants not deductible for
income tax purposes (516) 6,934
Meals and entertainment expenses, and officers
life insurance not deductible for
income tax purposes 3 133
State tax expense, net of federal income tax benefit 3 2
-------- --------
$ 4 $ 5
======== ========
52
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 2005 is presented below:
2005
--------
Deferred tax assets:
Net operating loss carryovers $ 19,702
Fixed assets, due to differences in depreciation 193
Inventory 86
Bad debt reserve 142
Notes receivable reserve 428
General business credits 132
Intangible assets, due to impairment and amortization 2,568
Investment in Joint venture, due to impairment 159
Other 13
--------
Total gross deferred tax assets 23,423
Valuation allowance (23,423)
--------
Net deferred tax assets $ --
========
The net change in the valuation allowance for the year ended December 2005 was
an increase of $14.9 million. Because there is uncertainty regarding the
Company's ability to realize its deferred tax assets, a 100% valuation allowance
has been established.
As of December 31, 2005, the Company had federal tax net operating loss
carryforwards of approximately $47.7 million, which will expire in the years
2005 through 2026. The Company also has federal research and development credit
carryforwards as of December 31, 2005 of approximately $132,000, which will
expire in the years 2005 through 2024. State tax net operating loss
carryforwards were approximately $39.5 million as of December 31, 2005. The
state net operating loss carryforwards will expire in the years 2006 through
2015.
The Company's ability to utilize its net operating loss and research and
development tax credit carryforwards may be limited in the future if it is
determined that the Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code.
NOTE 10 - STOCK OPTIONS
During 2002 as part of the confirmed plan of reorganization, ZAP created a new
Incentive Stock Option Plan ("2002 Plan").
Options to purchase common stock are granted by the Board of Directors under two
Stock Option Plans, referred to as the 2002 and 1999 plans. Options granted may
be incentive stock options (as defined under Section 422 of the Internal Revenue
Code) or nonstatutory stock options. The numbers of shares available for grant
under the 2002 and 1999 Plans are 10,000,000 and 1,500,000 respectively. Options
are granted at no less than fair market value on the date of grant. Options
granted in 2005 and 2004 generally become exercisable as they vest over a three
year period, and expire ten years after the date of grant.
53
Option activity under the 2002 and 1999 plans is as follows (thousands):
2002 Plan 1999 Plan
--------------------- ---------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------------- ---------------------
Outstanding at January 1, 2004 1,490 $ 0.38 161 $ 1.20
Granted 3,604 1.33 -- --
Exercised (35) 0.25 -- --
Canceled (175) 0.53 (2) 1.20
-------------------- ---------------------
Outstanding at December 31, 2004 4,884 $ 1.02 159 1.20
Granted 1,668 1.07 -- --
Exercised (10) 0.25 -- --
Canceled (280) 0.92 (4) 1.20
------- -------
Outstanding at December 31, 2005 6,262 $ 1.04 155 $ 1.20
======= =======
The weighted average fair value of options granted during the years ended
December 31, 2005 and 2004 was $1.06 and $1.27, respectively.
The following information applies to options outstanding at December 31, 2005:
2002 Plan 1999 Plan
------------- -------------
Range of exercise prices $0.25 - $2.80 $1.20
Weighted average remaining life (years) 5.01 2.97
Options exercisable 2,888,161 155,000
Weighted average exercise price $1.04 $1.20
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2005 2004
---------------- ----------------
Dividends None None
Expected volatility 151.10 - 221.37% 227.90 - 243.29%
Risk free interest rate 3.71 - 4.65% 3.25 - 4.78%
Expected life 1.25 - 9.9 years 10 years
At December 31, 2005, the Company has outstanding stock options for employees to
purchase 1,993,333 shares and for directors to purchase 4,423,017 shares, at
exercise prices ranging from $0.25 to $2.80.
NOTE 11 - MAJOR CUSTOMERS
During 2005 and 2004, no single customer accounted for more than 10% of the
Company's net sales, or receivables.
54
NOTE 12 - COMMITMENT
The Company presently rents its warehouse under an operating lease that expires
in 2006. The monthly rent is adjusted annually to reflect the average percentage
increase in the Consumer Price Index. The Company leases the location of its car
outlet and another warehouse from the Company's CEO (see Note 14). Rent expenses
under all leases were approximately $484,000 and $460,000 in 2005 and 2004,
respectively.
NOTE 13 - SHAREHOLDERS' EQUITY
While the Company was in the process of amending and restating its articles of
incorporation, the Secretary of State of California noted that the confirmed
plan of reorganization of June 20, 2002, did not authorize the Board to
designate its preferred shares, so the Board amended the articles through
shareholder vote to grant the Board this authority. The record date for this
vote was September 30, 2004. The Amended and Restated Articles of Incorporation
provide, among other things, for the authorization of the Company to issue
100,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, as
well as for the elimination of all prior classes and series of preferred stock.
The Board of Directors was further authorized, subject to limitations prescribed
by law, to fix the designations, determinations, powers, preference and rights,
and the qualifications, limitations or restrictions thereof, of any wholly
unissued series of Preferred Stock.
Common stock
------------
2005 ISSUANCES
STOCK ISSUED FOR ASSETS. In 2005, the Company issued stock for inventory and
assets and recorded the cost at the intrinsic value of the stock or the fair
value of the assets, whichever is more reliably measurable. During 2005, 455,442
shares with value of $1.1 million were issued for purchase of real estate. ZAP
recorded the common shares at the appraised value of the real estate. Under the
terms of the purchase, ZAP is obligated to issue additional common shares for no
additional consideration if at the end of 1 year the market price of ZAP's
common shares is less than the market price at their date of issuance.
In the third quarter of 2005, ZAP calculated the fair value of the anti-dilution
obligation to issue additional shares ("put option liability") using a binomial
pricing model to estimate future stock prices, using the following assumptions:
historical stock price volatility of 139.6%, a risk free interest rate of 4.01%,
and an expected dividend rate of 0.00%. ZAP calculated the fair value of the put
option liability at the date of the common stock issuance at $600,593, and
reclassified the obligation from common stock to a liability in the third
quarter. Zap also entered into other equity transactions that contained the
potential obligation to issue additional shares. The put option liability
related to those transactions was originally valued at $37,066. The liabilities
were revalued and recorded at $969,000 at December 31, 2005, with the change of
$331,000 recorded as an expense in other income. These liabilities were
calculated using a binomial pricing model to estimate future stock prices, using
the following assumptions: historical stock price volatility of 109.2%, a risk
free interest rate of 4.38%, and an expected dividend rate of 0.00%. ZAP also
issued 59,000 shares to acquire other assets valued at $111,000 and 223,833
shares for automobile and other inventory.
STOCK ISSUED FOR SERVICES. In 2005, the Company issued shares of its common
stock for consulting and other services and employee compensation. The stock
grants were recorded at the intrinsic value of the stock on the date of grant.
During 2005, the Company issued grants for 321,351 shares as consideration under
agreements for consulting and related services, 134,592 shares were issued for
legal fees, 114,440 shares were issued for rent expense, 308,795 shares were
issued for other outside services and 38,795 shares were issued for employee
compensation.
55
STOCK ISSUED FOR CASH. During 2005, the Company raised $1.25 million in cash
through the issuance of 630,000 shares of common stock and three warrants to an
investor. Each of the three warrants is exercisable for five years and is
exercisable for 300,000 shares of common stock at initial exercise prices of
$2.50, $3.25 and $4.00 per share. In addition, the Company issued 885,510 shares
for $973,000 upon exercises of options and warrants.
STOCK ISSUED FOR INVESTMENT. During 2005, the company issued 90,000 shares for
an investment stake in a Chinese joint venture.
2004 ISSUANCES
STOCK ISSUED FOR ASSET PURCHASES AND SERVICES. During 2004, the Company issued
grants for 2.349 million shares of its common stock. The stock grants were
issued as consideration under agreements for consulting and other services; for
building improvements, automobile and other inventory and equipment; and for
employee services. For stock issued for inventory and other assets, the Company
recorded cost as the intrinsic value of the stock or as the fair value of the
assets, whichever was more reliably measurable. For stock issued for consulting
and other services and for stock issued as employee compensation, the Company
recorded cost as the intrinsic value of the stock at the date of grant. The
stock grants resulted in noncash selling and marketing expense and general and
administrative expense totaling $1,958,000.
STOCK ISSUED FOR CASH. During 2004, the Company raised $2.3 million in cash
through the issuance of 1,145,000 shares of common stock at prices of $.53 to
$3.56 per share. In 2004 the Company also issued 3.617 million shares of common
stock for $5.316 million, upon exercises of warrants and options.
STOCK ISSUED FOR CONVERSIONS. In 2004 the Company also borrowed $1 million under
a 1.45% convertible note. The note was converted at $.50 per share into 2
million shares of common stock. The conversion price was below the common stock
market price of $.56 per share at the date the note was issued. The Company also
issued the noteholder warrants to purchase 2 million shares of common stock at
$1.20 per share. The warrants expire on July 1, 2007. The warrants were valued
at $1.29 per share using the Black-Scholes option-pricing model with the
following assumptions: expected dividend yield of 0.0%; risk free interest rate
of 3.14%; contractual life of 2.75 years; and volatility of 268.10%. The fair
value of the warrants and beneficial conversion feature exceeded the $1 million
face value of the note, and accordingly the value of the warrants and beneficial
conversion feature was credited to common stock, and the offsetting note
discount was limited to the face value of the note. The note discount of $1
million was amortized to interest expense over the term of the note, until the
note was converted to common stock. Upon conversion of the note, the balance of
the note discount was recorded as interest expense. During 2004, the Company
also issued 3.944 million common shares upon the conversion of convertible
preferred stock issued in 2003 and 2004 as consideration for cash, inventory,
equipment, consulting and other services, and the Smart Automobile license. The
preferred stock was convertible into common shares at various conversion prices.
STOCK ISSUED AS COLLATERAL. In December 2004, the Company issued 2.9 million
common shares as collateral for a $1 million loan. The $3.529 million market
value of these shares at the date of issuance was recorded in common stock with
an offsetting contra equity account. These shares were previously issued to
Mercatus Partners LLP in January 2003 as collateral for a loan that never
funded. The shares were reported as lost to the Company in December 2003. In
December 2004, the shares were reissued to Mercatus Partners who then assigned
the shares and their interests to Phi-Nest Fund, L.P. as
56
collateral for the $1 million loan commitment. The company has since amended the
Loan Agreement allowing Phi-Nest to purchase and sell 500,000 shares for $1.16
per shares. On March 30, 2006, the Company received $500,000 as partial payment
from the sale. The collateral was reduced to 2,441,176 shares and the loan is
still pending.
FUSION CAPITAL STOCK PURCHASE AGREEMENT
On July 22, 2004, the Company entered into a $24.5 million stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital"). The stock
purchase agreement provided for the issuance of up to $24.5 million in common
stock over a 40 month period. The purchase prices would be based on market price
on the date of sale without any fixed discount. The agreement also provided for
the immediate issuance of 300,000 common shares as commitment and signing shares
at no cost, and the immediate issuance of five-year warrants for the purchase of
2.5 million shares of common stock at $2.50 to $5.50 per share.
The stock purchase agreement required the Company to file a registration
statement by August 20, 2004 for the resale of shares issued or issuable under
the stock purchase agreement, and to have the registration agreement declared
effective within 120 days. The stock purchase agreement provided for cash
liquidated damages if the Company failed to meet the registration deadlines. The
warrant agreement provided that Fusion Capital could use a cashless exercise
feature if an effective registration was not available.
In July 2004, the Company made an initial issuance under the agreement of
200,000 common shares at $2.50 per share. The Company also issued 300,000 common
shares as commitment and signing shares at no cost. The Company did not file the
required registration statement by August 20, 2004, Fusion Capital refused to
purchase any additional shares, and due to its dispute with Fusion Capital the
Company did not issue warrants until February 2005.
The Company and Fusion Capital terminated the stock purchase agreement on
February 22, 2005. Under the termination agreement, the Company repurchased the
200,000 common shares from Fusion Capital for the original issuance price of
$500,000; and Fusion Capital retained the 300,000 commitment and signing common
shares and the five year warrants for the purchase of 2.5 million shares at
$2.50 to $5.50 per share. The termination agreement amended the original
registration statement filing requirement to provide that the Company would use
its best efforts to obtain an effective registration statement by September 1,
2005, and that the warrant holders could use a cashless exercise feature if an
effective registration was not available.
The warrants under the stock purchase agreement and the termination agreement
are summarized as follows: two warrants for 500,000 shares each, with an
exercise price of $2.50 per share; one warrant for 500,000 shares with an
exercise price of $3.50 per share; one warrant for 500,000 shares with an
exercise price of $4.50 per share; and one warrant for 500,000 shares with an
exercise price of $5.50 per share. The $2.50 warrants expire on July 7, 2009.
All other warrants expire on July 20, 2009.
The warrants were valued at inception at prices ranging from $2.07 to $2.08
using the Black-Scholes option-pricing model with the following assumptions:
expected dividend yield of 0.0%; risk free interest rate of 3.68%; the
contractual life of 5.0 years; and volatility of 229.40%. The $5.185 million
fair value of the warrants at inception and the $612,000 market value of the
commitment and signing shares, based upon market prices of $1.70 to $2.10 per
share at issuance, were recorded as deferred offering costs and such costs would
have been charged against proceeds from stock issuances under the stock purchase
agreement. The Company wrote off the deferred offering costs in 2004 when Fusion
57
Capital refused to purchase any additional stock, and recorded a $5.8 million
charge to other expense. The Company revalued the warrant liability in February
2005 and recorded the market to market adjustment of $1.5 million in other
income. The remaining warrant liability was transferred to equity since the
Company was no longer required to file a registration statement for the warrant
shares.
The warrants were revalued at December 31, 2004 at prices ranging from $3.28 to
$3.30 per share, with the marked-to-market adjustment of $3.045 million recorded
in other expense. The fair value of the warrants at December 31, 2004 was
calculated using the Black-Scholes option pricing model with the following
assumptions: expected dividend of 0.0%; risk free interest rate of 3.47%; the
remaining contractual life of 4.5 years; and volatility of 223.26%.
Preferred stock
---------------
Prior to amending and restating its articles of incorporation on September 30,
2004, the Company was authorized to issue 50 million shares of preferred stock.
In December 2003, the Board of Directors established four classes of preferred
stock with 4 separate timelines. The four classes of preferred shares convert to
common shares as follows: Class B converts to 2000 shares, Class C converts to
1,500 shares, Class D converts to 1,000 shares and Class F converts to 500
shares. Four time-line definitions were also established. Each time line gives
the bearer the right to convert the preferred shares to common a certain number
of days after issuance as follows II after 30 days, III after 90 days, IV after
180 days and V after 1 year. Dividends are cumulative and accrue at 6% per year
and payable on June 30th of each year or on conversion date. Dividends are
payable in cash or in common stock at the Company's option. The Preferred Stock
holders have no voting rights. The liquidation value is its stated value plus
accrued and unpaid dividends thereon.
Series SA Preferred stock
-------------------------
The Company has designated 8,000 shares of preferred stock as Series SA
Preferred Stock ("SA" preferred stock). On October 25, 2004, the SA preferred
stock was issued to Smart Automobile, LLC in exchange for Class D convertible
preferred stock. These preferred shares had previously been issued to
Smart-Automobile, LLC in April 2004 in connection with an Exclusive Purchase,
License and Supply Agreement entered into between the Company and
Smart-Automobile, LLC. The SA preferred stock may be converted at the option of
the holder into common shares upon deliveries of Smart (R) automobiles to the
Company in 2004, 2005 and 2006. For every delivery of 1,000 vehicles that are
fully EPA compliant and salable as new cars in the United States, the preferred
shareholder may convert 500 SA preferred shares into $500,000 of common stock,
based on the market value (as defined) of stock at the conversion date. Not
withstanding the foregoing conversion requirements, the preferred shareholder
may immediately convert 500 preferred shares into $500,000 of common shares. In
October 2004, 500 SA preferred shares were converted into 423,729 common shares.
The preferred shares may not be converted after December 31, 2006. The Company
has the right to redeem all or a portion of the outstanding shares of SA
preferred stock after March 1, 2008 at a price of $.10 per share. The preferred
stock participates with the common shareholders as to any dividends payable on
common stock, based on the number of shares into which the SA preferred stock is
then convertible. The preferred stock also has liquidation preference, upon
58
liquidation, dissolution or winding up of the Company or disposition of
substantially all of the assets of the Company ("liquidation event"). The
liquidation preference is calculated as if each 100 shares of SA preferred stock
had been converted into 1 share of common stock immediately prior to the
liquidation event. The preferred shareholders are not entitled to vote on any
matters, unless otherwise required by law.
Other Convertible Preferred Stock
During 2003 and 2004, the Company issued convertible preferred shares with
conversion dates ranging from 30 days to 1 year. The preferred shares were
converted into common shares in 2004. The convertible preferred issuances were
primarily in consideration for cash, automobiles, legal fees, and consulting
services. For stock issued for inventory and equipment, the Company recorded
cost as the intrinsic value of the common stock into which the preferred stock
was convertible or as the fair value of the assets, whichever was more reliably
measurable. For preferred stock issued for consulting and other services, the
Company recorded cost as the intrinsic value of the common stock into which the
preferred was convertible. The preferred stock issuances resulted in non-cash
general and administrative expenses totaling $298,000 in 2004 and $109,000 in
2003.
The preferred shares issued for cash generally included warrants to purchase
common shares. The proceeds from the issuance of the preferred shares with
warrants were allocated between the preferred stock and warrants, based on their
relative fair values. This resulted in a beneficial conversion feature for
certain of the preferred shares. The intrinsic value of the beneficial
conversion feature was calculated at the date of issuance as the difference
between the conversion price of the preferred stock and the fair value of the
Company's common stock into which the preferred was convertible, multiplied by
the number of common shares into which the preferred was convertible. The
beneficial feature totaling $1.57 million was reported in 2004 as a preferred
stock deemed dividend in the statement of operations.
Warrants
--------
The Company is authorized to issue 10 million shares each of Series B, C, D and
K Unrestricted Warrants. On November 8, 2004, the Board of Directors of ZAP
extended the expiration dates and exercise prices of the following Company
warrants:
1) Series B and B-2 Warrants expire on July 1, 2007 and have an exercise price
of $1.20.
2) Series C and C-2 Warrants expire on July 1, 2007 and have an exercise price
of $5.00.
3) Series D and D-2 Warrants expire on July 1, 2007 and have an exercise price
of $8.00.
4) Series K and K-2 Warrants expire on July 1, 2007 and have an exercise price
of $1.00.
The Board of Directors has also established the following restricted classes of
warrants: Series $1.50, Series $2.50, Series $3.05, Series $3.50, Series $4.00,
Series $4.05, Series $4.50, Series $4.75, Series $5.00, and Series $5.50, with
various expiration periods.
59
The Board of Directors of ZAP has the right to (i) decrease the exercise price
of the warrants, (ii) increase the life of the warrants in which event the
exercise price may be increased, or (iii) make such other changes as the Board
of Directors of ZAP deems necessary and appropriate under the circumstances
provided the changes contemplated do not violate any statutory or common law.
Shares acquired through exercises of warrants for all Series other than Series
B, C, D and K are restricted as to sale. However, the warrants may be assigned,
sold, or transferred by the holder without restriction.
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of
$0.01 per warrant upon thirty (30) days' written notice to the holders thereof;
provided, however, that if not all unexercised warrants in a particular series
are redeemed, then the redemption shall be pro-rated equally among the holders
of unexercised warrants in the series.
Total warrants outstanding at December 31, 2005 are summarized as follows (in
thousands):
Number of Exercise Expiration
Warrants Price Dates
-------- ----- -----
Series B-Unrestricted 4,370 1.20 7-1-07
Series B-2-Restricted 12,998 1.20 7-1-07
Series C-Unrestricted 6,897 5.00 7-1-07
Series C-2-Restricted 1,551 5.00 7-1-07
Series D-Unrestricted 7,438 8.00 7-1-07
Series D-2-Restricted 1,351 8.00 7-1-07
Series K-Unrestricted 4,040 1.00 7-1-07
Series K-2-Restricted 5,045 1.00 7-1-07
$1.50 Warrants Restricted 825 1.50 various
$2.50 Warrants Restricted 2,440 2.50 7-7-09
$3.05 Warrants Restricted 1,125 3.05 2-15-08
$3.25 Warrants Restricted 300 3.25 various
$3.50 Warrants Restricted 500 3.50 7-20-09
$4.00 Warrants Restricted 330 4.00 2-15-08
$4.05 Warrants Restricted 563 4.05 2-15-08
$4.50 Warrants Restricted 500 4.50 7-20-09
$4.75 Warrants Restricted 563 4.75 2-15-08
$5.00 Warrants Restricted 749 5.00 12-10-07
$5.50 Warrants Restricted 500 5.50 7-20-09
--------
52,085
========
Replacement warrants
---------------------
On July 1, 2004, the B and B-2 warrants and C and C-2 warrants expired, and
replacement warrants were issued. The Company issued replacement B and B-2
warrants to purchase 15,199,373 common shares at $1.26 per share, and
60
replacement C and C-2 warrants to purchase 8,988,743 common shares at $5.00 per
share. These replacement warrants are nonforfeitable and vested immediately, and
expire on January 1, 2005. The Company recorded compensation expense totaling
$2.5 million for replacement warrants held by current employees based on the
intrinsic value of the warrants. The Company also recorded prepaid professional
fees of $5.1 million for replacement warrants held by consultants currently
providing consulting services to the Company. The prepaid fees are being charged
to expense over the terms of the related consulting agreements. The consulting
expense was calculated using the Black-Scholes option-pricing model with the
following assumptions: expected dividend yield of 0.0%; risk free interest rate
of 1.64%; contractual life of 6 months; and volatility of 163.4%. For warrants
issued to investors and to consultants no longer providing consulting services
to the Company, there was no accounting consequence resulting from the
replacements. The Company amended the Loan Agreement allowing them to purchase
and sell 500,000 shares for $1.16 per share. On March 30, 2006, the Company
received $500,000 as a partial payment from the sale. The collateral was reduced
to 2,441,176 shares and the loan is still pending.
Modified warrants
------------------
On November 8, 2004, the Company repriced the B and B-2 warrants; and extended
the terms of the B and B-2 and the C and C-2 warrants. The exercise price of the
B and B-2 warrants was reduced from $1.26 per share to $1.20 per share, and the
expiration dates of the B and B-2 and the C and C-2 warrants were extended from
January 1, 2005 to July 1, 2007. On December 2, 2004, the C and C-2 warrants
were temporarily repriced from $5.00 per share to $3.25 per share for 30 days.
As result of the repricing of the B and B-2 and C and C-2 warrants, the warrants
held by current employees are accounted for using the variable method of
accounting under APB No. 25 and FIN 44. Accordingly, the intrinsic value of the
employee warrants at December 31, 2004 was used to calculate compensation
expense for the year, and resulted in an additional compensation charge of $2.9
million. The fair value of warrants held by consultants currently providing
services to the Company was calculated at November 8, 2004, and resulted in an
adjustment of $2.2 million to prepaid professional fees. The prepaid
professional fees are being charged to expense over the terms of the related
consulting agreements. The fair value of the consultant warrants at November 8,
2004 was determined using the Black-Scholes option pricing model with the
following assumptions: expected dividend yield of 0.0%; risk free interest rate
of 3.08%; contractual life of 2.7 years; and volatility of 228.9%. For warrants
held by investors and by consultants no longer providing services, there was no
accounting consequence resulting from the repricing and term modifications.
On November 8, 2004, the Company also extended terms of certain D and D-2
warrants and K and K-2 warrants, from July 1, 2005 to July 1, 2007. The Company
recorded compensation expense of $749,000 for warrants held by current employees
based on the intrinsic value of the warrants. The Company also recorded prepaid
professional fees of $470,000 for warrants held by consultants currently
providing consulting services to the Company. The prepaid professional fees are
being charged to expense over the terms of the related consulting agreements.
The consulting expense was calculated using the Black-Scholes option-pricing
model with the following assumptions: expected dividend yield of 0.0%; risk free
interest rate of 3.08%; contractual life of 2.7 years; and volatility of 228.9%.
For warrants issued to investors and to consultants no longer providing
consulting services, there was no accounting consequence resulting from the term
modifications. In November 2004, the Company repriced B and B2 and C and C2
warrants, including warrants held by employees. As a result, the warrants held
by current employees are being accounted for using the variable method of
accounting under APB No. 25 and FIN 44. Accordingly, the intrinsic value of the
employee warrants at December 31, 2005 was used to calculate compensation
expense for the year, and resulted in a reduction in compensation expense of
$5,438,000. This adjustment reverses the previously recorded intrinsic value
related to these warrants that was recorded in 2004 as compensation expense.
61
Warrants issued in 2005
------------------------
During 2005, the Company issued warrants in connection raising capital and
license fees. In addition, during 2005, the Company issued warrants to purchase
an aggregate 9,365,694 shares of its common stock under agreements with vendors,
employees, and consultants to perform legal, financial, business advisory and
other services. The warrant grants to vendors and consultants were
non-forfeitable and fully vested at the date of issuance and were valued using
the Black-Scholes option pricing model with the following range of assumptions:
Low High
------ ------
Exercise price per share $ 1.00 $ 4.75
Market price .80 3.41
Assumptions:
Expected dividend yield 0% 0%
Risk free rate of return 2.87% 4.3%
Contractual life .5 year 6.92 years
Volatility 137% 211%
Fair market value 0.29 2.13
Pursuant to the requirements of FASB Statement No. 123 and EITF 96-18 and 00-18
related to accounting for stock-based compensation, the Company recognized
non-cash general and administrative expense in the amount of $13.6 million
attributable to the warrants issued to consultants at the date of grant during
2005.
On September 20, 2005, ZAP issued non-forfeitable, fully vested 6.92 year
warrants to purchase 750,000 common shares at $1.50 per share. ZAP is required
to deliver registered shares upon the exercise of the warrants. The fair value
of the warrants of $890,000 was recorded as a warrant liability at September 30,
2005 pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." The fair value
of $890,000, or $1.19 per share, was calculated at the date of issuance using
the Black-Scholes option pricing model using the following assumptions: risk
free interest rate of 3.90%; expected dividend rate of 0.00%; volatility of
211.5%; and expected term of 5.75 years. The warrants were revalued on December
31, 2005. The fair value of $194,000, or $0.26 per share, was calculated using
the Black-Scholes option pricing model using the following assumptions: risk
free interest rate of 4.26%; expected dividend rate of 0.00%; volatility of
230.3%; and expected term of 5.5 years. The difference of $696,000 was recorded
in other income.
Warrants issued in 2004
------------------------
During 2004, the Company issued warrants for common stock in connection with
issuances of common and preferred stock for cash and for automobiles and other
assets. The Company also issued warrants in connection with convertible debt
issuances, the acquisition of the Smart Automobile license, and the Fusion
Capital stock purchase. The Company also issued warrants to employees for
2,244,164 shares of common stock as compensation; and warrants to vendors and
consultants for 5,420,500 shares of common stock for legal, financial, business
advisory, and promotional and other services. The warrants to vendors and
consultants were nonforfeitable and fully vested at the date of issuance and
were valued using the Black-Scholes option pricing model with the following
assumptions:
62
Low High
------ ------
Exercise price per share $1.07 $5.50
Market price $0.56 $4.00
Assumptions:
Expected dividend yield 0.0% 0.0%
Risk free rate of return 1.64% 3.08%
Volatility 163.4% 228.9%
Fair market value $0.15 $2.08
Pursuant to APB No. 25, FAS 123, and EITF Nos. 96-18 and 00-18 relating to
accounting for stock-based compensation, the Company recognized noncash general
and administrative expenses in the amount of $1.8 million attributable to
warrants issued to employees and consultants at the date of grant during 2004.
Stock-based non-cash expenses are summarized as follows:
Year ended December 31,
-----------------------------
2005 2004
------------ ------------
Consulting and other services:
Stock grants $ 2,254,000 $ 2,004,000
Warrants 13,606,000 1,295,000
Replacement warrants -- 3,123,000
Modified warrants -- 176,000
------------ ------------
15,860,000 6,598,000
------------ ------------
Employees:
Stock grants 83,000 252,000
Warrants (2,505,000) 503,000
Replacement warrants (2,933,000) 2,505,000
Modified warrants -- 3,683,000
------------ ------------
(5,355,000) 6,943,000
------------ ------------
$ 10,505,000 $ 13,541,000
============ ============
NOTE 14 - RELATED PARTY
Rental agreements
-----------------
The Company leases office space, land and warehouse space from its CEO and major
shareholder (see note 12). These properties are used to operate the car outlet
and to store inventory. Rental expense under these leases was approximately
$196,000 and $126,000 for the year ended December 31, 2005 and 2004,
respectively.
63
Consulting services and other services
--------------------------------------
In November and December 2003, the Company entered into certain agreements with
two cousins of Steven M. Schneider, the CEO. One cousin received 25,000 B-2
Restricted warrants and 25 shares of preferred stock, which was later converted
into 50,000 shares of restricted common stock. The stock and warrants were
issued for website design services. The other cousin received 200,000 shares of
unrestricted common stock in January 2004. The shares were issued for consulting
services to be provided through March 11, 2007. In April 2004, the Company
issued 2 million B-2 restricted warrants and 1 million K-2 restricted warrants
to Sunshine 511 Holdings for consulting services to be provided through March
11, 2007. The managing partner of Sunshine 511 Holdings is the cousin of the CEO
of ZAP. The fair value of the warrants issued was determined using the
Black-Scholes option pricing model (See Note 13). The resulting fair value of
$5.6 million (which includes amounts related to warrant repricings) was recorded
as prepaid consulting services and was being amortized using the straight-line
method over the term of this agreement. In the fourth quarter of 2005, the
Company expensed approximately $2.2 million, the carrying value of the prepaid
services, since only limited services have been received to date nor are there
any assurances that future services will be received. Also in 2004, certain
leasehold improvements in the amount of $65,000 made by the Company on rental
properties were abandoned in favor of the landlord, who is the CEO of ZAP.
Inventory Purchase
------------------
In December 2005, the Company purchased inventory from a related entity where
three of ZAP's officers and or Directors are also members of its Board of
Directors. The transaction resulted in a payable due to the related Company of
$204,000 at December 31, 2005.
NOTE 15 - LITIGATION
From time to time, the Company may become in the future subject to legal
proceedings and claims in the ordinary course of business, including
employment-related and trade related claims.
A dormant complaint filed in 2002 against the RAP Group and Steve Schneider
the CEO of ZAP, individually was reactivated by the plaintiff (Jim Arnold
Trucking). The Complaint alleges Breach of Contract, Promissory Estoppel and
Fraud and seeks contract damages in the amount $71,000 plus monthly storage fees
and punitive damages of $750,000. The Company has cross-claimed against
Plaintiffs seeking compensatory damages, attorneys' fees and equitable relief
for breach of oral contract, common count for goods sold and delivered,
conversion, liability of surety, violation of statue, and violation of the
Unfair Practices Act. On February 17, 2005, the court referred the matter to
non-binding arbitration. The non binding arbitration hearing was held on July
27, 2005 where the arbritrator awarded the plaintiff damages in the amount of
$68,290 plus prejudgement interest of 7%. ZAP intends to assert its defenses
vigorously and to litigate its cross-complaint aggressively. A settlement
conference is set for April 19, 2006. The Company has also requested a trial in
this matter on May 2, 2006. Management believes that the ultimate resolution of
this claim will not have a material adverse effect on our financial position or
on results of operations.
On October 28, 2005, we filed a complaint against DaimlerChrysler Corporation in
the Los Angeles Superior Court, under the title ZAP v. DaimlerChrysler AG, ET
AL. The complaint includes claims for intentional and negligent interference
with prospective economic relations; trade libel; defamation; breach of contract
- agreement to negotiate in good faith; breach of implied covenant of good faith
and fair dealing; and unfair competition. The complaint alleges that
DaimlerChrysler has engaged in a series of anti-competitive tactics aimed at
defaming ZAP and disrupting its third-party business relationships. As a result
64
of the allegations, the complaint requests damages in excess of $500 million and
such other relief as the court deems just and proper. DaimlerChrysler has not
yet filed a response to our complaint.
NOTE 16 - SEGMENT REPORTING
In accordance with the provisions of SFAS No. 131, the Company has identified
four reportable segments consisting of sales and marketing of electric products,
operation of a retail car outlet, sales to and marketing of electric car
dealerships and electric car rental outlets. These segments are strategic
business units that offer different services. They are managed separately
because each business requires different resources and strategies. The Company's
chief operating decision making group, which is comprised of the Chief Executive
Officer and the senior executives of each of the Company's segments, regularly
evaluates financial information about these segments in deciding how to allocate
resources and in assessing performance. The performance of each segment is
measured based on its profit or loss from operations before income taxes.
Segment results are summarized as follows (in thousands):
Electric Car Car Rental
products outlet dealerships outlets Total
-------- -------- -------- -------- --------
Year ended December 31, 2005:
Net sales $ 624 $ 2,524 $ 432 $ 22 $ 3,602
Gross profit 18 303 9 11 341
Depreciation, amortization
and impairment 7,392 44 175 49 7,660
Net loss (22,106) (744) (459) (192) (23,501)
Total assets 11,769 771 2,137 -- 14,677
Year ended December 31, 2004:
Net sales $ 894 $ 3,555 $ 101 $ 222 $ 4,772
Gross profit (loss) 258 783 (108) 160 1,093
Depreciation, amortization
and impairment 399 50 6 33 488
Net income (loss) (27,357) 397 (439) (435) (27,834)
Total assets 25,901 1,271 2,408 245 29,825
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
A summary of non-cash investing and financing information is as follows (in
thousands):
Year ended December 31
----------------------
2005 2004
--------- --------
Cash paid during the year for:
Income taxes $ 4 $ 2
Interest 59 --
Non-cash investing and financing activities:
Common and preferred stock and warrants and debt issuances for:
Smart Automobile license -- 9,586
Inventory 235 1,265
Investment in joint venture 248 --
Settlement of warrant liability 6,711 --
Prepaid professional fees 830 5,995
Property and equipment 1,211 561
Debt converted to common stock -- 1,000
Notes receivable from shareholders -- 14
License fee payable -- (1,000)
Common stock as loan collateral -- 3,529
Conversion of preferred to common stock -- 2,596
Common stock and warrants -- (15,036)
Preferred stock -- (8,510)
NOTE 18 - SUBSEQUENT EVENTS (UNAUDITED)
During March 2006, the Company has raised approximately $0.5 million through
warrant exercises, $0.5 million through the sale of common stock (see following
paragraph), and $1.2 million through the sale of Smart cars that were paid for
during 2004.
Also during March 2006, the Company agreed to allow Phi-Nest to purchase and
sell 500,000 shares of common stock that was being held as collateral for a loan
for $1.16 per share. On March 30, 2006, the Company received $500,000 as partial
payment from the sale. The loan collateral was reduced to 2,441,176 shares and
the loan is still pending.
65
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. Securities and Exchange
Commission, or SEC, rules define the term "disclosure controls and procedures"
to mean a company's controls and other procedures that are designed to ensure
that information required to be disclosed in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in its reports filed under the Securities Exchange Act of
1934 is accumulated and communicated to the company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
(b) Changes in Internal Control Over Financial Reporting.
-----------------------------------------------------
There were no changes our internal control over financial reporting that
occurred during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 8B. OTHER INFORMATION.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The required information for this item is incorporated by reference to our
Proxy Statement for the 2006 Annual Meeting of Shareholders, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year pursuant to Regulation 14A.
Our board of directors has adopted a Code of Ethics that applies to our
directors, executives, officers and employees. Our Code of Ethics can be found
on our web site, which is located at www.zapworld.com. We intend to make all
required disclosures concerning any amendments to, or waivers from, our Code of
Ethics on our web site. Any person may request a copy of the Code of Ethics, at
66
no cost, by writing to us at the following address: ZAP, 501 Fourth Street,
Santa Rosa, California 95401, Attention: Investor Relations.
ITEM 10. EXECUTIVE COMPENSATION.
The required information for this item is incorporated by reference to our
Proxy Statement for the 2006 Annual Meeting of Shareholders, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The required information for this item is incorporated by reference to our
Proxy Statement for the 2006 Annual Meeting of Shareholders, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The required information for this item is incorporated by reference to our
Proxy Statement for the 2006 Annual Meeting of Shareholders, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year pursuant to Regulation 14A.
ITEM 13. EXHIBITS.
EXHIBITS.
2.1 Approved Second Amended Plan of Reorganization, dated as June 20,
2002. (5)
3.1 Amended and Restated Articles of Incorporation. (4)
3.2 Certificate of Determination of Series SA Convertible Preferred
Stock. (14)
4.1 Form of common share purchase warrant of the Company held by Fusion
Capital Fund II, L.P. (6)
4.2 Form of Series B common stock purchase warrant of the Company. (14)
4.3 Form of Series K common stock purchase warrant of the Company. (14)
10.1 Settlement Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the
Shareholders dated June 27, 2001. (3)
10.3 2004 Consultant Stock Plan. (7)
10.4 Convertible Promissory Note, dated April 26, 2004, issued to Banks
Living Trust. (1)
67
10.5 Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land
LLC and ZAP. (3)
10.6 Promissory Note $2,000,000 - Atocha Land LLC and ZAP. (3)
10.7 Warrant Agreement dated April 26, 2004, issued to Banks Living
Trust. (1)
10.8 Common Stock Purchase Agreement between ZAP and Fusion Capital Fund
II, LLC. (6)
10.9 Registration Rights Agreement between ZAP and Fusion Capital Fund
II, LLC. (6)
10.10 Form of Common Stock Purchase Warrant between ZAP and Fusion Capital
Fund II, LLC (6)
10.11 Agreement for Consulting Services with Evan Rapoport dated
January 8, 2004. (1)
10.12 Asset Purchase Agreement dated April 12, 2004 with Jeffrey Banks for
purchase of various autos (1)
10.13 Agreement for Private Placement Investment received dated April 14,
2004 with Phi-Nest Fund LLP (1)
10.14 Consulting Agreement dated April 21, 2004 with Elexis International(1)
10.15 Consulting Agreement dated April 21, 2004 with Sunshine 511
Holdings (1)
10.16 Definitive Stock Agreement dated October 25, 2004 with
Smart-Automobile, LLC (2)
10.17 Master Distribution Agreement between Apollo Energy Systems, Inc. and
Voltage Vehicles Corporation, a subsidiary of ZAP. (8)
10.18 ZAP Floor Line and Dealer Development Agreement with Clean Air Motors,
LLC for a $45 Million Floor Plan Line of Credit for Qualified ZAP
Dealers (9)
10.19 Exclusive Purchase, License and Supply Agreement between Smart
Automobile, LLC and ZAP. (10)
10.20 Amendment dated November 15, 2004 to previous consulting agreement
with Sunshine Holdings 511 (14)
10.21 Secured Promissory Note Payable dated December 30, 2004 with
Phi-Nest Fund, LLP. (14)
10.22 ZAP assignment of 2.9 million shares of Restricted Common Stock to
Phi-Nest Fund, LLP as collateral on note payable (14)
10.23 Promissory note receivable dated January 6, 2005 for $1 million loan
due from Smart Automobile, LLC and Thomas Heidemann (President Smart
Automobile, LLC) (14)
68
10.24 Security Agreement dated January 6, 2005 from Smart Automobile, LLC
and Thomas Heidemann (President Smart Automobile ,LLC) to secure loan
above. (14)
10.25 Common Stock Purchase Agreement between ZAP and Platinum Partners
Value Arbitrage Fund LP (14)
10.26 Form of Common Stock Purchase Warrant between ZAP and Platinum
Partners Value Arbitrage Fund LP (14)
10.27 Common Stock Purchase Agreement between ZAP and Lazarus Investment
Partners LLP (14)
10.28 Form of Common Stock Purchase Warrant between ZAP and Lazarus
Investment Partners LLP (14)
10.29 Termination of Common Stock Purchase Agreement between ZAP and Fusion
Capital Fund II, LLC (11)
10.30 Financing Agreement between ZAP and Surge Capital II, LLC (12)
10.31 Exclusive Purchase, License, and Supply Agreement between ZAP and
Obvio! Automotoveiculos S.P.E. Ltda (13)
21.1 List of subsidiaries. (3)
23.1 Consent of Independent Registered Public Accounting Firm (Odenberg,
Ullakko, Muranishi & Co. LLP). (14)
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (14)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. (14)
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (14)
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (14)
(1) Previously Filed as an exhibit to the Registrants's Form 8-K for the
quarter ended March 31, 2004 and incorporated by reference.
(2) Previously filed as an exhibit to the Registrant's Form 8-K of November 6,
2004 and incorporated by reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2003 and incorporated by reference.
(4) Previously filed with Pre-effective Amendment Number 3 to Form SB-2
registration statement filed with the Securities and Exchange Commission on
October 3, 2001.
(5) Previously filed as an exhibit to the Registrant's Form 8-K of October 20,
2002 and incorporated by reference.
69
(6) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated July 22, 2004 and incorporated by reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (File No. 333-117560) on July 22, 2004.
(8) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on October 6, 2004 and
incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10QSB for the period ended June 30, 2004 and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on April 21, 2004 and
incorporated herein by reference.
(11) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on February 25, 2005
and incorporated herein by reference.
(12) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on September 16, 2005
and incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on September 21, 2005
and incorporated herein by reference.
(14) Previously filed as an exhibit to the Registrant's Yearly Report on Form
10KSB for the period ended December 31, 2004 and incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The required information for this item is incorporated by reference to our Proxy
Statement for the 2006 Annual Meeting of Shareholders, since such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the end of our fiscal year pursuant to Regulation 14A.
70
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZAP
By: /s/ Steven M. Schneider
-----------------------------
Steven M. Schneider
Chief Executive Officer
(principal executive officer)
Date: March 31, 2006
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name Position Date
---- -------- ----
By: /S/ STEVEN M. SCHNEIDER Director and Chief Executive Officer March 31,2006
---------------------------------- (principal executive officer)
Steven M. Schneider
By: /S/ GARY STARR Chairman of the Board of Directors March 31,2006
----------------------------------
Gary Starr
By: /S/ WILLIAM HARTMAN Chief Financial Officer March 31,2006
---------------------------------- (principal financial and
William Hartman accounting officer)
By: /S/ Maximilian F. Scheder-Bieschin President March 31, 2006
----------------------------------
Maximilian F. Scheder-Bieschin
By: /S/ RENAY CUDE Director and Secretary March 31,2006
----------------------------------
Renay Cude
By: /S/ LOUIS AULETTA Director March 31, 2006
----------------------------------
Louis Auletta
By: /S/ GUY FIERI Director March 31, 2006
----------------------------------
Guy Fieri
By: /S/ MARK HAYWOOD Director March 31, 2006
----------------------------------
Mark Haywood
By: /S/ MATTHIAS HEINZE Director March 31, 2006
----------------------------------
Matthias Heinze
71