WWW.EXFILE.COM, INC. -- 15238 -- ZAP -- FORM SB-2
REGISTRATION
STATEMENT NO.
333-__________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
ZAP
(Name
of
Small Business Issuer in Its Charter)
California
|
3751
|
94-3210624
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(IRS
Employee Identification No.)
|
501
Fourth Street
Santa
Rosa, California 95401
(707)
525-8658
(Address
and telephone number of principal executive
offices
and principal place of business)
Steven
M.
Schneider, Chief Executive Officer
501
Fourth Street
Santa
Rosa, California 95401
(707)
525-8658
(Name,
address and telephone number of Agent for Service)
COPY
TO:
Mark
Abdou, Esq.
RICHARDSON
& PATEL LLP
10900
Wilshire Boulevard, Suite 500
Los
Angeles, California 90024
(310)
208-1182
APPROXIMATE
DATE OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER
THE
EFFECTIVE
DATE OF THIS REGISTRATION STATEMENT.
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
CALCULATION
OF REGISTRATION FEE
Title
of each class of securities to be registered
|
|
Amount
to be
Registered
|
|
|
Proposed
maximum
offering
price
per share
|
|
|
Proposed
maximum
aggregate
offering
price
|
|
|
Amount
of
registration
fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock, no par value, held by current stockholders subject to this
offering
|
|
|
721,880
|
|
|
$ |
0.995
|
|
|
$ |
718,271
|
(1) |
|
$ |
22.05
|
|
130%
of Common Stock underlying 8% convertible notes held by current
stockholders subject to this offering
|
|
|
4,828,061
|
|
|
$ |
0.727
|
|
|
$ |
3,510,000
|
(2) |
|
$ |
107.76
|
|
130%
Common Stock underlying warrants held by current stockholders subject
to
this offering
|
|
|
772,201
|
|
|
$ |
0.80
|
|
|
$ |
617,761
|
(2) |
|
$ |
18.97
|
|
130%
Common Stock underlying warrants held by current stockholders subject
to
this offering
|
|
|
260,000
|
|
|
$ |
1.10
|
|
|
$ |
286,000
|
(2) |
|
$ |
8.78
|
|
130%
Common Stock underlying warrants held by current stockholders subject
to
this offering
|
|
|
514,800
|
|
|
$ |
1.20
|
|
|
$ |
617,760
|
(2) |
|
$ |
18.97
|
|
Common
Stock underlying warrants held by current stockholders subject to
this
offering
|
|
|
2,810,500
|
|
|
$ |
1.20
|
|
|
$ |
3,372,600
|
(2) |
|
$ |
103.54
|
|
Common
Stock underlying warrants held by current stockholders subject to
this offering
|
|
|
1,100,000
|
|
|
$ |
1.75
|
|
|
$ |
1,925,000
|
(2) |
|
$ |
59.10
|
|
Total
|
|
|
11,007,442
|
|
|
|
|
|
|
$ |
11,047,392
|
|
|
$ |
339.17
|
|
(1)
|
Estimated
solely for the purpose of calculating the amount of the registration
fee
pursuant to Rule 457(c) of the Securities Act of 1933. The price
per share
and aggregate offering price are based upon the average of the high
and
low prices of the common stock of the Registrant as traded in the
Over-The-Counter Market and reported in the Electronic Bulletin Board
of
the NASD on June 25, 2007.
|
(2)
|
Calculated
in accordance with Rule 457(g) of the Securities Act of
1933.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
PROSPECTUS
ZAP
11,007,442
shares of Common Stock
This
prospectus covers the resale by selling stockholders named on page 10 of up
to
11,007,442 shares of our common stock, no par value, which include:
|
●
|
4,828,061
shares of common stock representing 130% of the shares underlying
8%
Senior Convertible Notes, at a conversion price of $0.727 per share,
issued in conjunction with our private placements completed on December
5,
2006 and February 20, 2007, as amended on April 30, 2007 and June
26,
2007;
|
|
●
|
772,201
shares of common stock representing 130% of the shares issuable upon
exercise of outstanding common stock purchase warrants we issued
in
connection with our issuance of the 8% Senior Convertible Notes on
December 5, 2006, at an exercise price of $0.80 per share;
|
|
●
|
514,800
shares of common stock representing 130% of the shares issuable upon
exercise of outstanding common stock purchase warrants we issued
in
connection with our issuance of the 8% Senior Convertible Notes on
February 20, 2007, at an exercise price of $1.20 per share;
|
|
●
|
141,750
shares of common stock issued pursuant to the Amendment Agreement
dated
June 26, 2007;
|
|
●
|
260,000
shares of common stock representing 130% of the shares issuable upon
exercise of outstanding common stock purchase warrants we issued
pursuant
to the Amendment Agreement dated June 26, 2007, at an exercise price
of
$1.10 per share;
|
|
●
|
3,910,500
shares of common stock underlying common stock purchase warrants
issued
pursuant to various subscription agreements entered into in 2004,
2006 and
2007; and
|
|
●
|
580,130
shares of common stock issued pursuant to various subscription agreements
entered into in 2004, 2006 and
2007.
|
This
offering is not being underwritten. These securities will be offered for sale
by
the selling stockholders identified in this prospectus in accordance with the
methods and terms described in the section of this prospectus entitled “Plan of
Distribution.” We will
not
receive any of the proceeds from the sale of these shares. However, if all
of
the warrants are exercised for cash (and assuming there are no adjustments
to
the purchase price prior to exercise) we will receive $6,468,001 in gross
proceeds. Also, to the extent any of the notes are converted into stock,
the principal balance and interest payable by us under such notes would be
reduced. We will pay all expenses, except for the brokerage expenses, fees,
discounts and commissions, which will all be paid by the selling stockholders,
incurred in connection with the offering described in this prospectus. Our
common stock, notes and warrants are more fully described in the section of
this
prospectus entitled “Description of Securities.”
The
prices at which the selling stockholders may sell the shares of common stock
that are part of this offering will be determined by the prevailing market
price
for the shares at the time the shares are sold, a price related to the
prevailing market price, at negotiated prices or prices determined, from time
to
time by the selling stockholders. See “Plan of Distribution.”
Our
common stock is currently listed on the Over the Counter Bulletin Board under
the symbol “ZAAP.” On June 25, 2007, the closing price of our common stock was
$0.99 per share.
AN
INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK
FACTORS” BEGINNING AT PAGE 5.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date
of this prospectus is __________, 2007.
Prospectus
Summary
|
4 |
Risk
Factors
|
5 |
Use
of Proceeds
|
10 |
Selling
Security Holders
|
10 |
Plan
of Distribution
|
12 |
Legal
Proceedings
|
13 |
Directors,
Executive Officers, Promoters and Control Persons
|
16 |
Security
Ownership of Certain Beneficial Owners and Management
|
17 |
Description
of Securities
|
19 |
Interest
of Named Experts and Counsel
|
22 |
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
|
23 |
Description
of Business
|
24 |
Management’s
Discussion and Analysis or Plan of Operations
|
33 |
Description
of Property
|
47 |
Certain
Relationships and Related Transactions
|
48 |
Market
For Common Equity and Related Stockholder Matters
|
49 |
Executive
Compensation
|
50 |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
53 |
Where
You Can Find More Information
|
53 |
Financial
Statements
|
54 |
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. Such forward-looking statements
include statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans, and (e) our anticipated needs for
working capital. Forward-looking statements, which involve assumptions and
describe our future plans, strategies, and expectations, are generally
identifiable by use of the words “may,” “will,” “should,” “expect,”
“anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of
these words or other variations on these words or comparable terminology. This
information may involve known and unknown risks, uncertainties, and other
factors that may cause our actual results, performance, or achievements to
be
materially different from the future results, performance, or achievements
expressed or implied by any forward-looking statements. These statements may
be
found under “Prospectus Summary,” “Management’s Discussion
and
Analysis of Financial Condition and Results of Operations” and “Description of
Business,” as well as in this prospectus generally. Actual events or results may
differ materially from those discussed in forward-looking statements as a result
of various factors, including, without limitation, the risks outlined under
“Risk Factors” and matters described in this prospectus generally. This
prospectus may contain market data related to our business, which may have
been
included in articles published by independent industry sources. Although we
believe these sources are reliable, we have not independently verified this
market data. This market data includes projections that are based on a number
of
assumptions. If any one or more of these assumptions turns out to be incorrect,
actual results may differ materially from the projections based on these
assumptions. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this prospectus
will
in fact occur. In addition to the information expressly required to be included
in this prospectus, we will provide such further material information, if any,
as may be necessary to make the required statements, in light of the
circumstances under which they are made, not misleading.
Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and
our
business made elsewhere in this prospectus as well as other pubic reports which
may be filed with the United States Securities and Exchange Commission (the
“SEC”). You should not place undue reliance on any forward-looking statement as
a prediction of actual results or developments. We are not obligated to update
or revise any forward-looking statement contained in this prospectus to reflect
new events or circumstances, unless and to the extent required by applicable
law. Neither the Private Securities Litigation Reform Act of 1995 nor Section
27A of the Securities Act of 1933 provides any protection for statements made
in
this prospectus.
This
summary highlights information contained elsewhere in this prospectus. It does
not contain all of the information that you should consider before investing
in
our common stock. You should read the entire prospectus carefully, including
the
section entitled “Risk Factors” and our consolidated financial statements and
the related notes. In this prospectus, we refer to ZAP as “ZAP,” “Company,”
“we,” us“ and “our.”
OUR
COMPANY
ZAP
stands for Zero Air Pollution(R). With our new product offerings, we are
positioned to become a leading brand and distribution portal of electric and
other advanced technology vehicles. We are committed to running our business
based on a strong philosophical foundation that supports the environment, social
responsibility and profitability.
Our
strategy is to serve the growing and underrepresented consumer that seeks
electric and fuel efficient vehicles. With the recent increases in the cost
of
oil and increasing concern about the environment and the effects of global
warming, we believe there is a large and untapped demand in the areas of
transportation and consumer products. During the energy crisis of the 1970s,
Japanese automobile manufacturers penetrated the United States market when
domestic automobile manufacturers failed to anticipate changes. We
believe a similar opportunity is present today, enhanced by heightened
environmental awareness, climate changes and economic pressures. We
have assembled a complete line of products to meet the growing demands of the
environmentally conscious consumer focused on two primary businesses: ZAP
Automotive and ZAP Power Systems.
We
were
incorporated as “ZAP Power Systems” under the laws of the State of California on
September 23, 1994, and we changed our name to ZAP on June 18, 2001. 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 plan of reorganization was
confirmed on June 20, 2002 and the Bankruptcy Court closed the bankruptcy case
on June 14, 2004. Our principal executive offices are located at 501 Fourth
Street, Santa Rosa, California, 95401 and our telephone number is (707)
525-8658.
The
shares issued and outstanding prior to this offering consist of 9,804,067 shares
of common stock. We are registering shares of our common stock for sale by
the
selling stockholders identified in the section of this prospectus entitled
“Selling Security Holders.” The shares included in the table identifying the
selling stockholders consist of:
|
●
|
4,828,061
shares of common stock representing 130% of the shares underlying
8%
Senior Convertible Notes, at a conversion price of $0.727 per share,
issued in conjunction with our private placements completed on December
5,
2006 and February 20, 2007, as amended on April 30, 2007 and June
26,
2007;
|
|
●
|
772,201
shares of common stock representing 130% of the shares issuable upon
exercise of outstanding common stock purchase warrants we issued
in
connection with our issuance of the 8% Senior Convertible Notes on
December 5, 2006, at an exercise price of $0.80 per share;
|
|
●
|
514,800
shares of common stock representing 130% of the shares issuable upon
exercise of outstanding common stock purchase warrants we issued
in
connection with our issuance of the 8% Senior Convertible Notes on
February 20, 2007, at an exercise price of $1.20 per share;
|
|
●
|
141,750
shares of common stock issued pursuant to the Amendment Agreement
dated
June 26, 2007;
|
|
●
|
260,000
shares of common stock representing 130% of the shares issuable upon
exercise of outstanding common stock purchase warrants we issued
pursuant
to the Amendment Agreement dated June 26, 2007, at an exercise price
of
$1.10 per share;
|
|
●
|
3,910,500
shares of common stock underlying common stock purchase warrants
issued
pursuant to various subscription agreements entered into in 2004,
2006 and
2007; and
|
|
●
|
580,130
shares of common stock issued pursuant to various subscription agreements
entered into in 2004, 2006 and
2007.
|
The
shares of common stock offered under this prospectus may be sold by the selling
security holders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or
dealer.
Information regarding the selling shareholders, the common shares they are
offering to sell under this prospectus, and the times and manner in which they
may offer and sell those shares is provided in the sections of this prospectus
captioned “Selling Security Holders” and “Plan of Distribution.” We will not
receive any of the proceeds from those sales. Should the selling security
holders, in their discretion, exercise any of the common share purchase warrants
underlying the common shares offered under this prospectus, we would, however,
receive the exercise price for those warrants. The registration of common shares
pursuant to this prospectus does not necessarily mean that any of those shares
will ultimately be offered or sold by the selling stockholders, or that any
of
the common share purchase warrants underlying the common shares offered under
this prospectus will be exercised.
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated
into
this offering that are not historic facts are forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements.
If
any of the following risks actually occurs, our business, financial condition
or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
Risks
Relating to Our Business
WE
HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY ON A QUARTERLY OR ANNUAL
BASIS IS UNCERTAIN, WHICH COULD HAVE A HARMFUL EFFECT ON OUR BUSINESS AND THE
VALUE OF ZAP’S COMMON STOCK.
Since
we
began operation in 1994, we have generated a profit only for the three month
period ended September 30, 2006 and not in any other fiscal quarters or any
fiscal year. We incurred net losses of $11.9 million, $23.5 million, and $27.8
million for the years ended December 31, 2006, 2005 and 2004, respectively.
We
incurred a net loss of $14.8 million for the three month period ended March
31,
2007. We can give no assurance that we will be able to operate
profitably in the future.
In
each
of the 13 years since we began operations, we have generated less revenue than
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
or
force us to cease operations. Our cash on hand was $2.6 million on March 31,
2007. Failure to achieve profitable operations may require us to seek additional
financing when none is available or is only available on unfavorable
terms.
WE
MAY FACE LIQUIDITY CHALLENGES AND NEED ADDITIONAL FINANCING IN THE
FUTURE.
We
currently expect to be able to fund our working capital requirements from our
existing cash and cash flows from operations through at least December 31,
2007.
However, we could experience unforeseen circumstances, such as an economic
downturn, unforeseen difficulties in manufacturing/distribution, or other
factors that could increase our use of available cash and require us to seek
additional financing. We may find it necessary to obtain equity or debt
financing due to the factors listed above or in order to support our expansion,
develop new or enhanced products, respond to competitive pressures, or respond
to unanticipated requirements.
We
may
seek to raise additional funds through private or public sales of securities,
strategic relationships, bank debt, or otherwise. If additional funds are raised
through the issuance of equity securities, the percentage ownership of our
stockholders will be reduced, stockholders may experience additional dilution
or
any equity securities we sell may have rights, preferences or privileges senior
to those of the holders of our common stock. We may not be able to secure
additional financing on acceptable terms, if at all. As a result, we
may be unable to pay our debts as they become due, develop our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could have a material effect on our business,
financial condition and future operating results.
We
have
substantial indebtedness and we are highly leveraged. As of March 31, 2007,
we
have total indebtedness of approximately $4.6 million. Our substantial
indebtedness may limit our strategic operating flexibility and our capacity
to
meet competitive pressures and withstand adverse economic conditions. In
addition, our notes contain restrictive covenants which, among other things,
limit our ability to borrow additional funds, repay the notes before maturity
or
grant security interests on our assets.
Our
substantial indebtedness could have significant adverse consequences,
including:
·
|
increasing
our vulnerability to general adverse economic and industry
conditions;
|
·
|
limiting
our ability to obtain additional financing to fund future working
capital,
capital expenditures, research and development and other general
corporate
requirements;
|
·
|
limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry; and
|
·
|
placing
us at a disadvantage compared to our competitors with less debt and
competitors that have better access to capital
resources.
|
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 advanced
technology vehicles and 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 Portable Energy line. 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.
THE
FAILURE OF CERTAIN KEY MANUFACTURING SUPPLIERS TO PROVIDE US WITH XEBRA(TM)
ELECTRIC CARS AND COMPONENTS COULD HAVE A SEVERE AND NEGATIVE IMPACT UPON OUR
BUSINESS.
We
purchase all of our Xebra electric vehicles from one Chinese manufacturer and
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 the
manufacturer or these suppliers become unwilling or unable to provide the Xebra
vehicles and components, there are a limited number of alternative manufacturers
or 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 the Xebra vehicles
and
components from our manufacturer and 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
the
Xebra vehicles and these components could severely restrict our ability to
manufacture our products and prevent us from fulfilling customer orders in
a
timely fashion.
As
described elsewhere, we have entered into a contract with a Brazilian automobile
manufacturer, OBVIO, for the delivery of 50,000 flex-fuel vehicles in two
different models. We may not be able to obtain the vehicles that we expect
to
obtain from OBVIO because 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 constructing its factory, hiring personnel, acquiring equipment, assembling
a network of suppliers and developing the vehicle assembly process. If we cannot
get the vehicles from OBVIO that we expect to, our business will be adversely
affected.
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
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
|
·
|
whether
future regulation and legislation requiring increased use of nonpolluting
vehicles is enacted.
|
We
cannot
assure you that growth in the electric vehicle industry will continue. Our
business may suffer if the electric vehicle industry does not grow or grows
more
slowly than it has in recent years 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.
LITIGATION
AGAINST DAIMLER CHRYSLER AG.
ZAP
v. Daimler Chrysler AG, et al., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, we filed a complaint against
Daimler Chrysler Corporation and others in the Los Angeles Superior Court.
The
complaint alleges that Daimler
Chrysler
has engaged in a series of anti-competitive tactics aimed at defaming us and
disrupting our third-party business relationships. Daimler Chrysler has
successfully filed a motion to quash that complaint for lack of personal
jurisdiction and the court’s ruling on that matter is in the process of being
appealed. Two of the other defendants in the action, G&K Automotive
Conversion, Inc. and The Defiance LLC, have filed a cross-complaint against
us
in the Los Angeles Superior Court for, among other things, violations of Section
43(a) of the Lanham Act, statutory and common law unfair competition, and
intentional and negligent interference with prospective economic
advantage. We have responded to the cross-complaint and denied
engaging in any wrongful actions. If the cross-complaint is decided against
us,
it could have a material adverse effect on our operations.
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 $5,000,000, 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. We cannot assure you that such claims and/or recalls will not be
made in the future.
WE
MUST DEVOTE SUBSTANTIAL RESOURCES TO IMPLEMENTING A PRODUCT DISTRIBUTION
NETWORK.
Our
dealers are often hesitant to provide their own financing to contribute to
our
product distribution network. As a result, we anticipate that we may have to
provide financing or other consignment sale arrangements 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.
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.
Our
performance is substantially dependent upon the services of our executive
officers and other key employees, as well as on our 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, or Mr. Starr, our
Chairman of the Board, whose specialized knowledge of the electric vehicle
industry is essential to our business, would be detrimental. We have employment
agreements with Mr. Schneider and Mr. Starr that provide for their continued
service to us until October 1, 2013.
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
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 we had marketed our 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.
MANUFACTURING
OVERSEAS 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.
All
of our Xebra electric vehicles are manufactured in China. 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 patent applications, but we cannot ensure that any patents will
issue from those applications. 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.
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.
Risks
Relating to this Offering and Ownership of Our Securities
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.
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 Market For
Common Equity and Related Shareholder Matters. For example, on December 31,
2005, our stock had a high of $1.07 and on December 31, 2006, it had a low
of
$0.79. 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 stock markets in general
can experience considerable price and volume fluctuations.
WE
HAVE NOT PAID CASH DIVIDENDS ON OUR COMMON STOCK AND DO NOT ANTICIPATE PAYING
ANY CASH 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.
LIMITATIONS
ON DIRECTOR AND OFFICER LIABILITY AND OUR INDEMNIFICATION OF OFFICERS AND
DIRECTORS MAY DISCOURAGE SHAREHOLDERS FROM BRINGING SUIT AGAINST A
DIRECTOR.
Our
certificate of incorporation and bylaws provide, with certain exceptions as
permitted by governing Delaware law, that a director or officer shall not be
personally liable to us or our shareholders for breach of fiduciary duty as
a
director, except for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law, or unlawful payments of dividends. These
provisions may discourage shareholders from bringing suit against a director
for
breach of fiduciary duty and may reduce the likelihood of derivative litigation
brought by shareholders on our behalf against a director. In addition, our
certificate of incorporation and bylaws provide for mandatory indemnification
of
directors and officers to the fullest extent permitted by Delaware
law.
FUTURE
SALES OF OUR COMMON STOCK COULD PUT DOWNWARD SELLING PRESSURE ON OUR SHARES,
AND
ADVERSELY AFFECT THE STOCK PRICE. THERE IS A RISK THAT THIS DOWNWARD PRESSURE
MAY MAKE IT IMPOSSIBLE FOR AN INVESTOR TO SELL HIS SHARES AT ANY REASONABLE
PRICE, IF AT ALL.
Future
sales of substantial amounts of our common stock in the public market, if such
a
market develops, or the perception that such sales could occur, could put
downward selling pressure on our shares, and adversely affect the market price
of our common stock.
THE
OTC BULLETIN BOARD IS A QUOTATION SYSTEM, NOT AN ISSUER LISTING SERVICE, MARKET
OR EXCHANGE. THEREFORE, BUYING AND SELLING STOCK ON THE OTC BULLETIN BOARD
IS
NOT AS EFFICIENT AS BUYING AND SELLING STOCK THROUGH AN EXCHANGE. AS A RESULT,
IT MAY BE DIFFICULT FOR YOU TO SELL YOUR COMMON STOCK OR YOU MAY NOT BE ABLE
TO
SELL YOUR COMMON STOCK FOR AN OPTIMUM TRADING PRICE.
The
OTC
Bulletin Board is a regulated quotation service that displays real-time quotes,
last sale prices and volume limitations in over-the-counter
securities.
Because
trades and quotations on the OTC Bulletin Board involve a manual process, the
market information for such securities cannot be guaranteed. In addition, quote
information, or even firm quotes, may not be available. The manual execution
process may delay order processing and intervening price fluctuations may result
in the failure of a limit order to execute or the execution of a market order
at
a significantly different price. Execution of trades, execution reporting and
the delivery of legal trade confirmations may be delayed significantly.
Consequently, one may not be able to sell shares of our common stock at the
optimum trading prices.
When
fewer shares of a security are being traded on the OTC Bulletin Board,
volatility of prices may increase and price movement may outpace
the ability to deliver accurate quote information. Lower trading volumes in
a
security may result in a lower likelihood of an individual’s orders being
executed, and current prices may differ significantly from the price one was
quoted by the OTC Bulletin Board at the time of the order entry.
Orders
for OTC Bulletin Board securities may be canceled or edited like orders for
other securities. All requests to change or cancel an order must be submitted
to, received and processed by the OTC Bulletin Board. Due to the manual order
processing involved in handling OTC Bulletin Board trades, order processing
and
reporting may be delayed, and an individual may not be able to cancel or edit
his order. Consequently, one may not able to sell shares of common stock at
the
optimum trading prices.
The
dealer’s spread (the difference between the bid and ask prices) may be large and
may result in substantial losses to the seller of securities on the OTC Bulletin
Board if the common stock or other security must be sold immediately. Further,
purchasers of securities may incur an immediate “paper” loss due to the price
spread. Moreover, dealers trading on the OTC Bulletin Board may not have a
bid
price for securities bought and sold through the OTC Bulletin Board. Due to
the
foregoing, demand for securities that are traded through the OTC Bulletin Board
may be decreased or eliminated.
We
will
not receive any of the proceeds from the sale of these shares. However, if
all
of the warrants are exercised for cash (and assuming there are no adjustments
to
the purchase price prior to exercise) we will receive $6,468,001 in gross
proceeds. Also, to the extent any of the notes are converted into stock,
the principal balance and interest payable by us under such notes would be
reduced. We will pay all expenses, except for the brokerage expenses, fees,
discounts and commissions, which will all be paid by the selling stockholders,
incurred in connection with the offering described in this prospectus. Our
common stock, notes and warrants are more fully described in the section of
this
prospectus entitled “Description of Securities.”
There
can
be no assurance that any warrants will be exercised or that we will receive
any
proceeds therefrom. It is common that such warrants are never exercised because
the price of the common stock does not justify the exercise or the warrant
expires by its terms.
SELLING
SECURITY HOLDERS
We
are
registering 130% of the shares of common stock that may become issuable upon
conversion of our 8% Senior Convertible Notes in the aggregate principal amount
of $2,700,000 with a conversion price of $0.727 per share (the “Convertible
Notes”) and related warrants to purchase 594,001 shares at $0.80 per share,
warrants to purchase 396,000 shares at $1.20 per share, and warrants to purchase
200,000 shares at $1.10 per share (collectively, the
“Warrants”). The Convertible Notes and related Warrants were issued
to the Selling Security Holders in two private placement offerings which closed
on December 5, 2006 and February 20, 2007, as amended on April 30, 2007 and
June
26, 2007. Pursuant to the terms of the Securities Purchase
Agreement entered into between us and four accredited investors dated December
5, 2006, as amended on February 20, 2007 (the “Agreement”) under which the
Convertible Notes and related Warrants were issued, we agreed to file this
registration statement in order to permit those investors to sell the shares
underlying the Convertible Notes and Warrants. We are also
registering shares of common stock and common stock underlying warrants issued
to certain investors pursuant to various subscription agreements entered into
in
2004, 2006 and 2007.
The
table
below lists the Selling Security Holders and other information regarding the
beneficial ownership of the shares of common stock by each of the Selling
Security Holders. The second column lists the number of shares of common stock
beneficially owned by each Selling Security Holder as of June 27, 2007, assuming
conversion of all of the shares underlying the Convertible Notes and the
exercise of all of the Warrants held by the Selling Security Holders on that
date. The third column lists the shares of common stock being offered pursuant
to this prospectus by each of the Selling Security Holders. The fourth column
lists the number of shares that will be beneficially owned by the Selling
Security Holders assuming all of the shares offered pursuant to this prospectus
are sold and that shares beneficially owned by them, as of June 27, 2007, but
not offered hereby are not sold. The fifth column list the percentage
of shares that will be beneficially owned by the Selling Security Holders as
of
June 27, 2007, assuming all of the shares offered pursuant to this prospectus
are sold and that shares beneficially owned by them but not offered hereby
are
not sold.
The
inclusion of any securities in the following table does not constitute an
admission of beneficial ownership by the persons named below. Except as
indicated in the footnotes to the table, no Selling Security Holder has had
any
material relationship with us or our predecessors or affiliates during the
last
three years. We may amend or supplement this prospectus from time to
time to update the disclosure set forth herein. None of the Selling Security
Holders are or were affiliated with broker-dealers. See our
discussion entitled “Plan of Distribution” for further information regarding the
method of distribution of these shares.
Name
of Selling Security Holders
|
|
Number
of
Shares
Owned
Before
Offering
|
|
Number
of
Shares
Being
Offered
|
|
Number
of
Shares
Owned
After
Offering
(1)
|
|
Percentage
Owned
After
Offering
(2)
|
|
Gemini
Master Fund, Ltd. (3)
|
|
|
3,744,750
|
|
|
3,634,750
|
|
|
110,000
|
|
|
*
|
|
Grey
K Offshore Fund, Ltd. (4)
|
|
|
1,796,101
|
|
|
1,796,101
|
|
|
0
|
|
|
*
|
|
Grey
K Fund, LP (5)
|
|
|
721,602
|
|
|
721,602
|
|
|
0
|
|
|
*
|
|
Grey
K Offshore Leveraged Fund, Ltd. (6)
|
|
|
533,590
|
|
|
364,359
|
|
|
169,231
|
|
|
*
|
|
Diversified
Equity Funding, L.P. (7)
|
|
|
1,216,820
|
|
|
198,000
|
|
|
1,018,820
|
|
|
2.2
|
%
|
Diversified
Strategies Fund, LLC (8)
|
|
|
309,320
|
|
|
66,000
|
|
|
243,320
|
|
|
*
|
|
HES
Gift Trust (9)
|
|
|
3,357,896
|
|
|
1,166,000
|
|
|
2,191,896
|
|
|
4.5
|
%
|
Wendy
Spatz (10)
|
|
|
171,100
|
|
|
49,500
|
|
|
121,600
|
|
|
*
|
|
Joseph
S. Gottlieb
|
|
|
121,000
|
|
|
121,000
|
|
|
0
|
|
|
*
|
|
Marleen
Mulder (11)
|
|
|
143,000
|
|
|
143,000
|
|
|
0
|
|
|
*
|
|
Randal
Ames Churchill (12)
|
|
|
279,500
|
|
|
143,000
|
|
|
136,500
|
|
|
*
|
|
Raymond
J. Markman (13)
|
|
|
210,000
|
|
|
110,000
|
|
|
100,000
|
|
|
*
|
|
The
Banks Group LLC (14)
|
|
|
2,439,130
|
|
|
1,339,130
|
|
|
1,100,000
|
|
|
2.3
|
%
|
Thomas
Heidemann (15)
|
|
|
1,100,000
|
|
|
1,100,000
|
|
|
0
|
|
|
*
|
|
William
Courtright (16)
|
|
|
55,000
|
|
|
55,000
|
|
|
0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
11,007,442
|
|
|
|
|
|
|
|
*
Indicates less than one percent.
(1)
|
Assumes
that all shares will be resold by the selling stockholders after
this
offering.
|
|
|
(2)
|
Percentage
based upon 46,251,033 shares of common stock outstanding as of June
27,
2007.
|
|
|
(3)
|
Includes
2,682,256 shares representing 130% of the shares of common stock
underlying the Convertible Notes, 514,800 shares representing 130%
of the
shares of common stock underlying the Warrants exercisable at $0.80
per
share, 214,500 shares representing 130% of the shares of common stock
underlying the Warrants exercisable at $1.20 per share, 110,000 shares
of
common stock underlying warrants exercisable at $1.36 per share,
and
144,444 shares representing 130% of the shares of common stock underlying
warrants exercisable at $1.10 per share. The Investment Manager
of Gemini Master Fund, Ltd. is Gemini Strategies, LLC. The
Managing Member of Gemini Strategies, LLC is Mr. Steven W.
Winters. As such, Mr. Winters may be deemed beneficial owner of
the shares; however, Mr. Winters disclaims beneficial ownership of
such
shares.
|
|
|
(4)
|
Includes
1,333,796 shares representing 130% of the shares of common stock
underlying the Convertible Notes, 187,954 shares representing 130%
of the
shares of common stock underlying the Warrants exercisable at $0.80
per
share, 163,363 shares representing 130% of the shares of common stock
underlying the Warrants exercisable at $1.20 per share, and 71,828
shares
representing 130% of the shares of common stock underlying warrants
exercisable at $1.10 per share. The natural person with voting and
investment decision power for the selling stockholder is Robert
Koltun.
|
|
|
(5)
|
Includes
536,630 shares representing 130% of the shares of common stock underlying
the Convertible Notes, 69,447 shares representing 130% of the shares
of
common stock underlying the Warrants exercisable at $0.80 per share,
70,871 shares representing 130% of the shares of common stock underlying
the Warrants exercisable at $1.20 per share, and 28,899 shares
representing 130% of the shares of common stock underlying penalty
warrants exercisable at $1.10 per share. The natural person with
voting
and investment decision power for the selling stockholder is Robert
Koltun.
|
|
|
(6)
|
Includes
275,378 shares representing 130% of the shares of common stock underlying
the Convertible Notes, 66,066 shares representing 130% of the shares
of
common stock underlying the Warrants exercisable at $1.20 per share,
and
14,829 shares representing 130% of the shares of common stock underlying
penalty warrants exercisable at $1.10 per share. The natural
person with voting and investment decision power for the selling
stockholder is Robert Koltun.
|
|
|
(7)
|
Includes
198,000 shares of common stock underlying warrants exercisable at
$1.20
per share and 88,000 shares of common stock underlying warrants
exercisable at $1.50 per shares. The natural person with voting
and investment decision power for the selling stockholder is Sonya
Stay.
|
|
|
(8)
|
Includes
66,000 shares of common stock underlying warrants exercisable at
$1.20 per
share. The natural person with voting and investment decision
power for the selling stockholder is Sonya Stay.
|
|
|
(9)
|
Includes
3,166,000 shares of common stock underlying warrants exercisable
at $1.20
per share and 11,000 shares of common stock underlying warrants
exercisable at $1.50 per shares. The natural person with voting
and investment decision power for the selling stockholder is Sonya
Stay.
|
|
|
(10)
|
Includes
49,500 shares of common stock underlying warrants exercisable at
$1.20 per
share and 11,000 shares of common stock underlying warrants exercisable
at
$1.50 per shares.
|
|
|
(11)
|
Includes
33,000 shares of common stock underlying warrants exercisable at
$1.20 per
share.
|
|
|
(12)
|
Includes
33,000 shares of common stock underlying warrants exercisable at
$1.20 per
share.
|
|
|
(13)
|
Includes
210,000 shares of common stock underlying warrants exercisable at
$1.20
per share.
|
|
|
(14)
|
Includes
2,200,000 shares of common stock underlying warrants exercisable
at $1.20
per share. The natural person with voting and investment
decision power for the selling stockholder is Jeffrey G.
Banks.
|
|
|
(15)
|
Includes
1,100,000 shares of common stock underlying warrants exercisable
at $1.75
per share.
|
|
|
(16)
|
Includes
55,000 shares of common stock underlying warrants exercisable at
$1.20 per
share.
|
PLAN
OF DISTRIBUTION
We
are
registering shares of our common stock for resale by the selling stockholders
identified in the section above entitled “Selling Security Holders.” We will
receive none of the proceeds from the sale of these shares by the selling
stockholders. The common stock may be sold from time to time to
purchasers:
|
·
|
through
the OTC Bulletin Board at prevailing market prices; or
|
|
·
|
through
underwriters, broker-dealers or agents who may receive compensation
in the
form of discounts, concessions or commissions from the selling
stockholders or the purchasers of the common stock.
|
The
selling stockholders may use any one or more of the following methods when
selling shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
a
block trade in which the broker-dealer so engaged will attempt to
sell
such shares as agent, but may position and resell a portion of the
block
as principal to facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by such broker-dealer
for its
own account pursuant to this prospectus;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
settlement
of short sales;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per share;
|
|
·
|
a
combination of any such methods of sale;
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise; or
|
|
·
|
any
other method permitted pursuant to applicable law.
|
Neither
the selling stockholders nor ZAP can presently estimate the amount of
compensation in the form of discounts, concessions or commissions that
underwriters, broker-dealers or agents may receive from the selling stockholders
or the purchasers of the common stock. We know of no existing arrangements
between the selling stockholders, broker-dealers, underwriters or agents
relating to the sale or distribution of the shares.
The
selling stockholders may also enter into hedging transactions and persons with
whom they effect such transactions, including broker-dealers, may engage in
short sales of our common shares. Our selling stockholders may also engage
in
short sales and short sales against the box, and in options, swaps, derivatives
and other transactions in our securities, and may sell and deliver the shares
covered by this prospectus in connection with such transactions or in settlement
of securities loans. These transactions may be entered into with broker-dealers
or other financial institutions that may resell those shares pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of
section 2(11) of the Securities Act of 1933, as amended, in connection with
the
sales and distributions contemplated under this prospectus and may have civil
liability under Sections 11 and 12 of the Securities Act for any omissions
or
misstatements in this prospectus and the registration statement of which it
is a
part. Additionally, any profits which our selling stockholders may receive
might
be deemed to be underwriting compensation under the Securities Act. Because
the
selling stockholders may be deemed to be an underwriter under Section 2(11)
of
the Securities Act, the selling stockholders will be subject to the prospectus
delivery requirements of the Securities Act.
The
resale shares will be sold only through registered or licensed broker-dealers
if
required under applicable state securities laws. In addition, in certain states,
the resale shares may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
We
will
bear all expenses relating to the sale of our common shares under this
prospectus, except that the selling stockholders will pay any applicable
underwriting commissions and expenses, brokerage fees and transfer taxes, as
well as the fees and disbursements of counsel to and experts for the selling
stockholders. We have agreed to indemnify some of the selling stockholders
against certain losses, claims, obligations, damages and liabilities, including
liabilities under the Securities Act.
Any
common shares offered under this prospectus that qualify for sale pursuant
to
Rule 144 of the Securities Act may also be sold under Rule 144 rather than
pursuant to this prospectus.
We
have
agreed to keep this prospectus effective at least for a period ending with
the
first to occur of (i) the date on which all of the Registrable Securities
eligible for resale hereunder have been publicly sold pursuant to the
Registration Statement or Rule 144, and (ii) the date on which all of the
Registrable Securities remaining to be sold under such Registration Statement
(in the reasonable opinion of our counsel) may be immediately sold to the public
under Rule 144(k) under the Securities Act , or until such later date as we
shall determine.
Under
applicable rules and regulations under the Exchange Act of 1934, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our common stock for a period of
two
business days prior to the commencement of the distribution. In addition, the
selling stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which
may
limit the timing of purchases and sales of shares of our common stock by the
selling stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
In
the
normal course of business, we may become involved in various legal 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. We estimate
the amount of potential exposure it may have with respect to litigation claims
and assessments.
ZAP
v. Daimler Chrysler AG, et al., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, we filed
a complaint against Daimler Chrysler Corporation and others in the Los Angeles
Superior Court. 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 Daimler Chrysler has engaged in a series of anti-competitive
tactics aimed at defaming us and disrupting our 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.
Daimler Chrysler has successfully filed a motion to quash that compliant for
lack of personal jurisdiction and the court’s ruling on that matter is in the
process of being appealed. Two of the other defendants in the action, G&K
Automotive Conversion, Inc. and The Defiance LLC, have filed a cross-complaint
against us in the Los Angeles Superior Court for, among other things, violations
of Section 43(a) of the Lanham Act, statutory and common law unfair competition,
and intentional and negligent interference with prospective economic
advantage. We have responded to the cross-complaint and denied
engaging in any wrongful actions.
James
A. Arnold, et al. v. Steven Schneider, et al., Superior Court of
California, County of Sacramento, Case No. 02AS02062, filed April 5, 2002,
dismissed October 9, 2003, dismissal set aside and referred to Case Management
Program March 4, 2004. Plaintiffs seek damages of $71,000 in
compensatory damages, $50 per month since April 5, 2002, other charges,
interest, and further relief in the court’s discretion for breach of contract,
promissory estoppel, and fraud. Plaintiffs also seek $750,000 in
punitive damages for fraud. We have 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 statute, and violation of the Unfair Practices
Act. On February 17, 2005, the court referred the matter to
non-binding arbitration pursuant to California Code of Civil Procedure section
1141.1. The non-binding arbitration hearing was held on July 27,
2005. The arbitrator award, issued on August 5, 2005, awarded
plaintiffs damages in the amount of $68,290, plus prejudgment interest at the
rate of 7%. This amount was awarded against both us and Mr.
Schneider. Given an admission in the plaintiff’s case management
conference statement and the decision of the court to refer the matter to
non-binding arbitration, we believe that the amount in controversy should be
less than $50,000, though the complaint asks for more than $71,000 in
damages. Trial in Sacramento County Superior Court began on Tuesday,
May 2, 2006, at 8:30 a.m., in Department 47. At the trial, the
parties agreed to settle this matter upon the following terms: (1)
the plaintiff agreed to dismiss the causes of action it had alleged against
Mr.
Schneider; and (2) RAP Group agreed to (a) pay the plaintiff $20,000 on or
before May 31, 2006; (b) pay the plaintiff an additional $20,000 on or before
January 5, 2007; (c) provide the plaintiff with whatever ownership documentation
(such as titles) it can find in its possession, custody, or control regarding
the 43 cars identified by the plaintiff during discovery as being the subject
of
this litigation; (d) allow the court to enter an order directing that plaintiff
may dispose of the vehicles that are the subject of the litigation; and (e)
allow the court to enter judgment against it in the amount of $50,000, minus
whatever monies have already been paid by RAP Group to the plaintiff, if RAP
Group does not timely make either of the payments identified
above. Both the plaintiff and RAP Group agreed to execute general
mutual releases of all claims arising out of the subject matter of the
litigation (pursuant to section 1542 of the Civil Code) and to dismiss with
prejudice the complaint and the cross-complaint after performance of the
settlement agreement. The plaintiff and RAP Group further agreed that the
stipulated settlement will be governed by section 664.6 of the Code of Civil
Procedure. RAP Group made the first payment to the plaintiff for
$20,000, but did not pay the second payment of $20,000 that was due by January
5, 2007. Plaintiff
has
therefore moved the court to enter a default judgment against RAP Group for
$30,000 pursuant to the terms of the Settlement Agreement. A hearing
on that motion for default judgment was heard on April 4, 2007, and on April
27,
2007, the court entered judgment against RAP for $30,000.
Leandra
Dominguez v. RAP Group, Inc. dba The Repo Outlet et. al., Superior Court of
California, County of Sonoma, Case No. SCV-235641, complaint filed October
14,
2004, first amended complaint filed December 15, 2004. Plaintiff has
sued The Repo Outlet and Credit West Corporation for negligent
misrepresentation, for a violation of the Business and Professions Code Section
17200, for breach of the implied warranty of merchantability under the
Magnusson-Moss Act, and for violation of the federal Truth in Lending
Act. On January 13, 2005, the RAP Group, Inc. agreed to defend and
indemnify Credit West Corporation. At a hearing before the Sonoma
County Superior Court on February 23, 2005, the court granted The Repo Outlet’s
motion to compel arbitration, and on March 8, 2005, the court stayed the court
proceeding pending arbitration. The RAP Group, Inc. filed a demand
for arbitration with the American Arbitration Association (the “Association”) on
April 7, 2005, but the parties later stipulated that the arbitration would
proceed before JAMS. The Repo Outlet made a Code of Civil Procedure
998 offer to settle and have Dominguez dismiss the matter with prejudice for
the
sum of $1,001. Because Dominguez failed to timely respond to The Repo Outlet’s
Section 998 offer, that offer expired on March 2, 2006. The Repo
Outlet made another settlement offer of $1,857 to settle this matter as to
both
defendants on January 8, 2007, but this offer was rejected as plaintiff’s
counsel seeks to recover all of his attorneys’ fees. Although the
case was sent to arbitration before JAMS, and set for arbitration in February
2007, on January 9, 2007, The Repo Outlet informed the arbitrator and
plaintiff’s counsel that it would be ceasing operations and its counsel would be
withdrawing as attorneys of record. At a status conference on
February 8, 2007, the court was informed that counsel for RAP Group had moved
to
withdraw for non-payment of fees. The hearing on that motion is set
for April 18, 2007. Since that time, Credit West has substituted its
own counsel of record, and so RAP Group is no longer tendering a defense to
Credit
West. On April 4, plaintiff Dominguez filed with the Court a Request
for Entry of Default Judgment against RAP Group. On May 2, 2007, the
Court granted Donahue Gallagher Woods LLP’s motion to withdraw as counsel of
record. Thus, RAP Group is currently unrepresented by counsel in this
matter.
Marieta
Cruz Hansell v. Robert Warren Johnson, Jr.,ZAP, et. al., Superior Court of
California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell
filed suit against Robert Johnson (our former employee), us and other defendants
for personal injury, property damage and permanent disability based on an
alleged automobile collision between the plaintiff and defendant
Johnson. We and Mr. Johnson have both filed answers and case
management statements containing a general denial of the plaintiff’s entire
claim, and we have agreed to defend Mr. Johnson in this matter. The
parties are in the process of propounding and responding to
discovery. The plaintiff is claiming permanent disability, and she
has submitted a Statement of Damages in the amount of $108,727.34, plus
unspecified amounts of future general damages, future wage loss, diminution
of
earning capacity damages, and incidental, consequential and special
damages. The plaintiff has not yet made any demand for
settlement. We intend to vigorously defend both ourselves and Mr.
Johnson against these claims. This matter is now being handled by
alternative counsel for us. According to information received from alternative
counsel, the parties have agreed to settle this matter with a payment by us
and
Mr. Johnson to the plaintiff of a total of $70,000. The lawsuit was settled
on
February 15, 2007 and was dismissed with prejudice.
ZAP
v. Norm Alvis, et al., Superior Court of California, County of Sonoma, Case
No. SCV-238419, complaint filed March 27, 2006. Mr. Alvis was engaged
by us and Rotoblock Corporation (“Rotoblock”) as a consultant to perform public
relations work on our and Rotoblock’s behalf. As consideration for
Mr. Alvis’ consent to the contract with us, we provided Mr. Alvis with use of a
motor home worth approximately $306,000. We then sued Mr. Alvis,
claiming he failed to perform his obligations under the contract and refused
to
return the consideration he received therefore (i.e. the motor
home). We are seeking either the return of the motor home or $500,000
in damages. Mr. Alvis initially did not respond to the complaint
which prompted us to take his default on May 9, 2006. The court then
entered a default judgment on May 16, 2006, on which date we obtained a writ
of
possession allowing us to reclaim possession of the disputed motor
home. On June 18, 2006, Mr. Alvis moved the court to set aside the
default and default judgment and to vacate its order authorizing issuance of
the
writ of possession. The court agreed to set aside the default
judgments, but it left intact the writ of possession. The court also
required Mr. Alvis to pay us $1,000 as compensation for forcing us to initially
take his default. Mr. Alvis has paid us the required
$1,000. Mr. Alvis then filed (1) an answer denying our allegations,
and (2) a cross-claim against us, Steve Schneider in his individual capacity,
and Rotoblock, alleging two counts of breach of contract, one common count
of
work, labor, and services received, and one count of fraud. All of
Mr. Alvis’ claims relate to the two contracts he executed with us and
Rotoblock. Mr. Alvis claims he provided services to us and Rotoblock
pursuant to these contracts but received no consideration in exchange
therefore. For the fraud claim, defendant claims we and Mr. Schneider
executed the contracts with no intent to perform. Mr. Alvis has
prayed for damages of $2,000,000, interest according to proof, punitive damages,
and an order directing us to perfect title to the motor home. Mr.
Alvis then moved the court to quash the writ of possession. On
November 2, 2006, the court denied this motion, although it did require us
to
post a $300,000 bond to enforce the writ. We have not yet posted that
bond, and consequently Mr. Alvis has threatened to move to revoke the
writ. We, Rotoblock and Mr. Schneider then demurred to the
cross-complaint, and Mr. Alvis responded by filing an amended cross-complaint.
The first amended cross-complaint again seeks breach of contract and common
count damages against us and Rotoblock, as well as fraud damages against us
and
Mr. Schneider. We and Mr. Schneider answered the first amended
cross-complaint with general denials; Rotoblock responded by filing a second
demurrer in which it has alleged it was an improperly named
party. The hearing on Rotoblock’s demurrer was heard on March 21,
2007, at which time the demurrer was denied. Rotoblock intends to file an answer
to the amended cross-compliant with general denials. Counsel has given notice
of
the claims against Mr. Schneider to our D&O insurer, which has acknowledged
receipt of the notice. Discovery is on-going and the next case
management conference is scheduled for April 9, 2007, but has been continued
until July 5, 2007.
Robert
Chauvin; Mary Chauvin; Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of
Reno, dba ZAP of Sparks (“RobertChauvin, et al.”) v. Voltage Vehicles; ZAP; ZAP
Power Systems Inc.; ZAPWORLDCOM; Elliot Winfield; Steven Schneider;
Phillip Terrazzi; Max Scheder-Breschin; Renay Cude; [sic] and Does
I-XX, Second Judicial District Court State of Nevada, County of
Washoe, Case No. CV06 02767. On November 17, 2006, Robert Chauvin, et
al. filed a complaint alleging breach of contract, breach of the covenant of
good faith and fair dealing, breach of warranties, fraud/misrepresentation,
negligent misrepresentation, quantum merit or unjust enrichment, civil
conspiracy, violation of Security [sic] and Exchange Act/federal securities
law,
and deceptive trade practices, pursuant to a License Agreement (for a
distribution license) entered into between Rajun Cajun, Inc. dba ZAP of Carson
City, dba ZAP of Reno, dba ZAP of Sparks (“Rajun Cajun”) and Voltage
Vehicles. The complaint seeks general damages in an amount in excess
of $10,000, special damages in an amount in excess of $10,000, punitive damages
in an amount in excess of $10,000, attorneys’ fees and cost of suit, for
judgment in an amount equal to treble actual damages, and recession in the
amounts of $397,900 and $120,000. On January 19, 2007, defendants
Voltage Vehicles and ZAP filed a Motion to Dismiss on the grounds that the
License Agreement entered into between Rajun Cajun and Voltage contains a forum
selection clause designating Sonoma County, State of California as the only
appropriate forum. The court granted that Motion on April 13,
2007. In its order on that motion, the court also found that all
other motions pending in the Nevada court in this matter are now
moot. (As of that time, the following motions were still
pending: (1) Chauvin, et al.’s Notices of Intent to Take Default
against two of the named corporate defendants and against the individual
defendants, except Renay Cude; (2) a Motion to Quash Service of Process or
Alternatively for Dismissal by each of the individual defendants and both of
the
defunct corporate defendants; and (3) Chauvin, et al.’s Motion for Publication
of Summons against the named individual defendants.)
Voltage
Vehicles v. Rajun Cajun, et al., Superior Court of California, County of
Sonoma, Case No. SCV 240179, filed February 9, 2007. (This suit is
related to the Nevada case of Robert Chauvin, et al. v. Voltage Vehicles, et
al. discussed immediately above.) In its complaint, Voltage
Vehicles requests Declaratory Relief against Rajun Cajun, asking the Court
to
declare that the License Agreement between those two parties does not grant
Rajun Cajun an exclusive dealership in northern Nevada to distribute Voltage
Vehicle products and that Voltage Vehicles has performed its obligations under
the License Agreement. On April 19, 2007, Rajun Cajun filed a Motion
to Quash and/or for Dismissal or Stay. Rajun Cajun has since agreed
to voluntarily withdraw that motion, but Voltage Vehicles is still awaiting
confirmation of that withdrawal. It is anticipated that Rajun Cajun
will thereafter file an answer and cross-complaint in this matter.
ZAP
v. International Monetary Group,(Patrick J Harrington President and CEO) Inc.,
a
Delaware corporation; Michael C. Sher dba the Law Offices of
Michael C. Sher, Case No. SCV 240277, complaint filed March 1, 2007 in
Sonoma County Superior Court. We sued International Monetary Group
(“IMG”), whose President and CEO is Patrick D. Harrington and Michael Sher, for
declaratory relief, rescission, and breach of contract. We had
entered into an agreement with IMG, a merchant banking company, to procure
financing, and we allege that IMG, contrary to the parties’ agreement, is
seeking to enforce a $500,000 promissory note. We also allege that
IMG and Sher have taken 12,500 and 10,000 shares of our common stock that they
held in trust for us without authorization. We also allege that IMG
and Sher continue to hold 1,291,176 shares of our common stock that was supposed
to have been used as collateral for a $1 million loan to be procured by IMG
and
Sher that never materialized. After being served with the complaint,
counsel for IMG and Sher initiated settlement discussions and, in consideration,
were given until May 7, 2007 to respond to the complaint. We have not received
a
written response from IMG as of May 14, 2007. Management has recorded an
estimated liability for any potential exposure related to this transaction
which
is included in the accompanying consolidated balance sheets as of December
31,
2006 and March 31, 2007. In addition, management believes that the
ultimate resolution of this claim will not have a material adverse effect on
our
consolidated financial position or on results of operations.
ZAP
v. Thomas C. Graver and Auto America Group, Inc., filed in federal court
for the Northern District of California on April 3, 2007, Case No.
CV-01836-MJJ. In our complaint, we make claims against Graver and
Auto America Group under the Federal Anti-Cybersquatting Act and for trademark
infringement. Mr. Graver is the President and Chief Executive Officer
of Auto America Group, Inc. (“AAG”). AAG and Mr. Graver signed an
independent contractor agreement with us on October 21, 2005 to provide certain
services to us, but that agreement terminated on October 18, 2006. At
no time did we enter into an agreement with AAG or Mr. Graver giving either
of
them permission to use our federally-registered trademark
“zapworld.com.” Following discussions regarding a business dispute
between Mr. Graver, AAG and one of our business partners, a Brazilian company
called Obvio, Mr. Graver registered the domain name www.zapworld.us on January
4, 2007. Although there is very little content on the website
www.zapworld.us, the home page does refer extensively to Obvio and has two
references to us. One of those references is to “ZAP Agreement Correspondence”
with an apparent link that is not functional. The other ZAP reference
is to an article referring to us in a negative light. Mr. Graver
failed to respond to our cease and desist letters. In our lawsuit, we
request that the domain name “zapworld.us” be transferred to us and also that we
be awarded our damages and attorneys’ fees. The defendants have now
been served and the parties are discussing a proposed settlement agreement
with
terms favorable to us.
First
Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
ZAP, American Arbitration Association Case No. 74 133 00081 06
NOCA. First Class Imports is a vehicle dealer that executed a
licensing and distributorship agreement with Voltage Vehicles, our subsidiary,
in May 2004. On January 14, 2006, First Class Imports and its principal, Leon
Atkind, filed an arbitration demand with the American Arbitration Association
alleging that we and Voltage Vehicles breached the licensing agreement by not
delivering new SMART-branded vehicles to First Class Imports and demanded return
of the $100,000 licensing fee paid to Voltage Vehicles under the agreement,
plus
interest. In a separate cause of action, Mr. Atkind alleged we
breached a second contract by failing to timely deliver a stock certificate
in
exchange for a Mercedes vehicle that he sold to us. Regarding this
second claim, Mr. Atkind contends that the late delivery of the stock
certificate caused the shares to be restricted for an extra month during which
our stock price declined. He seeks as damages the difference in the
value of the stock on the two subject dates multiplied by 59,999, the number
of
shares of common stock he
received. Voltage
Vehicles filed a counterclaim against both First Class Imports and Mr.
Atkind. The first cause of action in the counterclaim alleges breach
of contract against First Class Imports for its refusal to accept SMART-branded
vehicles offered to it pursuant to the parties’ licensing
agreement. Voltage Vehicles seeks as damages the lost revenue it
otherwise would have gained through First Class Imports’ purchase of
SMART-branded vehicles, as well as damages based on the depreciation of a
SMART-branded vehicle it loaned to First Class Imports. The second
cause of action alleges breach of contract against Mr. Atkind based on his
failure to deliver title to the Mercedes identified above. On this
claim, Voltage Vehicles seeks as damages the depreciation of the Mercedes during
the time in which it has been unable to sell the vehicle. An
arbitrator was selected which resulted in the parties reaching settlement in
April. A Request for Dismissal with Prejudice was filed with the court in this
matter on April 11, 2007.
The
following table identifies our current executive officers and directors, their
respective offices and positions, and their respective dates of election or
appointment:
Name
|
|
Age
|
|
Position
|
|
Date
of Appointment
|
Steven
M. Schneider
|
|
46
|
|
Chief
Executive Officer and Director
|
|
October
26, 2002
|
Gary
Starr
|
|
51
|
|
Chairman
of the Board of Directors
|
|
September
23, 1994
|
William
Hartman
|
|
59
|
|
Chief
Financial Officer
|
|
March
27, 2001
|
Renay
Cude
|
|
30
|
|
Secretary
and Director
|
|
October
26, 2002
|
Amos
Kazzaz
|
|
55
|
|
Chief
Operating Officer
|
|
March
26, 2007
|
Peter
H. Scholl
|
|
60
|
|
Director
|
|
July
19, 2006
|
BUSINESS
EXPERIENCE DESCRIPTIONS
Steven
M. Schneider. Mr. Schneider has been our director and Chief Executive
Officer since October 26, 2002. Schneider has a 30-year career in the automotive
industry and a long-time interest in fun, fuel-efficient cars. He has served
as
our CEO since 2002, when we acquired Auto Distributors, Inc. and Voltage
Vehicles, businesses he founded which specialized in the distribution of
electric and alternative fuel vehicles including automobiles, motorcycles and
bicycles. Schneider also founded the RAP Group, an automotive liquidator and
reseller, which we also acquired. He serves on the board of directors of Apollo
Energy Systems, a developer of fuel cells and advanced batteries. He also serves
as a director of Rotoblock Corporation, a public company focused on the
continued development of the oscillating piston engine. He is an active member
with various industry groups, including the Electric Drive Transportation
Association in Washington, DC. , and is a member of the Bay Area Alliance of
CEOs. He lectures frequently on industry topics at universities and other
organizations.
Gary
Starr. Mr. Starr co-founded ZAP in 1994, has been a director since our
inception and served as Chief Executive Officer from 2000 to 2002. He became
chairman of the Board of Directors in October 2002. Mr. Starr founded US
Electricar’s electric vehicle operation in 1983. Mr. Starr has several
publications: “Electric Cars: Your Guide to Clean Motoring,” “The Shocking
Truth
of Electric Cars,” and “The True Cost of Oil.” In addition, he has appeared on
more than 300 radio and television shows, including Larry King Live, The Today
Show, Inside Edition, CNN Headline News, Prime Time Live, the CBS Evening News
and the McNeil Lehrer News Hour, as an authority in the field of electric
vehicles. Mr. Starr has a Bachelor of Science Degree from the University of
California, Davis in Environmental Consulting and Advocacy. He is a frequent
lecturer on electric cars and has developed several industry
inventions.
William
Hartman. Mr. Hartman was appointed Chief Financial Officer in March
2001. He was engaged with us as a financial consultant starting in January
2001.
Prior to his engagement with us, Mr. Hartman provided financial and accounting
consulting services to various Internet start-up companies in the San Francisco
Bay Area from 1999 to 2001. Mr. Hartman is a Certified Public Accountant in
the
State of California with a Masters in Accounting Degree from the State
University of New York. He also had previous public accounting experience as
an
audit manager with Price Waterhouse Coopers in San Francisco.
Renay
Cude. Ms. Cude was appointed Corporate Secretary in August 2002 and has
been our director since October 26, 2002. Ms. Cude is the President of our
subsidiary, Voltage Vehicles, where she works closely with corporate counsel
in
obtaining all the required licensing in the 50 states for the proper
distribution of advanced technology vehicles. Ms. Cude is also the President
of
ZAP Manufacturing and ZAP Rentals. Prior to joining us, from 1997 to 2002,
Ms.
Cude worked as a legal secretary for various law firms. Ms. Cude has over five
years experience working in the bankruptcy field where she helped companies
through the reorganization process. Ms. Cude also currently serves as Secretary
and a director of Rotoblock Corporation, a public company focused on the
continued development of the oscillating piston engine. Ms. Cude holds an
Associates Degree in General Education from Santa Rosa Junior
College.
Amos
Kazzaz. Mr. Kazzaz was appointed Chief Operating Officer on March 26,
2007. Prior to joining us, Mr. Kazzaz served as Vice President of Cost
Management at United Airlines, Inc. where he oversaw United Airlines’
operations, process improvement, and cost management. From 2003 to 2006, Mr.
Kazzaz served as United Airlines’ Vice President of Financial Planning and
Analysis during which time he accounted for United Airlines’ planning and
analysis function and capital budget. From 2002 to 2004, Mr. Kazzaz served
as
United Airlines’ Vice President of the Business Transformation Office, the
company’s first enterprise project management office, during which time he was
responsible for identifying areas of revenue and cost improvements;
concurrently, Mr. Kazzaz served as the Chief Operating Officer at Avolar, a
subsidiary of United Airlines. He currently sits on the Boards of Directors
of
Alliant Credit Union, SkyTech Solutions in India, and Integres. Mr. Kazzaz
holds
a bachelors degree in International Affairs from the University of Colorado
and
a Masters in Business Administration from the University of Denver.
Peter
H. Scholl. Mr. Scholl is currently an independent engineering
consultant. From 2003 to 2005, Mr. Scholl served as President of Rotoblock
Inc.
in Canada and Rotoblock Corporation, a Nevada corporation, in the development
of
Oscillating Piston Engine technology.
He
served
as President of Unimont Inc., a real estate development firm, in Penticton,
Canada from 2001 to 2003. From 1996 to 2000, Mr. Scholl worked on the
development of water purification systems in Arizona. Mr. Scholl has a
Bachelor’s of Science degree in Mechanical Engineering from the Institute of
Technology in Biel, Switzerland.
FAMILY
RELATIONSHIPS
There
are
no family relationships among any of our executive officers or
directors.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
To
the
best of our knowledge, none of our officers or directors currently beneficially
own any equity securities or rights to acquire any of our securities, and no
such persons have been involved in any transaction with us or any of our
directors, executive officers or affiliates that is required to be disclosed
pursuant to the rules and regulations of the SEC, other than with respect to
the
transactions that have been described herein. To the best of our knowledge,
none
of the officers and directors have been convicted in a criminal proceeding,
excluding traffic violations or similar misdemeanors, nor have they been a
party
to any judicial or administrative proceeding during the past five years, except
for matters that were dismissed without sanction or settlement, that resulted
in
a judgment, decree or final order enjoining the person from future violations
of, or prohibiting activities subject to, federal or state securities laws,
or a
finding of any violation of federal or state securities laws.
AUDIT
COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
The
Board’s Audit Committee is comprised of Peter Scholl and Gary Starr. During
2006, the Audit Committee met four times. All current members of the Audit
Committee are financially literate and are able to read and understand
fundamental financial statements, including a balance sheet, income statement
and cash flow statement. However, neither member has been designated as an
audit
committee financial expert in accordance with our Audit Committee
Charter. The Audit Committee Charter further requires that the Audit
Committee be comprised of at least three independent
directors. Currently, the Audit Committee is comprised of one
independent director and one non-independent director.
The
Audit
Committee assists the Board of Directors in its oversight of the quality and
integrity of our accounting, auditing, and reporting practices. The Audit
Committee’s role includes overseeing the work of our internal accounting and
financial reporting and external auditing processes and discussing with
management our processes to manage business and financial risk, and for
compliance with significant applicable legal, ethical, and regulatory
requirements. The Audit Committee is responsible for the appointment,
compensation, retention, and oversight of the independent auditor engaged to
prepare or issue audit reports on our financial statements and internal control
over financial reporting. The Audit Committee relies on the expertise and
knowledge of management and the independent auditor in carrying out its
oversight responsibilities. The Committee’s specific responsibilities are
delineated in the Audit Committee Charter. The Audit Committee Charter is
available on the ZAP website at http://www.zapworld.com.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of June 27, 2007, with
respect to the holdings of (1) each person who is the beneficial owner of more
than five percent of our common stock, (2) each of our directors, (3) the CEO
and each Named Executive Officer, and (4) all of our directors and executive
officers as a group.
Beneficial
ownership of the common stock is determined in accordance with the rules of
the
Securities and Exchange Commission and includes any shares of common stock
over
which a person exercises sole or shared voting or investment powers, or of
which
a person has a right to acquire ownership at any time within 60 days of June
27,
2007. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in this table have sole voting and investment
power with respect to all shares of common stock held by them. Applicable
percentage ownership in the following table is based on 46,251,033 shares of
common stock outstanding as of June 27, 2007 plus, for each individual, any
securities that individual has the right to acquire within 60 days of June
27,
2007.
Unless
otherwise indicated below, the address of each of the principal shareholders
is
c/o ZAP, 501 Fourth Street, Santa Rosa, California 95401.
Name
and Address
|
|
Shares
Beneficially Owned
|
|
Percentage
of Class
|
Beneficial
Owners of More than 5%:
|
|
|
|
|
Sunshine
511 Holdings (1)
101
N. Clematis Street, Suite 511
West
Palm Beach, Florida 33401
|
|
3,300,000
|
|
6.7%
|
Daka
Development Ltd. (2)
8/F
Leroy Plaza, Unit C
15
Cheung Shun Street
Chung
Sha Wan Kin, Hong Kong
|
|
2,799,136
|
|
5.7%
|
Fusion
Capital Fund II, LLC (3)
222
Merchandise Mart Plaza, Suite 9-112
Chicago,
Illinois 60654
|
|
2,750,000
|
|
5.6%
|
Jeffrey
G. Banks (4)
c/o
The Banks Group, LLC
PO
Box 10287
Oakland,
California 94610
|
|
6,828,373
|
|
13.3%
|
Current
Directors and Named Executive Officers:
|
|
|
|
|
Steven
M. Schneider (5)
|
|
17,138,611
|
|
28.4%
|
Gary
Starr (6)
|
|
8,396,775
|
|
15.7%
|
William
Hartman (7)
|
|
1,050,042
|
|
2.2%
|
Renay
Cude (8)
|
|
2,935,152
|
|
6.0%
|
Peter
Scholl (9)
|
|
625,218
|
|
1.3%
|
|
|
|
|
|
All
Directors and Executive Officers as a group (5 persons)
|
|
30,145,798
|
|
41.8%
|
(1)
|
Represents
3,300,000 warrants to purchase common stock. The managing partner
is
Andrew Schneider, a cousin of our CEO. The address for Sunshine 511
Holdings is 101 N. Clematis Street, Suite 511, West Palm Beach, FL
33401.
|
(2)
|
Includes
2,587,262 warrants to purchase common stock. The managing partner
is
Raymond Chow. The address for Daka Development is Unit C 8/F Leroy
Plaza,
15 Cheung Shun Street, Chung Sha Wan Kin, Hong
Kong.
|
(3)
|
Represents
2,750,000 warrants to purchase common stock. Pursuant to the terms
of the
warrant, Fusion Capital is not entitled to exercise the warrants
to the
extent such exercise would cause the aggregate number of shares of
common
stock beneficially owned by Fusion Capital to exceed 9.9% of the
outstanding shares of the common stock following such exercise. Steve
Martin is the managing partner. The address for Fusion Capital is
222
Merchandise Mart Plaza, Suite 9-112, Chicago, IL
60654.
|
(4)
|
Includes
5,005,000 warrants to purchase common
stock.
|
(5)
|
Includes
12,159,266 shares of common stock issuable upon the exercise of various
warrants and 1,849,845 shares of stock issuable upon the exercise
of stock
options.
|
(6)
|
Includes
5,441,160 shares of common stock issuable upon the exercise of various
warrants and 1,923,179 shares of
stock
|
|
issuable
upon the exercise of stock options.
|
(7)
|
Includes
709,500 shares of common stock issuable upon the exercise of various
warrants and 263,542 shares of stock issuable upon the exercise of
stock
options.
|
(8)
|
Includes
1,525,786 shares of common stock issuable upon the exercise of various
warrants and 1,326,465 shares of stock issuable upon the exercise
of stock
options.
|
(9)
|
Includes
600,000 shares of common stock issuable upon the exercise of various
warrants.
|
CHANGE
OF CONTROL
To
the
knowledge of management, there are no present arrangements or pledges of
securities of our company that may result in a change in control of the
company.
DESCRIPTION
OF SECURITIES
GENERAL
We
are
presently authorized under our Articles of Incorporation to issue 200,000,000
shares of common stock, no par value per share, and 50,000,000 shares of
preferred stock, no par value per share. Of the 50,000,000 shares of preferred
stock authorized, 10,000 shares were designated as Series SA Convertible
Preferred Stock pursuant to a Certificate of Determination (“Certificate of
Determination”) that was approved by our board of directors, and filed with and
accepted by the Secretary of State of the State of California. There are
currently no shares of Series SA Convertible Preferred Stock issued and
outstanding.
The
following descriptions of our capital stock are only summaries and do not
purport to be complete and are subject to and qualified by our Articles of
Incorporation, as amended, our By-laws, and the Certificate of Determination,
copies of which will be provided by us upon request, and by the provisions
of
applicable corporate laws of the State of California.
COMMON
STOCK
The
holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, except that
upon
giving the legally required notice, stockholders may cumulate their shares
in
the election of directors. We may pay dividends at such time and to the extent
declared by the Board of Directors in accordance with California corporate
law.
Our common stock has no preemptive or other subscription rights, and there
are
no conversion rights or redemption or sinking fund provisions with respect
to
such shares. All outstanding shares of common stock are fully paid and
non-assessable. To the extent that additional shares of common stock may be
issued in the future, the relative interests of the then existing stockholders
may be diluted.
PREFERRED
STOCK
Our
preferred stock may be divided into such number of series as the Board of
Directors may determine. The Board of Directors is authorized to determine
and
alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred shares, and to fix the
number of shares and the designation of any series of preferred shares. The
Board of Directors may increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any wholly unissued
series subsequent to the issue of those shares. The rights of the holders of
common stock will be subject to and may be adversely affected by the rights
of
the holders of any preferred stock that may be issued in the future. Issuance
of
a new series of preferred stock could make it more difficult for a third party
to acquire, or discourage a third party from acquiring, the outstanding shares
of common stock and make removal of the Board of Directors more
difficult.
SERIES
SA CONVERTIBLE PREFERRED STOCK
The
following is a summary of the preferences and rights contained in the
Certificate of Determination (the “Series SA Certificate”) of the Series SA
Convertible Preferred Stock (“Series SA Preferred Stock”) and is qualified in
its entirety by reference to the Series SA Certificate, a copy of which will
be
provided by us upon request.
Dividends
Holders
of Series SA Preferred Stock (the “Holders”) shall participate with the holders
of outstanding common stock as to any dividends payable on the common stock,
as
if such holder’s Series SA Preferred Stock were equal to the whole number of
shares of common stock into which such Holder’s aggregate number of shares of
Series SA Preferred Stock are then convertible.
Liquidation
Preference
Upon
(i)
any liquidation, dissolution or winding up of the Company (whether voluntary
or
involuntary), or (ii) the sale, conveyance, transfer or other disposition of
all
or substantially all of our assets ((i) and (ii) collectively, a “Liquidation
Event”), each Holder shall be entitled to be paid before any distribution or
payment is made upon any Common Stock, an amount in cash equal to the amount
payable with respect to the Series SA Preferred Stock calculated as if each
One
Hundred (100) shares of Series SA Preferred Stock had been converted into one
(1) share of Common Stock immediately prior to such Liquidation Event (the
“Liquidation Return”). If upon any Liquidation Event, our assets to
be distributed among the Holders are insufficient to permit payment to such
Holders of the aggregate amount which they are entitled to be paid, then the
entire assets available to be distributed to our shareholders shall be
distributed pro rata among such Holders based upon the aggregate Liquidation
Return of the Series SA Preferred Stock held by each such Holder.
Conversion
Rights
We
and
the Holders each shall have the following rights with respect to the conversion
of the Series SA Preferred Stock into shares of Common
Stock:
Optional
Conversion. Series SA Preferred Stock may, at the option of the
Holder, be converted into fully paid and nonassessable shares of Common Stock
after each Delivery of not less than One Thousand (1,000) Smart Cars by the
Holder (the “Conversion Requirement”). Upon occurrence of each
Conversion Requirement, the Holder shall be entitled to convert Five Hundred
(500) shares of Series SA Preferred Stock into such number of shares of Common
Stock as equals (x) Five Hundred Thousand Dollars ($500,000) divided by (y)
the
Fair Market Value (“FMV”) of the Common Stock on the Conversion Date (the
“Series SA Conversion Rate”). Notwithstanding the foregoing, the
holder may immediately convert up to Five Hundred (500) shares of Series SA
Preferred Stock into such number of shares of Common Stock as equals (x) Five
Hundred Thousand Dollars ($500,000) divided by (y) the FMV of the Common Stock
on the Conversion Date. Notwithstanding anything herein to the
contrary, the Holder may only exercise its rights of conversion if the
Conversion Requirements occur not later than December 31, 2006.
(a)
|
Adjustments
to Series SA Conversion Rate. The Series SA Conversion Rate
shall be adjusted as follows:
|
(i)
|
Adjustments
for Stock Splits and Combinations. If, at any time or from
time to time after the date hereof,
|
we
effect
a subdivision of the outstanding Common Stock, the Series SA Conversion Rate
in
effect immediately before that subdivision shall be proportionately
increased. Conversely, if we shall at any time or from time to time
after the date hereof, combine the outstanding shares of Common Stock into
a
smaller number of shares, the Series SA Conversion Rate in effect immediately
before the combination shall be proportionately decreased. Any
adjustment shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(ii) Adjustment
for Reclassification Exchange and Substitution. If, at any time
or from time to time after the date of issuance, the Common Stock issuable
upon
the conversion of the Series SA Preferred Stock is changed into the same or
a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise, in any such event each Holder
shall have the right thereafter to convert such stock into the kind and amount
of stock and other securities and property receivable in connection with such
recapitalization, reclassification or other change with respect to the maximum
number of shares of Common Stock into which such shares of Series SA Preferred
Stock could have been converted immediately prior to such recapitalization,
reclassification or change, all subject to further adjustments as provided
herein or with respect to such other securities or property by the terms
thereof.
(iii) Reorganizations,
Mergers or Consolidations. If, at any time or from time to time
after the date of issuance, the Common Stock is converted into other securities
or property, whether pursuant to a reorganization, merger, consolidation or
otherwise, as a part of such transaction, provision shall be made so that the
Holders shall be entitled thereafter to receive upon conversion of the Series
SA
Preferred Stock the number of shares of stock or other securities or property
of
the Company to which a holder of the maximum number of shares of Common Stock
deliverable upon conversion would have been entitled in connection with such
transaction, subject to adjustment in respect of such stock or securities by
the
terms thereof.
Redemption
Rights
(a) At
any time on or after March 1, 2008, we may redeem all, or a portion thereof
at
the discretion of the Board of Directors, of the outstanding shares of Series
SA
Preferred Stock by delivering a written notice of such election with the number
of shares so redeemed (a “Redemption Election”) to the Holders at a price of ten
cents ($0.10) per share (the “Redemption Price”).
(b) Upon
receipt of the applicable Redemption Price by certified check or wire transfer,
the shares of Series SA Preferred Stock so redeemed will be deemed to be
automatically canceled and each Holder so redeemed shall surrender the
certificate or certificates representing such shares to us, duly assigned or
endorsed for transfer (or accompanied by duly executed stock powers relating
thereto), or shall deliver a bond, indemnity and affidavit of loss, satisfactory
to us with respect to such certificates at our principal executive office,
and
each surrendered certificate will be canceled and retired. In the
event that the Holder fails to deliver a certificate representing at least
the
number of shares of Series SA Preferred Stock indicated in the Redemption
Election, we may cancel the Holder’s certificate on our
books
and
records and issue the Holder a new certificate representing the balance of
the shares of Series
SA Preferred Stock, if any, which were not converted.
Voting
Rights
The
Holders shall not be entitled to vote on any matter, except as otherwise
required by law. If the Holders are required by law to vote on a
matter and such shares have not been then converted to Common Stock as of the
record date for such matter to be submitted to a vote, then the Holders shall
vote the shares of Series SA Preferred Stock together with the holders of the
Common Stock as a single class as if the shares of Series SA Preferred Stock
had
been converted to Common Stock on a one-for-one basis.
8%
SENIOR CONVERTIBLE NOTES AND WARRANTS
On
December 5, 2006, when the market price of the Company’s common stock was $0.89
per share, the Company entered into a Securities Purchase Agreement with three
institutional and accredited investors or purchasers pursuant to which the
Company sold to the purchasers $1.5 million aggregate principal amount of 8%
senior convertible notes due December 5, 2008 (the “Notes due 2008”) and
warrants to purchase 450,000 shares of common stock of the Company (the “Initial
Warrants”) in a private placement. The Notes due 2008 are convertible at $1.00
per share into 1,500,000 shares of the Company’s common stock, subject to
anti-dilution and other adjustments.
The Initial Warrants, each immediately exercisable and expiring on December
5,
2011, are exercisable at $1.10 per share, subject to anti-dilution and other
adjustments.
On
February 20, 2007, when the market price of the Company’s common stock was $1.08
per share, the Company entered into a Purchase and Amendment Agreement (the
“First Amendment”), amending the Securities Purchase Agreement entered into by
the Company on December 5, 2006 (the “Original Agreement” and as amended by the
First Amendment, the “Agreement”), with four institutional and accredited
investors or purchasers pursuant to which the Company sold to the purchasers
$1.2 million aggregate principal amount of 8% senior convertible notes due
February 2009 (the “Notes due 2009” and with the Notes due 2008, the “Notes”)
and warrants to purchase 360,000 shares of the common stock of the Company
at an
exercise price of $1.32 per share (the “Additional Warrants” and with the
Initial Warrants, the “Warrants”), in a private placement. The transaction
closed on February 22, 2007 (the “February 2007 financing”). The Notes due 2009
are convertible at $1.00 per share into 1,200,000 shares of the Company’s common
stock, subject to anti-dilution and other adjustments.
The
Notes
provide for anti-dilution adjustments of issuable shares and the conversion
price should the Company issue common stock or common stock equivalents for
a
price less than the conversion price, on or prior to the later of 1) the earlier
of (x) the date a registration statement is declared effective by the SEC and
(y) the two year anniversary of the issue date and 2) the six month anniversary
of the issue date. The Warrants provide for anti-dilution adjustments of the
issuable shares and the exercise prices thereof should the Company issue common
stock or common stock equivalents for a price less than the exercise price
of
the Warrants, on or prior to the later of 1) the earlier of (x) the date a
registration statement is declared effective by the SEC and (y) the two year
anniversary of the issue date and 2) the six month anniversary of the issue
date. The anti-dilution provided by the Warrants calls for the exercise price
of
the Warrants to adjust to 110% of the price of any dilutive issuances, on a
per
share basis. After December 31, 2007 and if the daily volume weighted average
price of its common stock is equal to or greater than the Forced Conversion
Price (as defined) for 20 trading days occurring during any period of thirty
consecutive trading days, and certain other conditions are satisfied, the
Company has the right to require the conversion of any unconverted Notes into
shares of common stock. After December 31, 2007, and if the daily volume
weighted average price of its common stock is equal to or greater than the
$2.20
for 20 trading days occurring during any period of thirty consecutive trading
days, and certain other conditions are satisfied, the Company has the right
to
require the exercise of any unexercised Warrants into shares of common
stock.
The
Notes
provide for quarterly interest to be paid in cash, or subject to certain
conditions, by issuing shares of common stock. If the Company is eligible and
elects to pay quarterly interest in stock, the price per share used to calculate
the number of shares due for interest will be calculated by reducing the market
price of the shares by 5% (as defined).
Under
terms of a registration rights agreement, the Company is obligated to file
a
registration statement within 90 days of the closing date of the sale of the
Notes due 2008 registering for resale 200% of the shares of common stock
underlying the Notes, the Warrants and any other shares issuable pursuant to
the
terms of the Notes or the Warrants and to cause the registration statement
to
become effective within 180 days of the closing date. The Company is
also required to maintain the effectiveness of the registration statement until
all shares have been sold or may be sold without a registration
statement.
In
the
event the registration statement is not filed within 90 days after the closing
or does not become effective within 180 days of the closing, or once declared
effective ceases to remain effective during the period that the securities
covered by the agreement are not sold, the Company will be required to pay,
in
cash, an amount for such failure, equal to 1% of the aggregate principal amount
for each thirty day period in which the registration statement is not filed,
effective, or maintained effective. There is no cap on the amount of damages
potentially payable by the Company should the registration statement not be
filed, declared effective, or maintained effective. At May 14, 2007, the Company
has not filed a registration statement pursuant to the registration rights
agreement and has not made any payments to the purchasers of such amount. The
Company has been contacted by one of the noteholders regarding this situation.
In the current discussions, the Company has indicated its intention to file
the
required registration by June 30, 2007. The noteholder has expressed their
willingness
to work with the Company to resolve any issues regarding compliance with the
notes including a possible restructuring of the debt instruments if
necessary.
If
the
Company issues additional common stock or common stock equivalents for a price
less than the Conversion Price, on or prior to the later of 1) the earlier
of
(x) the date a registration statement is declared effective by the SEC and
(y)
the two year anniversary of the issue date and 2) the six month anniversary
of
the issue date of the Notes, the investors will have the right, but not the
obligation, to participate in such issuance, upon the same terms as those
offered, so that each Investor’s percentage ownership of the Company remains the
same.
The
Company is required to make monthly principal payments on the Notes beginning
on
June 1, 2007, in twelve equal installments. Under certain circumstances, the
Company may make all or a portion of these principal payments with common stock.
If the Company chooses to repay principal with common stock, the principal
payment share price will generally be the lesser of i) 90% of the lowest daily
volume weighted average price for any trading day among the ten consecutive
trading days occurring immediately prior to the principal payment date and
ii)
the conversion price in effect on such principal payment date.
The
note
agreements contain certain affirmative and restrictive covenants, including,
among other things, covenants prohibiting the Company from paying cash dividends
on its common stock and requiring the Company to file, and achieve and maintain
the effectiveness of a registration statement. If the Company breaches any
of
the covenants and, after receiving notice from noteholders, does not, within
a
certain
period of time, cure the breach, or if there is a change in control, the
noteholders may call the loan, thereby requiring the payment of the principal
balance of the notes and accrued interest plus a 20% penalty.
Certificates
of Adjustment
On
April
30, 2007, the Company entered into Certificates of Adjustments to the Notes
and
Warrants (the “Adjustments”) to adjust certain provisions of the Notes and
Warrants as a consequence of the declaration by the Company of a ten percent
(10%) common stock dividend to common shareholders of record on February 15,
2007, payable February 28, 2007. As a result of the Adjustments, the
conversion price of the Notes was reduced to $0.909 per share, the Initial
Warrants were increased to 495,000 at an exercise price of $1.00 per share,
and
the Additional Warrants were increased to 396,000 at an exercise price of $1.20
per share.
Second
Amendment
On
June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion
price of the Notes was reduced to $0.727 per share and the Initial Warrants
were
increased to 594,001 at an exercise price of $0.80 per share. The Second
Amendment also deferred the June and July 2007 payments of the principal due
under the Notes to August 1, 2007, extended the filing deadline of the
Registration Statement to July 9, 2007, reduced the number of shares required
to
be registered under the Agreement to 130% of the shares underlying the Notes
and
Warrants, and allowed for the inclusion of an aggregate of 4,490,630 additional
shares of common stock in any registration statement filed by the Company in
connection with the Agreement. In consideration for these
modifications, the Company agreed to pay the purchasers an aggregate of $113,000
in liquidation damages, payable in 141,750 shares of common stock of the
Company, and warrants to purchase an aggregate of 200,000 shares of common
stock
of the Company at an exercise price of $1.10 per share. The Company
also agreed to include the shares and warrants issued pursuant to the Second
Amendment in the registration statement required to be filed by the Company
pursuant to the Agreement.
SECURED
CONVERTIBLE NOTE
The
Company also 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 $ 1,872,000 at March 31, 2007.
Scheduled
annual maturities for this long-term debt for years ending after December 31,
2006 are as follows: $78,000 - 2007 (nine months); $104,000 - 2008; $104,000
-
2009; $104,000 - 2010; $104,000 - 2011; and $1,378,000- thereafter.
LEGAL
MATTERS
The
validity of the common stock to be sold by the selling stockholders under this
prospectus will be passed upon for us by Richardson &
Patel
LLP. As of June 11, 2007, Richardson & Patel LLP is a shareholder of record
of 103,671 shares of our common stock.
The
financial statements as of and for the years ended December 31, 2006 and 2005
included in this prospectus have been audited by Odenberg, Ullakko, Muranishi
& Co. LLP, an independent registered public accounting firm, to the extent
and for the periods set forth in their report appearing elsewhere herein and
are
included in reliance upon such report given upon the authority of that firm
as
experts in auditing and accounting.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES
ACT LIABILITIES
Pursuant
to the provisions of California’s Corporation Code, we have adopted the
following indemnification provisions in our amended and restated Articles of
Incorporation for our directors and officers:
“SIX:
The
liability of the directors of the
corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
SEVEN:
The
corporation is authorized to
indemnify the directors and officers of the corporation to the fullest extent
permissible under California law.”
In
addition, our Bylaws contain the following provision regarding indemnification
of our officers, directors, employees or other agents:
“The
directors and officers of the corporation shall be indemnified by the
corporation to the fullest extent not prohibited by the California Corporations
Code.”
Section
204 of the California General Corporation Law allows a corporation, among other
things, to eliminate or limit the personal liability of a director for monetary
damages in an action brought by the corporation itself or by way of a derivative
action brought by shareholders for breach of a director’s duties to the
corporation and its shareholders. The indemnification provision may not
eliminate or limit liability of directors for the following specified actions,
however: (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law; (ii) for acts or omissions that a
director believes to be contrary to the best interests of the corporation or
its
shareholders, or that involve the absence of good faith on the part of the
director; (iii) for any transaction from which a director derived an improper
personal benefit; (iv) for acts or omissions that show a reckless disregard
of
the director’s duty to the corporation or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director’s duties, of a risk of serious injury to the
corporation or its shareholders; (v) for acts or omissions that constitute
an
unexcused pattern of inattention that amounts to an abdication of the director’s
duty to the corporation or its shareholders; (vi) for transactions between
the
corporation and a director, or between corporations having interrelated
directors; and (vii) for improper distributions and stock dividends, loans
and
guaranties. The indemnification provision does not apply to acts or omissions
occurring before the date that the provision became effective and does not
eliminate or limit the liability of an officer for an act or omission as an
officer, regardless of whether that officer is also a director.
Section
317 of the California General Corporation Law gives a corporation the power
to
indemnify any person who was or is a party, or is threatened to be made a party,
to any proceeding, whether threatened, pending, or completed, and whether civil,
criminal, administrative or investigative, by reason of the fact that that
person is or was a director, officer, employee or agent of the corporation,
or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or
other enterprise. A corporation may indemnify such a person against expenses,
judgments, fines, settlements and other amounts actually or reasonably incurred
in connection with the proceeding, if that person acted in good faith, and
in a
manner that that person reasonably believed to be in the best interest of the
corporation; and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. In an action by or in the
right of the corporation, no indemnification may be made with respect to any
claim, issue or matter (a) as to which the person shall have been adjudged
to be
liable to the corporation in the performance of that person’s duty to the
corporation and its shareholders, unless and only to the extent that the court
in which such proceeding was brought shall determine that, in view of all of
the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for expenses; and (b) which is settled or otherwise disposed of
without court approval. To the extent that any such person has been successful
on the merits in defense of any proceeding, or any claim, issue or matter
therein, that person shall be indemnified against expenses actually and
reasonably
incurred in connection therewith. Indemnification is available only if
authorized in the specific case by a majority of a quorum of disinterested
directors, by independent legal counsel in a written opinion, by approval of
the
shareholders other than the person to be indemnified, or by the court. Expenses
incurred by such a person may be advanced by the corporation before the final
disposition of the proceeding upon receipt of an undertaking to repay the amount
if it is ultimately determined that the person is not entitled to
indemnification.
Section
317 of the California General Corporation Law further provides that a
corporation may indemnify its officers and directors in excess of the statutory
provisions if authorized by its Articles of Incorporation and that a corporation
may purchase and maintain insurance on behalf of any officer, director, employee
or agent against any liability asserted or incurred in his or her capacity,
or
arising out of his or her status with the corporation.
These
indemnification provisions may be sufficiently broad to permit indemnification
of the registrant’s executive officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act of
1933.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. No pending material
litigation or proceeding involving our directors, executive officers, employees
or other agents as to which indemnification is being sought exists, and we
are
not aware of any pending or threatened material litigation that may result
in
claims for indemnification by any of our directors or executive
officers.
DESCRIPTION
OF BUSINESS
OVERVIEW
ZAP
stands for Zero Air Pollution(R). With our new product offerings, we are
positioned to become a leading brand and distribution portal of electric and
other advanced technology vehicles. We are committed to running our business
based on a strong philosophical foundation that supports the environment, social
responsibility and profitability.
Our
strategy is to serve the growing and underrepresented consumer that seeks
electric and fuel efficient vehicles. With the recent increases in the cost
of
oil and increasing concern about the environment and the effects of global
warming, we believe there is a large and untapped demand in the areas of
transportation and consumer products. During the energy crisis of the 1970s,
Japanese automobile manufacturers penetrated the United States market when
domestic automobile manufacturers failed to anticipate changes. We
believe a similar opportunity is present today, enhanced by heightened
environmental awareness, climate changes and economic pressures. We
have assembled a complete line of products to meet the growing demands of the
environmentally conscious consumer focused on two primary businesses: ZAP
Automotive and ZAP Power Systems.
We
were
incorporated as “ZAP Power Systems” under the laws of the State of California on
September 23, 1994, and we changed our name to ZAP on June 18, 2001. 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 plan of reorganization was
confirmed on June 20, 2002 and the Bankruptcy Court closed the bankruptcy case
on June 14, 2004. Our principal executive offices are located at 501 Fourth
Street, Santa Rosa, California, 95401 and our telephone number is (707)
525-8658.
SUBSIDIARIES
We
have
the following wholly owned subsidiaries: Voltage Vehicles, a Nevada company
(“Voltage Vehicles”), RAP Group, Inc., a California company (“RAP Group”), 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 was 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 our products and ZAP Manufacturing is engaged
primarily in the distribution of our products. ZAP World Outlet and ZAP Rental
Outlet are not currently operating subsidiaries. RAP Group and Voltage Vehicles
were acquired by us in July 2002. On October 1, 2006, the RAP Group surrendered
its Dealer Vehicle License and ceased operations. A new Electric Vehicle
Dealership opened on the old automobile lot location. All subsidiaries are
100%
owned by us.
BUSINESS
DEVELOPMENT
Founded
in 1994, we have invented, designed, manufactured, and marketed numerous
innovative products since our inception. In 1995, we began marketing electric
transportation on the Internet through our website, www.zapworld.com. We have
been a pioneer in developing and marketing electric vehicles such as a
zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to most
bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through 1998,
we
continued to add to our product line; in 1999, we added electric motorbikes;
in
2001, we added electric dive scooters; in 2003, we announced our first electric
automobiles, including the first-ever production electric automobile imported
from our manufacturing partner in China; in 2004, we introduced electric
all-terrain vehicles
and the fuel-efficient Smart
Car; and in 2005, we introduced multi-fuel vehicles, capable of running on
ethanol and/or gasoline. To date, we have delivered more than 90,000 electric
vehicles and consumer products to customers in more than 75 countries, which
we
believe establishes us as one of the leaders in the alternative transportation
marketplace.
Today,
we
are renewing our focus as one of the pioneers of advanced transportation
technologies and leveraging our place in the market
as
a
magnet for new technologies. We believe there is a growing and underrepresented
market for fuel efficient transportation vehicles and we are capitalizing on
the
opportunities, enhanced by heightened environmental awareness, climate changes
and economic pressures. The technology is available to deliver transportation
solutions that are practical and affordable. With our recently introduced
products such as the XEBRA and ZAPPY 3, we are already delivering such solutions
to the market. Our goal is to become one of the largest and most complete brand
and distribution portals in the United States for advanced technology
vehicles.
To
distribute our practical, affordable and advanced transportation technologies,
we have established and are growing both our portal of qualified automotive
dealers and our relationships with specialty dealers/distributors for our power
system products. Through these distribution channels, coupled with the continued
establishment of partnerships with select manufacturers, we intend to expand
our
market recognition by building awareness of the evolving technologies available
for automotive transportation and in reducing our nation’s dependency on foreign
oil.
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. As of September 30, 2006, we no longer distribute the
Smart
Car Americanized by ZAP due to the conflict with Daimler-Chrysler and others,
and the uncertainty of Smart Car supply. 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:
ZAP
AUTOMOTIVE
We
believe we are positioned to become one of the leading distributors of fuel
efficient alternative energy vehicles in the United States. We believe that
we
are one of only a few companies distributing a 100% production electric vehicle
capable of speeds up to 40 mph. Within the next twelve to thirty-six months,
we
hope to have distribution agreements in place with three to four vehicle
manufacturers whose products fit our mission. To distribute our product to
end
consumers and fleets, we have established more than 20 licensed automotive
dealers and intend to grow this base significantly over the next several
years.
In
2006,
ZAP Automotive introduced the following automobile products:
·
|
the
100% electric XEBRA sedan with an MSRP of approximately
$10,000;
|
·
|
the
100% electric XEBRA utility vehicle truck with an MSRP of approximately
$10,500; and
|
·
|
the
Smart micro-car with an MSRP of approximately $25,000 (no longer
distributed after September 30,
2006).
|
Our
future offerings that are currently in the developmental stage
include:
·
|
the
OBVIO 828, an economy micro-car from Brazil with an estimated MSRP
of
$14,000,
|
·
|
the
OBVIO 012, a sports-coupe from Brazil with an estimated MSRP of $28,000;
and
|
·
|
the
ZAP-X, a 100% electric vehicle which will use Lotus Engineering’s Aluminum
Performance Crossover (“APX”) design
.
|
We
are
also in discussions with a number of other foreign manufacturers and hope to
establish additional relationships within the next twelve to thirty-six
months.
XEBRA
We
believe that XEBRA is the only series production electric vehicle in the United
States that can legally travel faster than 25 mph. The car’s suggested retail
price of $10,000 is significantly less expensive than most of its competitors,
some of which cost more than $100,000 and are not yet widely available today.
XEBRA has three wheels and is being imported as a motor-driven cycle, yet,
unlike most other motor-driven cycles, the XEBRA is enclosed with windows and
a
roof, affording it protection from inclement weather.
Working
with our Chinese manufacturing partner, we have designed two XEBRA models:
a
sedan and a utility pick-up truck. The Chinese manufacturer’s current
manufacturing capacity is approximately 1,000 vehicles per month. Subject in
large part to the level of financing secured, our current target is to
distribute approximately 200 vehicles per month over the next 12 months. Initial
market demand has been overwhelming, both from end consumers using the vehicle
as a “city-car” and from fleet managers of municipalities, states,
green
friendly corporations, and universities who have a preference or mandate to
purchase zero emission vehicles.
We
are
working closely with our manufacturing partner to continually upgrade the XEBRA,
adding features while balancing the goal of maintaining an affordable price
level. We have incorporated options to enhance the consumer’s experience,
including providing lithium battery packs for additional (up to 100 mile) range
and solar panels for low cost and true zero air pollution charging.
XEBRA
Sedan (ZAPCAR (R))
We
launched the sedan version of our XEBRA on July 11, 2006. The sedan has a
seating capacity for four and is being targeted for city/commuter use. Based
on
initial feedback, we will be marketing the XEBRA sedan to government and
corporate fleets as well as to families with two or more cars, but with plenty
of occasion to use their vehicles for short, city drives.
XEBRA
PK (ZAPTRUCK (TM))
We
launched our utility pick-up truck version of the XEBRA, the XEBRA PK, on August
24, 2006. This electric vehicle seats two with a multi-purpose platform behind
the passenger compartment that serves as a hauler, dump truck or flatbed. The
XEBRA PK is targeted to municipalities, maintenance facilities, universities,
ranches and warehouses. Since its launch, we have received overwhelming
inquiries for test drives. To date, we have focused on our west coast market
and
sales have exceeded our initial distribution and sales plans.
Smart
Car
The
Smart
Car was our initial automotive product. The project provided us with an
excellent entry level opportunity in the micro-car market in the United States
and confirmed our belief that there is a sizable demand for smaller, more fuel
efficient (or alternatively fueled) vehicles. The Smart Car is manufactured
by
Daimler Chrysler Corporation, who we believe failed to identify the United
States as a potential market. In Daimler Chrysler’s absence, we contracted with
a third party unaffiliated with Daimler Chrysler to have the Smart Car imported
and “Americanized” to meet the growing demand for micro-cars. The process of
Americanizing the Smart Car involves having the car modified to meet all Federal
Motor Vehicle Safety Standards, United States Department of Transportation
requirements, and Environmental Protection Agency regulations and applicable
state requirements.
We
have
sold over 300 Smart Cars to date, but due to the conflict with Daimler-Chrysler
and others, and the uncertainty of Smart Car supply we discontinued distribution
of the Smart Car in September of 2006.
OBVIO!
In
September 2005, we entered into an exclusive (in North America) distribution
contract with the Brazilian automobile manufacturer OBVIO! for the future
importation of two models of micro-cars - an economy 828 model and a full
performance 012 model. The cars will have butterfly doors, seating capacity
to
accommodate three persons, up to 250 horsepower output and accessories such
as
iMobile and air conditioning. This car will function on multi-fuel technology,
meaning they will have the ability to be powered by ethanol, gasoline, or any
combination thereof. We are also working with OBVIO! to produce a 100% electric
version. OBVIO! expects to deliver its first cars into the United States market
in 2008.
There
are
currently over four million flex-fuel vehicles in the United States and most
of
these vehicles are sport-utility vehicles or others in the “light truck” class.
Sedans, wagons, and others are usually only available in flex-fuel
configurations as part of fleet vehicle purchases by corporations. A recent
poll
conducted by Maritz(R) showed that 84% of consumers would consider purchasing
a
vehicle capable of running on E85, a fuel blend of 15% gasoline and 85% ethanol,
and consumers were willing to pay a median premium of $1,000 more than for
a
gasoline-only vehicle. Unlike most flex-fuel vehicles in the U.S. which can
run
on up to 85% ethanol, OBVIO! vehicles will have the capability to run on 100%
ethanol.
The
initial retail price of the 828 model is expected to be approximately $14,000
and the retail price of the 012 model is expected to be $28,000. OBVIO! is
scheduled to deliver 7,500 cars during the first year of production, 17,500
cars
during the second year and 25,000 thereafter. We intend to capture market share
of the flex-fuel segment by offering cars that are sporty, fun to drive, and
high-performance, but yet efficient and economical.
Lotus
On
January 30, 2007, we announced a contract with Lotus Engineering to develop
a
production-ready electric all-wheel drive crossover high performance vehicle
for
the U.S. market. A combination of the lightweight aluminum vehicle architecture,
a new efficient drive and advanced battery management systems is intended to
enable a range of up to 350 miles between charges, with a rapid 10-minute
recharging
time. An auxiliary power unit is planned to support longer distance
journeys.
Lotus’
APX will be powered by revolutionary in-hub electric motors, delivering 644
horsepower in all wheel drive mode, theoretically capable of powering the ZAP-X
to a potential top speed of 155mph. A new strong, lightweight and highly
efficient structure based on the Lotus technology is planned to give the car
a
very attractive power-to-weight ratio.
Future
Automotive Offerings
Over
the
next 36 months, we hope to establish relationships with two to four additional
manufacturers who can supply automobiles and related vehicles that meet our
mission of affordable, advanced transportation technologies that are socially
responsible and environmentally sustainable. In 2007, we have identified the
following products as potential future offerings for us: (1) an affordable
100%
electric two-seater sports coupe; (2) a 100% electric “Vespa”-type scooter with
brushless hub/wheel motors; and (3) a 100% electric, four-wheel low-speed
utility truck. There can be no assurances that any of these future product
offerings will be realized.
ZAP
POWER SYSTEMS
We
launched the Company in 1994 with the invention of the ZAPPY electric scooter
and quickly established a presence as one of the market leaders in the electric
“personal” transportation product segment. Since inception, we have been able to
maintain a steady business and committed buyers in this segment. In keeping
with
our initial product offerings, at the beginning of 2006, we revitalized our
consumer products line (recently renamed “Power Systems”), including an updated
version of the electric scooter. As part of the segment’s revitalization, we
reduced the number of suppliers and placed more emphasis on upgrading existing
models with newer component technology and more robust features in order to
provide a higher quality consumer experience and product.
Our
goal
for our consumer product line is to sell an average of 10,000 units per year.
At
$350 to $500 average unit prices, the business represents a strategic compliment
to the automotive portal by providing stable and increasing cash flows,
facilitating access to, and use of, new technologies, and continuing to foster
loyalty of our brand.
Our
current product offerings include:
·
|
Three-wheeled
personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3
EZ);
|
·
|
Off
road vehicles (electric quads and motorcycles);
and
|
·
|
Portable
energy (universal recharge-it-all batteries and ipod auxiliary
batteries).
|
The
ZAPPY3 Personal Transporters
Segway’s
highly publicized “human transporter to change the world” unearthed a growing
need for a “scooter for adults,” better known as personal electric
transportation. We responded to this demand by designing the ZAPPY3. Unlike
the
Segway, the ZAPPY3’s 3-wheeled vehicle design provides stability and
maneuverability allowing just about anyone to ride this vehicle without
training. It has a top speed of 15 mph and the Pro has the farthest range of
any
personal transporter available today at 25 miles range per charge.
We
initially thought that the ZAPPY3 would be great for the consumer market. Over
the past year, we have revisited our sales strategy and come to recognize that
the largest market opportunities are in the industrial and commercial
applications. Our primary sales channels are now more clearly defined as
security, sporting goods and material handling.
With
the
increased emphasis on homeland security, there are several product competitors
in the security and police market segment. Segway, the most well known, can
be
found in select police departments and airports and sells for about $5,500.
American Chariot which is a chariot-like transporter has entered the market
selling for between $1,500 to $2,500. Newest to the security transporter
business is T3Motion, which is built like a small tank and priced at up to
$8,000. The ZAPPY3 meets the need of a majority of the security transportation
needs and with an average selling price of $850, depending on the model
purchased, we believe is the most economical of all offerings.
The
ZAPPY3 retail focus has continued strong in 2006. In early 2006, we rolled
out a
new dealer development program that emphasized our commitment to a nationwide
distribution strategy coupled with consistent and responsive customer service.
As the product line has gained momentum and market acceptance, we plan to grow
distribution in the retail channel through larger regional and specialized
chain
stores.
The
material handling, warehousing, fabrication, and construction industries are
the
ideal markets for the ZAPPY3 Pro. We are not currently aware of any major
competitors in this market. The traditional solution for short distance
transportation has been bicycles. The ZAPPY Pro offers the perfect utility
vehicle for shuttling, picking and packing and getting into small areas like
elevators. While our entrance into this market is still in the early stages,
the
product response has been very favorable, demonstrated by our newly established
relationship with Indoff, the largest distributor of material handling equipment
in the United States.
Off
Road Vehicles
All
terrain vehicle (“ATV”) manufacturers recognized in excess of $5.5 billion in
revenues in 2005 with the market for ATVs and off road vehicles growing steadily
since 2003. In the United States alone, approximately 800,000 units were sold
in
2005. To date, all of the ATVs on the market are gas-powered. We believe
electric ATVs have practical environmental benefits over their gas-powered
counterparts: they are silent and generate no emissions. Moreover, there are
now
over 8,000 organic farms in the United States which are committed to
reducing
pollutants that may put organic certification at risk. The electric ATVs can
provide the ruggedness of the traditional ATV in areas never before accessible,
while being more versatile than golf carts.
We
entered the electric ATV market in 2006 with our ZAP Buzzz mini ATV. The Buzzz
has a 450 watt geared-motor and a top speed of 15 mph with a range of
approximately 20 miles. By the second quarter of 2007, we anticipate the 800
watt “mid size” ATV will be available for sale in the United States and some of
our existing ZAP dealers already have placed preorders. We hope to launch a
heavy duty ATV in late 2007 with product features and styling comparable to
existing gas-models. We believe our position as an innovator in the electric
vehicle market, coupled with first-mover advantage in the electric ATV market,
will allow us to capitalize on this market segment. If we are able to capture
1%
of the all terrain vehicle market share, it could equate to over $40 million
in
revenues per year. However, there can be no assurances that we will be able
to
achieve such market share.
Portable
Energy - Recharge-It -All Batteries
We
believe we were one of the first and now one of the leading producers of
rechargeable battery sources using lithium-ion and lithium polymer technology.
Through our Recharge-It-All line, we sell battery packs to power or charge
a
wide range of mobile electronics such as cellular phones, digital cameras and
laptops, providing significantly more charge time than currently available
technologies.
Our
Portable Energy devices fall under two product lines: universal chargers and
made-for iPOD models. The universal chargers are rechargeable battery packs
that
extend the use of most small and medium-sized electronic devices up to 2 to
5
times their normal battery life. The made-for iPOD models, which we begun
selling, are a series of portable energy devices designed to work specifically
with all the major iPOD products, including the iPOD nano, iPOD shuffle and
the
iPOD with video.
We
launched our Portable Energy products at the end of 2006 with marketing targeted
to large electronic retailers. Market statistics indicate that there will be
over two billion users of mobile electronic devices by 2007. Our goal with
Portable Energy is to provide a solution that helps solve the energy management
challenge for electronic and mobile internet users. Today, there are only a
few
companies that have begun to address the mobile device backup power/charge
market. The currently available products include Energizer’s “Energi to Go”,
Charge 2 Go, Cell Boost, and Medis Power Pack. We believe that no manufacturer
offers rechargeable devices and we believe that none offer the ability to
re-charge a myriad of electronic devices from the same device as effectively
as
our Portable Energy.
DISTRIBUTION
AND MARKET OUTLETS
We
employ
the following methods to distribute our products:
AUTO
DEALER PROGRAM. We 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 several states. We intend to use these ZAP qualified dealers to
sell
all ZAPCAR’s (TM). Some dealers will also sell other vehicle products, such as
scooters and bikes, depending on demand.
VOLTAGE
VEHICLES. We distribute our conventional cars through a wholly owned subsidiary,
located in Fulton, California. Voltage also serves as being a “beta” dealer for
its Xebra vehicles.
RETAIL
OUTLETS. We market our consumer products to independent representatives and
retail outlets, as well as undertaking direct marketing activities with these
entities.
ELECTRIC
VEHICLE RENTAL PROGRAM. We established ZAP Rental Outlets in 2002 to rent
electric vehicles in tourist locations. These vehicles are being rented in
Mendocino and we are seeking other tourist locations for potential rental
locations.
INTERNET
SALES. We market and sell our consumer products directly to consumers on our
Web
site.
Market
Opportunity
Oil
Dependency - Strategic Issues
The
United States has only 2% of the world’s oil reserves, but consumes 25% of the
world’s production. In 1973, 35% of our oil was coming from foreign sources,
while today it is approximately 60% and expected to equal 64% by 2020. The
International Energy Agency expects that world demand for oil will continue
to
rise as China and India become more industrialized. China recently became the
third largest
producer of cars and trucks with nearly 6 million new vehicles each year
entering the market. We believe that the need for non-petroleum based
transportation options is critical and that our vehicle offerings can fill
this
need.
Escalating
Concerns over Environmental Issues and Increasing Demand for Cleaner
Cars
Air
pollution and global warming issues have raised public awareness and increased
Americans’ environmental consciousness to levels never seen before. According to
a May 2006 Consumer Reports study, 37% of respondents surveyed reported that
they were considering replacing their current vehicle with one with greater
fuel
economy. According to an August 2006 Consumer Reports survey, nearly two-thirds
of respondents are considering purchasing vehicles with alternative power-trains
and 51% are considering a flexible-fuel vehicle for their next purchase. Many
buyers of hybrids have stated that they prefer to buy a plug-in hybrid or pure
electric car. We believe this type of consumer sentiment represents a large
opportunity for us as we believe that we sell the only production city class
electric vehicle currently available in the United States. An electric car
can
displace 10,000 pounds of CO2 a year.
Electric
Vehicle Market
The
electric vehicle industry, which provides an alternative to petroleum driven
cars, is still in its nascent stage with only approximately 56,000 EV vehicles
on the road today. However, according to a recent report titled, “Electric
Vehicles Forecasts, Players and Opportunities 2005-2015,” the EV industry is
large and prosperous with $31.1 billion in sales globally in 2005 and current
estimates project that by 2015, the industry will have grown to 7.3 times its
2005 value.
Electric
cars run on electricity stored in batteries. The common reason cited against
the
widespread use of electric cars is their limited range capabilities. To date,
these Low Speed Vehicles or neighborhood electric vehicles are being used for
making short trips. Studies have shown that 90% of all second car driving is
less than 21 miles per day. According to another study, the majority of these
vehicles travel less than 10 miles a day, so, for the current market, range
is
not a real objection. Additionally, we have developed relationships with
advanced battery companies and anticipate having optional battery systems
available by the second quarter of 2007, which will allow for longer range
capabilities of our electric vehicle offerings and faster charging
solutions.
There
are
many benefits to purchasing, owning and operating an electric vehicle, as
opposed to their petro-combustion engine counterparts.
CLEANER
VEHICLES - An electric vehicle is a zero emission vehicle and its motor produces
no exhaust or emissions. While the production of electricity does produce
emissions, this production is still over 90% more efficient than the internal
combustion engine.
NATIONAL
SECURITY AND OIL INDEPENDENCE - One of the largest segments of our national
military budget is the defense of foreign oil fields. The largest segment of
the
foreign trade deficit is foreign oil. Electric vehicles are powered by off
peak
electrical power that is typically from hydro, solar, nuclear or domestic coal
production.
GLOBAL
WARMING MITIGATION - CO2 has been identified as a major gas contribution to
global warming. Electric cars can displace up to 10,000 pounds of CO2 per unit
per year.
OPERATING
COST - The cost to operate an electric vehicle is approximately $0.03 per mile,
compared to $0.17 or more for gas cars. Individuals and businesses that
purchase electric vehicles may also qualify for various tax credits and other
incentives from governmental agencies.
MAINTENANCE
- Service requirements for electric vehicles are much less than those for gas
powered vehicles. Electric vehicles do not require tune-ups, oil changes, timing
belts, water pumps, radiators, fuel injectors, or tailpipes. The primary ongoing
maintenance is replacement of the battery, which will typically occur every
3 to
5 years.
HEALTH
-
Many types of cancer have been linked directly to Benzene a known carcinogen
in
gasoline. Air pollution has been named as the largest health threat to Americans
by the American Lung Association. Electric cars do not use or burn
gasoline.
Positioning
in the Market
Our
goal
is to deliver approximately 200 XEBRA vehicles per month over the next twelve
months. We believe we have the advantage of expanding our overall market share
with the launch of a wider variety of XEBRAs and other low cost electric
vehicles. We believe that we currently have the only production electric vehicle
that is capable of reaching speeds of greater than those offered by vehicles
in
the Low Speed Vehicle market.
We
believe that pure electric vehicles have not been identified as a potential
market by large domestic automobile manufacturers primarily because of the
significant investment required. Further, their business models tend to require
sales volumes that exceed 100,000 units per year to provide adequate returns.
Due to our unique relationship with a Chinese manufacturer, we believe we will
be able to profitably provide an electric car at a retail price of approximately
$10,000.
Growing
Distribution Network
We
have
developed a dealer network across the United States for the distribution of
our
products. This established dealership network provides a cost-efficient method
of distribution. Once a vehicle becomes available for distribution, such as
the
OBVIO! in 2008, this
established
network will enable timely and scheduled deliveries. We intend to strategically
manage the growth of the distribution network and enter into long term
agreements with authorized distributors.
Energy
Resources
Today,
most cars run on gasoline. But, within the next few years, it is projected
that
electric, ethanol and other alternative fuels are expected to replace gas.
Ethanol is an alcohol fuel made from corn, sugar cane or any biomass. Currently,
there are few producers of ethanol in the United States and only about 700
American gas stations that offer ethanol. However, in countries like Brazil,
approximately 34,000 gas stations offer both gas and ethanol. As more countries
mass-produce ethanol, it will become more available. We believe we are
positioned to be a leading distributor of alternative energy transportation,
specifically vehicles that run on electricity and ethanol.
Government
Incentives
Purchasers
of alternative energy vehicles receive numerous incentives from the government.
For instance, the federal government provides a 10% tax credit for the cost
of
certain alternative energy vehicles. In addition, many states have enacted
or
are in the process of enacting their own incentives, including parking
privileges, access to special lanes on highways, and discounted/free tolls.
California has just become the first state to require industries to lower their
greenhouse gas emissions by the year 2025. Violators face stiff fines and
penalties. Many states and municipalities require vehicle fleets to run on
the
most cost effective alternative fuel. Our micro cars and vehicles like the
XEBRA
Sedan, XEBRA PK Truck and the to be developed OBVIO!, are ideal vehicles for
lowering emissions, and at the same time, lowering the purchase cost to the
fleet buyer.
RESEARCH
AND PRODUCT DEVELOPMENT; PRODUCT DISTRIBUTION
We
are
primarily a marketer and distributor of our products and products manufactured
for us, such as the ZAP Xebra. 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.
SOURCES
AND AVAILABILITY OF PARTS AND SUPPLIES
Materials,
parts, supplies and services used in our business are generally available from
a
variety of sources. However, interruptions in production or delivery of these
goods could have an adverse impact on our general operations, or our
manufacturer’s operations and production of our products. We strive to have dual
sources.
LICENSES,
PATENTS AND TRADEMARKS
We
have
the following patents covering our electric vehicles:
United
States Patent
|
Date
|
Subject
|
|
|
|
Patent
No. 5,491,390
|
2/13/1996
|
Electric
motor power system for bicycles, tricycles, and scooters
|
Patent
No. 5,671,821
|
9/30/1997
|
Electric
motor system
|
Patent
No. 5,848,660
|
12/15/1998
|
Portable
Collapsible Scooter (ZAPPY)
|
Patent
No. 5,634,423
|
6/3/1997
|
Personal
Submersible Marine Vehicle
|
Patent
No. 5,423,278
|
6/13/1995
|
Submersible
Marine Vessel
|
Patent
No. 5,303,666
|
4/19/1994
|
Submersible
Marine Vessel
|
Patent
No. 6,748,894
|
6/15/2004
|
Submersible
Marine Vessel (sea scooter)
|
Patent
No. 6,588,528
|
7/8/2003
|
Electric
Vehicle Drive System
|
Patent
No. 5,842,535
|
12/1/1998
|
Electric
Drive Assembly for Bicycles
|
Patent
No. 6,050,357
|
4/18/2000
|
Powered
Skateboard
|
Patent
No. 6,059,062
|
5/9/2000
|
Powered
Roller Skates
|
Patent
No. 5,735,361
|
4/7/1998
|
Dual-Pole
Personal Towing Vehicle
|
Patent
No. 5,913,373
|
6/22/1999
|
Dual-Pole
Dual-Wheel Personal Towing Vehicle
|
Patent
No. DS40400
|
Pending
|
Three-Wheeled
Vehicle (ZAPPY 3 Scooter)
|
Patent
No. D433,718
|
11/14/2000
|
Portable
Collapsible Scooter (ZAPPY)
|
Patent
No. D347,418
|
5/31/1994
|
Scuba
Scooter
|
Patent
No. D359,022
|
6/6/1995
|
Scuba
Scooter
|
|
|
|
We
have
the following trademarks covering our electric vehicles:
United
States Trademark
|
|
Subject
|
|
|
|
Trademark
No. 2759913
|
|
Cap’n
Billy’s Wiz-Bang and design
|
Trademark
No. 2240270
|
|
Electricruizer
|
Trademark
No. 2534197
|
|
ETC
Express
|
Trademark
No. 2878219
|
|
ETC
Traveler
|
Trademark
No. 2248753
|
|
Powerbike
|
Trademark
No. 2224640
|
|
Powerski
|
Trademark
No. 2329466
|
|
The
Future is Electric
|
Trademark
No. 1794866
|
|
ZAP
|
Trademark
No. 2912329
|
|
ZAP
Car
|
Trademark
No. 2335090
|
|
ZAP
Electric Vehicle Outlet
|
Trademark
No. 2885816
|
|
ZAP
Seascooter
|
Trademark
No. 2330894
|
|
ZAPPY
|
Trademark
No. 2371240
|
|
Zapworld.com
|
Trademark
No. 2320346
|
|
Zero
Air Pollution
|
Trademark
No. 2689203
|
|
Swimmy
|
|
|
|
BACKLOG
As
of
March 30, 2007, we have approximately $95 million in backlog orders from
auto-dealer purchase contracts for Xebra (TM) Electric vehicles including a
signed purchase order from an electric vehicle company for 10,000 Xebra (TM)
Electric vehicles valued at $79 million that expires on March 28, 2008. Over
the
next few months, we will be revaluating these dealers for qualification. Since
our product
launch, we have sold and delivered approximately $1.3 million in Xebra (TM)
vehicles through March 30, 2007. The backlog for our consumer products on the
same date was $179,000. We anticipate shipping the consumer products throughout
the year of 2007.
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 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 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 portable energy line. 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
June 27, 2007, we had a total of 50 employees. We have employment agreements
with the following: Mr. Schneider (Chief Executive Officer and Director), Mr.
Starr (Chairman of the Board ), and Ms. Cude (Corporate Secretary and Director)
that provide for their continued service to us until October 2013. We believe
our employee relations are generally good. Our employees are not represented
by
a collective bargaining unit.
PRINCIPAL
EXECUTIVE OFFICES
Our
principal executive office is located at 501 Fourth Street, Santa Rosa,
California 95401, and the telephone number is (707) 525-8658.
SELECTED
CONSOLIDATED FINANCIAL DATA
You
should read the summary consolidated financial data set forth below in
conjunction with “Management’s Discussion and Analysis of Financial
Condition or Plan of Operations” and the related notes included elsewhere
in this prospectus. We derived the financial data for the period January 1
through March 31, 2007 and as of December 31, 2006 and 2005 from our financial
statements included in this report. The historical results are not necessarily
indicative of the results to be expected for any future period.
|
|
Three
months ended March 31,
|
|
|
Year
ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,137
|
|
|
$ |
2,929
|
|
|
$ |
10,830
|
|
|
$ |
3,602
|
|
Cost
of goods sold
|
|
|
(1,083 |
) |
|
|
(2,505 |
) |
|
|
(10,305 |
) |
|
|
(3,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
54
|
|
|
|
424
|
|
|
|
525
|
|
|
|
341
|
|
General
and administrative expenses
|
|
|
(13,990 |
) |
|
|
(3,068 |
) |
|
|
(15,452 |
) |
|
|
(18,352 |
) |
Research
and development
|
|
|
(335 |
) |
|
|
—
|
|
|
|
(715 |
) |
|
|
(156 |
) |
Sales
and marketing expenses
|
|
|
(371 |
) |
|
|
(251 |
) |
|
|
(1,319 |
) |
|
|
(909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations before the following
|
|
|
(14,642 |
) |
|
|
(2,895 |
) |
|
|
(19,409 |
) |
|
|
(25,506 |
) |
Gain
on revaluation of warrant and put options liabilities
|
|
|
—
|
|
|
|
135
|
|
|
|
581
|
|
|
|
1,883
|
|
Gain
on settlement of Smart Auto liability
|
|
|
—
|
|
|
|
—
|
|
|
|
7,051
|
|
|
|
—
|
|
Other
income, net
|
|
|
23
|
|
|
|
(3 |
) |
|
|
107
|
|
|
|
143
|
|
Interest
expenses, net
|
|
|
(216 |
) |
|
|
(6 |
) |
|
|
(241 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
(193 |
) |
|
|
126
|
|
|
|
(11,911 |
) |
|
|
(23,497 |
) |
Income
taxes
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(14,839 |
) |
|
$ |
(2,773 |
) |
|
$ |
(11,915 |
) |
|
$ |
(23,501 |
) |
|
|
As
at March 31,
|
|
|
As
at December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Consolidated
Balance Sheet Data:
(In
thousands)
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$ |
2,561
|
|
|
$ |
2,160
|
|
|
$ |
1,547
|
|
Working
Capital
|
|
|
415
|
|
|
|
(71 |
) |
|
|
543
|
|
Total
Assets
|
|
|
10,995
|
|
|
|
10,816
|
|
|
|
14,677
|
|
Total
Debt
|
|
|
5,634
|
|
|
|
7,806
|
|
|
|
7,065
|
|
Total
Shareholders’ Equity
|
|
|
3,449
|
|
|
|
3,010
|
|
|
|
7,612
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of our results of operations and financial
condition for the three months ended March 31, 2007 and 2006 and the years
ended
December 31, 2006 and 2005 should be read in conjunction with Selected
Consolidated Financial Data and our financial statements and the notes to those
financial statements that are included elsewhere in this prospectus. Our
discussion includes forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives,
expectations and intentions. Actual results and the timing of events could
differ materially from those anticipated in these forward-looking statements
as
a result of a number of factors, including those set forth under the “Risk
Factors,” “Cautionary Notice Regarding Forward-Looking Statements” and
“Description of Business” sections and elsewhere in this prospectus. We use
words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.
OVERVIEW
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. As of September 30, 2006, we no longer distribute the
Smart
Car Americanized by ZAP due to the conflict with Daimler-Chrysler and others,
and the uncertainty of Smart Car supply. 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:
ZAP
AUTOMOTIVE
ZAP
believes it is positioned to become one of the leading distributors of fuel
efficient alternative energy vehicles in the United States. We
believe that we are one of only a few companies distributing a 100% production
electric vehicle capable of speeds up to 40 mph. Within the next
twelve to thirty-six months, we hope to have distribution agreements in place
with three to four vehicle manufacturers whose products fit our
mission. To distribute our product to end consumers and fleets, we
have established more than 20 licensed automotive dealers and intend to grow
this base significantly over the next several years.
In
2006,
ZAP Automotive introduced the following automobile products:
·
|
the
100% electric XEBRA sedan with an MSRP of approximately
$10,000;
|
·
|
the
100% electric XEBRA utility vehicle truck with an MSRP of approximately
$10,500; and
|
·
|
the
Smart micro-car with an MSRP of approximately $25,000 (no
longer distributed after September 30,
2006).
|
Our
future offerings that are currently in the developmental stage
include:
·
|
the
OBVIO 828, an economy micro-car from Brazil with an estimated MSRP
of
$14,000;
|
·
|
the
OBVIO 012, a sports-coupe from Brazil with an estimated MSRP of $28,000;
and
|
·
|
the
ZAP-X, a 100% electric vehicle which will use Lotus Engineering’s Aluminum
Performance Crossover (“APX”)
design.
|
We
are also in discussions with a number of other foreign manufacturers and hope
to
establish additional relationships within the next twelve to thirty-six
months.
XEBRA
We
believe that XEBRA is the only series production electric vehicle in the United
States that can legally travel faster than 25 mph. The car’s
suggested retail price of $10,000 is significantly less expensive than most
of
its competitors, some of which cost more than $100,000 and are not yet widely
available today. XEBRA has three wheels and is being imported as a
motor-driven cycle, yet, unlike most other motor-driven cycles, the XEBRA is
enclosed with windows and a roof, affording it protection from inclement
weather.
Working
with our Chinese manufacturing partner, we have designed two XEBRA models:
a
sedan and a utility pick-up truck. The Chinese manufacturer’s current
manufacturing capacity is approximately 1,000 vehicles per
month. Subject in large part to the level of financing secured, our
current target is to distribute approximately 200 vehicles per month over the
next 12 months. Initial market demand has been overwhelming, both
from end consumers using the vehicle as a “city-car” and from fleet managers of
municipalities, states,
green friendly corporations, and universities who have a preference or mandate
to purchase zero emission vehicles.
We
are
working closely with our manufacturing partner to continually upgrade the XEBRA,
adding features while balancing the goal of maintaining an affordable price
level. We are in the process of looking into incorporating options to
enhance the consumer’s experience, including providing lithium battery packs for
additional (up to 100 mile) range and solar panels for low cost and true zero
air pollution charging. These options are expected to be available by
the second quarter of 2007.
XEBRA
Sedan (ZAPCAR ®)
We
launched the sedan version of our XEBRA ZAPCAR on July 11, 2006. The
sedan has a seating capacity for four and is being targeted for city/commuter
use. Based on initial feedback, we will be marketing the XEBRA sedan to
government and corporate fleets as well as to families with two or more cars,
but with plenty of occasion to use their vehicles for short, city
drives.
XEBRA
PK (ZAPTRUCK ™)
We
launched our utility pick-up truck version of the XEBRA, the XEBRA ZAPTRUCK,
on
August 24, 2006. This electric vehicle seats two with a multi-purpose
platform behind the passenger compartment that serves as a hauler, dump truck
or
flatbed. The XEBRA ZAPTRUCK is targeted to municipalities, maintenance
facilities, universities, ranches and warehouses. Since its launch,
we have received overwhelming inquiries for test drives. To date, we
have focused on our west coast market and sales have exceeded our initial
distribution and sales plans.
Smart
Car
The
Smart
Car was our initial automotive product. The project provided us with an
excellent entry level opportunity in the micro-car market in the United States
and confirmed our belief that there is a sizable demand for smaller, more fuel
efficient (or alternatively fueled) vehicles. The Smart Car is manufactured
by
Daimler Chrysler Corporation, who we believe failed to identify the United
States as a potential market. In Daimler Chrysler’s absence, we contracted with
a third party unaffiliated with Daimler Chrysler to have the Smart Car imported
and “Americanized” to meet the growing demand for micro-cars. The
process of Americanizing the Smart Car involves having the car modified to
meet
all Federal Motor Vehicle Safety Standards, United States Department of
Transportation requirements, and Environmental Protection Agency regulations
and
applicable state requirements.
We
have
sold over 300 Smart Cars to date, but due to the conflict with Daimler-Chrysler
and others, and the uncertainty of Smart Car supply, we discontinued
distribution of the Smart Car in September of 2006.
OBVIO!
In
September 2005, we entered into an exclusive (in North America) distribution
contract with the Brazilian automobile manufacturer OBVIO! for the future
importation of two models of micro-cars – an economy 828 model and a full
performance 012 model. The cars will have butterfly doors, seating capacity
to
accommodate three persons, up to 250 horsepower output and accessories such
as
iMobile and air conditioning. This car will function on multi-fuel technology,
meaning they will have the ability to be powered by ethanol, gasoline, or any
combination thereof. We are also working with OBVIO! to produce a 100% electric
version. OBVIO! expects to deliver its first cars into the United
States market in 2009.
There
are
currently over four million flex-fuel vehicles in the United States and most
of
these vehicles are sport-utility vehicles or others in the “light truck”
class. Sedans, wagons, and others are usually only available in
flex-fuel configurations as part of fleet vehicle purchases by
corporations. A recent poll conducted by Maritz® showed that 84% of
consumers would consider purchasing a vehicle capable of running on E85, a
fuel
blend of 15% gasoline and 85% ethanol, and consumers were willing to pay a
median premium of $1,000 more than for a gasoline-only
vehicle. Unlike most flex-fuel vehicles in the U.S. which can run on
up to 85% ethanol, OBVIO! vehicles will have the capability to run on 100%
ethanol.
The
initial retail price of the 828 model is expected to be approximately $16,000
and the retail price of the 012 model is expected to be
$28,000. OBVIO! is scheduled to deliver 7,500 cars during the first
year of production, 17,500 cars during the second year and 25,000
thereafter. We intend to capture market share of the flex-fuel
segment by offering cars that are sporty, fun to drive, and high-performance,
but yet efficient and economical.
Lotus
On
January 30, 2007, we announced a contract with Lotus Engineering to develop
a
production-ready electric all-wheel drive crossover high performance vehicle
for
the U.S. market. A combination of the lightweight aluminum
vehicle architecture, a new efficient drive and advanced battery management
systems is intended to enable a range of up to 350 miles between charges, with
a
rapid 10-minute recharging time. An auxiliary power unit is planned to support
longer distance journeys.
Lotus’
APX will be powered by revolutionary in-hub electric motors, delivering 644
horsepower in all wheel drive mode, theoretically capable
of powering the ZAP-X to a potential top speed of 155 mph. A new strong,
lightweight and highly efficient structure based on the Lotus technology is
planned to give the car a very attractive power-to-weight ratio.
Future
Automotive Offerings
Over
the
next 36 months, we hope to establish relationships with two to four additional
manufacturers who can supply automobiles and related vehicles that meet our
mission of affordable, advanced transportation technologies that are socially
responsible and environmentally sustainable. In 2007, we have
identified the following products as potential future offerings for us: (1)
an
affordable 100% electric two-seater sports coupe; (2) a 100% electric
“Vespa”-type scooter with brushless hub/wheel motors; and (3) a 100% electric,
four-wheel low-speed utility truck. There can be no assurances that
any of these future product offerings will be realized.
ZAP
POWER SYSTEMS
We
launched the Company in 1994 with the invention of the ZAPPY electric scooter
and quickly established a presence as one of the market leaders in the electric
“personal” transportation product segment. Since inception, we have been able to
maintain a steady business and committed buyers in this segment. In
keeping with our initial product offerings, at the beginning of 2006, we
revitalized our consumer products line (recently renamed “Power Systems”),
including an updated version of the electric scooter. As part of the segment’s
revitalization, we reduced the number of suppliers and placed more emphasis
on
upgrading existing models with newer component technology and more robust
features in order to provide a higher quality consumer experience and
product.
Our
goal
for our consumer product line is to sell an average of 10,000 units per
year. At $350 to $500 average unit prices, the business
represents
a strategic compliment to the automotive portal by providing stable and
increasing cash flows, facilitating access to, and use of, new technologies,
and
continuing to foster loyalty of our brand.
Our
current product offerings include:
·
|
Three-wheeled
personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3
EZ);
|
·
|
Off
road vehicles (electric quads and motorcycles);
and
|
·
|
Portable
energy (universal recharge-it-all batteries and ipod auxiliary
batteries).
|
The
ZAPPY3 Personal Transporters
Segway’s
highly publicized “human transporter to change the world” unearthed a growing
need for a “scooter for adults,” better known as personal electric
transportation. We responded to this demand by designing the ZAPPY3. Unlike
the
Segway, the ZAPPY3’s 3-wheeled vehicle design provides stability and
maneuverability allowing just about anyone to ride this vehicle without
training. It has a top speed of 15 mph, and the Pro has the farthest range
of
any personal transporter available today at 25 miles range per
charge.
We
initially thought that the ZAPPY3 would be great for the consumer market. Over
the past year, we have revisited our sales strategy and have come to recognize
that the largest market opportunities are in the industrial and commercial
applications. Our primary sales channels are now more clearly defined as
security, sporting goods and material handling.
With
the
increased emphasis on homeland security, there are several product competitors
in the security and police market segment. Segway, the most well known, can
be
found in select police departments and airports and sells for about $5,500.
American Chariot which is a chariot-like transporter has entered the market
selling for between $1,500 to $2,500. Newest to the security transporter
business is T3Motion, which is built like a small tank and priced at up to
$8,000. The ZAPPY3 meets the need of a majority of the security transportation
needs and with an average selling price of $850, depending on the model
purchased, we believe is the most economical of all offerings.
The
ZAPPY3 retail focus has continued strong in 2006. In early 2006, we rolled
out a
new dealer development program that emphasized our commitment to a nationwide
distribution strategy coupled with consistent and responsive customer service.
As the product line has gained momentum and market acceptance, we plan to grow
distribution in the retail channel through larger regional and specialized
chain
stores.
The
material handling, warehousing, fabrication, and construction industries are
the
ideal markets for the ZAPPY3 Pro. We are not currently aware of any major
competitors in this market. The traditional solution for short
distance transportation has been bicycles. The ZAPPY Pro offers the perfect
utility vehicle for shuttling, picking and packing and getting into small areas
like elevators. While our entrance into this market is still in the early
stages, the product response has been very favorable, demonstrated by our newly
established relationship with Indoff, the largest distributor of material
handling equipment in the United States.
Off
Road Vehicles
All
terrain vehicle (“ATV”) manufacturers recognized in excess of $5.5 billion in
revenues in 2005 with the market for ATVs and off road vehicles growing steadily
since 2003. In the United States alone, approximately 800,000 units were sold
in
2005. To date, all of the ATVs on
the
market are gas-powered. We believe electric ATVs have practical
environmental benefits over their gas-powered counterparts: they are silent
and
generate no emissions. Moreover, there are now over 8,000 organic farms in
the
United States which are committed to reducing pollutants that may put organic
certification at risk. The electric ATVs can provide the ruggedness
of the traditional ATV in areas never before accessible, while being more
versatile than golf carts.
We
entered the electric ATV market in 2006 with our ZAP Buzzz mini
ATV. The Buzzz has a 450 watt geared-motor and a top speed of 15 mph
with a range of approximately 20 miles. By the second quarter
of 2007, we anticipate the 800 watt “mid size” ATV will be available for sale in
the United States and some of our existing ZAP dealers already have placed
preorders. We hope to launch a heavy duty ATVs in late 2007 with product
features and styling comparable to existing gas-models. We believe our position
as an innovator in the electric vehicle market, coupled with first-mover
advantage in the electric ATV market, will allow us to capitalize on this market
segment. If we are able to capture 1% of the all terrain vehicle
market share, it could equate to over $40 million in revenues per
year. However, there can be no assurances that we will be able to
achieve such market share.
Portable
Energy – Recharge-It –All Batteries
We
believe we were one of the first and now one of the leading producers of
rechargeable battery sources using lithium-ion and lithium polymer technology.
Through our Recharge-It-All line, we sell battery packs to power or charge
a
wide range of mobile electronics such as cellular phones, digital cameras and
laptops, providing significantly more charge time than currently available
technologies.
Our
Portable Energy devices fall under two product lines: universal chargers and
made-for iPOD models. The universal chargers are rechargeable battery
packs that extend the use of most small and medium-sized electronic devices
up
to 2 to 5 times their normal battery
life. The
made-for iPOD models, which we begun selling are a series
of portable energy devices designed to work specifically with all the major
iPOD
products, including the iPOD nano, iPOD shuffle and the iPOD with
video.
We
launched our Portable Energy products at the end of 2006 with marketing targeted
to large electronic retailers. Market statistics indicate that there
will be over two billion users of mobile electronic devices by
2007. Our goal with Portable Energy is to provide a solution that
helps solve the energy management challenge for electronic and mobile internet
users. Today, there are only a few companies that have begun to
address the mobile device backup power/charge market. The currently
available products include Energizer’s “Energi to Go,” Charge 2 Go, Cell Boost,
and Medis Power Pack. We believe that no manufacturer offers
rechargeable devices and we believe that none offer the ability to re-charge
a
myriad of electronic devices from the same device as effectively as ZAP’s
Portable Energy.
We
were
incorporated under the laws of the State of California, on September 23, 1994,
as “ZAP Power Systems.” Our name 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. Our website is www.zapworld.com;
please refer to it for further information on us.
Subsidiaries
We
have
the following wholly owned subsidiaries: 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”). Voltage Vehicles is engaged
primarily in the distribution and sale of advanced technology through Voltage
Vehicles dealers. We also operate a retail vehicle outlet in Santa Rosa to
distribute advanced technology vehicles and some conventional gas
automobiles. ZAP Stores is engaged primarily in consumer sales of our
products and ZAP Manufacturing is engaged primarily in the distribution of
our
products. ZAP World Outlet and ZAP Rental Outlet are not currently operating
subsidiaries.
Recent
Developments
Some
of
the significant events for us that occurred during the year of 2006 and through
the date of this filing are as follows:
1.
|
We
contracted Lotus Engineering to develop a new electric car based
on the
APX (Aluminum Performance Crossover) concept, which showcases Lotus
Engineering’s Versatile Vehicle Architecture technology. The vehicle, the
ZAPX, will be a production-ready electric all-wheel drive crossover
high
performance vehicle for us in the USA
market.
|
2.
|
We
introduced the new XEBRA a “City Car” available as a 4-door sedan or
2-passenger truck, good for city-speed driving up to 40 MPH and priced
about $10,000. We recently introduced another way of improving range
and
battery life with an optional rooftop solar panel. In 2007, we received
signed purchase orders for 12,300 electric cars from 20 dealers for
approximately $95 million at the recent National Automobile Dealers
Association (NADA) annual convention and exposition. This includes
a
signed purchase order from one electric vehicle company for $79
million.
|
3.
|
We
announced the introduction of a new series of lithium battery packs
designed specifically to work with the iPod. Called iZAP, the battery
accessories for the iPod are part of a new line of ZAP Portable Energy
systems to power a wide range of mobile electronics. The iZAP’s Portable
Energy(TM) chargers and power packs are designed to work in conjunction
with the iPod, including the iPod mini, iPod shuffle, iPod nano and
the
iPod with video. The iZAP designed for the iPod shuffle can extend
listening time up to 60 hours. The new rechargeable power packs can
power
a wide range of mobile electronics like cell phones, digital cameras,
laptops and more.
|
4.
|
We
invested in Obvio! Automotoveiculos S.A., based in Rio de Janeiro,
to
develop two ’trybrid’ high-performance microsports cars for markets across
the globe. Lotus Engineering has been selected by OBVIO for the design
of
’trybrid’ engines that will run on gasoline, bio-ethanol or natural gas,
and other powertrain variants.
|
5.
|
We
began selling a new and improved line of electric scooters such as
the
ZAPPY (R) 3 Pro and the ZAPPY(R) 3 EZ. In addition, the ZAP BUZZZ
All
Terrain Vehicle and the ZAP MUD’E Trail Bike have also been introduced
into the consumer market place.
|
6.
|
During
the third quarter of 2006, we renegotiated our agreement with Smart
Automobile LLC for the Smart Car and were released from any liability
by
Smart Auto (due to the unavailability of the Smart Car Americanized
by
ZAP) and Daimler Chrysler’s decision to import Smart Cars into the U.S. in
2008. We recognized other income of $7 million together with the
write-off
of the license with Smart Auto of $2.3 million. We also decided that
after
September 30, 2006 we will no longer continue to distribute Smart
Cars
Americanized by ZAP due to the unavailability of Smart Cars Americanized
by ZAP and the conflict with Daimler
Chrysler.
|
Some
of
the significant events for us that occurred during the first quarter of 2007
and
through the date of this filing are as follows:
1.
|
We
have undertaken a feasibility study with Lotus Engineering to explore
the
development of next generation electric vehicles that incorporate
the
latest advances in technology.
|
2.
|
In
April 2007, the Electric Vehicle Company, LLC, which is backed by
two
hedge funds, has placed a purchase order with us for 10,000 of our
Xebra
2007 model year electric vehicles. The purchase order requests 6,000
sedans and 4,000 trucks. The total amount of the order is $79.1 million
with a dealer acquisition cost ranging from $7,500 to $8,200 depending
on
the equipment included with the
vehicle.
|
3.
|
Joining
state and community efforts to green transportation, we introduced
a new
design that uses a solar panel: the XEBRA ZAPCAR and ZAPTRUCK, now
with a
solar panel option. With the solar panel we have enabled short
commutes on sunlight alone.
|
4.
|
We
attended the February 2007 National Automobile Dealers Association
Trade
show in Las Vegas where we received purchase orders for 2,300 electric
cars from various dealers.
|
5.
|
We
introduced a rapid battery charger, enabling purchasers of the XEBRAS
to
charge the vehicle in one hour or
less.
|
6.
|
We
began the development and manufacturing of a wheel motor “Vespa” type
electric motor scooter, with sales expected to begin by the second
quarter
of 2007.
|
CRITICAL
ACCOUNTING POLICIES
This
management’s discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have
been
prepared in accordance with U.S. generally accepted accounting principles.
In
preparing these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and
expenses, and related disclosures of contingent assets and liabilities. On
an
ongoing basis, we evaluate our estimates, including those related to doubtful
accounts, stock-based compensation, investments, goodwill and intangible assets
and income taxes as well as contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable, the results of which form the basis for making judgments about
the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates using different
assumptions or conditions. We believe the following critical accounting policies
reflect the more significant judgments and estimates used in the preparation
of
our consolidated financial statements.
Revenue
Recognition
We
record
revenues only upon the occurrence of all of the following
conditions:
·
|
We
have 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);
|
·
|
The
purchase price has been fixed, based on the terms of the purchase
order;
|
·
|
We
have delivered the product from its distribution center to a common
carrier acceptable to the purchaser. Our customary shipping terms
are FOB
shipping point; and
|
·
|
We
deem the collection of the amount invoiced
probable.
|
We
provide no price protection. Product sales are net of promotional discounts,
rebates and return allowances.
We
do not
recognize sales taxes collected from customers as revenue.
We
provide 30 to 90 day warranties on our personal electric products and record
the
estimated cost of the product warranties at the date of sale. The estimated
cost
of warranties has not been significant to date. Should actual failure rates
and
material usage differ from our estimates, revisions to the warranty obligation
may be required.
We
had
provided up to an extended 36 month or 36,000 mile warranty on the Smart Car
Americanized by ZAP, no longer distributed by us since September 30, 2006 and
6
month warranties for the Xebra™ vehicles. At March 31, 2007, we have recorded a
warranty liability for $251,973 for estimated repair costs.
Allowance
for Doubtful Accounts
We
perform ongoing credit evaluations of our customers’ financial condition and,
generally, require no collateral from our customers. We record 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, we believe that our allowance for doubtful accounts is adequate
at March 31, 2007, December 31, 2006 and 2005. If the financial condition of
our
customers should deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Inventory
Valuation
We
adjust
the value of our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions and
development of new products by our competitors. Inventories consist
primarily of vehicles, gas and electric, parts and supplies, and finished goods
and are carried at the lower of cost (first-in, first-out method) or
market.
Deferred
Tax Asset Realization
We
record
a full valuation allowance to reduce our deferred tax assets to the amount
that
is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
Classification
of Financial Instruments with Characteristics of both Liability and
Equity
We
account for financial instruments that we have issued and that have
characteristics of both liability and equity in accordance with SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. SFAS No. 150 specifies that mandatorily
redeemable financial instruments are to be recorded as liabilities unless the
redemption is required to occur upon the liquidation or termination of the
issuer. SFAS No. 150 also specifies that a financial instrument that
embodies a conditional obligation that an issuer may settle by issuing a
variable number of its equity shares is to be classified as a liability if,
at
inception, the value of the obligation is based solely or predominantly on
variations inversely related to changes in the fair value of the issuer’s equity
shares. Should a financial instrument not be classified as a
liability under the provisions of SFAS No. 150, we further apply the criteria
in
Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, which enumerates additional criteria to determine the appropriate
classification as liability or equity. We also evaluate the
anti-dilution and/or beneficial conversion features that may be included in
our
financial instruments in accordance with the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which may
classify the feature as an embedded derivative and require that the financial
instrument be bifurcated and the feature accounted for separately. We
evaluate each financial instrument on its own merits at inception or other
prescribed measurement or valuation dates and may engage the services of
valuation experts and other professionals to assist us in our determination
of
the appropriate classification.
Accounting
for Stock-Based Compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS No.
123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), using the
modified-prospective transition method. Under the fair value recognition
provisions of SFAS 123(R), share-based compensation cost is estimated at the
grant date based on the fair value of the award and is recognized as expense,
net of estimated pre-vesting forfeitures, ratably over
the vesting period of the award.
In
addition, the adoption of SFAS 123R requires additional accounting related
to
the income tax effects and disclosure regarding the cash flow effects resulting
from share-based payment arrangements. In January 2005, the SEC issued Staff
Accounting Bulletin (“SAB”) No. 107, which provides supplemental implementation
guidance for SFAS 123R. We selected the Black-Scholes option-pricing model
as
the most appropriate fair-value method for our awards. Calculating share-based
compensation expense requires the input of highly subjective assumptions,
including the expected term of the share-based awards, stock price volatility,
and pre-vesting forfeitures. The assumptions used in calculating the fair value
of stock-based awards represent our best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result,
if factors change and we use different assumptions, our share-based compensation
expense
could be materially different in the future. In addition, we are required to
estimate the expected pre-vesting forfeiture rate and only recognize expense
for
those shares expected to vest. If our actual forfeiture rate is materially
different from our estimate, our share-based compensation expense could be
significantly different from what we have recorded in the current period. The
total amount of stock-based compensation expense recognized during the year
ended December 31, 2006 was $4.1 million, all of which has been recorded in
general and administrative expenses. At December 31, 2006, total unrecognized
estimated compensation expense related to non-vested stock options granted
prior
to that date was $2,112,270, which is expected to be recognized through December
2009.
On
November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
“TRANSITION ELECTION RELATED TO ACCOUNTING FOR TAX EFFECTS OF SHARE-BASED
PAYMENT AWARDS” (FSP 123(R)-3). We adopted the alternative transition method
provided in the FASB Staff Position for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R in the fourth quarter of fiscal
2006. The alternative transition method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool (APIC pool) related
to the tax effects of employee stock-based compensation, and to determine
the
subsequent
impact on the APIC pool and Consolidated Statements of Cash Flows of the tax
effects of employee stock-based compensation awards that are outstanding upon
adoption of SFAS 123R. The adoption did not have a material impact on our
results of operations and financial condition.
Prior
to
January 1, 2006, we accounted for share-based payments to our employees and
non-employee members of our board of directors under the recognition and
measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related guidance, as permitted
by
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (“SFAS 123”), and amended
by SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND
DISCLOSURE (“SFAS 148”) . We did not recognize any significant share-based
employee compensation costs in our statements of operations prior to January
1,
2006, as options granted to employees and non-employee members of the board
of
directors
generally had an exercise price equal to the fair value of the underlying common
stock on the date of grant. As required by SFAS 148, prior to the adoption
of
SFAS 123(R), we provided pro forma disclosure of net income (loss) applicable
to
common shareholders as if the fair-value-based method defined in SFAS No. 123
had been applied. In the pro forma information for periods prior to 2006, we
accounted for pre-vesting forfeitures as they occurred. Our operating results
for prior periods have not been restated.
Further
details related to our Stock Plans and our adoption of SFAS 123R are provided
in
Note 1 - Organization and Significant Accounting Policies and Note 13
- Stockholders’ Equity (Deficit) to our consolidated financial
statements.
We
selected the Black-Scholes option-pricing model as the most appropriate
fair-value method for our awards. Calculating share-based compensation expense
requires the input of highly subjective assumptions, including the expected
term
of the share-based awards, stock price volatility, and pre-vesting forfeitures.
The assumptions used in calculating the fair value of stock-based awards
represent our best estimates, but these estimates involve inherent uncertainties
and the application of management judgment. As a result, if factors change
and
we use different assumptions, our share-based compensation expense could be
materially different in the future. In addition, we are required to estimate
the
expected pre-vesting forfeiture rate and only recognize expense for those shares
expected to vest. If our actual forfeiture rate is materially different from
our
estimate, our share-based compensation expense could be significantly different
from what we have recorded in the current period.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not
have any off-balance sheet transactions.
ADOPTION
OF NEW ACCOUNTING PRONOUNCEMENTS
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Staff
Position (FSP) Emerging Issues Task Force (EITF) 00-19-2, “Accounting for
Registration Payment Arrangements.” This FASB staff position addresses how to
account for registration payment arrangements and clarifies that a financial
instrument subject to a registration payment arrangement should be accounted
for
in accordance with other generally accepted accounting principles without regard
to the contingent obligation to transfer consideration pursuant to the
registration payment arrangement. This accounting pronouncement further
clarifies that a liability for liquidated damages resulting from registration
statement obligations should be recorded in accordance with Statement of
Financial Accounting Standards No. 5, “Accounting for Contingencies,”
when the payment of liquidated damages becomes probable and can be
reasonably
estimated.
Prior
to
the adoption of this FSP, we had classified as a note derivative liability
and
as a warrant liability, financial instruments included in or issued in
conjunction with our December 5, 2006 convertible note financing, since the
offering of the underlying shares issuable upon conversion
of the notes and exercise of the warrants was required to be registered with
the
SEC, and our failure to file, and obtain and maintain the effectiveness of
a
registration statement would result in potential cash payments which were not
capped. Our adoption of this accounting pronouncement as of January
1, 2007 resulted in a reclassification of the note derivative liability to
the
note liability and the warrant liability to equity, and an adjustment to the
note discount to reflect the allocated value of the warrant and a beneficial
conversion feature, accreted to December 31, 2006, both calculated in accordance
with EITF Nos. 98-5 and 00-27. The cumulative effect of this
accounting change of $24,000 was credited to our opening accumulated deficit
balance as of January 1, 2007.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN
48”). This Interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position
in accordance with FIN 48 is a two-step process. The first step is recognition:
The entity determines whether it is “more-likely-than-not” that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the “more-likely-than-not” recognition
threshold, the entity presumes that the position will be examined by the
appropriate taxing authority that would have full knowledge of all relevant
information. The second step is measurement: A tax position that meets the
“more-likely-than-not” recognition threshold is measured to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely
to be realized upon ultimate settlement. We adopted FIN 48 on January 1, 2007
and the impact on our financial statements was not material.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“FAS 159”). FAS15
permits the measurement of many financial instruments and certain other items
at
fair value. Entities may choose to measure eligible items at fair value at
specified election dates, reporting unrealized gains and losses on such items
at
each subsequent reporting period. The objective of FAS 159 is to
provide entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. It is intended
to expand the use of fair value measurement. FAS159 is effective for
fiscal years beginning after November 15, 2007. We have not evaluated
the potential impact of adopting SFAS 159.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements
required under other accounting pronouncements. FAS 157 does not change existing
guidance regarding whether or not an instrument is carried at fair value. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact on our
consolidated financial statements of adopting SFAS No. 157.
RESULTS
OF OPERATIONS
Quarter
Ended March 31, 2007 Compared to Quarter Ended March 31,
2006
The
following table sets forth, as a percentage of net sales, certain items included
in our Income Statements (see Financial Statements and Notes) for the periods
indicated:
|
|
Three
months ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost
of sales
|
|
|
95.3
|
%
|
|
|
85.5
|
%
|
Operating
expenses
|
|
|
1,292.5
|
%
|
|
|
113.3
|
%
|
Loss
from operations
|
|
|
(1,287.8
|
)%
|
|
|
(98.8
|
)%
|
Net loss
|
|
|
(1,305.1
|
)%
|
|
|
(94.7
|
)%
|
Net
sales for the quarter ended March 31, 2007 were $1.1 million compared
to $2.9 million for the period ended March 31, 2006. Sales of
vehicles were $964,000 versus $2.8 million in 2006. The difference was primarily
due the decrease in sales of the Smart Cars Americanized by ZAP in 2007, since
we decided in September 2006 to no longer distribute the vehicles due to the
conflict with Daimler Chrysler, and the supply was uncertain. We had to initiate
new market strategies, and were forced to close down Smart only dealers and
to
convert some Smart dealers to XEBRA dealers and to train all dealers in the
sales and service of electric vehicles.
The
sales
of consumer products increased from $87,000 for the first three months of 2006
to $173,000 for the three months ended March 31, 2007. The increase was
primarily due to sales of the new ZAPPY 3 electric scooter and the launch of
the
portable energy rechargeable line.
Gross
profit decreased from $424,000 for the first quarter ended March 31,
2006 compared to $54,000 for the quarter ended March 31, 2007. The major reason
for the decrease was due to less vehicle unit sales in the first quarter of
2007
due to the lack of Smart Cars and the start-up of XEBRA sales, where the gross
margin in 2006 was $417,000 compared to $89,000 in 2007. Gross profit
on consumer products also decreased from a gross profit of $4,000 in 2006 to
a
gross loss of $37,000 in 2007. Although overall sales of consumer product units
were greater for 2007, these increases were offset by inventory adjustments
for
certain outdated and slow-moving products.
Sales and
marketing expenses increased by $120,000 from $251,000 for the quarter
ended March 31, 2006 to $371,000 in 2007. As a percentage of sales,
total selling expenses increased from 8.6% of sales in 2006 to 32.6% in 2007.
The increase was due to higher salary expenses due to hiring of additional
sales
personnel and expenses for trade shows and marketing were higher to promote
the
new Xebra ™ vehicle product line and selected new portable energy
items.
General
and administrative expenses increased by $10.9
million from $3.1 million for the quarter ended March 31, 2006 to $14.0 million
in 2007. The primary increase was due to non-cash expenses of $12 million to
account for the modification and extension of certain expiring warrants that
were issued to shareholders pursuant to the plan of reorganization in June
of
2002 and also to our current employees and officers for compensation purposes.
The warrants were extended by five years until July 2012 with the exercise
prices also adjusted. The aforementioned increase was offset by lower expenses
in 2007 versus 2006 for the following areas: professional fees,
amortization for previous terminated licenses agreements and salaries paid
to
fewer administrative personnel. Many of the other operating expenses for the
quarter ended March 31, 2007 remained comparable with the first quarter of
2006.
Research
and development expenses of $335,000 in 2007 were for our investment in
a project with Lotus Engineering to develop a new electric car based on the
APX
(Aluminum Performance Crossover) concept, which showcases Lotus Engineering’s
Versatile Vehicle Architecture technology. The vehicle, the ZAPX, will
potentially be a production-ready electric all-wheel drive crossover high
performance vehicle for us in the USA market.
Interest
expense, net increased from an expense of $6,000 in first quarter 2006
to $216,000 in first quarter 2007. The increase was due to interest expense
on
the 8% convertible notes issued in December 2006 and February 2007.
Other
expense, net increased from other expense of $3,000 for the first
quarter of 2006 to other income of $23,000 in the first quarter of 2007. The
increase was due to minor administration fees earned by us.
Net
Loss we reported a net loss of $14.9 million for the quarter ended
March 31, 2007 as compared to a net loss of $2.8 million for period ended March
31, 2006.The additional losses in 2007 were primarily due to the modification
and extension of certain expiring warrants that were issued by us to selected
shareholders and our current employees and officers.
Year
Ended December 31, 2006 Compared to Year Ended December 31,
2005
The
following table sets forth, as a percentage of net sales, certain items included
in our Income Statements (see Financial Statements and Notes) for the periods
indicated:
|
|
Fiscal
year ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
Net
sales
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost
of sales
|
|
|
95.15
|
%
|
|
|
90.53
|
%
|
Operating
expenses
|
|
|
184.06
|
%
|
|
|
717.57
|
%
|
Loss
from operations
|
|
|
(179.22)
|
%
|
|
|
(70.81)
|
%
|
Net loss
|
|
|
(110.02)
|
%
|
|
|
(652.44)
|
%
|
Net
sales for the year ended December 31, 2006 were $10.8 million compared
to $3.6 million for the year 2005. The increase of $7.2 million or 200% was
due
to sales of Advanced Technology Vehicles of $8.3 million for the year-ended
2006
versus $432,000 for the year-ended 2005. Sales of the Smart Car Americanized
by
ZAP accounted for $7.4 million and shipments of the Xebra (TM) Electric vehicles
were
$737,000. We have shipped 342 Smart Cars Americanized by ZAP and approximately
100 Xebra vehicles through December 31, 2006. Due to supply problems with
Daimler Chrysler’s decision to import Smart Cars in 2008 and interference with
our marketing efforts by Daimler Chrysler AG, et al, in September 2006 we
discontinued the distribution of the Smart Car Americanized by ZAP. Sales for
electric consumer products were $824,000 compared to $624,000 an increase of
$200,000 due to the introduction of new electric scooters and All Terrain
Vehicles in 2006. Sales for the retail vehicle lot were $1.6 million versus
$2.5
million in 2005. The decrease was due to less consumer demand for pre-owned
gas
vehicles and the transition of the retail lot to include electric vehicles
beginning in September 2006.
Gross
profit was $525,000 for the year ended December 31, 2006 compared to
$341,000 for the year ended December 31, 2005. The overall increase of $184,000
was primarily due to the sales of advanced technology vehicles which resulted
in
gross profit of $530,000 in 2006 compared with $9,000 in 2005. Sales of electric
consumer products in 2006 resulted in a gross loss of $445,000 versus a profit
of $17,000 in 2005. In 2006 we provided a reserve for some older consumer
products that are slow moving and older models of the product lines. The retail
vehicle lot had an increase in gross profit of $440,000 in 2006 versus $303,000
in 2005. The increase was due to product mix with higher margins on certain
vehicle models.
Sales
and marketing expenses for the year ended 2006 were $1,319,000 as
compared to $909,000 in 2005. The increase of $410,000 or 45% in 2006. The
higher expense was primarily due to $215,000 for the higher sales salaries,
more
personnel, higher commissions due to higher sales volume, $175,000 for shows
and
marketing promotion for attendance at more trade shows and for advertising
campaigns for the Xebra (TM) electric vehicles and new consumer
products.
General
and administrative expenses for the year ended December 31, 2006 were
$15.5 million as compared to $18.3 million in 2005. The decrease of $2.9 million
or 16% was primarily due to: consulting expenses for the year ended December
31,
2006 being less by approximately $10.4 million and legal and professional fees
were less by $1.4 million. In the prior year ended 2005, we incurred a number
of
one time expenses for legal fees, such as for the Daimler Chrysler lawsuit
preparation and various expenses to consultants to identify future funding
sources for us. Many of these expenses did not result in the use of our cash
but
was provided for by the issuance of warrants, common stock or stock options.
Also in 2005, we had recorded favorable adjustments to employee compensation
warrants and options. The total of non-cash General and Administrative Expenses
was $10.5 million for the year ended December 31, 2005. In the year ended
December 31, 2006 the decreases in some expense categories was offset by
increases in the following: the expensing of stock options and warrants in
accordance with FAS 123R resulted in $3.7 million of expense, we also
experienced higher expenses for shareholder relations, travel, employee salaries
and benefits, higher rents for more warehouse space and higher expenses in
many
of the other operating expense categories.
Research
and development expense for the year ended December 31, 2006 was
$715,000 as compared to $156,000 in 2005. The increase of $559,000 was due
to
payments to Obvio! Automotoveiculos S.A., based in Rio de Janeiro, to develop
two ’trybrid’ high-performance microsports cars for markets across the globe.
Lotus Engineering, has been selected by OBVIO for the design of ’trybrid’
engines
that will run on gasoline, bio-ethanol or natural gas, and other powertrain
variants. We also invested in a project with Lotus Engineering to develop a
new
electric car based on the APX (Aluminum Performance Crossover) concept, which
showcases Lotus Engineering’s Versatile Vehicle Architecture technology. The
vehicle, the ZAPX, will be a production-ready electric all-wheel drive
crossover high performance vehicle for us in the USA market.
Impairment
loss on the Smart Automobile license resulted from the cancellation of
the Smart Auto license and distribution agreement during the third quarter
of
2006. The expense of $2.2 million represents the write-off of the net book
value
of the Smart Automobile license, advances for inventory and related
equipment.
Gain
on settlement of Smart Auto liability we realized a gain of $7.1
million resulting from the discharge of the liability from Smart Auto during
the
third quarter of 2006. The agreement with Smart Auto was previously cancelled
in
the second quarter of 2006 with a residual liability of $7.1 million at June
30,
2006. The discharge of the liability was largely due to Smart Auto’s inability
to supply Smart Cars for ZAP to convert to Smart Cars Americanized by
ZAP.
Interest
expense, net increased from $17,000 in the year ended December 31, 2005
to $241,000 in 2006. The net increase in interest expense was due to noncash
interest expense related to the discount on our Senior Convertible
notes.
Other
expense increased from $2.0 million in 2005 to $7.5 million in 2006.
The increase is primarily due to the gain on the discharge of the Smart Auto
liability of $7 million in 2006. In 2005, other income was primarily derived
from the gain on the Fusion warrant liability of $1.5 million.
Gain
(loss) on revaluation of warrant liability decreased from a gain of
$2.2 million for the year ended 2005 to a loss of $158,000 in 2006. The decrease
was due to a one-time 2005 transaction which accounted for $1.5 million of
the
difference. It represented the difference between the fair market value of
the
warrant liability at December 31, 2004 and the fair market value on February
22,
2005, the date when the warrant liability was settled and transferred to equity.
The balance for the year ended December 31, 2006 resulted from favorable changes
in the value of warrant and put option liabilities.
Net
loss was $11.9 million for the year ended December 31, 2006 as compared
to a loss of $23.5 million for December 31, 2005. The decrease in net losses
was
due to the gain on the discharge of the Smart Auto liability of $7.1 million
during the period. However, the gain was offset by the write-off of the Smart
License agreement with related equipment , a decrease in the impairment losses
on the Smart
License and the expensing of stock options and warrants in accordance with
FAS
123R.
LIQUIDITY
AND CAPITAL RESOURCES
In
the
first three months of 2007 net cash used for operating activities was $1.8
million. In the first three months of 2006, we received cash provided
by operations of $65,000. Cash used in the first three months of 2007 was
comprised of the net loss incurred for the first three months of $14.8 million
plus net non-cash expenses of $13.1 million plus the net change in operating
assets and liabilities of $76,000. Cash used in operations in the first three
months of 2006 was comprised of the net loss of $2.8 million plus net non-cash
expenses of $2.1 million, and the net change in operating assets and liabilities
resulting in a use of cash of $700,000.
Investing
activities used cash of $18,000 in the first three months ended March 31, 2007
and provided cash of $11,000 during the first three months ended March 31,
2006.
Financing
activities provided cash of $2,188,000 and $987,000 during the first three
months ended March 31, 2007 and 2006, respectively.
We
had
cash of $2.6 million at both March 31, 2007 and 2006. At March 31, 2007, we
had
working capital of $271,000, as compared to working capital of $1 million at
March 31, 2006.
We
do not
have a bank operating line of credit, and 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 our
shares.
At
a
special meeting of shareholders, scheduled for October 17, 2006 and subsequently
adjourned to October 31, 2006, shareholders approved the issuance and sale
of up
to 20,000,000 shares of common stock and up to 6,000,000 securities exercisable
or convertible into shares of common stock at below-market prices in future
private financing transactions. At present, we need additional
capital to continue expanding our current operations.
Our
primary capital needs are: (i) to purchase Xebra™ vehicles, both sedan and
utility trucks, from our Chinese partner to fulfill the increasing demand for
100% electric vehicles in the United States, and (ii) to continue building
our
dealer network and expanding our market initiatives. We also require
financing to purchase consumer product inventory for the continued roll-out
of
new products, to add qualified sales and professional staff to execute on our
business plan, and to expand our efforts in the research and development of
advanced technology vehicles, such as the ethanol-driven OBVIO! Automobiles
and
other fuel efficient vehicles.
We
used
cash from operations of $4.9 million and $4.6 million during the years ended
December 31, 2006 and 2005, respectively.
Cash
used
in operations in 2006 was the result of the net loss incurred for the year
of
$11.9 million, offset by non-cash expenses of $5.1 million. In 2006, non-cash
expenses included $4.7 million related to stock-based compensation for
consulting and other services, $4.1 million related to stock-based employee
compensation, $2.4 million related to the Smart Auto license and equipment
impairment offset by a $7.1 million gain resulting from the settlement of the
Smart Auto liability. In 2005 the non-cash expenses included 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 employee compensation, 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.
In
2006,
the net change in operating assets and liabilities resulted in a cash increase
of $2.0 million. The change was primarily due to a decrease in
inventory.
Investing
activities used cash of $42,000 and $798,000 during the year ended December
31,
2006 and 2005, respectively. In 2005, our investing activities used cash for
the
acquisition of property and equipment and to acquire a distribution
license.
Financing
activities provided cash of $5.5 million and $1.6 million during the year ended
December 31, 2006 and 2005, respectively.
At
December 31, 2006 we had cash of $2.2 million as compared to $1.5 million at
December 31, 2005. Our working capital deficit at December 31, 2006 was $71,000
compared to working capital of $543,000 at December 31, 2005. We do not have
a
bank operating line of credit, and 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 our
shares.
In
September of 2006, we signed a Settlement Agreement with Phi-Nest requiring
that
the common stock being held as collateral be transferred to an independent
third
party (Michael C. Sher dba the Law Offices of Michael C. Sher), to hold the
securities in a depository account. At the same time, we entered into an
agreement with International Monetary Group (“IMG”) whose President and CEO is
Patrick D. Harrington, a merchant banking company to procure financing for
us.
Michael C. Sher was also acting as IMG’s in-house attorney. In return, Phi-Nest
received 150,000 shares of the collateral stock for consulting services and
forgiveness of a note receivable for $56,000 owed by a principle of Phi-Nest
and
cousin of Steven Schneider, our CEO. As a result, we recognized $236,000 in
non-cash charges in the accompanying consolidated statement of
income.
In
January 2005, we advanced $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 loan was secured by an interest in certain Smart
Cars owned by Smart Auto LLC. The note was in default as of January 7, 2006
since we have not received the required payments and is uncertain if any
payments will be received in the future and has therefore established a reserve
a $1 million in the event efforts to collect the note are
unsuccessful.
In
September 2005, we signed a $425 million revolving financing facility with
Surge
Capital II, LLC that, subject to certain conditions, can be used by us to import
Smart Cars Americanized by ZAP and other advanced transportation vehicles for
our dealers. The financing agreement had a term of one year, but may be extended
upon agreement by both parties. The financing is based on orders we receive
from
dealers who must be approved in advance by Surge Capital II, LLC and is secured
by a first lien on substantially all of our assets. In September of 2006, the
financing facility expired with neither party wishing to continue the agreement.
No amounts were outstanding and due under the agreement and all liens placed
on
behalf of Surge Capital II, LLC have been cancelled.
A
special
meeting of shareholders was held on October 17, 2006 to approve the issuance
and
sale of up to 20,000,000 shares of common stock and up to 6,000,000 securities
exercisable or convertible into shares of common stock at below-market prices
to
private investors. It is estimated that the issuance and sale of these
securities may potentially raise between $10 and $15 million in the financing
transaction. At present, we need additional capital to continue expanding its
current operations. Due to the lack of a quorum of the shareholders at the
special meeting on October 17, 2006 the meeting was adjourned and rescheduled
for October 31, 2006 where the proper quorum existed and the proposal was
approved by 88% of the shareholders. As of March 30, 2007 we have issued $2.7
million of Convertible notes and sold $900,000 of common stock and warrants
to a
qualified investor. Any further equity transactions will depend on the overall
stock market price acceptance.
Investment
proceeds will be used primarily: (i) to purchase Xebra (TM) vehicles, both
sedan
and utility trucks, from our Chinese partner to fulfill the increasing demand
for 100% electric vehicles in the United States, and (ii) to continue building
our dealer network and expanding our market initiatives. We will also use the
proceeds to purchase consumer product inventory for the continued roll-out
of
new products, to add qualified sales and professional staff to execute on our
business plan, and to expand our efforts in the research and development of
advanced technology vehicles, such as the ethanol-driven OBVIO! Automobiles
and
other fuel efficient vehicles.
8%
SENIOR CONVERTIBLE NOTES
On
December 5, 2006, when the market price of the Company’s common stock was $0.89
per share, the Company entered into a Securities Purchase Agreement with three
institutional and accredited investors or purchasers pursuant to which the
Company sold to the purchasers
$1.5 million aggregate principal amount of 8% senior convertible notes due
December 5, 2008 (the “Notes due 2008”) and warrants to purchase 450,000 shares
of common stock of the Company (the “Initial Warrants”) in a private placement.
The Notes due 2008 are convertible at $1.00 per share into 1,500,000 shares
of
the Company’s common stock, subject to anti-dilution and other adjustments. The
Initial Warrants, each immediately exercisable and expiring on December 5,
2011,
are exercisable at $1.10 per share, subject to anti-dilution and other
adjustments.
On
February 20, 2007, when the market price of the Company’s common stock was $1.08
per share, the Company entered into a Purchase and Amendment Agreement (the
“Amendment”), amending the Securities Purchase Agreement entered into by the
Company on December 5, 2006 (the “Original Agreement” and as amended by the
Amendment, the “Agreement”), with several institutional and accredited investors
or purchasers pursuant to which the Company sold to the purchasers $1.2 million
aggregate principal amount of 8% senior convertible notes due February 2009
(the
“Notes due 2009” and with the Notes due 2008, the “Notes”) and warrants to
purchase 360,000 shares of the common stock of the Company (the “Additional
Warrants” and with the Initial Warrants, the “Warrants”), in a private
placement. The transaction closed on February 22, 2007 (the “February 2007
financing”). The Notes due 2009 are convertible at $1.00 per share into
1,200,000 shares of the Company’s common stock, subject to anti-dilution and
other adjustments. Gross proceeds from the sale to the Company were $1.2
million, of which $15,000 was paid to one of the purchasers for expenses
incurred in connection with the February 2007 financing.
The
Notes
provide for anti-dilution adjustments of issuable shares and the conversion
price should the Company issue common stock or common stock equivalents for
a
price less than the conversion price, on or prior to the later of 1) the earlier
of (x) the date a registration statement is declared effective by the SEC and
(y) the two year anniversary of the issue date and 2) the six month anniversary
of the issue date. The Warrants provide for anti-dilution adjustments of the
issuable shares and the exercise prices thereof should the Company issue common
stock or common stock equivalents for a price less than the exercise price
of
the Warrants, on or prior to the later of 1) the earlier of (x) the date a
registration statement is declared effective by the SEC and (y) the two year
anniversary of the issue date and 2) the six month anniversary of the issue
date. The anti-dilution provided by the Warrants calls for the exercise price
of
the Warrants to adjust to 110% of the price of any dilutive issuances, on a
per
share basis. After December 31, 2007 and if the daily volume weighted average
price of its common stock is equal to or greater than the Forced Conversion
Price (as defined) for 20 trading days occurring during any period of thirty
consecutive trading days, and certain other conditions are satisfied, the
Company has the right to require the conversion of any unconverted Notes into
shares of common stock. After December 31, 2007, and if the daily volume
weighted average price of its common stock is equal to or greater than the
$2.20
for 20 trading days occurring during any period of thirty consecutive trading
days, and certain other conditions are satisfied, the Company has the right
to
require the exercise of any unexercised Warrants into shares of common
stock.
The
Notes
provide for quarterly interest to be paid in cash, or subject to certain
conditions, by issuing shares of common stock. If the Company is eligible and
elects to pay quarterly interest in stock, the price per share used to calculate
the number of shares due for interest will be calculated by reducing the market
price of the shares by 5% (as defined).
The
Company will use the proceeds from the issuance of the Notes for general working
capital purposes and to increase the capacity of its product distribution
network.
Under
terms of a registration rights agreement, the Company is obligated to file
a
registration statement within 90 days of the closing date of the sale of the
Notes due 2008 for the resale of the shares of common stock underlying the
Notes, the Warrants and any other shares issuable pursuant to the terms of
the
Notes or the Warrants and to cause the registration statement to become
effective within 180 days of the closing date. The Company is also
required to maintain the effectiveness of the registration statement until
all
shares have been sold or may be sold without a registration
statement.
In
the
event the registration statement is not filed within 90 days after the closing
or does not become effective within 180 days of the closing, or once declared
effective ceases to remain effective during the period that the securities
covered by the agreement are not sold, the Company will be required to pay,
in
cash, an amount for such failure, equal to 1% of the aggregate principal amount
for each thirty day period in which the registration statement is not filed,
effective, or maintained effective. There is no cap on the amount of damages
potentially payable by the Company should the registration statement not be
filed, declared effective, or maintained effective. At May 14, 2007, the Company
has not filed a registration statement pursuant to the registration rights
agreement and has not made any payments to the purchasers of such amount. The
Company has been contacted by one of the noteholders regarding this situation.
In the current discussions, the Company has indicated its intention to file
the
required registration by June 30, 2007. The noteholder has expressed their
willingness to work with the Company to resolve any issues regarding compliance
with the notes including a possible restructuring of the debt instruments if
necessary.
If
the
Company issues additional common stock or common stock equivalents for a price
less than the Conversion Price, on or prior to the later of 1) the earlier
of
(x) the date a registration statement is declared effective by the SEC and
(y)
the two year anniversary of the issue date and 2) the six month anniversary
of
the issue date of the Notes, the investors will have the right, but not the
obligation, to participate in such issuance, upon the same terms as those
offered, so that each Investor’s percentage ownership of the Company remains the
same.
The
Company paid fees of $40,000 related to the Notes. These cash fees have been
recorded as deferred offering costs and are being amortized over the life of
the
Notes.
As
discussed in Note 2, on January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Staff Position (FSP) Emerging Issues Task Force (EITF)
00-19-2, “Accounting for Registration Payment Arrangements”. This FASB staff
position addresses how to account for registration payment arrangements and
clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other generally accepted
accounting principles without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement. Prior to the
adoption of this FSP, the Company classified as a note derivative liability
and
as a warrant liability, financial instruments included in or issued in
conjunction with our December 2006 financing, since the resale of the underlying
shares issuable upon conversion of the notes and exercise of the warrants was
required to be registered with the SEC, and the Company’s failure to file, and
obtain and maintain the effectiveness of a registration statement would result
in potential cash payments which were not capped. The Company’s adoption of this
accounting pronouncement as of January 1, 2007 resulted in a reclassification
of
the note derivative liability to the note liability and the warrant liability
to
equity, and an adjustment to the note discount to reflect the allocated value
of
the warrant and a beneficial conversion feature, accreted to December 31, 2006,
both calculated in accordance with EITF Nos. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,’ to Certain Convertible Instruments,” and EITF 00-27,
“Application of EITF Issue No. 98-5, ’Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,’ to
Certain Convertible Instruments.” The cumulative effect of this accounting
change of $24,000 was credited to the opening accumulated deficit balance as
of
January 1, 2007.
In
accordance with EITF 98-5 and 00-27, the Company allocated the note proceeds
of
$1.2 million from the February 2007 financing between the fair value of the
notes and the fair value of the warrants. The Company valued the warrants at
$0.97 per share using the binomial option pricing model with the following
assumptions: risk free interest rate of 4.69%; effective dividend rate of 0.00%;
volatility of 140%, and expected term of 4 years. The relative fair value of
the
warrants is $272,000, which was recorded as a discount to the notes, with a
corresponding credit to equity or common stock. The Company determined that
the
proceeds allocated to the warrants should be treated as equity in accordance
with the provisions of EITF 00-19 and FSP 00-19-2. The Company further
determined that there was a beneficial conversion feature associated with the
notes of $368,000, calculated as the difference between the fair value of the
shares of common stock issuable upon conversion of the notes and the proceeds
allocated to the notes. The Company recorded the amount of the beneficial
conversion feature as an additional discount to the notes, with a corresponding
credit to equity, or common stock. The aggregate amounts of the discounts to
the
notes was $640,000, which is being amortized to interest expense using the
effective interest method prescribed by APB Opinion No. 21, “Interest on
Receivables and Payables,” over the life of the notes. The effective interest
rate of these notes is approximately 46.7% based on the stated interest rate,
the amount of amortized discount, the amount of deferred offering costs
attributable to the notes and their term.
The
Company is required to make monthly principal payments on the Notes beginning
on
June 1, 2007, in twelve equal installments. Under certain circumstances, the
Company may make all or a portion of these principal payments with common stock.
If the Company chooses to repay principal with common stock, the principal
payment share price will generally be the lesser of i) 90% of the lowest daily
volume weighted average price for any trading day among the ten consecutive
trading days occurring immediately prior to the principal payment date and
ii)
the conversion price in effect on such principal payment date.
Scheduled
annual maturities for this long-term debt for years ending after December 31,
2006 are as follows: $1,575,000 - 2007 (nine months); and $1,125,000 -
2008.
The
note
agreements contain certain affirmative and restrictive covenants, including,
among other things, covenants prohibiting the Company from paying cash dividends
on its common stock and requiring the Company to file, and achieve and maintain
the effectiveness of a registration statement. If the Company breaches any
of
the covenants and, after receiving notice from noteholders, does not, within
a
certain period of time, cure the breach, , or if there is a change in
control,the noteholders may call the loan, thereby requiring the payment of
the
principal balance of the notes and accrued interest plus a 20%
penalty.
Certificates
of Adjustment
On
April
30, 2007, the Company entered into Certificates of Adjustments to the Notes
and
Warrants (the “Adjustments”) to adjust certain provisions of the Notes and
Warrants as a consequence of the declaration by the Company of a ten percent
(10%) common stock dividend to common shareholders of record on February
15,
2007, payable February 28, 2007. As a result of the Adjustments, the
conversion price of the Notes was reduced to $0.909 per share, the Initial
Warrants were increased to 495,000 at an exercise price of $1.00 per share,
and
the Additional Warrants were increased to 396,000 at an exercise price of
$1.20
per share.
Second
Amendment
On
June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion
price of the Notes was reduced to $0.727 per share and the Initial Warrants
were
increased to 594,001 at an exercise price of $0.80 per share. The Second
Amendment also deferred the June and July 2007 payments of the principal
due
under the Notes to August 1, 2007, extended the filing deadline of the
Registration Statement to July 9, 2007, reduced the number of shares required
to
be registered under the Agreement to 130% of the shares underlying the Notes
and
Warrants, and allowed for the inclusion of an aggregate of 4,490,630 additional
shares of common stock in any registration statement filed by the Company
in
connection with the Agreement. In consideration for these
modifications, the Company agreed to pay the purchasers an aggregate of $113,000
in liquidation damages, payable in 141,750 shares of common stock of the
Company, and warrants to purchase an aggregate of 200,000 shares of common
stock
of the Company at an exercise price of $1.10 per share. The Company
also agreed to include the shares and warrants issued pursuant to the Second
Amendment in the registration statement required to be filed by the Company
pursuant to the Agreement.
SECURED
CONVERTIBLE NOTE
The
Company also 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 $1,872,000 at March 31, 2007.
Scheduled
annual maturities for this long-term debt for years ending after December 31,
2006 are as follows: $78,000 - 2007 (nine months); $104,000 - 2008; $104,000
-
2009; $104,000 - 2010; $104,000 - 2011; and $1,378,000- thereafter.
SEASONALITY
AND QUARTERLY RESULTS
Our
business is subject to seasonal influences. Sales volumes in this industry
typically slow down during the winter months, November to March in the U.S.
We
intend to develop a wide auto distribution network to counter any seasonality
effects.
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 annually in December, absent earlier indicators of
impairment. 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 U. S. generally accepted
accounting principles generally accepted in the United States of America
requires our 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.
The
chart below contains a summary of our principal facilities:
Location
|
Use
|
Square
Feet
|
Rent
|
501
Fourth Street
Santa
Rosa, California
|
Corporate
Headquarters
|
20,000
|
$
—
(1)
|
44720
Main Street
Mendocino,
California
|
Retail
Outlet
|
5,507
|
$
—
(2)
|
2
West Third Street
|
Main
Warehouse
|
22,000
|
$9,000
|
806
Donahue Street
|
Vehicle
Storage
|
21,954
|
$8,800
|
3362
& 3405 Fulton Road
Santa
Rosa, California
|
Office,
Automobile Lot
|
21,780
|
$7,000
|
(1)
|
Under
the terms of the Mortgage, dated March 7, 2003, between us
and Atocha Land
LLC concerning the Fourth Street location, monthly
payments of principal and interest amortizing the underlying
$2 million
debt have commenced on April 7, 2005, with the interest at
the prime rate
plus 2%. The underlying debt may be converted to our common
shares at
Atocha’s option. See also
below.
|
(2)
|
In
the second quarter of 2005, we issued 445,442 common shares in exchange
for the purchase of real estate. We recorded the common shares
at the appraised value of the real estate. Under the terms of the
purchase, we are obligated to issue additional common shares for
no
additional consideration if after 1 year the market price of our
common
shares is less than the market price at their date of
issuance. We have evaluated the potential liability and has
accordingly provided an estimate in the financial statements at December
31, 2006.
|
We
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
us. We have renovated the building during our 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. We occupy 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. We
have
a $2 million convertible note due in March 2025, with annual interest at 7.5%.
We 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
note-holder has the option to convert some or all of the unpaid principal and
accrued interest to shares of our 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. We 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, 2006
was
approximately $4 million.
The
rest
of our facilities are leased. The properties located at 3362 and 3405 Fulton
Road are rented on a month-by-month basis from our Chief Executive Officer.
We
plan to continue to rent properties based on our needs. We believe
these properties are adequate for our 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. At present, the manufacturing for
us
is being contracted out as well as certain research and developments projects
such as the Lotus Arrangement mentioned earlier.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Described
below are certain transactions or series of transactions since inception between
us and our subsidiaries and our executive officers, directors and the beneficial
owners of 5% or more of our common stock, on an as converted basis, and certain
persons affiliated with or related to these persons, including family members,
in which they had or will have a direct or indirect material interest in an
amount that exceeds $60,000 other than compensation arrangements that are
otherwise required to be described under “Executive Compensation.”
RELATED
PARTY TRANSACTIONS
Rental
agreements
We
rent
office space, land and warehouse space from our CEO and major shareholder.
These
properties are used to operate the car outlet and to store inventory. Rental
expense was approximately $96,500 and $196,000 for the years ended December
31,
2006 and 2005, respectively.
Consulting
services and other services
In
November and December 2003, we entered into certain agreements with two cousins
of Steven M. Schneider, our CEO. One cousin received 25,000 B-2 restricted
warrants and 25 shares of preferred stock, which were 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. In April 2004, we issued 2 million B-2 restricted warrants and 1
million K-2 restricted warrants to Sunshine 511 Holdings for consulting
services. The managing partner of Sunshine 511 Holdings is the cousin of our
CEO. In the fourth quarter of 2005 we expensed approximately $2.2 million,
the
carrying value of the prepaid services, since limited services had been received
and there were no assurances that future services would be received. Also in
2004, certain leasehold improvements in the amount of $65,000 made by us on
rental properties were abandoned in favor of the landlord, who is our CEO.
In
September of 2006, we cancelled a shareholder note of $56,000 due by the cousin
of Steven Schneider in exchange for consulting services.
Inventory
Purchase
In
December 2005, we purchased inventory from a related entity where two of
our
officers and 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, 2006 and 2005. During the second quarter of 2006 the parties
agreed
that the payment will be offset against future outside advertising services
which will be provided to the related entity by us.
Sales
to a related entity
We
also
signed in the third quarter of 2006 a Distributor License Agreement with a
business entity that is wholly owned by the brother of Maximilian Scheder-
Bieschin, our former President. The terms of the agreement are the same as
other
distributor licenses signed with us. The total sales through December 31, 2006
were $21,000. In addition, Smart Concepts is holding certain Xebra (TM) Vehicles
on a consignment basis valued at $24,000.
DIRECTOR
INDEPENDENCE
The
following director is an independent director as that term is defined under
NASDAQ Rule 4200(a)(15):
Peter
H.
Scholl
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock, having no par value per share, is traded on the Over-The-Counter
Bulletin Board (“OTCBB”) under the symbol “ZAAP.” The following table sets
forth, for the periods indicated, the reported high and low closing bid
quotations for our common stock as reported on the OTCBB. The bid prices reflect
inter-dealer quotations, do not include retail markups, markdowns or commissions
and do not necessarily reflect actual transactions.
Common
Stock
Quarter
Ended
|
|
High
Bid
|
|
|
Low
Bid
|
|
June
30, 2007
|
|
$ |
1.27 |
|
|
$ |
0.91 |
|
March
31, 2007
|
|
|
1.15
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
1.18
|
|
|
|
0.79
|
|
September
30, 2006
|
|
|
1.74
|
|
|
|
0.69
|
|
June
30, 2006
|
|
|
2.59
|
|
|
|
1.12
|
|
March
31, 2006
|
|
|
1.81
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
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
|
|
HOLDERS
We
have
approximately 3,625 record holders of our common stock as of June 27, 2007
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.
DIVIDENDS
We
have
never declared nor paid any cash dividends on our common stock and we do not
anticipate that we will pay any cash dividends on our common stock in the
foreseeable future. Any future determination to declaration and payment 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. On November 9, 2006, our Board of
Directors approved a 10% stock dividend to be issued, effective February 28,
2007, to all common shareholders of record as of February 15,
2007.
EXECUTIVE
COMPENSATION
The
following executive compensation disclosure reflects all compensation awarded
to, earned by or paid to the executive officers below for the fiscal year ended
December 31, 2006. The following table summarizes all compensation for fiscal
year 2006 received by our Chief Executive Officer, and our three most highly
compensated executives . Each of these officers is referred to as a
“named executive officer.”
SUMMARY
COMPENSATION TABLE
|
|
|
|
Name
and principal position
|
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
(1)
|
|
|
Option
Awards
($)
(1)
|
|
|
Non-Equity
Incentive
Plan Compensation
($)
|
|
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Steven
Schneider, CEO
Principal
Executive Officer
|
|
2006
|
|
$ |
120,000
|
|
|
|
0
|
|
|
|
17,800
|
|
|
|
419,756
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$ |
557,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary
Starr, Chairman
|
|
2006
|
|
$ |
120,000
|
|
|
|
0
|
|
|
|
17,800
|
|
|
|
419,756
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$ |
557,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Hartman
Principal
Financial Officer
|
|
2006
|
|
$ |
115,000
|
|
|
|
0
|
|
|
|
17,800
|
|
|
|
100,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
232,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renay
Cude, Secretary
|
|
2006
|
|
$ |
78,000
|
|
|
|
0
|
|
|
|
17,800
|
|
|
|
419,756
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$ |
515,556
|
|
(1) Stock
awards are based on the stock price on the date of issue. Options/warrant awards
were calculated using the following assumptions:
dividend of 0, risk-free interest rate of 5.12% for warrants and 4.91% for
options, expected life of 5 months for warrants and 6.75 years for options,
strike price of $1.00 for warrants and $0.91 for options, stock price of $0.91
and volatility of 149.75%. All option and warrant issuances were fully vested
at
time of issue.
EMPLOYMENT
AGREEMENTS
We
currently have employment agreements with three of our Named Executive Officers
as described below.
Steve
Schneider, Chief Executive Officer
We
entered into an employment agreement with Steve Schneider on October 1, 2003.
The agreement provides that Mr. Schneider will serve as our Chief Executive
Officer through October 1, 2008 and receive a salary, benefits and options
equal
to our highest paid employee, but in no event less than $75,000 per year. Mr.
Schneider’s current salary is set at $120,000. In addition, the agreement
provides that should we become profitable, Mr. Schneider’s salary will
automatically be increased by 10% for every $100,000 in profits calculated
on a
quarterly basis. Mr. Schneider annually receives a grant of stock options or
warrants equal to 1% of our outstanding common stock at an exercise price equal
to 110% of the market price on the date of grant. Mr. Schneider also receives
all other benefits as are afforded to our employees and a Company car, or a
car
allowance of $5,000 per year in lieu of a Company car. In the event we terminate
his employment without cause, Mr. Schneider is entitled to his full salary
for
the remainder of the term of the agreement. Should we elect to terminate Mr.
Schneider’s employment in the case of a merger or reclassify Mr. Schneider
without cause prior to the expiration of the employment agreement, we
must
retain Mr. Schneider as an employee or consultant for a period of five years
for
an aggregate salary of $500,000, payable bi-monthly, or make a lump sum payment
of $300,000. The agreement automatically renews for successive five year periods
unless terminated by either party upon proper notice. On March 30, 2007, our
Board of Directors did approve the extension of the employment agreement with
Mr. Schneider through October 1, 2013.
Gary
Starr, Chairman of the Board
We
entered into an employment agreement with Gary Starr on October 1, 2003. The
agreement provides that Mr. Starr will serve as our Chairman of the Board of
Directors through October 1, 2008 and receive a salary, benefits and options
equal to our highest paid employee, but in no event less than $75,000 per year.
Mr. Starr’s current salary is set at $120,000. In addition, the agreement
provides that should we become profitable, Mr. Starr’s salary will automatically
be increased by 10% for every $100,000 in profits, calculated on a quarterly
basis. Mr. Starr annually receives a grant of stock options or warrants equal
to
1% of our outstanding common stock at an exercise price equal to 110% of the
market price on the date of grant. Mr. Starr also receives all other benefits
as
are afforded to our employees and a Company car, or a car allowance of $5,000
per year in lieu of a Company car. In the event we terminate his employment
without cause, Mr. Starr is entitled to his full salary for the remainder of
the
term of the agreement. Should we elect to terminate Mr. Starr’s employment in
the case of a merger or reclassify Mr. Starr without cause prior to the
expiration of the employment agreement, we
must
retain Mr. Starr as an employee or consultant for a period of five years for
an
aggregate salary of $500,000, payable bi-monthly, or make a lump sum payment
of
$300,000. The agreement automatically renews for successive five year periods
unless terminated by either party upon proper notice. On March 30, 2007, our
Board of Directors approved the extension of the employment agreement with
Mr.
Starr through October 1, 2013.
Renay
Cude, Corporate Secretary
We
entered into an employment agreement with Renay Cude on October 1, 2003. The
agreement provides that Ms. Cude will serve as our Corporate Secretary through
October 1, 2008 and receive a salary, benefits and options equal to our highest
paid non-corporate officer-employee, but in no event less than $36,000 per
year.
Ms. Cude’s current salary is set at $78,000. In addition, the agreement provides
that should we become profitable, Ms. Cude’s salary will automatically be
increased by 10% for every $100,000 in profits, calculated on a quarterly basis.
Ms. Cude annually receives a grant of stock options or warrants equal to 1%
of
our outstanding common stock at an exercise price equal to 110% of the market
price on the date of grant. Ms. Cude also receives all other benefits as are
afforded to our employees and a Company car, or a car allowance of $5,000 per
year in lieu of a Company car. In the event we terminate her employment without
cause, Ms. Cude is entitled to her full salary for the remainder of the term
of
the agreement. Should we elect to terminate Ms. Cude’s employment in the case of
a merger or reclassify Ms. Cude without cause prior to the expiration of the
employment agreement, we must retain Ms. Cude as an employee or consultant
for a
period of five years for an aggregate salary of $250,000, payable bi-monthly,
or
make a lump sum payment of $150,000. The agreement automatically renews for
successive five year periods unless terminated by either party upon proper
notice. On March 30, 2007, our Board of Directors did approve the extension
of
the employment agreement with Ms. Cude through October 1, 2013.
The
following table sets forth certain information concerning stock option awards
granted to our named executive officers.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
|
OPTION
AWARDS
|
|
STOCK
AWARDS
|
Name
|
|
Number
of securities underlying unexercised options (#)
Exercisable
|
|
|
Number
of securities underlying unexercised options (#)
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities underlying unexercised
unearned options (#)
|
|
|
Option
exercise price ($)
|
|
Option
expiration date
|
|
Number
of shares or units of stock that have not vested (#)
|
|
Market
value of shares or units of stock that have not vested ($)
|
|
Equity
incentive plan awards: number of unearned shares, units or other
rights
that have not vested (#)
|
|
Equity
incentive plan awards: Market or payout value of unearned shares,
units or
other rights that have not vested ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steve
Schneider (1)
|
|
|
1,690,786
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.00
|
|
7/1/12
|
|
|
|
|
|
|
|
|
Steve
Schneider (2)
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.25
|
|
7/5/12
|
|
|
|
|
|
|
|
|
Steve
Schneider (2)
|
|
|
486,111
|
|
|
|
13,889
|
|
|
|
—
|
|
|
|
1.26
|
|
6/23/14
|
|
|
|
|
|
|
|
|
Steve
Schneider (2)
|
|
|
428,877
|
|
|
|
85,775
|
|
|
|
—
|
|
|
|
1.32
|
|
11/16/14
|
|
|
|
|
|
|
|
|
Steve
Schneider (2)
|
|
|
211,265
|
|
|
|
105,633
|
|
|
|
—
|
|
|
|
0.93
|
|
6/7/15
|
|
|
|
|
|
|
|
|
Steve
Schneider (1)
|
|
|
355,424
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.91
|
|
8/11/16
|
|
|
|
|
|
|
|
|
Gary
Starr (1)
|
|
|
1,470,671
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.00
|
|
7/1/12
|
|
|
|
|
|
|
|
|
Gary
Starr (2)
|
|
|
116,667
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.20
|
|
12/19/11
|
|
|
|
|
|
|
|
|
Gary
Starr (2)
|
|
|
150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.25
|
|
7/5/12
|
|
|
|
|
|
|
|
|
Gary
Starr (2)
|
|
|
486,111
|
|
|
|
13,889
|
|
|
|
—
|
|
|
|
1.26
|
|
6/23/14
|
|
|
|
|
|
|
|
|
Gary
Starr (2)
|
|
|
428,877
|
|
|
|
85,775
|
|
|
|
—
|
|
|
|
1.32
|
|
11/16/14
|
|
|
|
|
|
|
|
|
Gary
Starr (2)
|
|
|
211,265
|
|
|
|
105,633
|
|
|
|
—
|
|
|
|
0.93
|
|
6/7/15
|
|
|
|
|
|
|
|
|
Gary
Starr (1)
|
|
|
355,424
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.91
|
|
8/11/16
|
|
|
|
|
|
|
|
|
Renay
Cude (1)
|
|
|
1,525,786
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.00
|
|
7/1/12
|
|
|
|
|
|
|
|
|
Renay
Cude (1)
|
|
|
161,700
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.50
|
|
12/2/13
|
|
|
|
|
|
|
|
|
Renay
Cude (2)
|
|
|
48,611
|
|
|
|
1,389
|
|
|
|
—
|
|
|
|
1.26
|
|
6/23/14
|
|
|
|
|
|
|
|
|
Renay
Cude (2)
|
|
|
428,877
|
|
|
|
85,775
|
|
|
|
—
|
|
|
|
1.32
|
|
11/16/14
|
|
|
|
|
|
|
|
|
Renay
Cude (2)
|
|
|
211,265
|
|
|
|
105,633
|
|
|
|
—
|
|
|
|
0.93
|
|
6/7/15
|
|
|
|
|
|
|
|
|
Renay
Cude (1)
|
|
|
355,424
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.91
|
|
8/11/16
|
|
|
|
|
|
|
|
|
William
Hartman (1)
|
|
|
687,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.00
|
|
7/1/12
|
|
|
|
|
|
|
|
|
William
Hartman (3)
|
|
|
41,667
|
|
|
|
8,333
|
|
|
|
—
|
|
|
|
1.32
|
|
11/16/14
|
|
|
|
|
|
|
|
|
William
Hartman (3)
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.20
|
|
12/19/11
|
|
|
|
|
|
|
|
|
William
Hartman (3)
|
|
|
72,917
|
|
|
|
2,083
|
|
|
|
—
|
|
|
|
1.26
|
|
6/23/14
|
|
|
|
|
|
|
|
|
William
Hartman (1)
|
|
|
100,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.03
|
|
9/18/16
|
|
|
|
|
|
|
|
|
(1)
|
The
award represents warrants which are exercisable at the time of
issuance.
|
(2)
|
The
award vests equally over 36 months from date of grant. The option
has a
ten year life. Issued per the employment
agreements
|
(3)
|
The
award vests equally over 36 months from date of grant. The option
has a
ten year life.
|
DIRECTOR
COMPENSATION
The
following director compensation disclosure reflects all compensation awarded
to,
earned by or paid to the independent directors below for the fiscal year ended
December 31, 2006.
DIRECTOR
COMPENSATION
|
|
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
(6)
|
|
Non-Equity
Incentive Plan Compen-sation
($)
|
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
|
All
Other Compen-sation
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond
F. Byrne (1)
|
|
$ |
3,000
|
|
|
$ |
20,800
|
|
|
|
0
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$ |
23,800
|
|
Peter
H. Scholl (1)
|
|
$ |
3,000
|
|
|
$ |
20,800
|
|
|
|
0
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
$ |
23,800
|
|
|
(1)
|
Both
independent directors received a stock award with value of $17,800
for
their service on the Board and $3,000 for attending Board meetings.
Raymond Byrne resigned from the Board of Directors in May
2007.
|
Compensation
of Directors
Starting
in April 2006, all directors received $500 and a grant of $500 of common stock
for attendance at each Board meeting and each committee meeting. Directors
are
also reimbursed for out-of-pocket travel and other expenses incurred in
attending Board and/or committee meetings. Prior to April 2006, we did not
provide our directors with cash or other forms of compensation, although we
did
reimburse their out-of-pocket expenses. Each Director also received 20,000
shares of common stock in December 2006 as an additional compensation
incentive.
FINANCIAL
DISCLOSURE
There
were no changes in or disagreements with our accountants on accounting and
financial disclosure during the last two fiscal years or the interim period
from
January 1, 2007 through the date of this prospectus.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act with respect to the common stock being offered in this offering. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the registration
statement. For further information with respect to us and our common stock,
we
refer you to the registration statement and the exhibits and schedules filed
as
a part of the registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit
to
the registration statement, we refer you to the copy of the contract or document
that has been filed. Each statement in this prospectus relating to a contract
or
document filed as an exhibit is qualified in all respects by the filed exhibit.
The reports and other information we file with the SEC can be read and copied
at
the SEC’s Public Reference Room at 100 F. Street, NE, Washington,
D.C. 20549. Copies of these materials can be obtained at prescribed rates
from the Public Reference Section of the SEC at the principal offices of the
SEC, 100 F. Street, NE, Washington, D.C. 20549. You may obtain information
regarding the operation of the public reference room by calling 1(800) SEC-0330.
The SEC also maintains a website (http://www.sec.gov) that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
FINANCIAL
STATEMENTS
The
consolidated financial statements as of December 31, 2006 and 2005 and the
unaudited condensed consolidated financial statements as of March 31, 2007
and
for the three months ended March 31, 2007 and 2006 commence on the following
page.
ZAP
CONSOLIDATED
FINANCIAL STATEMENTS
December
31, 2006 and 2005
Index
to
Consolidated Financial Statements
|
|
Pages
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Statements of Operations
|
|
F-3
|
|
|
|
Consolidated
Balance Sheets
|
|
F-4
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
F-6
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
|
F-8
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-9
|
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,
2006, and the related consolidated statements of operations, shareholders’
equity, and cash flows for each of the years in the two-year period ended
December 31, 2006. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with 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, 2006,
and
the consolidated results of its operations and its cash flows for each of the
years in the two-year period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for share based compensation when it adopted
SFAS No. 123(revised 2004),“Share-Based Payments” in accounting for its employee
stock-based compensation, applying the modified prospective method effective
January 1, 2006.
|
|
|
|
|
|
|
|
|
/s/
ODENBERG, ULLAKKO, MURANISHI & CO. LLP |
|
|
|
San
Francisco,
California |
|
|
|
March
30, 2007, except for Note
17, which is as of June 26, 2007 |
|
|
|
|
|
ZAP
Consolidated
Statements of Operations
(In
thousands; except per share data)
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
Net
sales
|
|
$ |
10,830
|
|
|
$ |
3,602
|
|
Cost
of goods sold (exclusive of amortization of smart license)
|
|
|
(10,305 |
) |
|
|
(3,261 |
) |
Gross
profit
|
|
|
525
|
|
|
|
341
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
(1,319 |
) |
|
|
(909 |
) |
General
and administrative expenses (non-cash of $8,749 in 2006 and $10,505
in 2005, respectively)
|
|
|
(15,452 |
) |
|
|
(18,352 |
) |
Research
and development
|
|
|
(715 |
) |
|
|
(156 |
) |
Loss
on disposal of equipment
|
|
|
—
|
|
|
|
(36 |
) |
Loss
on joint venture investment
|
|
|
—
|
|
|
|
(372 |
) |
Impairment
loss on Smart Automobile license, fixed assets and
goodwill
|
|
|
(2,448 |
) |
|
|
(6,022 |
) |
Total
operating expenses
|
|
|
(19,934 |
) |
|
|
(25,847 |
) |
Loss
from operations
|
|
|
(19,409 |
) |
|
|
(25,506 |
) |
Other
income (expense):
|
|
|
|
|
|
|
|
|
Gain
on settlement of Smart Auto liability
|
|
|
7,051
|
|
|
|
—
|
|
Gain
on revaluation of put-option, warrant and note derivative
liabilities
|
|
|
581
|
|
|
|
1,883
|
|
Interest
expense, net (non-cash of $207 and $10 in 2005,
respectively)
|
|
|
(241 |
) |
|
|
(17 |
) |
Other
income, net
|
|
|
107
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(11,911 |
) |
|
|
(23,497 |
) |
Provision
for income taxes
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(11,915 |
) |
|
$ |
(23,501 |
) |
Net
loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$ |
(0.31 |
) |
|
$ |
(0.68 |
) |
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
39,021
|
|
|
|
34,687
|
|
See
notes
to consolidated financial statements
ZAP
Consolidated
Balance Sheets
(In
thousands, except per share data)
|
|
As
of December 31,
2006
|
|
ASSETS
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,160
|
|
Accounts
receivable, net of allowance of $179 ($333 in 2005)
|
|
|
224
|
|
Inventories
|
|
|
2,347
|
|
Prepaid
non-cash professional fees
|
|
|
715
|
|
Other
prepaid expenses and other current assets
|
|
|
449
|
|
Total
current assets
|
|
|
5,895
|
|
Property
and equipment, net
|
|
|
4,466
|
|
Other
assets:
|
|
|
|
|
Patents
and trademarks, net
|
|
|
91
|
|
Smart
Automobile license, net
|
|
|
—
|
|
Goodwill
|
|
|
175
|
|
Prepaid
non-cash professional fees, less current portion
|
|
|
146
|
|
Deferred
offering costs
|
|
|
25
|
|
Deposits
and other
|
|
|
18
|
|
TOTAL
ASSETS
|
|
$
|
10,816
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Current
portion of long-term note
|
|
$
|
104
|
|
Accounts
payable
|
|
|
250
|
|
Accrued
liabilities
|
|
|
2,703
|
|
Deferred
revenue
|
|
|
1,190
|
|
Put
option liability
|
|
|
230
|
|
Note
derivative liability
|
|
|
1,189
|
|
Warrant
liability
|
|
|
300
|
|
License
fee payable
|
|
|
—
|
|
Total
current liabilities
|
|
|
5,966
|
|
Secured
convertible note, less current portion
|
|
|
1,833
|
|
8%
Senior convertible notes, net of discount of $1,498
|
|
|
2
|
|
Other
long-term debt
|
|
|
5
|
|
TOTAL LIABILITIES
|
|
|
7,806 |
|
ZAP
Consolidated
Balance Sheets (cont’d)
(In
thousands, except per share data)
|
|
As
of December 31,
|
|
|
|
2006
|
|
Commitments
and contingencies
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
Preferred
stock; 50 million shares authorized; no par value; no shares issued
and outstanding
|
|
|
—
|
|
Common
stock; 200 million shares authorized; no par value; 38,414,259 shares
issued and outstanding
|
|
|
91,227
|
|
Common
stock issued as loan collateral
|
|
|
(1,549
|
)
|
Notes
receivable from shareholders, net
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(86,668
|
)
|
Total
shareholders’ equity
|
|
|
3,010
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
10,816
|
|
See
notes
to consolidated financial statements
ZAP
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(11,915 |
) |
|
$ |
(23,501 |
) |
Items
not requiring the current use of cash:
|
|
|
|
|
|
|
|
|
Gain
on settlement on Smart Auto liability
|
|
|
(7,051 |
) |
|
|
—
|
|
Depreciation
and amortization
|
|
|
1,434
|
|
|
|
1,426
|
|
Loss
on disposal of fixed assets
|
|
|
—
|
|
|
|
36
|
|
Impairment
write down of Smart Auto license and equipment
|
|
|
2,191
|
|
|
|
5,721
|
|
Impairment
of goodwill
|
|
|
—
|
|
|
|
301
|
|
Impairment
of fixed assets
|
|
|
257
|
|
|
|
—
|
|
Loss
on investment in joint venture
|
|
|
—
|
|
|
|
372
|
|
Gain
(loss) on revaluation of warrant and note derivative
liabilities
|
|
|
158
|
|
|
|
(2,215 |
) |
Gain
(loss) on revaluation of put option liability
|
|
|
(739 |
) |
|
|
331
|
|
Allowance
for doubtful accounts
|
|
|
(154 |
) |
|
|
(215 |
) |
Stock-based
compensation for consulting and other services
|
|
|
4,699
|
|
|
|
15,860
|
|
Stock-based
employee compensation
|
|
|
4,050
|
|
|
|
(5,355 |
) |
Non-cash
interest expense attributable to discount on convertible
debt
|
|
|
207
|
|
|
|
10
|
|
Changes
in other items affecting operations:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
115
|
|
|
|
224
|
|
Inventories
|
|
|
(609 |
) |
|
|
573
|
|
Advance
on Smart car inventory
|
|
|
1,378
|
|
|
|
188
|
|
Prepaid
expenses
|
|
|
(267 |
) |
|
|
42
|
|
Other
assets
|
|
|
260
|
|
|
|
—
|
|
Accounts
payable
|
|
|
61
|
|
|
|
39
|
|
Accrued
liabilities
|
|
|
921
|
|
|
|
1,464
|
|
Deferred
revenue
|
|
|
140
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
Cash
used for operating activities
|
|
|
(4,864 |
) |
|
|
(4,624 |
) |
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(77 |
) |
|
|
(406 |
) |
Proceeds
from sale of equipment
|
|
|
35
|
|
|
|
—
|
|
Acquisition
of distribution license
|
|
|
—
|
|
|
|
(268 |
) |
Investment
in joint venture
|
|
|
—
|
|
|
|
(124 |
) |
|
|
|
|
|
|
|
|
|
Cash
used for investing activities
|
|
|
(42 |
) |
|
|
(798 |
) |
Consolidated
Statements of Cash Flows (cont’d)
(In
thousands)
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
Financing
activities:
|
|
|
|
|
|
|
Issuance
of common stock
|
|
|
2,076
|
|
|
|
1,250
|
|
Exercise
of warrants and options
|
|
|
2,061
|
|
|
|
978
|
|
Proceeds
from convertible debt, net of issuance costs
|
|
|
1,475
|
|
|
|
—
|
|
Payments
on long-term debt
|
|
|
(93 |
) |
|
|
(127 |
) |
Payments
on note receivable from shareholder
|
|
|
—
|
|
|
|
14
|
|
Repurchase
of common stock
|
|
|
—
|
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
5,519
|
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
613
|
|
|
|
(3,807 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,547
|
|
|
|
5,354
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
2,160
|
|
|
$ |
1,547
|
|
|
|
|
|
|
|
|
|
|
See
notes
to consolidated financial statements
ZAP
Consolidated
Statements of Stockholders’ Equity
For
the
years ended December 31, 2006 and 2005
(Stated
in US Dollars)
|
|
Convertible
preferred stock
|
|
|
Common
stock
|
|
|
Accumulated
|
|
|
Common
stock issued as loan
|
|
|
Notes
Receivable from Share-
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
collateral
|
|
|
holders
|
|
|
Total
|
|
Balance
at December 31, 2004
|
|
|
7.50
|
|
|
$ |
7,500
|
|
|
|
29,524
|
|
|
$ |
63,616
|
|
|
$ |
(51,252 |
) |
|
$ |
(3,529 |
) |
|
$ |
(70 |
) |
|
$ |
16,265
|
|
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,
December 31, 2005
|
|
|
7.50
|
|
|
|
7,500
|
|
|
|
32,585
|
|
|
|
78,451
|
|
|
|
(74,753 |
) |
|
|
(3,529 |
) |
|
|
(56 |
) |
|
|
7,613
|
|
Issuance
of common stock for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
and other assets
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
Consulting
and other services
|
|
|
—
|
|
|
|
—
|
|
|
|
1,786
|
|
|
|
1,585
|
|
|
|
—
|
|
|
|
780
|
|
|
|
56
|
|
|
|
2,421
|
|
Employee
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
435
|
|
|
|
388
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
388
|
|
Cash
|
|
|
—
|
|
|
|
—
|
|
|
|
1,129
|
|
|
|
876
|
|
|
|
—
|
|
|
|
1,200
|
|
|
|
—
|
|
|
|
2,076
|
|
Exercise
of warrants and options
|
|
|
—
|
|
|
|
—
|
|
|
|
2,174
|
|
|
|
2,061
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,061
|
|
Settlement
of Smart Auto liability
|
|
|
(7.5 |
) |
|
|
(7,500 |
) |
|
|
300
|
|
|
|
405
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of warrants and options issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
and other services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,278
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,278
|
|
Employee
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,662
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,662
|
|
Settlement
of Smart Auto liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
950
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
950
|
|
Reclassification
of warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
568
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,915 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
(11,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2006
|
|
|
—
|
|
|
$ |
—
|
|
|
|
38,414
|
|
|
$ |
91,227
|
|
|
$ |
(86,668 |
) |
|
$ |
(1,549 |
) |
|
$ |
—
|
|
|
$ |
3,010
|
|
See
notes
to consolidated financial statements
ZAP
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ZAP
(“The
Company” or “ZAP”), was incorporated in California in September 1994. We market
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, we produce an electric scooter, known as the ZAPPY(R), using
parts
manufactured by various contractors. Our 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. We intend to further expand our 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. Our business
goal is to become the largest and most complete distribution portal for advanced
transportation (fuel efficient) and electric vehicles. In 2006, we continued
to
accelerate our market positioning in the electric vehicle industry. We are
now
focused on creating a distribution channel for our 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
The
accompanying consolidated financial statements have been prepared assuming
we
will continue as a going concern. We have incurred net losses of $11.9 million
and $23.5 million in 2006 and 2005, respectively. The accumulated deficit at
December 31, 2006 was $86.9 million. As described more completely in Note 18,
Subsequent Events, during 2007, we raised $1.2 million from the issuance of
Senior Convertible notes and sale of common stock to a qualified investor.
Management believes this will provide the additional funds needed to sustain
operations at expected levels, at least through December 31, 2007. Our 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 our new
products, including the necessary intellectual property rights, obtaining
regulatory approvals for our new products, market acceptance of all our
products, existence of competing products in our current and anticipated
markets, and our ability to raise additional capital in a timely manner.
Management expects to be able to raise additional capital; however, we may
not
be able to obtain additional financing on acceptable terms, or at all. If
adequate funds are not available or not available on acceptable terms as needed,
we may be unable to pay our debts as they become due, develop our products,
take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.
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, 2006 and 2005. On October 1, 2006 RAP surrendered its Dealer
Vehicle License and began doing business under the existing Dealer Vehicle
License of Voltage Vehicles. All subsidiaries are 100% owned by us. All
significant inter-company transactions and balances have been
eliminated.
Revenue
Recognition
We
record
revenues only upon the occurrence of all of the following
conditions:
·
|
We
have 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);
|
·
|
The
purchase price has been fixed, based on the terms of the purchase
order;
|
·
|
We
have delivered the product from our distribution center to a common
carrier acceptable to the purchaser. Our customary shipping terms
are FOB
shipping point; and
|
·
|
We
deem the collection of the amount invoiced
probable.
|
We
provide no price protection. Product sales are net of promotional discounts,
rebates and return allowances. We do not recognize sales taxes collected from
customers as revenue.
Deferred
Revenue
Voltage
Vehicles sells licenses to auto dealerships under the ZAP name. The term of
the
license agreements range from four to five years and among other things, call
for the licensee to purchase a minimum number of vehicles from us each year.
As
of December 31, 2006, we have collected a total of $1,230,000 related to these
agreements and has classified them as current deferred revenue. Our policy
is to
begin recognizing revenue when we begin delivering a substantial number of
vehicles to these dealerships on a regular basis. During the first quarter
of
2006, we began recognizing revenue on various license agreements on a
straight-line basis over the term of the agreements. We
have
recognized $48,000 of revenue for the year ended December 31, 2006 resulting
in
an ending balance in deferred revenue of $1,190,000.
Allowance
for doubtful accounts
We
perform ongoing credit evaluations of our customers’ financial condition and,
generally, require no collateral from our customers. We record 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, we believe that our allowance for doubtful accounts is adequate
at December 31, 2006. If the financial condition of our customers should
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Cash
and cash equivalents
We
consider all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents. We maintain the majority of our cash
balances with one financial institution. At times the balances may exceed
federally insured limits. We have not experienced any losses in such accounts
and believe we are not exposed to any significant credit risk on cash and cash
equivalents.
Inventories
Inventories
consist primarily of vehicles (gas and electric), 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 land, 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
|
5
years
|
Computer
equipment and software
|
3-5
years
|
Office
furniture and equipment
|
5
years
|
Vehicles
|
5
years
|
Leasehold
improvements
|
10
years or life of lease, whichever is shorter
|
Building
and improvements
|
30
years
|
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, 2006 and 2005, amortization expense was approximately $33,000
and $40,000, respectively.
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. We report an asset to be disposed of at
the
lower of its carrying value or its estimated net realizable value.
Goodwill
Goodwill
results from our acquisition of Voltage Vehicles “VV” in 2002. We
test for goodwill impairment annually in December, absent earlier indicators
of
impairment. The valuation of goodwill is based on our discounted projected
cash
flows of VV. The valuation of goodwill related to VV indicated that the fair
value of goodwill at December 31, 2006 was greater than its carrying value
of
$175,000.
Investment
in Chinese Joint Venture
During
2005, we invested approximately $372,000 for an 80% interest 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.
However, the joint venture has not begun any manufacturing activity and we
do
not have a date that any profits will be generated by the joint venture and
has
accordingly established a reserve for the full amount of the investment during
the fourth quarter of 2005.
Investment
in Obvio
We
invested in Obvio! Automotoveiculos S.A., based in Rio de Janeiro, to develop
two ’trybrid’ high performance microsports cars. We recorded research and
development expenses of $275,000 and $269,000 during the years ended December
31, 2006 and 2005, respectively, related to this agreement.
Advertising
The
cost
of advertising is expensed as incurred. Advertising and marketing expenses
amounted to $320,000 and $356,000 in the years ended December 31, 2006 and
2005,
respectively.
Warranty
We
provide 30 to 90 day warranties on our personal electric products and record
the
estimated cost of the product warranties at the date of sale. The estimated
cost
of warranties has not been significant to date. Should actual failure rates
and
material usage differ from our estimates, revisions to the warranty obligation
may be required.
We
also
provide a 36 month or 36,000 mile warranty on the Smart Car Americanized by
ZAP
and 6 month warranties for the Xebra (TM) vehicles. At December 31, 2006, we
have recorded a warranty liability for $279,000 for estimated warranty
obligations (repair costs) for Smart Cars Americanized by ZAP and Xebra
vehicles, which is included in accrued liabilities in the accompanying
consolidated balance sheet.
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
We
account 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 carry-forwards
and are measured using the currently enacted tax rates and laws. We have made
no
provision for income taxes except for the minimum state tax due in any period
presented in the accompanying consolidated financial statements because we
incurred operating losses in each of these periods.
We
analyze our deferred tax assets with regard to potential realization. We have
established a valuation allowance on our deferred tax assets to the extent
that
management has determined that it is more likely than not that some portion
or
all of the deferred tax asset will not be realized based upon the uncertainty
of
their realization. We have considered estimated future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the amount
of
the valuation allowance.
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 (major supplier)
We
currently rely on one manufacturer, Shandong Jindalu Vehicle Co., LTD of China
(“Shandong”) to supply 100% of Xebra (TM) Electric Vehicles. If Shandong is
unable to supply electric vehicles and we are unable to obtain alternative
sources of supply for these products and services, we might not be able to
fill
existing backorders and/or to sell more Xebra (TM) Electric
Vehicles.
Fair
value of financial instruments
We
measure our 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 our 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
We
have
no components of other comprehensive loss other than our net loss, and,
accordingly, our comprehensive loss is equivalent to our net loss for the
periods presented.
Stock-based
compensation
Effective
January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R,
using the modified-prospective transition method. Under the fair value
recognition provisions of SFAS 123R, share-based compensation cost is estimated
at the grant date based on the fair value of the award and is recognized as
expense, net of estimated pre-vesting forfeitures, ratably over the vesting
period of the award. In addition, the adoption of SFAS 123R requires additional
accounting related to the income tax effects and disclosure regarding the cash
flow effects resulting from share-based payment arrangements. In January 2005,
the SEC issued SAB No. 107, which provides supplemental implementation guidance
for SFAS 123R. Calculating share-based compensation expense requires the input
of highly subjective assumptions, including the expected term of the share-based
awards, stock price volatility, dividend yield, risk free interest rates, and
pre-vesting forfeitures. The assumptions used in calculating the fair value
of
stock-based awards represent our best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result,
if factors change and we use different assumptions, our share-based compensation
expense could be materially different in the future. In addition, we are
required to estimate the expected pre-vesting forfeiture rate and only recognize
expense for those shares expected to vest. If our actual forfeiture rate is
materially different from our estimate, our share-based compensation expense
could be significantly different from what we have recorded in the current
period. The total amount of stock-based compensation expense recognized during
the year ended December 31, 2006 totaled $4,050,000, all of which has been
recorded in general and administrative expenses. As of December 31, 2006, the
total unrecognized stock-based compensation balance for unvested options was
$2,112,270, which is expected to be recognized through December
2009.
On
November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
“Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards ” (FSP 123(R)-3). We adopted the alternative transition method
provided in the FASB Staff Position for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R in the fourth quarter of fiscal
2006. The alternative transition method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool (APIC pool) related
to the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows
of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123R. The adoption did not have a material impact on
our
results of operations and financial condition.
The
fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model based on the assumptions noted in the
following table. The expected term of options represents the period that our
stock-based awards are expected to be outstanding based on the simplified method
provided in SAB 107. The risk-free interest rate for periods related to the
expected life of the options is based on the U.S. Treasury yield curve in effect
at the time of grant. The expected volatility is based on historical
volatilities of our stock. The expected dividend yield is zero, as we do not
anticipate paying cash dividends in the near future. During the year ended
December 31, 2006, we used a forfeiture rate of 3% based on an analysis of
historical data as we reasonably approximates the currently anticipated rate
of
forfeiture for granted and outstanding options that have not vested. The
following assumptions were used to determine stock-based compensation during
the
year ended December 31, 2006:
|
|
Twelve
months
|
|
|
|
ended
|
|
|
|
December
31,
|
|
|
|
2006
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
6.0
|
|
Volatility
|
|
|
134.0-154.4 |
% |
Risk-free
interest rate
|
|
|
4.63-5.21 |
% |
Dividend
yield
|
|
|
0.00 |
% |
We
account 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.
Prior
to
January 1, 2006, we accounted for share-based payments to our employees and
non-employee members of our Board of Directors under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related guidance, as permitted by SFAS 123,
Accounting for Stock-Based Compensation (“SFAS 123”), and amended by SFAS 148,
Accounting for Stock-Based Compensation-Transition and Disclosure (“SFAS 148”).
We did not recognize any significant share-based employee compensation costs
in
our statements of operations prior to January 1, 2006, as options granted to
employees and non-employee members of the board of directors generally had
an
exercise price equal to the fair value of the underlying common stock
on
the
date of grant. As required by SFAS 148, prior to the adoption of SFAS 123R,
we
provided pro forma disclosure of net loss applicable to common stockholders
as
if the fair-value-based method defined in SFAS 123 had been applied to employee
stock options and purchase rights. In the pro forma information for periods
prior to 2006, we accounted for pre-vesting forfeitures as they occurred. Our
operating results for prior periods have not been restated. The following table
illustrates the effect on net loss per share applicable to common shareholders
as if we had applied the fair value recognition provisions of SFAS 123 to
share-based compensation for the year ended December 31, 2005 (in thousands,
except per share amounts):
|
|
2005
|
|
|
|
|
|
|
Net
loss attributable to common shareholders, as reported
|
|
$ |
(23,501 |
) |
|
|
|
|
|
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 |
) |
|
|
|
|
|
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 |
) |
|
|
|
|
|
Pro
forma net loss attributable to common shareholders
|
|
$ |
(30,548 |
) |
|
|
|
|
Net
loss per share attributable to common shareholders:
|
|
|
|
|
As
reported
|
|
$ |
(0.68 |
) |
|
|
|
|
Pro
forma
|
|
$ |
(0.88 |
) |
The
vesting of all unvested employee stock options will be accelerated upon the
occurrence of a change of control of the Company.
Upon
adoption of SFAS 123(R), we continued estimating the value of stock option
awards on the date of grant using the Black-Scholes option pricing model
(Black-Scholes Model). The determination of the fair value of share-based
payment awards on the date of grant using an option pricing model is affected
by
our stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate
and
expected dividends.
Estimates
of share-based compensation expenses are significant to our financial
statements, but these expenses are based on option valuation models and will
never result in the payment of cash by us. For this reason, and because we
do
not view share-based compensation as related to our operational performance,
we
exclude estimated share-based compensation expense when evaluating the business
performance of our operations.
The
guidance in SFAS 123(R) and SAB 107 is relatively new, and best practices are
not well established. The application of these principles may be subject to
further interpretation and refinement over time. There are significant
differences among valuation models, and there is a possibility that we will
adopt different valuation models in the future. This may result in a lack of
consistency in future periods and materially affect the fair value estimate
of
share-based payments. It may also result in a lack of comparability with other
companies that use different models, methods and assumptions.
Theoretical
valuation models and market-based methods are evolving and may result in lower
or higher fair value estimates for share-based compensation. The timing,
readiness, adoption, general acceptance, reliability and testing of these
methods is uncertain. Sophisticated mathematical models may require voluminous
historical information, modeling expertise, financial analyses, correlation
analyses, integrated software and databases, consulting fees, customization
and
testing for adequacy of internal controls. Market-based methods are emerging
that, if employed by us, may dilute our earnings per share and involve
significant transaction fees and ongoing administrative expenses. The
uncertainties and costs of these extensive valuation efforts may outweigh the
benefits to investors.
Net
loss per share
On
November 9, 2006, our Board of Directors approved a 10% stock dividend to be
issued effective February 28, 2007, to all shareholders of record as of February
15, 2007. As a result of the stock dividend, approximately 3.9 million shares
were issued to shareholders. The number of shares and loss per share amounts
included in these financial statements has been adjusted for all periods
presented
to reflect the stock dividend.
Basic
net
loss per share is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the year. The computation of
diluted loss per common share is similar to the computation of basic net loss
per share 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 were the same for the two years ended December 31,
2006 and 2005. Options, warrants and convertible debt for 64,770,809 shares
and
59,432,000 shares were excluded from the computation of loss per share at
December 31, 2006 and 2005, respectively, as their effect is anti-dilutive.
Common shares issued as collateral for a loan that has not been finalized
totaling 1.292 million and 2.941 million shares have been excluded from the
weighted average number of shares outstanding for 2006 and 2005,
respectively.
Recent
accounting pronouncements
In
June
2006, the EITF reached a consensus on Issue No. 06-3, How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement” (“EITF 06-3”). The scope of EITF 06-3 includes sales, use,
value added and some excise taxes that are assessed by a governmental authority
on specific revenue-producing transactions between a seller and customer. EITF
06-3 states that a company should disclose its accounting policy (i.e., gross
or
net presentation) regarding the presentation of taxes within its scope, and
if
significant, these disclosures should be applied retrospectively to the
financial statements for all periods presented. EITF 06-3 is effective for
interim and annual reporting periods beginning after December 15, 2006. The
adoption of EITF 06-3 is not expected to have a material effect on our financial
position, results of operations or cash flows.
In
July
2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty
in
Income Taxes (“FIN No.48”), which prescribes a recognition threshold and
measurement process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. Additionally, FIN
No.
48 provides guidance on the derecognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. The accounting
provisions of FIN No. 48 will be effective for fiscal years beginning after
December 15, 2006. We are in the process of determining the effect, if any,
that
the adoption of FIN No. 48 will have on our financial statements.
In
September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides guidance on how prior year misstatements should
be taken into consideration when quantifying misstatements in current year
financial statements for purposes of determining whether the current year’s
financial statements are materially misstated. SAB No. 108 is effective for
fiscal years ending on or after November 15, 2006. The adoption of SAB No.
108
did not have a material impact on our financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No.
157 establishes a framework for measuring the fair value of assets and
liabilities. This framework is intended to provide increased consistency in
how
fair value determinations are made under various existing accounting standards
which permit, or in some cases require, estimates of fair market value. SFAS
No.
157 is effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Earlier application is encouraged, provided
that the reporting entity has not yet issued financial statements for that
fiscal year, including any financial statements for an interim period within
that fiscal year. We are currently in the process of evaluating the impact
of
SFAS No. 157 on our financial position and results of operations.
On
December 21, 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2,
Accounting for Registration Payment Arrangements. This FSP addresses how to
account for registration payment arrangements and clarifies that a financial
instrument subject to a registration payment arrangement should be accounted
for
in accordance with other generally accepted accounting principles (“GAAP”)
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement. This accounting pronouncement further
clarifies that a liability for registration statement obligations should be
recorded in accordance with SFAS No. 5, Accounting for Contingencies, when
the
payments become probable and can be reasonably estimated. This FSP is effective
for companies with fiscal years ending on or after December 15, 2006. We are
currently assessing the impact that this FSP may have in our financial
statements.
NOTE
2 - SMART AUTOMOBILE LICENSE
On
April
19, 2004, we entered into an Exclusive Purchase, License and Supply Agreement
with Smart-Automobile LLC (“SA”), a California limited liability company, to
distribute and manufacture Smart 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 we were SA’s exclusive distributor and licensee of the right to
manufacture and distribute Smart cars in the United States and the non-exclusive
distributor and licensee outside of the United States for a period of ten years.
Subject to the terms of the agreement, we 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 our 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 our common
shares under the following formula: For every 1,000 Smart vehicles delivered
to
us 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, we allowed SA to convert
500
preferred shares to $500,000 of common stock prior to delivering any EPA
compliant Smart Cars.
We
recorded the cost of the Smart Automobile license at $10.6 million, based on:
1)
the $10 million we paid to SA 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%.
In
the
fourth quarter of 2005, we 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 us and disrupting our
third
party relationships including this arrangement. Shortly thereafter, we commenced
our 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, we recorded an impairment
charge of $5.7 million for the year ended December 31, 2005. The valuation
of
the license was based on our discounted projected cash flows from projected
sales of Smart Cars over the estimated life of the license
agreement.
In
June
2006, we agreed in principle to amend our agreement with SA that was originally
signed in April 2004. As a result, SA returned to us all of the remaining
preferred shares, or 7,500 preferred shares valued at $7.5 million, in exchange
for, among other things, 300,000 common shares valued at $405,000 and 1 million
warrants with an exercise price of $1.75 per share, valued at $950,000 using
the
Black-Scholes option pricing model. In addition, our obligation to pay accrued
license fees of $906,000 at June 30, 2006 was canceled. As a result, we recorded
a liability to SA of $7 million at June 30, 2006.
In
September 2006, we further amended and renegotiated our agreement with SA for
the Smart Car, due to the unavailability of Smart Cars and Daimler-Chrysler’s
announcement to begin selling Smart Cars in the U.S. in 2008. This negotiation
superseded all previous license and other distribution or asset agreements
between us and SA. The renegotiated agreement released us from any remaining
obligations to SA under our previous agreements and any liability to SA and
resulted in the reversal of the $7 million liability owed and the corresponding
recognition of $7 million in other income. We also recognized an impairment
loss
on the remaining value of the license with SA of approximately $2.2 million.
Amortization expense of the license was $1,056,000 and $1,059,000 for the years
ended December 31, 2006 and 2005. As of September 30, 2006, we no longer
distribute Smart Cars.
NOTE
3 - INVENTORIES
Inventories
at December 31, 2006 are summarized as follows (thousands):
Vehicles-conventional
|
|
$ |
209
|
|
Advanced
technology vehicles
|
|
|
1,472
|
|
Parts
and supplies
|
|
|
425
|
|
Finished
goods
|
|
|
759
|
|
|
|
|
2,865
|
|
Less
- inventory reserve
|
|
|
(518 |
) |
|
|
$ |
2,347
|
|
Inventory
reserve policy
We
record
inventory at the lower of cost or market and establish reserves for slow moving
or excess inventory, product obsolescence and valuation impairment. In
determining the adequacy of our reserves, at each reporting period we analyze
the following, among other things:
·
|
Current
inventory quantities on hand;
|
·
|
Product
acceptance in the marketplace;
|
·
|
Product
obsolescence; and
|
·
|
Technological
innovations.
|
Any
modifications to our estimates of our 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 our inventory
reserve during the year ended December 31, 2006 are as follows (in
thousands):
Balance
as of January 1, 2006
|
|
$ |
180
|
|
Provision
for slow moving inventory
|
|
|
338
|
|
Write-off
of slow moving inventory
|
|
|
—
|
|
Balance
as of December 31, 2006
|
|
$ |
518
|
|
Note
4 - NOTE RECEIVABLE SMART AUTOMOBILE LLC
In
January 2005, we advanced $1 million 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 note is in default
as
of December 31, 2006 and to date we have 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, we have discontinued recording any interest income and has
established a reserve of $1 million. We have also named Smart Automobile LLC
as
a party in our lawsuit against Daimler Chrysler AG (See Note 15).
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment at December 31, 2006 are summarized as follows
(thousands):
Land
|
|
$ |
1,078
|
|
Buildings
and improvements
|
|
|
3,222
|
|
Machinery
and equipment
|
|
|
218
|
|
Computer
equipment and software
|
|
|
209
|
|
Office
furniture and equipment
|
|
|
98
|
|
Leasehold
improvements
|
|
|
9
|
|
Vehicles
|
|
|
523
|
|
|
|
|
5,357
|
|
|
|
|
|
|
Less
- accumulated depreciation and amortization
|
|
|
891
|
|
|
|
$ |
4,466
|
|
The
land
and building and certain equipment, with a net book value of $2,800,000 at
December 31, 2006, are pledged as security for certain indebtedness (see Note
7). Depreciation and amortization expense for the years ended December 31,
2006
and 2005 was approximately $345,000 and $327,000, respectively.
NOTE
6 - ACCRUED LIABILITIES
Accrued
liabilities at December 31, 2006 consisted of the following (in
thousands):
Accrued
professional fees
|
|
$ |
1,244
|
|
Accrued
payables
|
|
|
286
|
|
Customer
deposits
|
|
|
315
|
|
Warranty
obligation
|
|
|
279
|
|
Other
accrued expenses
|
|
|
579
|
|
|
|
$ |
2,703
|
|
NOTE
7 - DEBT
CONVERTIBLE
SECURED NOTE
We
have 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 note holder has
the option to convert some or all of the unpaid principal and accrued interest
to shares of
our
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 our new corporate
headquarters and is secured by this property. The note has a balance of $
1,937,000 at December 31, 2006. Scheduled annual maturities for this long-term
debt for years ending after December 31, 2006 are as follows: $104,000 - 2007;
$104,000 - 2008; $104,000 - 2009; $104,000 - 2010; $104,000 - 2011; and
$1,422,000- thereafter.
8%
SENIOR CONVERTIBLE NOTES
On
December 5, 2006, when the market price of our common stock was $0.89 per share,
we concluded a private placement to three institutional investors of $1,500,000
of 8% Senior Convertible Notes due December 5, 2008 (the “Notes”). The Notes are
convertible at $1.00 per share (the “Conversion Price”) into 1,500,000 shares of
our common stock, subject to anti-dilution adjustments should we issue common
stock or common stock equivalents for a price less than the Conversion Price,
on
or prior to the later of 1) the earlier of (x) the date a Registration Statement
is declared effective by the SEC and (y) the two year anniversary of the issue
date and 2) the six month anniversary of the issue date. We also issued to
the
Investors common stock purchase warrants (the “Warrants”), each immediately
exercisable and expiring on December 5, 2011. The Warrants are exercisable
to
purchase 450,000 shares of our common stock at $1.10 per share. The Warrants
provide for anti-dilution and other adjustments of the issuable shares and
the
exercise prices thereof should we issue common stock or common stock equivalents
for a price less than the exercise price of the Warrants, on or prior to the
later of 1) the earlier of (x) the date a Registration Statement is declared
effective by the SEC and (y) the two year anniversary of the issue date and
2)
the six month anniversary of the issue date. The anti-dilution provided by
the
Warrants calls for the exercise price of the Warrants to adjust to 110% of
the
price of any dilutive issuances, on a per share basis. After December 31, 2007
and if the daily volume weighted average price of our common stock is equal
to
or greater than the Forced Conversion Price (as defined) for 20 trading days
occurring during any period of thirty consecutive trading days, we have the
right to require the conversion of any unconverted Notes into shares of common
stock. After December 31, 2007, and if the daily volume weighted average price
of our common stock is equal to or greater than the $2.20 for 20 trading days
occurring during any period of thirty consecutive trading days, we have the
right to require the exercise of any unexercised Warrants into shares of common
stock.
The
Notes
provide for quarterly interest to be paid in cash, or subject to certain
conditions, by issuing shares of common stock. If we are eligible and elect
to
pay quarterly interest in stock, the price per share used to calculate the
number of shares due for interest will be calculated by reducing the market
price of the shares by 5% (as defined).
We
will
use the proceeds from the issuance of the Notes for general working capital
purposes and to increase the capacity of our product distribution
network.
Under
terms of a registration rights agreement, we are obligated to file a
registration statement within 90 days of the closing date for the resale of
the
shares of common stock underlying the Notes, the Warrants and any other shares
issuable pursuant to the terms of the Notes or the Warrants and to cause the
registration statement to become effective within 180 days of the closing date.
We are also required to maintain the effectiveness of the registration statement
until all shares have been sold or may be sold without a registration
statement.
In
the
event the registration statement is not filed within 90 days after the closing
or does not become effective within 180 days of the closing, or once declared
effective ceases to remain effective during the period that the securities
covered by the agreement are not sold, we will be required to pay, in cash,
an
amount for such failure, equal to 1% of the aggregate principal amount for
each
thirty day period in which the registration statement is not filed, effective,
or maintained effective. There is no cap on the amount of damages potentially
payable by us should the registration statement not be filed, declared
effective, or maintained effective. At March 30, 2007, we have not filed a
registration statement pursuant to the registration rights
agreement.
If
we
issue additional common stock or common stock equivalents for a price less
than
the Conversion Price, on or prior to the later of 1) the earlier of (x) the
date
a Registration Statement is declared effective by the SEC and (y) the two year
anniversary of the issue date and 2) the six month anniversary of the issue
date
of the Notes, the Investors will have the right, but not the obligation, to
participate in such issuance, upon the same terms as those offered, so that
each
Investor’s percentage ownership of us remains the same.
We
paid
fees of $25,000 related to the Notes. These cash fees have been recorded as
Deferred Offering Costs and are being amortized over the life of the
Notes.
As
a
result of the anti-dilution provisions, the Notes are not considered
conventional convertible debt under the provisions of Emerging Issues Task
Force
(EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock. We further determined
that the conversion feature is subject to the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities and is an embedded
derivative which should be bifurcated and accounted for separately. Accordingly,
the fair value of the derivative was accounted for at inception as a discount
to
the face value of the Notes and a corresponding liability, and will be marked
to
market at each balance sheet date with the change in the fair value of the
derivative being recorded as interest expense. At December 5, 2006, the date
the
Notes were issued, we valued the derivative at approximately $1,325,000 using
a
binomial pricing model to estimate future stock prices, assuming historical
stock price volatility of 125.77%, a risk-free interest rate of 4.52%, an
expected dividend rate of 0.00%, and a 100% probability of completing additional
rounds of equity financing during the two-year term of the derivative. As a
result of changes in the market price of our stock between December 4, 2006
and
December 31, 2006, the decrease in the remaining life of the derivative, and
changes in other assumptions, our valuation of the derivative decreased to
approximately
$1,189,000, with the change in valuation being recorded as a credit to other
income. The value of the derivative at December 31, 2006 was again determined
using a binomial pricing model to estimate future stock prices, assuming
historical stock price volatility of 124.82%, a risk-free interest rate of
4.82%, an expected dividend rate of 0.00%, and a 100% probability of completing
additional rounds of equity financing during the remaining term of the
derivative.
Due
to
our obligation to file, and achieve and maintain effectiveness of the
registration statement, we have classified the Warrants as a liability. This
liability will be marked to market at each balance sheet date with the change
in
the fair value of the Warrants being recorded as interest expense. We valued
the
Warrants at December 5, 2006 at $0.844 per share using a binomial pricing model
with the following assumptions: risk free interest rate of 4.39%; expected
dividend rate of 0.00%; volatility of 142.17%; and expected term of 5 years.
The
fair value of the Warrants at December 5, 2006 was approximately $380,000,
which
we recorded as an additional discount to the Notes with a corresponding credit
to a Warrant liability. The anti-dilution provision contained in the Warrants
reduces the exercise price but does not increase the number of shares issuable
to the warrant holders. The Warrant liability was adjusted to its fair value
of
$300,000 at December 31, 2006 and the decrease in the Warrant liability was
recorded as a credit to other income. We valued the Warrants at December 31,
2006 at $0.667 per share using a binomial pricing model with the following
assumptions: risk free interest rate of 4.70%; expected dividend rate of 0.00%;
volatility of 141.13%; and expected term of 4.93 years.
The
aggregate amount of the discount to the Notes related to the note derivative
and
Warrant liabilities at December 5, 2006 was approximately $1,705,000. As this
discount exceeds the face value of the Notes by $205,000, we expensed this
excess discount to the Notes to interest expense. We are amortizing the
remaining $1,500,000 discount to interest expense using the effective interest
method prescribed by APB Opinion No. 21, Interest on Receivable and Payables,
over the life of the Notes. The effective interest rate on these notes is
approximately 279% based on the stated interest rate, the amount of amortized
discount, and the term of the notes.
We
will
be required to make monthly principal payments, beginning on June 1, 2007,
in
twelve equal installments; however, we will not be obligated to issue our stock
in payment of such principal at a price below the lower of $0.75 or the adjusted
conversion price in effect. The investors may, however, choose to receive our
stock at (but not below) the lower of $0.75 or the adjusted conversion price
in
effect. If we choose to pay principal with common stock, it will be based on
the
lower of a 10% discount to the lowest daily Volume Weighted Average Price for
any trading day among the immediately preceding ten consecutive trading days
and
the conversion price in effect on such Principal Payment Date.
Scheduled
annual maturities for this long term debt for years ending after December 31,
2006 are as follows: $875,000 - 2007 and $625,000 - 2008.
NOTE
8 - REVOLVING FINANCING FACILITY
In
September 2005, we signed a $425 million revolving financing facility with
Surge
Capital II, LLC that, subject to certain conditions can be used by us to import
Smart Cars Americanized by ZAP and other advanced transportation vehicles for
our 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 we receive
from
dealers who must be approved in advance by Surge Capital II, LLC and is secured
by a first lien on substantially all of our assets. In September of 2006 the
financing facility expired with neither party wishing to continue the agreement.
No amounts were outstanding and due under the agreement. All of the previous
liens by Surge Capital II, LLC on our assets have been cancelled.
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:
|
|
2006
|
|
|
2005
|
|
Computed
expected tax expense
|
|
$ |
(4,057 |
) |
|
$ |
(7,991 |
) |
Losses
and credits for which no benefits have been recognized
|
|
|
2,800
|
|
|
|
8,505
|
|
Stock
grants and warrants not deductible for income tax purposes
|
|
|
1,244
|
|
|
|
(510 |
) |
Other
|
|
|
17
|
|
|
|
|
|
|
|
$ |
4
|
|
|
$ |
4
|
|
The
tax
effect of temporary differences that give rise to significant portions of the
deferred tax assets at December 31, 2006 is presented below:
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
Net
operating loss carryovers
|
|
$ |
25,492
|
|
Other
|
|
|
1,737
|
|
Total
gross deferred tax assets
|
|
|
27,229
|
|
Valuation
allowance
|
|
|
(27,229 |
) |
Net
deferred tax assets
|
|
$ |
0
|
|
The
net
change in the valuation allowance for the year ended December 2006 was an
increase of $3.8 million. Because there is uncertainty regarding our ability
to
realize its deferred tax assets, a 100% valuation allowance has been
established.
As
of
December 31, 2006, we had federal tax net operating loss carryforwards of
approximately $60.6 million, which will expire in the years 2012 through 2026.
We also has federal research and development credit carryforwards as of December
31, 2006 of approximately $130,000, which will expire in the years 2012 through
2026. State tax net operating loss carryforwards were approximately $53.1
million as of December 31, 2006. The state net operating loss carryforwards
will
expire in the years 2012 through 2017.
Our
ability to utilize our net operating loss and research and development tax
credit carryforwards may be limited in the future if it is determined that
we
experienced an ownership change, as defined in Section 382 of the Internal
Revenue Code. Federal and State tax laws impose substantial restrictions on
the
utilization of net operating loss and credit carryforwards in the event of
an
“ownership change” for tax purposes as defined in the Internal Revenue Code
Section 382.
NOTE
10 - STOCK OPTIONS
During
2002 as part of the confirmed plan of reorganization, we adopted an Incentive
Stock Option Plan (“2002 Plan”). During 2006, we adopted a new Incentive Stock
Option Plan (“2006 Plan”).
Options
to purchase common stock are granted by the Board of Directors under three
Stock
Option Plans, referred to as the 2006, 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 2006, 2002 and 1999 Plans are 4,000,000, 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 2006 and 2005 generally become exercisable as
they
vest over a three year period, and expire ten years after the date of
grant.
Option
activity under the 2006, 2002 and 1999 plans is as follows
(thousands):
|
|
2006
Plan
|
|
|
2002
Plan
|
|
|
1999
Plan
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
of
Shares
|
|
|
Price
|
|
|
of
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2005
|
|
|
—
|
|
|
|
—
|
|
|
|
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
|
|
Granted
|
|
|
1,367
|
|
|
$ |
0.92
|
|
|
|
612
|
|
|
|
0.57
|
|
|
|
208
|
|
|
|
1.11
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
(619 |
) |
|
|
0.34
|
|
|
|
—
|
|
|
|
—
|
|
Canceled
|
|
|
—
|
|
|
|
—
|
|
|
|
(400 |
) |
|
|
1.07
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,367
|
|
|
$ |
0.92
|
|
|
|
5,855
|
|
|
$ |
0.99
|
|
|
|
363
|
|
|
$ |
1.15
|
|
The
weighted average fair value of options granted during the years ended December
31, 2006 and 2005 was $0.57 and $1.06, respectively.
The
following information applies to options outstanding at December 31, 2006:
(backup as exhibit 7)
|
|
2006
Plan
|
|
2002
Plan
|
|
1999
Plan
|
|
|
|
|
|
|
|
Range
of exercise prices
|
|
$1.03
- $0.88
|
|
$2.80
- $0.25
|
|
$1.20
- $1.11
|
Weighted
average remaining life (years)
|
|
8.92
|
|
7.03
|
|
7.67
|
Options
exercisable
|
|
178,056
|
|
4,128,360
|
|
155,000
|
Weighted
average exercise price
|
|
$0.92
|
|
$0.99
|
|
$1.15
|
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:
|
|
2006
|
|
2005
|
|
|
|
|
|
Dividends
|
|
None
|
|
None
|
Expected
volatility
|
|
134.00
- 154.43%
|
|
151.10
- 221.37%
|
Risk
free interest rate
|
|
4.63
- 5.21%
|
|
3.71
- 4.65%
|
Expected
life
|
|
0.50
- 6.5 years
|
|
1.25
- 9.9 years
|
At
December 31, 2006, we have outstanding stock options for employees to purchase
2,183,833 shares and for directors to purchase 5,464,289 shares, at exercise
prices ranging from $0.25 to $2.80.
NOTE
11 - COMMITMENTS
We
presently rent our warehouse. The monthly rent is adjusted annually to reflect
the average percentage increase in the Consumer Price Index. We lease the
location of our car outlet and another warehouse from our CEO (see Note 14).
Rent expenses were approximately $300,000 and $484,000 in 2006 and 2005,
respectively.
NOTE
12 - SHAREHOLDERS’ EQUITY
While
we
were in the process of amending and restating our 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 our 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,
to
authorize us 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 un-issued series of Preferred
Stock.
Stock
Dividend
On
November 9, 2006, our Board of Directors approved a 10% stock dividend to be
issued, effective February 28, 2007, to all shareholders of record as of
February 15, 2007.
Common
stock
2006
ISSUANCES
STOCK
ISSUED FOR ASSETS. In 2006, we 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 2006, 4,441
shares with value of $3,230 were issued for purchase of inventory and certain
assets. In 2005, under the terms of the purchase of a building, we were
obligated to issue additional shares of common stock for no additional
consideration if at the end of at least one year the market price of our common
shares was less than the market price of the date of issuance. At December
31,
2006, the remaining put option liability related to a land purchase was recorded
at $230,105, to reflect the remaining amount due to the seller.
STOCK
ISSUED FOR SERVICES. In 2006, we issued shares of our 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 2006,
we issued grants for 2,436,000 shares, including 650,000 collateral shares,
as
consideration under agreements for consulting, legal and other services. We
also
issued 435,000 shares for employee compensation.
STOCK
ISSUED FOR CASH. During 2006, we raised $2.076 million in cash through
the issuance of 2,129,000 shares of common stock, including 1,000,000 shares
of
collateral stock. In addition, we issued 2,173,870 shares for $2,060,000 upon
exercises of options and warrants.
2005
ISSUANCES
STOCK
ISSUED FOR ASSETS. In 2005, we 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. We recorded
the common shares at the appraised value of the real estate. Under the terms
of
the purchase, we are obligated to issue additional common shares for no
additional consideration if at the end of at least 1 year the market price
of
our common shares is less than the market price at their date of
issuance.
In
the
third quarter of 2005, we 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%. We 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. We 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%. We 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, we issued shares of our 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,
we 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.
STOCK
ISSUED FOR CASH. During 2005, we 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, we issued 885,510 shares for
$978,000 upon exercises of options and warrants.
STOCK
ISSUED FOR INVESTMENT. During 2005, we issued 90,000 shares for an
investment stake in a Chinese joint venture.
STOCK
ISSUED AS COLLATERAL. In January 2003, we entered into a
Loan Agreement with Mercatus Partners LLP (“Mercatus”) and issued 2, 941,176
common shares to Mercatus as collateral for a $1 million loan that never funded.
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. The shares
were reported as lost to us in December 2003 and in December 2004, the shares
were reissued to Mercatus who then assigned the shares and their interests
to
Phi-Nest Fund, L.P. (“Phi-Nest”) as collateral for the $1 million loan
commitment. We amended the Loan Agreement allowing Phi-Nest to purchase 500,000
shares for $1.16 per share. On March 30, 2006, we received $500,000 in net
proceeds from the sale of the 500,000 shares and the collateralized shares
were
reduced to 2,441,176 shares. Phi-Nest did not provide the $1 million loan.
In
September of 2006, we signed a Settlement Agreement with Phi-Nest requiring
that
the common stock being held as collateral be transferred to an independent
third
party (Michael C. Sher dba the Law Offices of Michael C. Sher), to hold the
securities in a depository account. At the same time, we entered into an
agreement with International Monetary Group (“IMG”) whose President and CEO is
Patrick D. Harrington, a merchant banking company to procure financing for
us.
Michael C. Sher was also acting as IMG’s in-house attorney. In return, Phi-Nest
received 150,000 shares of the collateral stock for consulting services and
forgiveness of a note receivable for $56,000 owed by a cousin of Steven
Schneider, our CEO. As a result, we recognized $236,000 in non-cash charges
in
the accompanying consolidated statement of income. In September, the Board
of
Directors approved the sale of 500,000 shares of the collateral stock to a
qualified investor for $500,000. In October 2006, the qualified investor
transferred $500,000 directly to IMG who in turn was to transfer the proceeds
to
us after we authorized Michael C. Sher to release 500,000 shares of the
collateral stock. In October, IMG required us to sign a $500,000 note and
represented that they would not enforce the note based on other agreements
with
us and in return IMG transferred $487,500 in net proceeds to us for the 500,000
shares of collateral stock previously issued to the qualified investor. Also
in
October 2006, we authorized the issuance of 250,000 shares of the collateral
stock to IMG and 250,000 shares of the collateral stock to Michael C. Sher
for
consulting services and recognized $600,000 in non-cash consulting expense
in
the accompanying consolidated statement of operations. At December 31, 2006,
there were 1,291,176 shares remaining in collateral stock held by Michael C.
Sher. In January 2007, IMG provided us with a notice of default on the $500,000
alleged note obligation. In addition, Michael C. Sher has refused to release
the
remaining 1,291,176 shares of collateral stock to us due to a dispute over
the
alleged debt obligation with IMG. In February 2007, we filed suit to have the
collateral stock returned ( See Note 15) ZAP v. International Monetary
Group, Inc., a Delaware corporation; Michael C. Sher dba the Law Offices of
Michael C. Sher, Case No. SCV 240277) for a detailed discussion. Management
has recorded an estimated liability for any potential exposure related to this
transaction which is included in the accompanying consolidated balance sheet.
In
addition, management believes that the ultimate resolution of this claim will
not have a material adverse effect on our consolidated financial position or
on
results of operations.
FUSION
CAPITAL STOCK PURCHASE AGREEMENT
On
July
22, 2004, we 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 us 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
we
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, we made an initial issuance under the agreement of 200,000 common shares
at $2.50 per share. We also issued 300,000 common shares as commitment and
signing shares at no cost. We did not file the required registration statement
by August 20, 2004, Fusion Capital refused to purchase any additional shares,
and due to our dispute with Fusion Capital, we did not issue warrants until
February 2005.
We
and
Fusion Capital terminated the stock purchase agreement on February 22, 2005.
Under the termination agreement, we 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 we would use our 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. We wrote off the deferred offering costs in 2004 when Fusion Capital
refused to purchase any additional stock, and recorded a $5.8 million charge
to
other expense. We 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 we were 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 our Articles of Incorporation on September 30, 2004,
we
were 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 our 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
We
have
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 us 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 us 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. We have 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 liquidation,
dissolution or winding up of the Company or disposition of substantially all
of
our assets (“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.
On
June
19, 2006, Smart Automobile LLC returned to us all the remaining shares of
preferred stock with a carrying value of $7.5 million in exchange for 300,000
shares of common stock valued at approximately $400,000, one million warrants
with a strike price of $1.75 valued at approximately $950,000. See Note 2,
Smart
Auto License and Distribution Fee, for further discussion on this
transaction.
Warrants
We
are
authorized to issue 10 million shares each of Series B, C, D and K Unrestricted
Warrants. On November 8, 2004, our Board of Directors extended the expiration
dates and exercise prices of our following 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 $1.10, Series $1.50, Series $1.75, Series $2.00, Series $2.50, Series
$3.05, Series $3.25, 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.
The
Board
of Directors 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 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 us 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, 2006 are summarized as follows (in
thousands):
|
Number
of
|
Exercise
|
Expiration
|
|
Warrants
|
Price
|
Dates
|
Series
B-Unrestricted
|
4,200
|
1.20
|
7-1-07
|
Series
B-2-Restricted
|
13,588
|
1.20
|
7-1-07
|
Series
C-Unrestricted
|
6,898
|
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
|
6,236
|
1.00
|
7-1-07
|
$1.10
Warrants Restricted
|
540
|
1.10
|
various
|
$1.50
Warrants Restricted
|
1,763
|
1.50
|
various
|
$1.75
Warrants Restricted
|
1,000
|
1.75
|
6-18-08
|
$2.00
Warrants Restricted
|
350
|
2.00
|
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
|
|
56,525
|
|
|
See
Note
18 - Subsequent events for additional information relating to the outstanding
warrants at December 31, 2006.
Replacement
Warrants
On
July
1, 2004, the B and B-2 warrants and C and C-2 warrants expired, and replacement
warrants were issued. We issued replacement B and B-2 warrants to purchase
15,199,373 common shares at $1.26 per share, and 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. We recorded compensation expense totaling $2.5 million for replacement
warrants held by current employees based on the intrinsic value of the warrants.
We also recorded prepaid professional fees of $5.1 million for replacement
warrants held by consultants currently providing consulting services to us.
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 us, there was no
accounting consequence resulting from the replacements.
Modified
warrants
On
November 8, 2004, we 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 and 2005 was used to calculate
compensation expense for each year, and resulted in an additional compensation
charge of $2.9 million, or a total of $5.4 million for 2004, and a reduction
of
compensation expense of $5.4 million for 2005. The fair value of warrants held
by consultants currently providing services to us 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, we also extended terms of certain D and D-2 warrants and
K and
K-2 warrants, from July 1, 2005 to July 1, 2007. We recorded compensation
expense of $749,000 for warrants held by current employees based on the
intrinsic value of the warrants. We also recorded prepaid
professional fees of $470,000 for warrants held by consultants currently
providing consulting services to us. 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.
Warrants
issued in 2006
During
2006 we issued warrants in connection raising capital and settlement of the
Smart Auto liability. In addition, during 2006 we issued warrants to purchase
an
aggregate of 4,191,272 shares of our 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
|
$
2.00
|
Market
price
|
0.32
|
2.08
|
Assumptions:
|
|
|
Expected
dividend yield
|
0%
|
0%
|
Risk
free rate of return
|
4.9%
|
2.02%
|
Contractual
life
|
8
months
|
5
years
|
Volatility
|
134.2
|
143.6
|
Fair
market value
|
$.06
per share
|
$1.21
per share
|
Pursuant
to the requirements of FASB Statement No. 123 and EITF 96-18 and 00-18 related
to accounting for stock-based compensation, we recognized non-cash general
and
administrative expense in the amount of $2.3 million attributable to the
warrants issued to vendors and consultants at the date of grant during
2006.
Warrants
issued in 2005
During
2005, we issued warrants in connection raising capital and license fees. In
addition, during 2005, we issued warrants to purchase an aggregate 9,365,694
shares of our 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 was 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, we recognized non-cash general
and
administrative expense in the amount of $13.6 million attributable to the
warrants issued to vendors and consultants at the date of grant during
2005.
On
September 20, 2005, we issued non-forfeitable, fully vested 6.92 year warrants
to purchase 750,000 common shares at $1.50 per share. We are 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.
NOTE
13 - RELATED PARTY
Rental
agreements
We
lease
office space, land and rent warehouse space from our CEO and major shareholder.
These properties are used to operate the car outlet and to store inventory.
Rental expense was approximately $96,500 and $196,000 for the years ended
September 31, 2006 and 2005, respectively.
Consulting
services and other services
In
November and December 2003, we entered into certain agreements with two cousins
of Steven M. Schneider, our 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. In April 2004, we issued 2 million B-2 restricted warrants and 1
million K-2 restricted warrants to Sunshine 511 Holdings for consulting
services. The managing partner of Sunshine 511 Holdings is the cousin of our
CEO. In the fourth quarter of 2005, we expensed approximately $2.2
million, the carrying value of the prepaid services, since limited services
had
been received and there were no assurances that future services would be
received. Also in 2004, certain leasehold improvements in the amount of $65,000
made by us on rental properties were abandoned in favor of the landlord, who
is
our CEO. In September of 2006, we cancelled a shareholder note of $56,000 due
by
the cousin of Steven Schneider in exchange for consulting services.
Inventory
Purchase
In
December 2005, we purchased inventory from a related entity where three of
our
officers and 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 and September 30, 2006. During the second quarter of 2006
the
parties agreed that the payment will be offset against future outside
advertising services which will be provided to the related entity by
us.
Sales
to a related entity
We
also
signed in the third quarter of 2006, a Distributor License Agreement with a
business entity that is wholly owned by the brother of Maximilian Scheder-
Bieschin, our former President. The terms of the agreement are the same as
other
distributor licenses signed with us. The total sales through December 31, 2006
were $21,000. In addition, Smart Concepts is holding certain Xebra (TM) Vehicles
on a consignment basis valued at $24,000.
NOTE
14 - LITIGATION
In
the
normal course of business, we may become involved in various legal 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. We estimate
the amount of potential exposure it may have with respect to litigation claims
and assessments.
Zap
v. Daimler Chrysler AG, et al., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, we filed a complaint against
Daimler Chrysler Corporation and others in the Los Angeles Superior Court.
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 Daimler
Chrysler has engaged in a series of anti-competitive tactics aimed at defaming
us and disrupting our 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. Daimler Chrysler has
successfully filed a motion to quash that compliant for lack of personal
jurisdiction, and the court’s ruling on that matter is in the process of being
appealed. Two of the other defendants in the action, G&K Automotive
Conversion, Inc. and The Defiance LLC, have filed a cross-complaint against
us
in the Los Angeles Superior Court for, among other things, violations of Section
43(a) of the Lanham Act, statutory and common law unfair competition, and
intentional and negligent interference with prospective economic
advantage. We have responded to the cross-complaint and denied
engaging in any wrongful actions.
James
A. Arnold, et al. v. Steven Schneider, et al., Superior Court of
California, County of Sacramento, Case No. 02AS02062, filed April 5, 2002,
dismissed October 9, 2003, dismissal set aside and referred to Case Management
Program March 4, 2004. Plaintiffs seek damages of $71,000 in compensatory
damages, $50 per month since April 5, 2002, other charges, interest, and further
relief in the court’s discretion for breach of contract, promissory estoppel,
and fraud. Plaintiffs also seek $750,000 in punitive damages for fraud. We
have
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 statute, and
violation of the Unfair Practices Act. On February 17, 2005, the court referred
the matter to non-binding arbitration pursuant to California Code of Civil
Procedure section 1141.1. The non-binding arbitration hearing was held on July
27, 2005. The arbitrator award, issued on August 5, 2005, awarded plaintiffs
damages in the amount of $68,290, plus prejudgment interest at the rate of
7%.
This amount was awarded against both us and Mr. Schneider. Given an admission
in
the plaintiff’s case management conference statement and the decision of the
court to refer the matter to non-binding arbitration, we believe that the amount
in controversy should be less than $50,000, though the complaint asks for more
than $71,000 in damages. Trial in Sacramento County Superior Court began on
Tuesday, May 2, 2006, at 8:30 a.m., in Department 47. At the trial, the parties
agreed to settle this matter upon the following terms: (1) the plaintiff agreed
to dismiss the causes of action it had alleged against Mr. Schneider; and (2)
RAP Group agreed to (a) pay the plaintiff $20,000 on or before May 31, 2006;
(b)
pay the plaintiff an additional $20,000 on or before January 5, 2007; (c)
provide the plaintiff with whatever ownership documentation (such as titles)
it
can find in its possession, custody, or control regarding the 43 cars identified
by the plaintiff during discovery as being the subject of this litigation;
(d)
allow the court to enter an order directing that plaintiff may dispose of the
vehicles that are the subject of the litigation; and (e) allow the court to
enter judgment against it in the amount of $50,000, minus whatever monies have
already been paid by RAP Group to the plaintiff, if RAP Group does not timely
make either of the payments identified above. Both the plaintiff and RAP Group
agreed to execute general mutual releases of all claims arising out of the
subject matter of the litigation (pursuant to section 1542 of the Civil Code)
and to dismiss with prejudice the complaint and the cross-complaint after
performance of the settlement agreement. The plaintiff and RAP Group further
agreed that the stipulated settlement will be governed by section 664.6 of
the
Code of Civil Procedure. RAP Group made the first payment to the plaintiff
for
$20,000, but did not pay the second payment of $20,000 that was due by January
5, 2007. Plaintiff has therefore moved the court to enter a default judgment
against RAP Group for $30,000 pursuant to the terms of the Settlement Agreement.
A hearing on that motion for default judgment is scheduled for April 4, 2007
in
Sacramento Superior Court.
Leandra
Dominguez v. RAP Group, Inc. dba The Repo Outlet, et al., Superior Court of
California, County of Sonoma, Case No. SCV-235641, complaint filed October
14,
2004, first amended complaint filed December 15, 2004. Plaintiff has sued The
Repo Outlet and Credit West Corporation for negligent misrepresentation, for
a
violation of the Business and Professions Code Section 17200, for breach of
the
implied warranty of merchantability under the Magnusson-Moss Act, and for
violation of the federal Truth in Lending Act. On January 13, 2005, the RAP
Group, Inc. agreed to defend and indemnify Credit West Corporation. At a hearing
before the Sonoma County
Superior
Court on February 23, 2005, the court granted The Repo Outlet’s motion to compel
arbitration, and on March 8, 2005, the court stayed the court proceeding pending
arbitration. The RAP Group, Inc. filed a demand for arbitration with the
American Arbitration Association (the “Association”) on April 7, 2005, but the
parties later stipulated that the arbitration would proceed before JAMS. The
Repo Outlet made a Code of Civil Procedure 998 offer to settle and have
Dominguez dismiss the matter with prejudice for the sum of $1,001. Because
Dominguez failed to timely respond to The Repo Outlet’s Section 998 offer, that
offer expired on March 2, 2006. The Repo Outlet made another settlement offer
of
$1,857 to settle this matter as to both defendants on January 8, 2007, but
this
offer was rejected as plaintiff’s counsel seeks to recover all of his attorneys’
fees. Although the case was sent to arbitration before JAMS, and set for
arbitration in February 2007, on January 9, 2007, The Repo Outlet informed
the
arbitrator and plaintiff’s counsel that it would be ceasing operations and its
counsel would be withdrawing as attorneys of record. At a status conference
on
February 8, 2007, the court was informed that counsel for RAP Group had moved
to
withdraw for non-payment of fees. The hearing on that motion is set for April
18, 2007. Since that time, Credit West has substituted its own counsel of
record, and so RAP Group is no longer tendering a defense to Credit West. The
next case management conference is scheduled for April 25, 2007.
Voltage
Vehicles v. American Electric Power Company, et al., Superior Court of
California, County of Sonoma, Case No. SCV 236 830. On June 1, 2005, Voltage
Vehicles filed suit against American Electric Power Company, CSW Energy
Services, Inc., Central and Southwest Corporation, Total EV, Freightquote,
LLC,
and Central Freight Lines, Inc. A First Amended Complaint was filed August
29,
2005, against the same defendants, asserting causes of action for breach of
a
written contract of sale against certain defendants, as well as breach of a
written contract as a third party beneficiary against all defendants. Voltage
Vehicles’ First Amended Complaint seeks compensatory damages in the amount of
$744,735, prejudgment interest, attorneys’ fees, and costs of suit. Defendants
CSW Energy Services, Inc. and Central Freight Lines filed demurrers, both of
which the court overruled. This matter settled in December 2006 with payment
by
defendants CSW Energy Services and American Electric Power Company to Voltage
Vehicles of $15,000. All parties agreed to bear their own costs and attorneys
fees. All defendants were thereafter dismissed with prejudice on December 27,
2006.
Marieta
Cruz Hansell v. Robert Warren Johnson, Jr., ZAP, et al., Superior Court of
California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell filed
suit
against Robert Johnson (our former employee), us and other defendants for
personal injury, property damage and permanent disability based on an alleged
automobile collision between the plaintiff and defendant Johnson. We and Mr.
Johnson have both filed answers and case management statements containing a
general denial of all of the plaintiff’s claim, and we have agreed to defend Mr.
Johnson in this matter. The parties are in the process of propounding and
responding to discovery. The plaintiff is claiming permanent disability, and
she
has submitted a Statement of Damages in the amount of $108,727.34, plus
unspecified amounts of future general damages, future wage loss, diminution
of
earning capacity damages, and incidental, consequential and special damages.
The
plaintiff has not yet made any demand for settlement. We intend to vigorously
defend both ourself and Mr. Johnson against these claims. This matter is now
being handled by alternative counsel for us. According to information received
from alternative counsel, the parties have agreed to settle this matter with
a
payment by us and Mr. Johnson to the plaintiff of a total of $70,000. The
lawsuit was settled on February 15, 2007 and was dismissed with
prejudice.
First
Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
ZAP, American Arbitration Association Case No. 74 133 00081 06 NOCA. First
Class Imports is a vehicle dealer that executed a licensing and distributorship
agreement with Voltage Vehicles, our subsidiary, in May 2004. On January 14,
2006, First Class Imports and its principal, Leon Atkind, filed an arbitration
demand with the American Arbitration Association. Therein they alleged that
Voltage Vehicles breached the licensing agreement by not delivering new
SMART-branded vehicles to First Class Imports and demanded return of the
$100,000 licensing fees paid to Voltage Vehicles under the agreement, plus
interest. In a separate cause of action, Mr. Atkind alleged Voltage Vehicles
breached a second contract by failing to timely deliver a stock certificate
in
exchange for a Mercedes vehicle that he sold to Voltage Vehicles. Regarding
this
second claim, Mr. Atkind contended that the late delivery of the certificate
caused the shares to be restricted for an extra month during which our stock
price declined, and he seeks as damages the difference in the value of the
stock
on the two subject dates multiplied by 59,999, the number of shares he received.
Concerning both causes of action, First Class Imports and Mr. Atkind alleged
that we should be held liable as Voltage Vehicles’ alleged alter ego. Voltage
Vehicles filed a counterclaim against both First Class Imports and Mr. Atkind.
The first cause of action therein alleges breach of contract against First
Class
Imports for its refusal to accept SMART-branded vehicles offered to it pursuant
to the parties’ licensing agreement. Voltage Vehicles seeks as damages the lost
revenue it otherwise would have gained through First Class Imports’ purchase of
SMART-branded vehicles, as well as damages based on the depreciation of a
SMART-branded vehicle it loaned to First Class Imports. The second cause of
action alleges breach of contract against Mr. Atkind based on his failure to
deliver title to the Mercedes identified above. On this claim, Voltage Vehicles
seeks as damages the depreciation of the Mercedes during the time in which
it
has been unable to sell the vehicle. After selection of an arbitrator, the
arbitration was continued several times as the parties discussed settlement.
Eventually the parties decided to allow the arbitrator to mediate the dispute,
and a mediation was held on January 22, 2007. During the mediation the parties
agreed in principle to resolve the dispute via: (1) Voltage Vehicles’ retention
of the $100,000 licensing fee; (2) termination of the licensing contract
effecting a territorial buyback by Voltage Vehicles of all rights that were
granted to First Class Imports in that contract; (3) our provision to Leon
Atkind of 47,500 shares of restricted stock; and (4) our provision to First
Class Imports of two SMART-branded motor vehicles (a 2003 and a 2005 model,
each
with less than 500 miles on their odometers). Counsel for us and Voltage
Vehicles have sent a draft settlement agreement to counsel for First Class
Imports and Mr. Atkind, who has yet to provide comments in response thereto.
Meanwhile, Sonoma County Superior Court has scheduled the next case management
conference for April 19, 2007.
ZAP
v. Norm Alvis, et al., Superior Court of California, County of
Sonoma, Case No. SCV-238419, complaint filed March 27, 2006. Mr. Alvis was
engaged by us and
Rotoblock
Corporation (“Rotoblock”) as a consultant to perform public relations work on
behalf of us and Rotoblock. As consideration for Mr. Alvis’ consent to the
contract with us, we provided Mr. Alvis with use of a motor home worth
approximately $306,000. We then sued Mr. Alvis, claiming he failed to perform
his obligations under the contract and refused to return the consideration
he
received therefor (i.e. the motor home). We are seeking either the return of
the
motor home or $500,000 in damages. Mr. Alvis initially did not respond to the
complaint, which prompted us to take his default on May 9, 2006. The court
then
entered a default judgment on May 16, 2006, on which date we obtained a writ
of
possession allowing us to reclaim possession of the disputed motor home. On
June
18, 2006, Mr. Alvis moved the court to set aside the default and default
judgment and to vacate its order authorizing issuance of the writ of possession.
The court agreed to set aside the default judgments, but it left intact the
writ
of possession. The court also required Mr. Alvis to pay us $1,000 as
compensation for forcing us to initially take his default. Mr. Alvis has paid
us
the required $1,000. Mr. Alvis then filed (1) an answer denying our allegations,
and (2) a cross-claim against us, Steve Schneider in his individual capacity,
and Rotoblock, alleging two counts of breach of contract, one common count
of
work, labor, and services received, and one count of fraud. All of Mr. Alvis’
claims relate to the two contracts he executed with us and Rotoblock. Mr. Alvis
claims he provided services to us and Rotoblock pursuant to these contracts
but
received no consideration in exchange therefor. For the fraud claim, defendant
claims we and Schneider executed the contracts with no intent to perform. Mr.
Alvis has prayed for damages of $2,000,000, interest according to proof,
punitive damages, and an order directing us to perfect title to the motor home.
Mr. Alvis then moved the court to quash the writ of possession. On November
2,
2006, the court denied this motion, although it did require us to post a
$300,000 bond to enforce the writ. We have not yet posted that bond, and
consequently Mr. Alvis has threatened to move to revoke the writ. We, Rotoblock
and Schneider then demurred to the cross-complaint, and Alvis responded by
filing an amended cross-complaint. The first amended cross-complaint again
seeks
breach of contract and common count damages against us and Rotoblock, as well
as
fraud damages against us and Schneider. We and Schneider answered the first
amended cross-complaint with general denials; Rotoblock responded by filing
a
second demurrer in which it has alleged it was an improperly named party. The
hearing on Rotoblock’s demurrer was heard on March 21, 2007, at which time the
demurrer was denied. Rotoblock intends to file an answer to the amended
cross-compliant with general denials. Counsel has given notice of the claims
against Schneider to our D&O insurer, which has acknowledged receipt of the
notice. Discovery is on-going, and the next case management conference is
scheduled for July5, 2007.
Department
of Motor Vehicles v. RAP Group, Inc. et al., This is an administrative
proceeding brought by the Department of Motor Vehicles (the “DMV”) which is
seeking license revocation of the following licenses related to the RAP Group’s
operations: (1) vehicle verifier license for RAP Group employee Jeff Schneider;
(2) sales license for Jeff Schneider; and (3) dealer’s license for RAP Group,
doing business as Bug Motors and Voltage Vehicles. Settlement with the DMV
was
reached in late 2006, resulting in the voluntary surrender of RAP Group’s dealer
license.
Robert
Chauvin; Mary Chauvin; Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of
Reno, dba ZAP of Sparks (“Robert Chauvin, et al.”) v. Voltage Vehicles; ZAP; ZAP
Power Systems, Inc.; zapworld.com; Elliot Winfield; Steven Schneider; Phillip
Terrazzi; Max Scheder-Breschin; Renay Cudie; [sic] and Does I-XX, Second
Judicial District Court State of Nevada, County of Washoe, Case No. CV06 02767.
On November 17, 2006, Robert Chauvin, et al. filed a complaint alleging breach
of contract, breach of the covenant of good faith and fair dealing, breach
of
warranties, fraud/misrepresentation, negligent misrepresentation, quantum merit
or unjust enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks (“Rajun Cajun”) and
Voltage Vehicles. The complaint seeks general damages in an amount in excess
of
$10,000, special damages in an amount in excess of $10,000, punitive damages
in
an amount in excess of $10,000, attorneys’ fees and cost of suit, for judgment
in an amount equal to treble actual damages, and recession in the amounts of
$397,900 and $120,000. Defendants Voltage Vehicles and ZAP filed a Motion to
Dismiss on January 19, 2007. Chauvin, et al. filed an opposition to that motion
on February 16, 2007, and we and Voltage Vehicles filed a reply on March 5,
2007. The matter has now been submitted to the court, and the parties are
awaiting a ruling on that motion. It is anticipated that the Motion to Dismiss
will be granted as the License Agreement entered into between Rajun Cajun and
Voltage Vehicles contains a forum selection clause designating Sonoma County,
State of California as the appropriate forum. On February 16, 2007, Robert
Chauvin, et al. filed Notices of Intent to Take Default against the individual
defendants, with the exception of Renay Cude, and two of the named corporate
defendants. In response, on February 22, 2007, named defendants ZAP Power
Systems, Inc., ZAPWORLDCOM, Elliot Winfield, Steven Schneider, Phillip Terrazzi,
Max Scheder-Breschin, and Renay Cude filed a Motion to Quash Service of Process
or Alternatively for Dismissal as the individual defendants were never properly
served, and because the two corporate defendants no longer exist. Chauvin,
et
al. filed an opposition to that motion on March 8, 2007, and the defendants
will
be filing a reply thereto on March 19, 2007, after which the matter will be
submitted to the court for a ruling. On March 5, 2007, Chauvin, et al. filed
a
Motion for Publication of Summons for each of the five named individual
defendants in the underlying matter filed in Nevada. On February 9, 2007 Voltage
Vehicles filed a Complaint against Rajun Cajun in the Superior Court of
California, County of Sonoma for Declaratory Relief, which asks the Court to
declare that the License Agreement does not grant Rajun Cajun an exclusive
dealership in northern Nevada to distribute Voltage Vehicle products and that
Voltage Vehicles has performed its obligations under the License Agreement.
(Voltage Vehicles v. Rajun Cajun, et al., Case No. SCV 240179) Rajun Cajun
has
yet to file an Answer to this Complaint.
ZAP
v. International Monetary Group (Patrick J. Harrington, President and CEO)
Inc.,
a Delaware Corporation; Michael C. Sher dba The Law Offices of Michael C.
Sher, Case No. SCV 240277, complaint filed March 1, 2007 in Sonoma County
Superior Court. We sued International Monetary Group (“IMG”) whose President and
CEO is Patrick D. Harrington and Michael Sher for declaratory relief,
rescission, and breach of contract. We had entered into an agreement with IMG,
a
merchant banking company, to procure financing, and we allege that IMG, contrary
to the parties’ agreement, is seeking to enforce a $500,000 promissory note. We
also allege that IMG and Sher have taken $12,500 and 10,000 shares of our common
stock that they held in trust for us without authorization. We also allege
that
IMG and Sher continue to hold 1,291,176 shares of our stock that was supposed
to
have been used as collateral for a $1 million loan to be
procured
by IMG and Sher that never materialized. After being served with the complaint,
counsel for IMG and Sher initiated settlement discussions and, in consideration,
were given until May 7, 2007 to respond to the complaint. Management has
recorded an estimated liability for any potential exposure related to these
transactions which is included in the accompanying consolidated balance sheets
as of December 31, 2006 and March 31, 2007. In addition, management believes
that the ultimate resolution of this claim will not have a material adverse
effect on our consolidated financial position or on results of
operations.
ZAP
v. Thomas C. Graver and Auto America Group, Inc., to be filed in the
Northern District of California in March 2007 with claims under the Federal
Anti-Cybersquatting Act and for trademark infringement. Graver is the President
and Chief Executive Officer of Auto America Group, Inc. (“AAG”). AAG and Graver
signed an independent contractor agreement with us on October 21, 2005 to
provide certain services to us, but that agreement terminated on October 18,
2006. At no time did we enter into an agreement with AAG or Graver giving either
of them permission to use our federally-registered trademark “zapworld.com.”
Following discussions regarding a business dispute between Graver, AAG and
one
of our business partners, a Brazilian company called Obvio, Graver registered
the domain name www.zapworld.us on January 4, 2007. Although there is very
little content on the website www.zapworld.us, the home page does refer
extensively to Obvio and has two references to us. One of those references
is to
“ZAP Agreement Correspondence” with an apparent link that is not functional. The
other ZAP reference is to an article referring to us in a negative light. As
Graver has failed to respond to our cease and desist letters, we anticipate
filing suit later this month against Graver and AAG to have the domain name
“zapworld.us” transferred to us and for attorneys’ fees and
damages.
NOTE
15 - SEGMENT REPORTING
In
accordance with the provisions of SFAS No. 131, we have identified three
reportable segments consisting of sales and marketing of electric consumer
products, operation of a retail car outlet, sales of advanced technology
vehicles for the Xebra (TM) electric vehicles and Smart Cars Americanized by
ZAP. These segments are strategic business units that offer different services.
They are managed separately because each business requires different resources
and strategies. Our chief operating decision making group, which is comprised
of
the Chief Executive Officer and the senior executives of each of our 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
|
|
|
|
|
|
Advanced
|
|
|
|
|
|
|
Consumer
|
|
|
Car
|
|
|
Technology
|
|
|
|
|
|
|
Products
|
|
|
Outlet
|
|
|
Vehicles
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
843
|
|
|
$ |
1,618
|
|
|
$ |
8,369
|
|
|
$ |
10,830
|
|
Gross
profit (loss)
|
|
|
(445 |
) |
|
|
440
|
|
|
|
530
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
impairment
|
|
|
3,844
|
|
|
|
25
|
|
|
|
17
|
|
|
|
3,886
|
|
Net
loss
|
|
|
(11,755 |
) |
|
|
(17 |
) |
|
|
(143 |
) |
|
|
(11,915 |
) |
Total
assets
|
|
|
8,304
|
|
|
|
430
|
|
|
|
2,082
|
|
|
|
10,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
624
|
|
|
$ |
2,524
|
|
|
$ |
432
|
|
|
$ |
3,602
|
|
Gross
profit
|
|
|
18
|
|
|
|
303
|
|
|
|
9
|
|
|
|
341
|
|
Depreciation,
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
impairment
|
|
|
7,392
|
|
|
|
44
|
|
|
|
175
|
|
|
|
7,660
|
|
Net
loss
|
|
|
(22,106 |
) |
|
|
(744 |
) |
|
|
(459 |
) |
|
|
(23,501 |
) |
Total
assets
|
|
|
11,769
|
|
|
|
771
|
|
|
|
2,137
|
|
|
|
14,677
|
|
NOTE
16 - SUPPLEMENTAL CASH FLOW INFORMATION
A
summary
of non-cash investing and financing information is as follows (in
thousands):
|
|
Year
ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
4
|
|
|
$ |
4
|
|
Interest
|
|
|
72
|
|
|
|
59
|
|
Common
stock and warrant issuances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
235
|
|
Investment
in joint venture
|
|
|
|
|
|
|
248
|
|
Settlement
of warrant liability
|
|
|
568
|
|
|
|
6,711
|
|
Prepaid
professional fees
|
|
|
861
|
|
|
|
830
|
|
Property
and equipment
|
|
|
3
|
|
|
|
1,211
|
|
NOTE
17 - SUBSEQUENT EVENTS
In
January 2007, we received $900,000 through the sale of 700,000 shares of common
stock and 2 million warrants to qualified investors.
On
January 26, 2007,the Board of Directors extended by five years through July
1,2012, the expiration date of certain of our warrants, Series B through K.
These warrants were issued for executive incentives and by the plan of
reorganization. The exercise prices of the warrants were also revised from
prices ranging from $1.00 to $8.00 to prices ranging from $1.00 to
$1.20.
On
February 20, 2007, we entered in to a Purchase and Amendment Agreement (the
“Amendment”), amending the Securities Purchase Agreement entered into by us on
December 5, 2006 (the “Original Agreement” and as amended by the Amendment, the
“Agreement”), with several institutional and accredited investors (the
“Purchasers”) pursuant to which we sold to the Purchasers additional $1.2
million aggregate principal amount of 8% senior convertible notes due February
2009 (the “Notes”) and warrants to purchase 360,000 shares of our common stock
(the “Warrants”), in a private placement. The Transaction closed on February 22,
2007. Gross proceeds from the sale to us were $1.2 million, of which $15,000
was
paid to one of the Purchasers for expenses incurred in connection with the
Transaction.
The
Notes
bear interest at 8% per year, payable quarterly, and are convertible into shares
of our common stock at an original conversion price of $1.00 per
share.
The
Warrants entitle each Purchaser to purchase a number of shares of common stock
equal to thirty percent of the number of shares of common stock that would
be
issuable upon conversion of the Note purchased by such Purchaser in the
Transaction. The Warrants have an initial exercise price of $1.32.
On
March
31, 2007, the Board of Directors extended the employment agreements for Mr.
Schneider, Mr. Starr and Ms. Cude to October 1, 2013.
On
April
30, 2007, the Company entered into Certificates of Adjustments to the Notes
and
Warrants (the “Adjustments”) to adjust certain provisions of the Notes and
Warrants as a consequence of the declaration by the Company of a ten percent
(10%) common stock dividend to common shareholders of record on February
15,
2007, payable February 28, 2007. As a result of the Adjustments, the
conversion price of the Notes was reduced to $0.909 per share, the Initial
Warrants were increased to 495,000 at an exercise price of $1.00 per share,
and
the Additional Warrants were increased to 396,000 at an exercise price of
$1.20
per share.
On
June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion
price of the Notes was reduced to $0.727 per share and the Initial Warrants
were
increased to 594,001 at an exercise price of $0.80 per share. The Second
Amendment also deferred the June and July 2007 payments of the principal
due
under the Notes to August 1, 2007, extended the filing deadline of the
Registration Statement to July 9, 2007, reduced the number of shares required
to
be registered under the Agreement to 130% of the shares underlying the Notes
and
Warrants, and allowed for the inclusion of an aggregate of 4,490,630 additional
shares of common stock in any registration statement filed by the Company
in
connection with the Agreement. In consideration for these
modifications, the Company agreed to pay the purchasers an aggregate of $113,000
in liquidation damages, payable in 141,750 shares of common stock of the
Company, and warrants to purchase an aggregate of 200,000 shares of common
stock
of the Company at an exercise price of $1.10 per share. The Company
also agreed to include the shares and warrants issued pursuant to the Second
Amendment in the registration statement required to be filed by the Company
pursuant to the Agreement.
ZAP
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
Index
to
financial statements
Condensed
consolidated statements of operations
|
F-32
|
|
|
Condensed
consolidated balance sheets
|
F-33
|
|
|
Condensed
consolidated statements of cash flows
|
F-34
|
|
|
Notes
to condensed consolidated financial statements
|
F-35
|
ZAP
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Thousands,
except share amounts)
|
|
Three
Months
ended
March
31, 2007
|
|
|
Three
Months
ended
March
31, 2006
|
|
NET
SALES
|
|
$
|
1,137
|
|
|
$
|
2,929
|
|
|
|
|
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
1,083
|
|
|
|
2,505
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
54
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
371
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
General
and administrative (non-cash of $12.9 million and $1.8 million for
the
three months ended March 31, 2007 and 2006)
|
|
|
13,990
|
|
|
|
3,068
|
|
Research
and development
|
|
|
335
|
|
|
|
—
|
|
|
|
|
14,696
|
|
|
|
3,319
|
|
LOSS
FROM OPERATIONS
|
|
|
(14,642
|
)
|
|
|
(2,895
|
)
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Gain
on revaluation of warrant and put option liabilities
|
|
|
—
|
|
|
|
135
|
|
Interest
expense, net
|
|
|
(216
|
)
|
|
|
(6
|
)
|
Other
income (expense)
|
|
|
23
|
|
|
|
(3
|
)
|
|
|
|
(193
|
)
|
|
|
126
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(14,835
|
)
|
|
|
(2,769
|
)
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(4
|
)
|
|
|
(4
|
)
|
NET LOSS
|
|
$
|
(14,839
|
)
|
|
$
|
(2,773
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
BASIC
and DILUTED
|
|
$
|
(0.36
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE OF COMMON SHARES OUTSTANDING — BASIC AND
DILUTED
|
|
|
41,526
|
|
|
|
36,021
|
|
The
accompanying notes to condensed consolidated financial statements
(unaudited).
ZAP
CONDENSED
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(In
thousands)
|
|
March
31,
2007
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,561
|
|
Accounts
receivable, net of allowance for doubtful accounts of $199
|
|
|
248
|
|
Inventories
|
|
|
2,017
|
|
Prepaid
non-cash professional fees
|
|
|
903
|
|
Other
prepaid expenses and other current assets
|
|
|
320
|
|
Total
current assets
|
|
|
6,049
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net of accumulated depreciation of
$955
|
|
|
4,420
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
Patents
and trademarks, net
|
|
|
41
|
|
Goodwill
|
|
|
175
|
|
Prepaid
non-cash professional fees, less current portion
|
|
|
207
|
|
Deferred offering
costs
|
|
|
40
|
|
Deposits
and other assets
|
|
|
63
|
|
Total
assets
|
|
$
|
10,995
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
1,679
|
|
Accounts
payable
|
|
|
184
|
|
Accrued
liabilities
|
|
|
2,745
|
|
Deferred
revenue
|
|
|
1,026
|
|
Total
current liabilities
|
|
|
5,634
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
Secured
convertible note, less current portion
|
|
|
1,768
|
|
8%
Senior convertible notes, net of discount of $981, less current
portion
|
|
|
144
|
|
Total
Liabilities
|
|
|
7,546
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
Preferred
stock, authorized 50 million shares; no par value, no shares issued
and
outstanding
|
|
|
—
|
|
Common
stock, authorized 200 million shares; no par value; 44,563,083 shares
issued and outstanding
|
|
|
106,529
|
|
Common
stock issued as loan collateral
|
|
|
(1,549
|
)
|
Accumulated
deficit
|
|
|
(101,531
|
)
|
Total
shareholders’ equity
|
|
|
3,449
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
10,995
|
|
See
accompanying notes to condensed consolidated financial statements
(unaudited).
ZAP
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In
thousands)
|
|
Three
months ended
March
31,
|
|
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,839
|
)
|
|
$
|
(2,773
|
)
|
Items
not requiring the use of cash:
|
|
|
|
|
|
|
|
|
Amortization
of note discount
|
|
|
85
|
|
|
|
—
|
|
Stock-based
compensation for consulting and other services
|
|
|
887
|
|
|
|
1,283
|
|
Stock-based
employee compensation
|
|
|
12,040
|
|
|
|
518
|
|
Gain
on revaluation of warrant and put option liabilities
|
|
|
—
|
|
|
|
(135
|
)
|
Depreciation
and amortization
|
|
|
114
|
|
|
|
494
|
|
Loss
on disposal of equipment
|
|
|
—
|
|
|
|
4
|
|
Allowance
for doubtful accounts
|
|
|
20
|
|
|
|
(16
|
)
|
Changes
in other items affecting operations:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(38
|
)
|
|
|
(142
|
)
|
Smart
car inventory
|
|
|
—
|
|
|
|
1,235
|
|
Inventories
|
|
|
330
|
|
|
|
(188
|
)
|
Prepaid
expenses and other assets
|
|
|
79
|
|
|
|
(213
|
)
|
Accounts
payable
|
|
|
(66
|
)
|
|
|
(12
|
)
|
Accrued
liabilities
|
|
|
(217
|
)
|
|
|
(40
|
)
|
Deferred
revenue
|
|
|
(164
|
)
|
|
|
50
|
|
Net
cash provided by (used for) operating activities
|
|
|
(1,769
|
)
|
|
|
65
|
|
CASH
FLOWS FROM INVESTING ACTIVITES
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(18
|
)
|
|
|
(24
|
)
|
Proceeds
from sale of equipment
|
|
|
—
|
|
|
|
35
|
|
Net
cash provided by ( used for) investing activities
|
|
|
(18
|
)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock and warrants, net of offering costs
|
|
|
1,045
|
|
|
|
1,005
|
|
Borrowings
of long-term debt, net of offering costs
|
|
|
1,185
|
|
|
|
(18
|
)
|
Repayments
of long term debt
|
|
|
(42
|
)
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
2,188
|
|
|
|
987
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
401
|
|
|
|
1,063
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
2,160
|
|
|
|
1,547
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
2,561
|
|
|
$
|
2,610
|
|
See
accompanying notes to condensed consolidated financial statements
(Unaudited)
ZAP
NOTES
TO THE INTERIM UNAUDITED CONDENSED FINANCIAL STATEMENTS
Note
1 BASIS OF PRESENTATION
The
accompanying unaudited condensed financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form SB-2 and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. All
adjustments (all of which are of a normal recurring nature) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 2007 are not indicative of the results that may be
expected for the year ending December 31, 2007 or for any other period. These
condensed financial statements and the notes thereto should be read in
conjunction with the audited financial statements and notes thereto included
in
our Annual Report on Form 10-K for the year ended December 31, 2006 filed with
the Securities and Exchange Commission (the “SEC”) on April 2, 2007 (our “2006
10-K”).
Going
Concern - The accompanying consolidated condensed financial statements have
been
prepared assuming we will continue as a going concern. We have a
history of losses and might not achieve profitability. We will 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. Our 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 our new products, including the necessary intellectual property
rights, obtaining regulatory approvals for our new products, market acceptance
of all our products, existence of competing products in our current and
anticipated markets, and our ability to raise additional capital in a timely
manner. Management expects to be able to raise additional capital; however,
we
may not be able to obtain additional financing on acceptable terms, or at
all.
Other
risks include, but are not limited to, the following:
We
face
intense competition, which could cause us to lose market share. Changes in
the
market for electrical or fuel-efficient vehicles could cause our products to
become obsolete or lose popularity. We cannot assure you that growth in the
electric vehicle industry or fuel-efficient cars will continue and our business
may suffer if growth in the electric vehicle industry or fuel-efficient market
decreases or if we are unable to maintain the pace of industry demands. We
may
be unable to keep up with changes in electric vehicle or fuel-efficient
technology and, as a result, may suffer a decline in our competitive position.
The failure of certain key suppliers to provide us with components could have
a
severe and negative impact upon our business. Product liability or other claims
could have a material adverse effect on our business. We may not be able to
protect our Internet address. Our success is heavily dependent on protecting
our
intellectual property rights.
Note
2 SIGNIFICANT ACCOUNTING POLICIES
ADOPTION
OF NEW ACCOUNTING PRONOUNCEMENT
Effective
January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Staff
Position (FSP) Emerging Issues Task Force (EITF) 00-19-2, “Accounting for
Registration Payment Arrangements.” This FASB staff position addresses how to
account for registration payment arrangements and clarifies that a financial
instrument subject to a registration payment arrangement should be accounted
for
in accordance with other generally accepted accounting principles (GAAP) without
regard to the contingent obligation to transfer consideration pursuant to the
registration payment arrangement. This accounting pronouncement further
clarifies that a liability for liquidated damages resulting from registration
statement obligations should be recorded in accordance with Statement of
Financial Accounting Standards No. 5, “Accounting for Contingencies,” when the
payment of liquidated damages becomes probable and can be reasonably
estimated.
Prior
to
the adoption of this FSP, we had classified as a note derivative liability
and
as a warrant liability, financial instruments included in or issued in
conjunction with our December 5, 2006 convertible note financing, since the
offering of the underlying shares issuable upon conversion of the notes and
exercise of the warrants was required to be registered with the SEC, and our
failure to file, and obtain and maintain the effectiveness of a registration
statement would result in potential cash payments which were not
capped. Our adoption of this accounting pronouncement as of January
1, 2007 resulted in a reclassification of the note derivative liability to
the
note liability and the warrant liability to equity, and an adjustment to the
note discount to reflect the allocated value of the warrant and a beneficial
conversion feature, accreted to December 31, 2006, both calculated in accordance
with EITF Nos. 98-5 and 00-27. The cumulative effect of this
accounting change of $24,000 was credited to our opening accumulated deficit
balance as of January 1, 2007.
In
June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (“FIN
48”). This Interpretation clarifies the accounting for uncertainty in income
taxes recognized in a company’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax position
in accordance with FIN 48 is a two-step process. The first step is recognition:
The entity determines whether it is “more-likely-than-not” that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the “more-likely-than-not” recognition
threshold, the entity presumes that the position will be examined by the
appropriate taxing authority that would have full knowledge of all relevant
information. The second step is measurement: A tax position that meets the
“more-likely-than-not” recognition threshold is measured to determine the amount
of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely
to be realized upon ultimate settlement. We adopted FIN 48 on January 1, 2007
and the impact on our financial statements was not material.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159
permits the measurement of many financial instruments and certain other items
at
fair value. Entities may choose to measure eligible items at fair value at
specified election dates, reporting unrealized gains and losses on such items
at
each subsequent reporting period. The objective of FAS 159 is to
provide entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. It is intended
to expand the use of fair value measurement. FAS 159 is effective for
fiscal years beginning after November 15, 2007. We have not evaluated
the potential impact of adopting SFAS 159.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements
required under other accounting pronouncements. FAS 157 does not change existing
guidance regarding whether or not an instrument is carried at fair value. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. We are currently evaluating the impact on our
consolidated financial statements of adopting SFAS No. 157.
NET
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic
and
diluted loss per common share is based on the weighted average number of common
shares outstanding in each period. The weighted average number of shares
outstanding for the period ended March 31, 2006 has been restated for the 10%
stock dividend of February 2007. Potential dilutive securities associated with
stock options, warrants and convertible preferred stock and debt have been
excluded from the diluted per share amounts, since the effect of these
securities would be anti-dilutive. At March 31, 2007, these potentially dilutive
securities include options for 8,632,783 shares of common
stock, warrants for 68,651,324 shares of common stock and debt convertible
into
4.33 million shares of common stock.
PRINCIPLES
OF CONSOLIDATION
Our
accounts and our consolidated subsidiaries are included in the condensed
consolidated financial statements after elimination of significant inter-company
accounts and transactions.
REVENUE
RECOGNITION
We
record
revenues only upon the occurrence of all of the following
conditions:
·
|
We
have 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);
|
·
|
The
purchase price has been fixed, based on the terms of the purchase
order;
|
·
|
We
have delivered the product from its distribution center to a common
carrier acceptable to the purchaser. Our customary shipping terms
are FOB
shipping point; and
|
·
|
We
deem the collection of the amount invoiced
probable.
|
We
provide no price protection. Product sales are net of promotional discounts,
rebates and return allowances.
We
do not
recognize sales taxes collected from customers as revenue.
DEFERRED
REVENUE - One of our subsidiaries, Voltage Vehicles, sold licenses to
auto dealerships under the ZAP name. The license agreements call for the
licensee to purchase a minimum number of vehicles from us each
year. As we collect monies related to these agreements, it is
classified as deferred revenue until we begin delivering a substantial number
of
vehicles to these dealerships on a regular basis. During the first quarter
of
2006, we began recognizing revenue on various license agreements on a straight
line basis over the terms of the agreement. Accordingly, we have
recognized approximately $26,000 of revenue and other adjustments for the three
month period ended March 31, 2007 resulting in an ending balance of
$1,026,000.
USE
OF ESTIMATES - The preparation of financial statements in accordance
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Estimates were made relating to
the useful lives of fixed assets, valuation allowances, impairment of assets
and
valuation of stock-based compensation and contingencies. Actual results could
differ materially from those estimates. Significant estimates
include:
ACCOUNTS
RECEIVABLE – We perform ongoing credit evaluations of its customers’
financial condition and generally requires no collateral from our
customers. We
maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers should deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.
INVENTORY
- We maintain reserves for estimated excess, obsolete and damaged
inventory based on projected future shipments using historical selling rates,
and taking into account market conditions, inventory on-hand, purchase
commitments, product development plans and life expectancy, and competitive
factors. If markets for our products and corresponding demand were to decline,
then additional reserves may be deemed necessary.
LEGAL
ACCOUNTS – We estimate the amount of potential exposure we may have
with respect to litigation claims and assessments.
RECOVERY
OF LONG-LIVED ASSETS - We evaluate the recovery of our long-lived
assets at least annually by analyzing our operating results and considering
significant events or changes in the business environment.
STOCK
ISSUED AS COLLATERAL - In January 2003, we entered into a Loan
Agreement with Mercatus Partners LLP (“Mercatus”) and issued 2, 941,176 common
shares to Mercatus as collateral for a $1 million loan that never funded. 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. The shares were
reported as lost to us in December 2003 and in December 2004, the shares were
reissued to Mercatus who then assigned the shares and their interests to
Phi-Nest Fund, L.P. (“Phi-Nest”) as collateral for the $1 million loan
commitment. We amended the Loan Agreement allowing Phi-Nest to purchase 500,000
shares for $1.16 per share. On March 30, 2006, we received $500,000 in net
proceeds from the sale of the 500,000 shares and the collateralized shares
were
reduced to 2,441,176 shares. Phi-Nest did not provide the $1 million loan.
In
September of 2006, we signed a Settlement Agreement with Phi-Nest requiring
that
the common stock being held as collateral be transferred to an independent
third
party (Michael C. Sher dba the Law Offices of Michael C. Sher), to hold the
securities in a depository account. At the same time, we entered into an
agreement with International Monetary Group (“IMG”) whose President and CEO is
Patrick D. Harrington, a merchant banking company to procure financing for
us.
Michael C. Sher was also acting as IMG’s in-house attorney. In return, Phi-Nest
received 150,000 shares of the collateral stock for consulting services and
forgiveness of a note receivable for $56,000 owed by a cousin of Steven
Schneider, our CEO. As a result, we recognized $236,000 in non-cash charges
in
the consolidated statement of operations for the year ended December 31, 2006.
In September, the Board of Directors approved the sale of 500,000 shares of
the
collateral stock to a qualified investor for $500,000. In October 2006, the
qualified investor transferred $500,000 directly to IMG who in turn was to
transfer the proceeds to us after we authorized Michael C. Sher to release
500,000 shares of the collateral stock. In October, IMG required us to sign
a
$500,000 note and represented that they would not enforce the note based on
other agreements with us and in return IMG transferred $487,500 in net proceeds
to us for the 500,000 shares of collateral stock previously issued to the
qualified investor. Also in October 2006, we authorized the issuance of 250,000
shares of the collateral stock to IMG and 250,000 shares of the collateral
stock
to Michael C. Sher for consulting services and recognized $600,000 in non-cash
consulting expense in the consolidated statement of operations for the year
ended December 31, 2006. At December 31, 2006, there were 1,291,176 shares
remaining in collateral stock held by Michael C. Sher. In January 2007, IMG
provided us with a notice of default on the $500,000 alleged note obligation.
In
addition, Michael C. Sher has refused to release the remaining 1,291,176 shares
of collateral stock to us due to a dispute over the alleged debt obligation
with
IMG. In February 2007, we filed suit to have the collateral stock returned.
See
Note 9 ZAP v. International Monetary Group, Inc., a Delaware corporation;
Michael C. Sher dba the Law Offices of Michael C. Sher, Case No. SCV 240277)
for
a detailed discussion. Management has recorded an estimated liability
for any potential exposure to this transaction which is included in the
accompanying condensed consolidated balance sheet. In addition, management
believes that the ultimate resolution of this claim will not have a material
adverse effect on our consolidated financial position or on the results of
operation.
WARRANTY
– We provide 30 to 90 day warranties on our personal electric products
and record the estimated cost of the product warranties at the date of sale.
The
estimated cost of warranties has not been significant to date. Should actual
failure rates and material usage differ from our estimates, revisions to the
warranty obligation may be required.
We
had
provided up to an extended 36 month or 36,000 mile warranty on the Smart Car
Americanized by ZAP, no longer distributed by us since September 30, 2006 and
6
month warranties for the Xebra™ vehicles. At March 31, 2007, we have recorded a
warranty liability for $251,973 for estimated repair costs.
CASH
AND CASH EQUIVALENTS– We consider highly liquid investments with
maturities from the date of purchase of three months or less to be cash
equivalents.
Note
3 STOCK-BASED COMPENSATION
We
have
stock compensation plans for employees and directors which are described in
Note
10 to our consolidated financial statements in our 2006 Annual Report on Form
10-KSB as filed with the SEC on April 2, 2007. In June 2006, our shareholders
approved our 2006 incentive stock plan. Under the 2006 plan, we may grant stock
options for up to 4 million shares of common stock. We adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment,” (“SFAS 123R”) effective January 1, 2006. SFAS 123R requires the
recognition of the fair value of stock compensation in net income (loss). We
recognize the stock compensation expense over the requisite service period
of
the individual grantees, which generally equals the vesting period. All of
our
stock compensation is accounted for as an equity instrument. Prior to January
1,
2006, we followed Accounting Principles Board Opinion 25, Accounting for
Stock Issued to Employees” (“APB 25”) and related interpretations in
accounting for our stock compensation.
We
elected the modified prospective method in adopting SFAS 123R. Under this
method, the provisions of SFAS 123R apply to all awards granted or modified
after the date of adoption. The unrecognized expense of awards not yet vested
at
the date of adoption is recognized in net income (loss) in the periods after
the
date of adoption using the same valuation method ( i.e. Black-Scholes)
and assumptions determined under the original provisions of SFAS 123, “
Accounting for Stock-Based Compensation,” as disclosed in our previous
filings. In accordance with the modified prospective method, the consolidated
financial statements for periods prior to 2006 have not been restated to reflect
SFAS 123R.
On
January 26, 2007, we extended the expiration date of 21.8 million warrants
previously issued to employees and officers by five years to July 1, 2012,
with
new exercise prices ranging from $1.00 to $1.20. As a result of the modification
of the warrants, we determined the fair value of the warrants immediately prior
to and after the modification. The incremental difference in value resulted
in
the recognition of $11.7 million in non-cash compensation expense during the
first quarter of 2007. We valued the modified warrants at $0.57 per share using
a Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 4.98%; dividend rate of 0.00%; volatility of 123%, and expected
term of 2.7 years.
Under
the
provisions of SFAS 123R, we recorded $ 12 million of stock compensation, net
of
estimated forfeitures, in selling, general and administrative expenses, in
our
unaudited condensed consolidated statement of operations for the three months
ended March 31, 2007 . We utilized the Black-Scholes valuation model for
estimating the fair value of the stock compensation granted after the adoption
of SFAS 123R, with the following range of assumptions for the three months
ended
March 31, 2007:
|
|
2007
|
|
Expected
Dividend yield
|
|
0%
|
|
Expected
volatility
|
|
|
121.60
to 154.43
|
|
Risk-free
interest rate
|
|
|
4.58
to 5.21
|
|
Expected
life (in years) from grant date
|
|
|
2.5
to 5.75
|
|
Exercise
price
|
|
|
$0.68
to $2.13
|
|
The
dividend yield of zero is based on the fact that we have never paid cash
dividends and have no present intention to pay cash dividends. Expected
volatility is based upon historical volatility of our common stock over the
period commensurate with the expected life of the options. The risk-free
interest rate is derived from the average U.S. Treasury Constant Maturity Rate
during the period, which approximates the rate in effect at the time of the
grant. Our unvested options vest over the next three years. Our options
generally have a 10-year term. The expected term is calculated using the
simplified method prescribed by the SEC’s Staff Accounting Bulletin 107. Based
on the above assumptions, the weighted-average fair values of the options
granted under the stock option plans for the three months ended March 31, 2007
was $0.91. As required by SFAS No. 123R, we now estimate forfeitures
of employee stock options and recognize compensation cost only for those awards
expected to vest. Forfeiture rates are determined based on historical
experience. Estimated forfeitures are now adjusted to actual forfeiture
experience as needed.
A
summary
of options under our stock option plans from December 31, 2006 through March
31,
2007 is as follows:
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
December 31, 2006
|
|
|
8,288,17
|
|
|
$ |
1.02
|
|
|
|
7.40
|
|
|
|
1,942,600
|
|
Options
granted under the plan
|
|
|
589,606
|
|
|
$ |
1.15
|
|
|
|
9.99
|
|
|
|
—
|
|
Options
exercised
|
|
|
(245,000 |
) |
|
$ |
.059
|
|
|
|
—
|
|
|
|
119,300
|
|
Options
forfeited and expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
March 31, 2007
|
|
|
8,632,783
|
|
|
$ |
1.03
|
|
|
|
8.04
|
|
|
|
1,823,300
|
|
Aggregate
intrinsic value is the sum of the amounts by which the quoted market price
of
our stock exceeded the exercise price of the options at March 31, 2007, for
those options for which the quoted market price was in excess of the exercise
price (“in-the-money-options”). The total intrinsic value of options exercised
was $119,300 and $222,590 for the three month period end March 31, 2007 and
2006, respectively.
As
of
March 31, 2007, total compensation cost of unvested employee stock options
was
$675,000. This cost is expected to be recognized through March 2010. We recorded
no income tax benefits for stock-based compensation expense arrangements for
the
three months ended March 31, 2007, as we have cumulative operating losses,
for
which a valuation allowance has been established.
As
of
March 31, 2007, total compensation cost of unvested options and warrants to
consultants was $1.1 million. This cost is expected to be recognized through
March 2010.
Note
4 INVENTORIES- Inventories at March 31, 2007 are
summarized as follows (thousands):
Vehicles
- conventional
|
|
$
|
214
|
|
Advanced
Transportation vehicles
|
|
|
1,070
|
|
Parts
and supplies
|
|
|
478
|
|
Finished
Goods
|
|
|
695
|
|
|
|
|
2,457
|
|
Less-inventory
reserve
|
|
|
(440
|
)
|
|
|
$
|
2,017
|
|
Note
5 LICENSE AND DISTRIBUTION FEE
On
April
19, 2004, we entered into an Exclusive Purchase, License and Supply Agreement
with Smart-Automobile LLC (“SA”), a California limited liability company, to
distribute and manufacture Smart Cars. Smart Cars 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 we were SA’s exclusive distributor and licensee of the right to
manufacture and distribute Smart cars in the United States and the non-exclusive
distributor and licensee outside of the United States for a period of ten years.
Subject to the terms of the agreement, we were obligated to 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 our 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 our common
shares under the following formula: For every 1,000 Smart vehicles delivered
to
us 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 the holder was 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, we allowed
SA
to convert 500 preferred shares to $500,000 of common stock prior to delivering
any EPA compliant Smart Cars.
We
recorded the cost of the Smart Automobile license at $10.6 million, based on:
1)
the $10 million we 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%.
In
the
fourth quarter of 2005, we 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 us and disrupting our
third
party relationships including this arrangement. Shortly thereafter, we commenced
our 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, we recorded an impairment
charge of $5.7 million for the year ended December 31, 2005. The valuation
of
the license was based on our discounted projected cash flows from projected
sales of Smart Cars over the estimated life of the license
agreement.
In
June
2006, we agreed in principle to amend our agreement with SA that was originally
signed in April 2004. As a result, SA returned to us all of the remaining
preferred shares, or 7,500 preferred shares valued at $7.5 million, in exchange
for, among other things, 300,000 common shares valued at $405,000 and 1 million
warrants with an exercise price of $1.75 per share, valued at $950,000 using
the
Black-Scholes option pricing model. In addition, our obligation to pay accrued
license fees of $906,000 at June 30, 2006 was canceled. As a result, we recorded
a liability to SA of $7 million at June 30, 2006.
In
September 2006, we further amended and renegotiated our agreement with SA for
the Smart Car, due to the unavailability of Smart Cars and Daimler-Chrysler’s
announcement to begin selling Smart Cars in the U.S. in 2008. This negotiation
superseded all previous license and other distribution or asset agreements
between us and SA. The renegotiated agreement released us from any remaining
obligations to SA under our previous agreements and any liability to SA and
resulted in the reversal of the $7 million liability owed and the corresponding
recognition of $7 million in other income. We also recognized an impairment
loss
on the remaining value of the license with SA of approximately $2.2 million.
Amortization expense of the license was $1,056,000 and $1,059,000 for the years
ended December 31, 2006 and 2005. As of September 30, 2006, we no longer
distribute Smart Cars.
NOTE
6 - LONG-TERM DEBT
8%
SENIOR CONVERTIBLE NOTES
On
December 5, 2006, when the market price of our common stock was $0.89 per share,
we entered into a Securities Purchase Agreement with three institutional and
accredited investors or purchasers pursuant to which we sold to the purchasers
$1.5 million aggregate principal amount of 8% senior convertible notes due
December 5, 2008 (the “Notes due 2008”) and warrants to purchase 450,000 shares
of our common stock (the “Initial Warrants”) in a private placement. The Notes
due 2008 are convertible at $0.909 per share into 1,500,000 shares of our common
stock, subject to anti-dilution and other adjustments. The Initial Warrants,
each immediately exercisable and expiring on December 5, 2011, are exercisable
at $1.10 per share, subject to anti-dilution and other adjustments.
On
February 20, 2007, when the market price of our common stock was $1.08 per
share, we entered into a Purchase and Amendment Agreement (the “Amendment”),
amending the Securities Purchase Agreement entered into by us on December 5,
2006 (the “Original Agreement” and as amended by the Amendment, the
“Agreement”), with several institutional and accredited investors or purchasers
pursuant to which we sold to the purchasers $1.2 million aggregate principal
amount of 8% senior convertible notes due February 2009 (the “Notes due 2009”
and with the Notes due 2008, the “Notes”) and warrants to purchase 360,000
shares of our common stock (the “Additional Warrants” and with the Initial
Warrants, the “Warrants”), in a private placement. The transaction closed on
February 22, 2007 (the “February 2007 financing”). The Notes due 2009 are
convertible at $1.00 per share into 1,200,000 shares of our common stock,
subject to anti-dilution and other adjustments. Gross proceeds from the sale
to
us were $1.2 million, of which $15,000 was paid to one of the purchasers for
expenses incurred in connection with the February 2007 financing.
The
Notes
provide for anti-dilution adjustments of issuable shares and the conversion
price should we issue common stock or common stock equivalents for a price
less
than the conversion price, on or prior to the later of 1) the earlier of (x)
the
date a registration statement is declared effective by the SEC and (y) the
two
year anniversary of the issue date and 2) the six month anniversary of the
issue
date. The Warrants provide for anti-dilution adjustments of the issuable shares
and the exercise prices thereof should we issue common stock or common stock
equivalents for a price less than the exercise price of the Warrants, on or
prior to the later of 1) the earlier of (x) the date a registration statement
is
declared effective by the SEC and (y) the two year anniversary of the issue
date
and 2) the six month anniversary of the issue date. The anti-dilution provided
by the Warrants calls for the exercise price of the Warrants to adjust to 110%
of the price of any dilutive issuances, on a per share basis. After December
31,
2007 and if the daily volume weighted average price of our common stock is
equal
to or greater than the Forced Conversion Price (as defined) for 20 trading
days
occurring during any period of thirty consecutive trading days, and certain
other conditions are satisfied, we have the right to require the conversion
of
any unconverted Notes into shares of common stock. After December 31, 2007,
and
if the daily volume weighted average price of our common stock is equal to
or
greater than the $2.20 for 20 trading days occurring during any period of thirty
consecutive trading days, and certain other conditions are satisfied, we have
the right to require the exercise of any unexercised Warrants into shares of
common stock.
The
Notes
provide for quarterly interest to be paid in cash, or subject to certain
conditions, by issuing shares of common stock. If we are eligible and elect
to
pay quarterly interest in stock, the price per share used to calculate the
number of shares due for interest will be calculated by reducing the market
price of the shares by 5% (as defined).
We
will
use the proceeds from the issuance of the Notes for general working capital
purposes and to increase the capacity of our product distribution
network.
Under
terms of a registration rights agreement, we are obligated to file a
registration statement within 90 days of the closing date of the sale of the
Notes due 2008 for the resale of the shares of common stock underlying the
Notes, the Warrants and any other shares issuable pursuant to the terms of
the
Notes or the Warrants and to cause the registration statement to become
effective within 180 days of the closing date. We are also required
to maintain the effectiveness of the registration statement until all shares
have been sold or may be sold without a registration statement.
In
the
event the registration statement is not filed within 90 days after the closing
or does not become effective within 180 days of the closing, or once declared
effective ceases to remain effective during the period that the securities
covered by the agreement are not sold, we will be required to pay, in cash,
an
amount for such failure, equal to 1% of the aggregate principal amount for
each
thirty day period in which the registration statement is not filed, effective,
or maintained effective. There is no cap on the amount of damages potentially
payable by us should the registration statement not be filed, declared
effective, or maintained effective. At May 14, 2007, we have not filed a
registration statement pursuant to the registration rights agreement and has
not
made any payments to the purchasers of such amount. We have been contacted
by
one of the noteholders regarding this situation. In the current discussions,
we
have indicated our intention to file the required registration by June 30,
2007.
The noteholder has expressed their willingness to work with us to resolve any
issues regarding compliance with the notes including a possible restructuring
of
the debt instruments if necessary.
If
we
issue additional common stock or common stock equivalents for a price less
than
the Conversion Price, on or prior to the later of 1) the earlier of (x) the
date
a registration statement is declared effective by the SEC and (y) the two year
anniversary of the issue date and 2) the six month anniversary of the issue
date
of the Notes, the investors will have the right, but not the obligation, to
participate in such issuance, upon the same terms as those offered, so that
each
Investor’s percentage ownership of us remains the same.
We
paid
fees of $40,000 related to the Notes. These cash fees have been recorded as
deferred offering costs and are being amortized over the life of the
Notes.
As
discussed in Note 2, on January 1, 2007, we adopted Financial Accounting
Standards Board (FASB) Staff Position (FSP) Emerging Issues Task Force (EITF)
00-19-2, “Accounting for Registration Payment Arrangements.” This FASB staff
position addresses how to account for registration payment arrangements and
clarifies that a financial instrument subject to a registration payment
arrangement should be accounted for in accordance with other generally accepted
accounting principles without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement. Prior to the
adoption of this FSP, we classified as a note derivative liability and as a
warrant liability, financial instruments included in or issued in conjunction
with our December 2006 financing, since the resale of the underlying shares
issuable upon conversion of the notes and exercise of the warrants was required
to be registered with the SEC, and our failure to file, and obtain and maintain
the effectiveness of a registration statement would result in potential cash
payments which were not capped. Our adoption of this accounting pronouncement
as
of January 1, 2007 resulted in a reclassification of the note derivative
liability to the note liability and the warrant liability to equity, and an
adjustment to the note discount to reflect the allocated value of the warrant
and a beneficial conversion feature, accreted to December 31, 2006, both
calculated in accordance with EITF Nos. 98-5, “Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,’ to Certain Convertible Instruments,” and EITF 00-27,
“Application of EITF Issue No. 98-5, ’Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,’ to
Certain Convertible Instruments.” The cumulative effect of this accounting
change of $24,000 was credited to the opening accumulated deficit balance as
of
January 1, 2007.
In
accordance with EITF 98-5 and 00-27, we allocated the note proceeds of $1.2
million from the February 2007 financing between the fair value of the notes
and
the fair value of the warrants. We valued the warrants at $0.97 per share using
the binomial option pricing model with the following assumptions: risk free
interest rate of 4.69%; effective dividend rate of 0.00%; volatility of 140%,
and expected term of 4 years. The relative fair value of the warrants is
$272,000, which was recorded as a discount to the notes, with a corresponding
credit to equity or common stock. We determined that the proceeds allocated
to
the warrants should be treated as equity in accordance with the provisions
of
EITF 00-19 and FSP 00-19-2. We further determined that there was a beneficial
conversion feature associated with the notes of $368,000, calculated as the
difference between the fair value of the shares of common stock issuable upon
conversion of the notes and the proceeds allocated to the notes. We recorded
the
amount of the beneficial conversion feature as an additional discount to the
notes, with a corresponding credit to equity, or common stock. The aggregate
amounts of the discounts to the notes was $640,000, which is being amortized
to
interest expense using the effective interest method prescribed by APB Opinion
No. 21, “Interest on Receivables and Payables,” over the life of the notes. The
effective interest rate of these notes is approximately 46.7% based on the
stated interest rate, the amount of amortized discount, the amount of deferred
offering costs attributable to the notes and their term.
We
are
required to make monthly principal payments on the Notes beginning on June
1,
2007, in twelve equal installments. Under certain circumstances, we may make
all
or a portion of these principal payments with common stock. If we choose to
repay principal with common stock, the principal payment share price will
generally be the lesser of i) 90% of the lowest daily volume weighted average
price for any trading day among the ten consecutive trading days occurring
immediately prior to the principal payment date and ii) the conversion price
in
effect on such principal payment date.
Scheduled
annual maturities for this long-term debt for years ending after December 31,
2006 are as follows: $1,575,000 - 2007 (nine months); and $1,125,000 -
2008.
The
note
agreements contain certain affirmative and restrictive covenants, including,
among other things, covenants prohibiting us from paying cash dividends on
our
common stock and requiring us to file, and achieve and maintain the
effectiveness of a registration statement. If we breach any of the covenants
and, after receiving notice from noteholders, does not, within a certain period
of time, cure the breach, , or if there is a change in control, the noteholders
may call the loan, thereby requiring the payment of the principal balance of
the
notes and accrued interest plus a 20% penalty.
SECURED
CONVERTIBLE NOTE
We
also
have 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 our 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 our new
corporate headquarters and is secured by this property. The note has a balance
of $ 1,872,000 at March 31, 2007.
Scheduled
annual maturities for this long-term debt for years ending after December 31,
2006 are as follows: $78,000 - 2007 (nine months); $104,000 - 2008; $104,000
-
2009; $104,000 - 2010; $104,000 - 2011; and $1,378,000- thereafter.
NOTE
7 – INCOME TAXES
We
adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,
or FIN 48, on January 1, 2007. Upon adoption of FIN 48, we commenced a
review of our tax position taken in our tax returns that remain subject to
examination. Based upon our review we do not believe we have any unrecognized
tax benefits or that there is a material impact on our financial condition
or
results of operations as a result of implementing FIN 48.
We
file
income tax returns in the U.S. federal jurisdiction and various state and
foreign jurisdictions. We are subject to U.S. federal or state income tax
examinations by tax authorities for all years in which we reported net operating
losses that are being carried forward. We do not believe there will be any
material changes in our unrecognized tax positions over the next 12
months.
We
recognize interest and penalties accrued on any unrecognized tax benefits as
a
component of income tax expense. As of the date of adoption of FIN 48, we did
not have any accrued interest or penalties associated with any unrecognized
tax
benefits, nor was any interest expense recognized for the period ended March
31,
2007.
NOTE
8 – SHAREHOLDERS’ EQUITY
On
July
1, 2002, our stock began trading on the National Association of Securities
Dealers, Inc. Electronic Bulletin Board (the “OTC Bulletin Board”) under the
stock symbol of “ZAPZ.”
On
June
20, 2005, we received approval to list our common stock on the Archipelago
Exchange (ArcaEx). This exchange was a facility of the Pacific Exchange (PCXE)
and is the nation’s first totally open, all-electronic stock exchange. We
changed our stock ticker symbol used on the ArcaEx from “ZAPZ” to “ZP” on July
7, 2005. On March 7, 2006, the ArcaEx merged with the New York Stock Exchange
(the “NYSE”) creating the NYSE Arca electronic trading platform.
On
October 31, 2006, we received written notice that our common stock would be
suspended from trading on the NYSE Arca effective at the market opening on
November 8, 2006. This action was due to our inability to satisfy the continued
listing standards. On November 8, 2006, our common stock was approved
for quotation on the OTC Bulletin Board under the symbol “ZAAP.”
On
November 9, 2006, our Board of Directors approved a 10% stock dividend to be
issued effective February 28, 2007, to all shareholders of record as of February
15, 2007. As a result of the stock dividend, approximately 4.0 million shares
were issued to shareholders. The number of shares and loss per share amounts
included in these financial statements has been adjusted for all periods
presented to reflect the stock dividend.
On
January 25, 2007, the Board of Directors extended by five years through July
1,
2012, the expiration date of certain of our warrants, Series B through K .
These
warrants were issued for executive compensation and by the plan of
reorganization. The exercise prices of the warrants were also revised from
prices ranging from $1.00 to $8.00 to prices ranging from $1.00 to
$1.20.
During
our annual meeting of shareholders held in June of 2006 an amendment to our
Amended and Restated Articles of Incorporation was approved to increase the
authorized common stock from 100 million to 200 million shares.
Preferred
Stock
On
June
19, 2006, Smart Automobile LLC returned to us all the remaining shares of
preferred stock with a carrying value of $7.5 million in exchange for 300,000
shares of common stock valued at approximately $400,000, one million warrants
with a strike price of $1.75 valued at approximately $950,000. See
Note 5, License and Distribution Fee, for further discussion on this
transaction.
Our
shareholder equity activity for the three months ended March 31, 2007 is
summarized as follows: (in thousands)
|
|
Common
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
Balance
at December 31, 2006
|
|
|
38,414
|
|
|
$
|
91,227
|
|
|
|
|
|
|
|
|
|
|
Issuances
of Common Stock for:
|
|
|
|
|
|
|
|
|
Exercise
of options and warrants for cash
|
|
|
245
|
|
|
|
145
|
|
Cash
|
|
|
843
|
|
|
|
900
|
|
Consulting
and other services
|
|
|
837
|
|
|
|
876
|
|
Employee
Compensation
|
|
|
267
|
|
|
|
300
|
|
Stock
dividend
|
|
|
3,957
|
|
|
|
—
|
|
|
|
|
6,149
|
|
|
$
|
2,221
|
|
Stock
Option and Warrant Transactions
|
|
|
|
|
|
|
|
|
Warrants
issued to convertible debt holders
|
|
|
|
|
|
|
1,081
|
|
Fair
value of warrants issued for consulting and other services
|
|
|
|
|
|
|
260
|
|
Fair
value of options and warrants issued to employees
|
|
|
|
|
|
|
11,740
|
|
|
|
|
|
|
|
|
13,081
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
|
44,563
|
|
|
|
106,529
|
|
We
issued
common stock as consideration under agreements for consulting and employee
services during the three months ended March 31, 2007. We recorded the cost
based on the market value of the stock at the date of grant. The cost of
consulting services resulting from issuing stock and warrants and stock options
is being recognized as expense over the term of their respective
agreements.
Stock
issued as collateral is discussed in detail in Note 2, “Stock Issued as
Collateral”, and Note 9, “Litigation,” ZAP v. International Monetary Group,
Inc., a Delaware Corporation; Michael C. Sher dba the Law Offices Of Michael
C.
Sher, Case No. SCV 240277.
We
also
issued options and warrants to consultants for professional
services. During the three months ended March 31, 2007, we issued
options and warrants to consultants to purchase 272,000 shares of common stock
at prices ranging from $1.00 per share to $1.32 per share, with a contractual
life ranging from 5 to 6 years. The options and warrants were nonforfeitable
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
|
$1.32
|
Market
price
|
$1.15
|
$1.15
|
Assumptions:
|
|
|
Expected
dividend yield
|
0.0%
|
0.0%
|
Risk
free rate of return
|
4.58%
|
4.58%
|
Expected
life (contractual term)
|
3.9
years
|
6
years
|
Volatility
|
120.97%
|
120.97%
|
Fair
market value
|
$0.89
|
$0.98
|
NOTE 9
– LITIGATION
In
the
normal course of business, we may become involved in various legal 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. We estimate
the amount of potential exposure we may have with respect to litigation claims
and assessments.
ZAP
v. Daimler Chrysler AG, et al., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, we filed
a complaint against Daimler Chrysler Corporation and others in the Los Angeles
Superior Court. 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 Daimler Chrysler has engaged in a series of anti-competitive
tactics aimed at defaming us and disrupting our 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.
Daimler Chrysler has successfully filed a motion to quash that compliant for
lack of personal jurisdiction, and the court’s ruling on that matter is in the
process of being appealed. Two of the other defendants in the action, G&K
Automotive Conversion, Inc. and The Defiance LLC, have filed a cross-complaint
against us in the Los Angeles Superior Court for, among other things, violations
of Section 43(a) of the Lanham Act, statutory and common law unfair competition,
and intentional and negligent interference with prospective economic advantage.
We have responded to the cross-complaint and denied engaging in any wrongful
actions.
James
A. Arnold, et al. v. Steven Schneider, et al., Superior Court of
California, County of Sacramento, Case No. 02AS02062, filed April 5, 2002,
dismissed October 9, 2003, dismissal set aside and referred to Case Management
Program March 4, 2004. Plaintiffs seek damages of $71,000 in
compensatory damages, $50 per month since April 5, 2002, other charges,
interest, and further relief in the court’s discretion for breach of contract,
promissory estoppel, and fraud. Plaintiffs also seek $750,000 in
punitive damages for fraud. 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 statute, and violation of the
Unfair Practices Act. On February 17, 2005, the court referred the
matter to non-binding arbitration pursuant to California Code of Civil Procedure
section 1141.1. The non-binding arbitration hearing was held on July
27, 2005. The arbitrator award, issued on August 5, 2005, awarded
plaintiffs damages in the amount of $68,290, plus prejudgment interest at the
rate of 7%. This amount was awarded against both us and Mr.
Schneider. Given an admission in the plaintiff’s case management
conference statement and the decision of the court to refer the matter to
non-binding arbitration, we believe that the amount in controversy should be
less than $50,000, though the complaint asks for more than $71,000 in
damages. Trial in Sacramento County Superior Court began on Tuesday,
May 2, 2006, at 8:30 a.m., in Department 47. At the trial, the
parties agreed to settle this matter upon the following terms: (1)
the plaintiff agreed to dismiss the causes of action it had alleged against
Mr.
Schneider; and (2) RAP Group agreed to (a) pay the plaintiff $20,000 on or
before May 31, 2006; (b) pay the plaintiff an additional $20,000 on or before
January 5, 2007; (c) provide the plaintiff with whatever ownership documentation
(such as titles) it can find in its possession, custody, or control regarding
the 43 cars identified by the plaintiff during discovery as being the subject
of
this litigation; (d) allow the court to enter an order directing that plaintiff
may dispose of the vehicles that are the subject of the litigation; and (e)
allow the court to enter judgment against it in the amount of $50,000, minus
whatever monies have already been paid by RAP Group to the plaintiff, if RAP
Group does not timely make either of the payments identified
above. Both the plaintiff and RAP Group agreed to execute general
mutual releases of all claims arising out of the subject matter of the
litigation (pursuant to section 1542 of the Civil Code) and to dismiss with
prejudice the complaint and the cross-complaint after performance of the
settlement agreement. The plaintiff and RAP Group further agreed that the
stipulated settlement will be governed by section 664.6 of the Code of Civil
Procedure. RAP Group made the first payment to the plaintiff for
$20,000, but did not pay the second payment of $20,000 that was due by January
5, 2007. Plaintiff has therefore moved the court to enter a default
judgment against RAP Group for $30,000 pursuant to
the
terms
of the Settlement Agreement. A hearing on that motion for default
judgment was heard on April 4, 2007, and on April 27, 2007, the court entered
judgment against RAP for $30,000.
Leandra
Dominguez v. RAP Group, Inc. dba The Repo Outlet et. al., Superior Court of
California, County of Sonoma, Case No. SCV-235641, complaint filed October
14,
2004, first amended complaint filed December 15, 2004. Plaintiff has
sued The Repo Outlet and Credit West Corporation for negligent
misrepresentation, for a violation of the Business and Professions Code Section
17200, for breach of the implied warranty of merchantability under the
Magnusson-Moss Act, and for violation of the federal Truth in Lending
Act. On January 13, 2005, the RAP Group, Inc. agreed to defend and
indemnify Credit West Corporation. At a hearing before the Sonoma
County Superior Court on February 23, 2005, the court granted The Repo Outlet’s
motion to compel arbitration, and on March 8, 2005, the court stayed the court
proceeding pending arbitration. The RAP Group, Inc. filed a demand
for arbitration with the American Arbitration Association (the “Association”) on
April 7, 2005, but the parties later stipulated that the arbitration would
proceed before JAMS. The Repo Outlet made a Code of Civil Procedure
998 offer to settle and have Dominguez dismiss the matter with prejudice for
the
sum of $1,001. Because Dominguez failed to timely respond to The Repo Outlet’s
Section 998 offer, that offer expired on March 2, 2006. The Repo
Outlet made another settlement offer of $1,857 to settle this matter as to
both
defendants on January 8, 2007, but this offer was rejected as plaintiff’s
counsel seeks to recover all of his attorneys’ fees. Although the
case was sent to arbitration before JAMS, and set for arbitration in February
2007, on January 9, 2007, The Repo Outlet informed the arbitrator and
plaintiff’s counsel that it would be ceasing operations and its counsel would be
withdrawing as attorneys of record. At a status conference on
February 8, 2007, the court was informed that counsel for RAP Group had moved
to
withdraw for non-payment of fees. The hearing on that motion is set
for April 18, 2007. Since that time, Credit West has substituted its
own counsel of record, and so RAP Group is no longer tendering a defense to
Credit West. On April 4, plaintiff Dominguez filed with the Court a
Request for Entry of Default Judgment against RAP Group. On May 2,
2007, the Court granted Donahue Gallagher Woods LLP’s motion to withdraw as
counsel of record. Thus, RAP Group is currently unrepresented by
counsel in this matter.
Marieta
Cruz Hansell v. Robert Warren Johnson, Jr.,ZAP, et. al., Superior Court of
California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell
filed suit against Robert Johnson (our former employee), us and other defendants
for personal injury, property damage and permanent disability based on an
alleged automobile collision between the plaintiff and defendant
Johnson. We and Mr. Johnson have both filed answers and case
management statements containing a general denial of all of the plaintiff’s
claim, and we have agreed to defend Mr. Johnson in this matter. The
parties are in the process of propounding and responding to
discovery. The plaintiff is claiming permanent disability, and she
has submitted a Statement of Damages in the amount of $108,727.34, plus
unspecified amounts of future general damages, future wage loss, diminution
of
earning capacity damages, and incidental, consequential and special
damages. The plaintiff has not yet made any demand for
settlement. We intend to vigorously defend both ourselves and Mr.
Johnson against these claims. This matter is now being handled by
alternative counsel for us. According to information received from alternative
counsel, the parties have agreed to settle this matter with a payment by us
and
Mr. Johnson to the plaintiff of a total of $70,000. The lawsuit was settled
on
February 15, 2007 and was dismissed with prejudice.
ZAP
v. Norm Alvis, et al., Superior Court of California, County of Sonoma, Case
No. SCV-238419, complaint filed March 27, 2006. Mr. Alvis was engaged
by us and Rotoblock Corporation (“Rotoblock”) as a consultant to perform public
relations work on behalf of us and Rotoblock. As consideration for
Mr. Alvis’ consent to the contract with us, we provided Mr. Alvis with use of a
motor home worth approximately $306,000. We then sued Mr. Alvis,
claiming he failed to perform his obligations under the contract and refused
to
return the consideration he received therefore (i.e. the motor
home). We are seeking either the return of the motor home or $500,000
in damages. Mr. Alvis initially did not respond to the complaint,
which prompted us to take his default on May 9, 2006. The court then
entered a default judgment on May 16, 2006, on which date we obtained a writ
of
possession allowing us to reclaim possession of the disputed motor
home. On June 18, 2006, Mr. Alvis moved the court to set aside the
default and default judgment and to vacate its order authorizing issuance of
the
writ of possession. The court agreed to set aside the default
judgments, but it left intact the writ of possession. The court also
required Mr. Alvis to pay us $1,000 as compensation for forcing us to initially
take his default. Mr. Alvis has paid us the required
$1,000. Mr. Alvis then filed (1) an answer denying our allegations,
and (2) a cross-claim against us, Steve Schneider in his individual capacity,
and Rotoblock, alleging two counts of breach of contract, one common count
of
work, labor, and services received, and one count of fraud. All of
Mr. Alvis’ claims relate to the two contracts he executed with us and
Rotoblock. Mr. Alvis claims he provided services to us and Rotoblock
pursuant to these contracts but received no consideration in exchange
therefore. For the fraud claim, defendant claims we and Schneider
executed the contracts with no intent to perform. Mr. Alvis has
prayed for damages of $2,000,000, interest according to proof, punitive damages,
and an order directing us to perfect title to the motor home. Mr.
Alvis then moved the court to quash the writ of possession. On
November 2, 2006, the court denied this motion, although it did require us
to
post a $300,000 bond to enforce the writ. We have not yet posted that
bond, and consequently Mr. Alvis has threatened to move to revoke the
writ. We, Rotoblock and Schneider then demurred to the
cross-complaint, and Alvis responded by filing an amended cross-complaint.
The
first amended cross-complaint again seeks breach of contract and common count
damages against us and Rotoblock, as well as fraud damages against us and
Schneider. We and Schneider answered the first amended
cross-complaint with general denials; Rotoblock responded by filing a second
demurrer in which it has alleged it was an improperly named
party. The hearing on Rotoblock’s demurrer was heard on March 21,
2007, at which time the demurrer was denied. Rotoblock intends to file an answer
to the amended cross-compliant with general denials. Counsel has given notice
of
the claims against Schneider to our D&O insurer, which has acknowledged
receipt of the notice. Discovery is on-going, and the next case
management conference is scheduled for April 9, 2007, but has been continued
until July5, 2007.
Robert
Chauvin; Mary Chauvin; Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of
Reno, dba ZAP of Sparks (“RobertChauvin, et
al.”)
v. Voltage Vehicles; ZAP; ZAP Power Systems Inc.; ZAPWORLDCOM; Elliot
Winfield; Steven Schneider; Phillip Terrazzi; Max Scheder-Breschin; Renay
Cude; [sic] and Does I-XX, Second Judicial District Court
State of Nevada, County of Washoe, Case No. CV06 02767. On November 17, 2006,
Robert Chauvin, et al. filed a complaint alleging breach of contract, breach
of
the covenant of good faith and fair dealing, breach of warranties,
fraud/misrepresentation, negligent misrepresentation, quantum merit or unjust
enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks (“Rajun Cajun”) and
Voltage Vehicles. The complaint seeks general damages in an amount in
excess of $10,000, special damages in an amount in excess of $10,000, punitive
damages in an amount in excess of $10,000, attorneys’ fees and cost of suit, for
judgment in an amount equal to treble actual damages, and recession in the
amounts of $397,900 and $120,000. On January 19, 2007, defendants
Voltage Vehicles and ZAP filed a Motion to Dismiss on the grounds that the
License Agreement entered into between Rajun Cajun and Voltage contains a forum
selection clause designating Sonoma County, State of California as the only
appropriate forum. The court granted that Motion on April 13,
2007. In its order on that motion, the court also found that all
other motions pending in the Nevada court in this matter are now
moot. (As of that time, the following motions were still
pending: (1) Chauvin, et al.’s Notices of Intent to Take Default
against two of the named corporate defendants and against the individual
defendants, except Renay Cude; (2) a Motion to Quash Service of Process or
Alternatively for Dismissal by each of the individual defendants and both of
the
defunct corporate defendants; and (3) Chauvin, et al.’s Motion for Publication
of Summons against the named individual defendants.)
Voltage
Vehicles v. Rajun Cajun, et al., Superior Court of California, County of
Sonoma, Case No. SCV 240179, filed February 9, 2007. (This suit is
related to the Nevada case of Robert Chauvin, et al. v. Voltage
Vehicles, et al. discussed immediately above.) In its Complaint, Voltage
Vehicles requests Declaratory Relief against Rajun Cajun, asking the Court
to
declare that the License Agreement between those two parties does not grant
Rajun Cajun an exclusive dealership in northern Nevada to distribute Voltage
Vehicle products and that Voltage Vehicles has performed its obligations under
the License Agreement. On April 19, 2007, Rajun Cajun filed a Motion
to Quash and/or for Dismissal or Stay. Rajun Cajun has since agreed
to voluntarily withdraw that motion, but Voltage Vehicles is still awaiting
confirmation of that withdrawal. It is anticipated that Rajun Cajun
will thereafter file an answer and cross-complaint in this matter.
ZAP
v. International Monetary Group,(Patrick J Harrington President and CEO) Inc.,
a
Delaware corporation; Michael C. Sher dba the Law Offices of
Michael C. Sher, Case No. SCV 240277, complaint filed March 1, 2007 in
Sonoma County Superior Court. We sued International Monetary Group
(“IMG”) who’s President and CEO is Patrick D. Harrington and Michael Sher for
declaratory relief, rescission, and breach of contract. We had entered into
an
agreement with IMG, a merchant banking company, to procure financing, and we
allege that IMG, contrary to the parties’ agreement, is seeking to enforce a
$500,000 promissory note. We also allege that IMG and Sher have taken
$12,500 and 10,000 shares of our common stock that they held in trust for us
without authorization. We also allege that IMG and Sher continue to
hold 1,291,176 shares of our stock that was supposed to have been used as
collateral for a $1 million loan to be procured by IMG and Sher that never
materialized. After being served with the complaint, counsel for IMG
and Sher initiated settlement discussions and, in consideration, were given
until May 7, 2007 to respond to the complaint. We have not received a written
response from IMG as of May 14, 2007. Management has recorded an estimated
liability for any potential exposure related to this transaction which is
included in the accompanying consolidated balance sheet. In addition,
management believes that the ultimate resolution of this claim will not have
a
material adverse effect on our consolidated financial position or on results
of
operations.
ZAP
v. Thomas C. Graver and Auto America Group, Inc., filed in federal court
for the Northern District of California on April 3, 2007, Case No.
CV-01836-MJJ. In our complaint, we make claims against Graver and
Auto America Group under the Federal Anti-Cybersquatting Act and for trademark
infringement. Graver is the President and Chief Executive Officer of
Auto America Group, Inc. (“AAG”). AAG and Graver signed an
independent contractor agreement with us on October 21, 2005 to provide certain
services to us, but that agreement terminated on October 18, 2006. At
no time did we enter into an agreement with AAG or Graver giving either of
them
permission to use our federally-registered trademark
“zapworld.com.” Following discussions regarding a business dispute
between Graver, AAG and one of our business partners, a Brazilian company called
Obvio, Graver registered the domain name www.zapworld.us on January 4,
2007. Although there is very little content on the website
www.zapworld.us, the home page does refer extensively to Obvio and has two
references to us. One of those references is to “ZAP Agreement Correspondence”
with an apparent link that is not functional. The other ZAP reference
is to an article referring to us in a negative light. Graver failed
to respond to our cease and desist letters. In its lawsuit, we
request that the domain name “zapworld.us” be transferred to usand also that we
be awarded our damages and attorneys’ fees. The defendants have now
been served, and the parties are discussing a proposed settlement agreement
with
terms favorable to us.
First
Class Auto Sales, Inc. d/b/a First Class Imports v. Voltage Vehicles and
ZAP, American Arbitration Association Case No. 74 133 00081 06
NOCA. First Class Imports is a vehicle dealer that executed a
licensing and distributorship agreement with Voltage Vehicles, our subsidiary,
in May, 2004. On January 14, 2006, First Class Imports and its principal, Leon
Atkind, filed an arbitration demand with the American Arbitration Association
alleging that we and Voltage Vehicles breached the licensing agreement by not
delivering new SMART-branded vehicles to First Class Imports and demanded return
of the $100,000 licensing fee paid to Voltage Vehicles under the agreement,
plus
interest. In a separate cause of action, Mr. Atkind alleged we
breached a second contract by failing to timely deliver a stock certificate
in
exchange for a Mercedes vehicle that he sold to us. Regarding this
second claim, Mr. Atkind contends that the late delivery of the certificate
caused the shares to be restricted for an extra month during which our stock
price declined. He seeks as damages the difference in the value of
the stock on the two subject dates multiplied by 59,999, the number of shares
he
received. Voltage Vehicles filed a counterclaim against both First
Class Imports and Mr. Atkind. The first cause of action in the
counterclaim alleges breach of contract against First Class Imports for its
refusal to accept SMART-branded vehicles offered to it pursuant to the parties’
licensing
agreement. Voltage
Vehicles seeks as damages the lost revenue it otherwise would have gained
through First Class Imports’ purchase of SMART-branded vehicles, as well as
damages based on the depreciation of a SMART-branded vehicle it loaned to First
Class Imports. The second cause of action alleges breach of contract
against Mr. Atkind based on his failure to deliver title to the Mercedes
identified above. On this claim, Voltage Vehicles seeks as damages
the depreciation of the Mercedes during the time in which it has been unable
to
sell the vehicle. An arbitrator was selected, which resulted in the
parties reaching settlement in April. A Request for Dismissal with Prejudice
was
filed with the court in this matter on April 11, 2007.
NOTE
10 – RELATED PARTY TRANSACTIONS
Rental
agreements
We
rent
office space, land and warehouse space from our CEO and major shareholder.
These
properties are used to operate the car outlet and to store inventory. Rental
expense under these rentals was approximately $21,000 and $39,500 for the three
months ended March 31, 2007 and 2006, respectively.
Inventory
Purchase
In
December 2005, we purchased inventory from a related entity where three of
our
officers and 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, 2006 and March 31, 2007. During the second quarter of 2006 the
parties agreed that the payment will be offset against future outside
advertising services which will be provided to the related entity by
us.
NOTE
11 – SUBSEQUENT EVENT
On
April
18, 2007, we accepted a purchase order from the Electric Vehicle Company, LLC
(“EVC”) for 10,000 of our Xebra 2007 model year electric vehicles. The purchase
order requests 6,000 sedans and 4,000 trucks. The total amount of the order
is
$79.1 million with a dealer acquisition costs ranging from $7,500 to $8,200
depending on the equipment included with the vehicle. If the entire
order is fulfilled within one year, a rebate equal to 8% of the total sales
price will be granted to EVC. This rebate maybe extended by us depending on
the
delivery schedule of the vehicles. The order is also subject to meeting
performance criteria of EVC.
EVC
is
funded by two hedge funds, Diversified Equity Funding, LP and Diversified
Strategies Fund, LLC, both of which have an ownership interest in
us. Larry Spatz, the CEO of EVC has also entered into a consulting
agreement with us, to provide consulting services, to assist us with marketing,
sales and public relations, for up to one year.
On
April
30, 2007, the Company entered into Certificates of Adjustments to the Notes
and
Warrants (the “Adjustments”) to adjust certain provisions of the Notes and
Warrants as a consequence of the declaration by the Company of a ten percent
(10%) common stock dividend to common shareholders of record on February 15,
2007, payable February 28, 2007. As a result of the Adjustments, the
conversion price of the Notes was reduced to $0.909 per share, the Initial
Warrants were increased to 495,000 at an exercise price of $1.00 per share,
and
the Additional Warrants were increased to 396,000 at an exercise price of $1.20
per share.
On
June
26, 2007, the Company entered into an Amendment Agreement (the “Second
Amendment”) with the purchasers to adjust certain provisions of the Notes and
Initial Warrants as a consequence of selling shares to a third party investor
for per share consideration less than the conversion price of the Notes and
exercise price of the Initial Warrants. As a result, the conversion
price of the Notes was reduced to $0.727 per share and the Initial Warrants
were
increased to 594,001 at an exercise price of $0.80 per share. The Second
Amendment also deferred the June and July 2007 payments of the principal due
under the Notes to August 1, 2007, extended the filing deadline of the
Registration Statement to July 9, 2007, reduced the number of shares required
to
be registered under the Agreement to 130% of the shares underlying the Notes
and
Warrants, and allowed for the inclusion of an aggregate of 4,490,630 additional
shares of common stock in any registration statement filed by the Company in
connection with the Agreement. In consideration for these
modifications, the Company agreed to pay the purchasers an aggregate of $113,000
in liquidation damages, payable in 141,750 shares of common stock of the
Company, and warrants to purchase an aggregate of 200,000 shares of common
stock
of the Company at an exercise price of $1.10 per share. The Company
also agreed to include the shares and warrants issued pursuant to the Second
Amendment in the registration statement required to be filed by the Company
pursuant to the Agreement.
ZAP
SHARES
COMMON
STOCK
PROSPECTUS
_________,
2007
You
should rely only on the information contained in this prospectus to make your
investment decision. We have not authorized anyone to provide you with different
information. This prospectus may be used only where it is legal to sell these
securities. You should not assume that the information in this prospectus is
accurate as of any date other than the date of this prospectus.
PART
II
Pursuant
to the provisions of California’s Corporation Code, we have adopted the
following indemnification provisions in our amended and restated Articles of
Incorporation for our directors and officers:
“SIX:
The
liability of the directors of the
corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law.
SEVEN:
The
corporation is authorized to
indemnify the directors and officers of the corporation to the fullest extent
permissible under California law.”
In
addition, our Bylaws contain the following provision regarding indemnification
of our officers, directors, employees or other agents:
“The
directors and officers of the corporation shall be indemnified by the
corporation to the fullest extent not prohibited by the California Corporations
Code.”
Section
204 of the California General Corporation Law allows a corporation, among other
things, to eliminate or limit the personal liability of a director for monetary
damages in an action brought by the corporation itself or by way of a derivative
action brought by shareholders for breach of a director’s duties to the
corporation and its shareholders. The indemnification provision may not
eliminate or limit liability of directors for the following specified actions,
however: (i) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law; (ii) for acts or omissions that a
director believes to be contrary to the best interests of the corporation or
its
shareholders, or that involve the absence of good faith on the part of the
director; (iii) for any transaction from which a director derived an improper
personal benefit; (iv) for acts or omissions that show a reckless disregard
of
the director’s duty to the corporation or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director’s duties, of a risk of serious injury to the
corporation or its shareholders; (v) for acts or omissions that constitute
an
unexcused pattern of inattention that amounts to an abdication of the director’s
duty to the corporation or its shareholders; (vi) for transactions between
the
corporation and a director, or between corporations having interrelated
directors; and (vii) for improper distributions and stock dividends, loans
and
guaranties. The indemnification provision does not apply to acts or omissions
occurring before the date that the provision became effective and does not
eliminate or limit the liability of an officer for an act or omission as an
officer, regardless of whether that officer is also a director.
Section
317 of the California General Corporation Law gives a corporation the power
to
indemnify any person who was or is a party, or is threatened to be made a party,
to any proceeding, whether threatened, pending, or completed, and whether civil,
criminal, administrative or investigative, by reason of the fact that that
person is or was a director, officer, employee or agent of the corporation,
or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or
other enterprise. A corporation may indemnify such a person against expenses,
judgments, fines, settlements and other amounts actually or reasonably incurred
in connection with the proceeding, if that person acted in good faith, and
in a
manner that that person reasonably believed to be in the best interest of the
corporation; and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful. In an action by or in the
right of the corporation, no indemnification may be made with respect to any
claim, issue or matter (a) as to which the person shall have been adjudged
to be
liable to the corporation in the performance of that person’s duty to the
corporation and its shareholders, unless and only to the extent that the court
in which such proceeding was brought shall determine that, in view of all of
the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for expenses; and (b) which is settled or otherwise disposed of
without court approval. To the extent that any such person has been successful
on the merits in defense of any proceeding, or any claim, issue or matter
therein, that person shall be indemnified against expenses actually and
reasonably incurred in connection therewith. Indemnification is available only
if authorized in the specific case by a majority of a quorum of disinterested
directors, by independent legal counsel in a written opinion, by approval of
the
shareholders other than the person to be indemnified, or by the court. Expenses
incurred by such a person may be advanced by the corporation before the final
disposition of the proceeding upon receipt of an undertaking to repay the amount
if it is ultimately determined that the person is not entitled to
indemnification.
Section
317 of the California General Corporation Law further provides that a
corporation may indemnify its officers and directors in excess of the statutory
provisions if authorized by its Articles of Incorporation and that a corporation
may purchase and maintain insurance on behalf of any officer, director, employee
or agent against any liability asserted or incurred in his or her capacity,
or
arising out of his or her status with the corporation.
The
indemnification provisions described above provide coverage for claims arising
under the Securities Act and the Exchange Act. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to our Articles of Incorporation,
Bylaws, the California Corporations Code, or otherwise, we have been advised
that in the opinion of the SEC, such indemnification is against public policy
as
expressed in the Securities Act and is, therefore, unenforceable.
The
following table sets forth an estimate of the costs and expenses payable by
us
in connection with the offering described in this registration statement. All
of
the amounts shown are estimates except the Securities and Exchange Commission
Registration Fee:
Securities
and Exchange Commission Registration Fee
|
|
$
|
339
#
|
|
Printing
Fees
|
|
$
|
10,000
*
|
|
Accounting
Fees and Expenses
|
|
$
|
10,000
*
|
|
Legal
Fees and Expenses
|
|
$
|
50,000
*
|
|
Miscellaneous
|
|
$
|
2,500
*
|
|
Total
|
|
$
|
72,839
*
|
|
|
|
|
*
|
|
Estimates
|
(#)
|
|
Rounded
up to nearest whole dollar.
|
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, within the past three years. Except as stated below, no
underwriting discounts or commissions were payable with respect to any of the
following transactions. The offer and sale of the following securities was
exempt from the registration requirements of the Securities Act under Rule
506
insofar as (1) except as stated below, each of the investors was accredited
within the meaning of Rule 501(a); (2) the transfer of the securities were
restricted by the company in accordance with Rule 502(d); (3) there were no
more
than 35 non-accredited investors in any transaction within the meaning of Rule
506(b), after taking into consideration all prior investors under Section 4(2)
of the Securities Act within the twelve months preceding the transaction; and
(4) none of the offers and sales were effected through any general solicitation
or general advertising within the meaning of Rule 502(c).
2004
COMMON
STOCK ISSUED
On
1/8/2004, we issued 50,000 shares of common stock to a consultant, in connection
with a conversion of 25 preferred shares. On 1/8/2004, we issued
12,500 shares of common stock to professional contractors, in connection with
a
conversion of 6.25 preferred shares. On 1/8/2004 we issued 100,000
shares of common stock to a consultant in payment for professional services
valued at $100,000. On 1/22/2004 we issued 100,000 shares of common
stock to a consultant in payment for professional services valued at
$100,000.
On
3/8/2004, we purchased inventory with value of $12,000 from suppliers with
16,438 shares of common stock.
On
4/7/2004, we issued 15,000 shares of common stock to employees for employment
bonuses valued at $9,750. On 4/12/2004, we issued 10,000 shares of
common stock to employees for employment bonuses valued at $5,600. On
4/12/2004, we issued 89,286 shares of common stock to consultants, in connection
with a conversion of 50 preferred shares. On 4/12/2004, we issued
25,000 shares of common stock to employees, in connection with an exercise
of
25,000 employee stock options. On 4/20/2004, we issued 15,000 shares
of common stock to professional contractors for professional services valued
at
$14,100. On 4/21/2004, we entered into a consulting agreement whereby
we issued 1,500 shares of common stock with value of $1,395 in consideration
for
professional services under the agreement. The shares are fully
earned. On 4/21/2004, we issued 27,000 shares of common stock to
professional contractors in payment for professional services valued at
$25,110. On 4/21/2004, we issued 12,500 shares of common stock to
investors, in connection with a conversion of 7 preferred shares. On
4/23/2004, we issued 127,660 shares of common stock to a consultant, in
connection with a conversion of 60 preferred shares. On 4/26/2004, we
settled an obligation with lessors, for $22,500, which was paid with 15,000
shares of common stock. On 4/27/2004, we issued 3,529 shares of
common stock to professional contractors in payment for professional services
valued at $6000. On 4/27/2004, we issued 29,412 shares of common
stock to our lawyers, in connection with a conversion of 50 preferred
shares.
On
5/3/2004, we issued 45,000 shares of common stock to accredited investors for
$76,500. On 5/3/2004, we issued 2,500 shares of common stock to
professional contractors, in connection with a conversion of 4 preferred
shares. On 5/7/2004, we issued 26,316 shares of common stock to our
lawyers, in connection with a conversion of 50 preferred shares. On
5/10/2004, we issued 11,208 shares of common stock to B & B2 warrant
holders, in connection with an exercise of warrants. We received cash of
$11,993. On 5/18/2004, we settled an obligation with institutional
investors, for $1,549,701, which was paid with 395,332 shares of common
stock. On 5/20/2004, we issued 66,667 shares of common stock to
accredited investors for $100,000. On 5/21/2004, we issued 136,986
shares of common stock to institutional investors, in connection with a
conversion of 100 preferred shares. On 5/25/2004, we issued 56,832
shares of common stock to B & B2 warrant holders, in connection with its
exercise of warrants. We received cash of $60,810. On 5/26/2004, we
issued 656 shares of common stock to a consultant, in connection with a
conversion of 2 preferred shares. On 5/26/2004, we purchased
inventory with value of $4,500 from a supplier with 1,475 shares of common
stock.
On
6/1/2004, we settled an obligation with a supplier, for $65,200, which was
paid
with 20,000 shares of common stock. On 6/2/2004, we issued 994,500
shares of common stock to B & B2 warrant holders, in connection with an
exercise of warrants. We received cash of $1,064,115. On 6/4/2004, we
issued 76,923 shares of common stock to our lawyers, in connection with a
conversion of 50 preferred shares. On 6/4/2004, we issued 714 shares
of common stock to professional contractors in payment for professional services
valued at $2,000. On 6/4/2004, we issued 70,212 shares of common
stock to professional contractors, in connection with a conversion of 33
preferred shares. On 6/21/2004, the company issued 19,840 shares of
common stock to accredited investors for $35,712. On 6/21/2004, we
settled an obligation with lessors for $48,000, which was paid with 26,667
shares of common stock. On 6/21/2004, we issued 10,000 shares of
common stock to B & B2 warrant holders, in connection with its exercise of
warrants. We received cash of $10,700. On 6/22/2004, we issued
300,000 shares of common stock to B & B2 warrant holders, in connection with
an exercise of warrants. We received cash of $321,000. On 6/23/2004,
we issued 8,352 shares of common stock to our employees for employment bonuses
valued at $10,524. On 6/23/2004, we issued 10,000 shares of common
stock to a K warrant holder, in connection with an exercise of warrants. We
received cash of $10,000. On 6/23/2004, we issued 11,905 shares of
common stock to a consultant, in connection with a conversion of 7.5 preferred
shares. On 6/23/2004, we entered into a consulting agreement whereby
we issued 8,937 shares of common stock with value of $10,630 in consideration
for professional services under the agreement. The shares are fully
earned. On 6/23/2004, we issued 3,000 shares of common stock to
accredited investors for $3,780. On 6/23/2004, we issued 17,000
shares of common stock to professional contractors in payment for professional
services valued at $21,420. On 6/23/2004, we issued 11,333 shares of
common stock to B & B2 warrant holders, in connection with an exercise of
warrants. We received cash of $12,126. On 6/30/2004, we issued 91,005
shares of common stock to B & B2 warrant holders, in connection with an
exercise of warrants. We received cash of $97,374. On 6/30/2004, we
issued 147,662 shares of common stock to our lawyers in settlement of
indebtedness arising from the provision of legal services rendered us valued
at
$378,015.
On
7/6/2004, we issued 87,433 shares of common stock to B & B2 warrant holders,
in connection with an exercise of warrants. We received cash of
$101,527. On 7/6/2004, we issued 75,000 shares of common stock to A
warrant holders, in connection with an exercise of warrants. We received cash
of
$78,750. On 7/8/2004, we issued 32,105 shares of common stock to our
lawyers in settlement of indebtedness arising from the provision of legal
services rendered to us valued at $50,000. On 7/8/2004, we issued
3,037 shares of common stock to professional contractors in payment for
professional services valued at $5,770. On 7/13/2004, we issued 3,811
shares of common stock to B & B2 warrant holders, in connection with an
exercise of warrants. We received cash of $4,078. On 7/19/2004, we
issued 10,000 shares of common stock to a professional organization, in
connection with a conversion of 21 preferred shares. On 7/19/2004, we
issued 50,000 shares of common stock to our lawyers in settlement of
indebtedness arising from the provision of legal services rendered to us valued
at $105,000. On 7/19/2004, we purchased inventory with value of
$4,200 from a supplier with 2,000 shares of common stock. On
7/20/2004, we issued 455,000 shares of common stock to institutional investors
for $500,000.
On
8/23/2004, we issued 36,254 shares of common stock to B & B2 warrant
holders, in connection with an exercise of warrants. We received cash of
$45,680. On 8/23/2004, we settled an obligation with a supplier, for
$50,000, which was paid with 44,118 shares of common stock. On
8/23/2004, we issued 13,421 shares of common stock to professional contractors
in payment for professional services valued at $15,300. On 8/30/2004,
we purchased inventory with value of $60,000 from a supplier with 62,500 shares
of common stock. On 8/30/2004, we issued 2,731,000 shares of common
stock to group of institutional and accredited investors, in connection with
a
conversion of 1,375 preferred shares. On 8/30/2004, we issued
2,000,000 shares of common stock to accredited investors for
$1,000,000. On 8/30/2004, we issued 33,125 shares of common stock to
our employees for employment bonuses valued at $31,800. On 8/30/2004,
we issued 154,533 shares of common stock to B & B2 warrant holders, in
connection with its exercise of warrants. We received cash of
$194,700. On 8/30/2004, we issued 150,000 shares of common stock to
our lawyers in settlement of indebtedness arising from the provision of legal
services rendered to us valued at $144,000. On 8/30/2004, we issued
24,375 shares of common stock to professional contractors in payment for
professional services valued at $23,400.
On
9/4/2004 we issued 45,625 shares of common stock to accredited investors for
$73,000. On 9/4/2004, we issued 22,979 shares of common stock to
professional contractors in payment for professional services valued at
$32,400. On 9/4/2004, we settled an obligation with lessors, for
$65,000, which was paid with 47,794 shares of common stock. On
9/20/2004, we purchased assets with value of $63,786 from suppliers with 34,294
shares of common stock. On 9/20/2004, we issued 67,559 shares of
common stock to professional contractors in payment for professional services
valued at $125,660. On 9/24/2004, we issued 9,210 shares of common
stock to professional contractors in payment for professional services valued
at
$17,500. On 9/27/2004, we issued 7,236 shares of common stock to
lessors, in connection with a conversion of 14.4 preferred shares. On
9/27/2004, we issued 1,005 shares of common stock to professional contractors,
in connection with a conversion of 2 preferred shares. On 9/28/2004,
we issued 121,951 shares of common stock to professional contractors, in
connection with a conversion of 250 preferred shares. On 9/28/2004,
we issued 2,580 shares of common stock to suppliers, in connection with a
conversion of 6 preferred shares. On 9/29/2004, we purchased assets
with value of $14,450 from suppliers with 7,817 shares of common
stock. On 9/30/2004, we issued 100,000 shares of common stock to B
& B2 warrant holders, in connection with an exercise of warrants. We
received cash of $126,000.
On
10/6/2004, we issued 1,622 shares of common stock to professional contractors
in
payment for professional services valued at $3,000.
On
10/20/2004 we issued 30,000 shares of common stock to accredited investors
for
$15,000. On 10/20/2004, we purchased assets with value of $20,000
from suppliers with 16,667 shares of common stock. On 10/20/2004, we
issued 5,000 shares of common stock to a consultant in payment for professional
services valued at $6,000. On 10/20/2004, we issued 5,000 shares of
common stock to our lawyers in settlement of indebtedness arising from the
provision of legal services rendered to us valued at $6,000. On
10/25/2004, we issued 15,000 shares of common stock to professional contractors
in payment for professional services valued at $17,250. On
10/26/2004, we issued 10,000 shares of common stock to employees for employment
bonuses valued at $11,800. On 10/26/2004, we issued 423,729 shares of
common stock to suppliers, in connection with a conversion of 500 preferred
shares. On 10/27/2004, we settled an obligation with our lessors, for
$22,631, which was paid with 16,764 shares of common stock.
On
11/8/2004, we issued 24,000 shares of common stock to professional contractors
in payment for professional services valued at $27,600. On 11/8/2004,
we purchased assets with value of $64,239 from our suppliers with 55,860 shares
of common stock. On 11/8/2004, we entered into a consulting agreement
with a consultant, whereby we issued 100,000 shares of common stock with value
of $115,000 in consideration for professional services under the agreement.
The
shares are fully earned. On 11/8/2004, we issued 226,012 shares of
common stock to employees for employment bonuses valued at
$259,914. On 11/10/2004, we entered into a consulting agreement with
a consultant, whereby we issued 5,000 shares of common stock with value of
$13,500 in consideration for professional services under the agreement. The
shares are fully earned. On 11/10/2004, we settled an obligation with
professional contractors, for $34,921, which was paid with 25,123 shares of
common stock. On 11/12/2004, we purchased assets with value of
$379,107 from suppliers with 313,311 shares of common stock. On
11/12/2004, we issued 8,264 shares of common stock to professional contractors
in payment for professional services valued at $10,000. On
11/12/2004, we settled an obligation with institutional investors, for $30,250,
which was paid with 25,000 shares of common stock. On 11/16/2004, we
purchased inventory with value of $175,945 from suppliers with 133,290 shares
of
common stock. On 11/18/2004, we issued 32,000 shares of common stock
to accredited investors for $57,600. On 11/19/2004, we purchased
inventory with value of $126,585 from suppliers with 72,334 shares of common
stock. On 11/19/2004, we entered into a consulting agreement with a
consultant, whereby we issued 34,286 shares of common stock with value of
$60,000 in consideration for professional services under the agreement. The
shares are fully earned. On 11/24/2004, we issued 8,000 shares of
common stock to B & B2 warrant holders, in connection with an exercise of
warrants. We received cash of $9,600. On 11/24/2004, we issued
100,000 shares of common stock to B & B2 warrant holders, in connection with
an exercise of warrants. We received cash of $120,000. On 11/29/2004,
we purchased inventory with value of $14,000 from suppliers with 4,746 shares
of
common stock. On 11/29/2004, we issued 29,762 shares of common stock
to professional contractors in payment for professional services valued at
$100,000.
On
12/2/2004, we issued 60,000 shares of common stock to $2.50 Restricted warrant
holders, in connection with its exercise of warrants. We received cash of
$150,000. On 12/2/2004, we issued 100,000 shares of common stock to B
& B2 Warrant Holders, in connection with an exercise of warrants. We
received cash of $120,000. On 12/3/2004, we issued 10,000 shares of
common stock to $2.50 Restricted warrant holders, in connection with an exercise
of warrants. We received cash of $25,000. On 12/6/2004, we entered
into a consulting agreement with a consultant, whereby we issued 25,000 shares
of common stock with value of $97,250 in consideration for professional services
under the agreement. On 12/8/2004, we issued 200,000 shares of common
stock to B & B2 warrant holders, in connection with an exercise of warrants.
We received cash of $240,000. On 12/9/2004, we issued 5,000 shares of
common stock to B & B2 warrant holders, in connection with its exercise of
warrants. We received cash of $6,000. On 12/9/2004, we issued 10,000
shares of common stock to employees, in connection with an exercise of employee
stock options. We received cash of $2,500. On 12/9/2004, we issued
538,462 shares of common stock to C warrant holders, in connection with an
exercise of warrants. We received cash of $1,750,000. On 12/9/2004,
we issued 25,000 shares of common stock to our lawyers in settlement of
indebtedness arising from the provision of legal services rendered to us valued
at $101,250. On 12/10/2004, we issued 27,093 shares of common stock
to accredited investors for $55,000. On 12/13/2004, we issued 32,107
shares of common stock to accredited investors for $57,150. On
12/13/2004, we issued 240,279 shares of common stock to accredited investors
for
$432,500. On 12/13/2004, we issued 8,618 shares of common stock to
professional contractors in payment for professional services valued at
$30,680. On 12/13/2004, we issued 57,625 shares of common stock to
$2.50 Restricted warrant holders, in connection with its exercise of warrants.
We received cash of $144,000. On 12/13/2004, we issued 53,000 shares
of common stock to accredited investors for $63,600. On 12/14/2004,
we purchased inventory with value of $364,500 from suppliers with 112,154 shares
of common stock. On 12/15/2004, we issued 100,000 shares of common
stock to B & B2 warrant holders, in connection with its exercise of
warrants. We received cash of $120,000. On 12/20/2004, we issued
531,750 shares of common stock to accredited investors for
$1,116,668. On 12/21/2004, we issued 5,000 shares of common stock to
our lawyers in settlement of indebtedness arising from the provision of legal
services rendered to us valued at $16,500. On 12/22/2004, we issued
20,000 shares of common stock to professional contractors in payment for
professional services valued at $63,800. On 12/22/2004, we purchased
inventory with value of $24,785 from our suppliers with 7,769 shares of common
stock. On 12/29/2004, we issued 7,435 shares of common stock to B
& B2 warrant holders, in connection with its exercise of warrants. We
received cash of $8,922. On 12/29/2004, we issued 1,342 shares of
common stock to C warrant holders, in connection with its exercise of warrants.
We received cash of $4,361.
PREFERRED
SHARES ISSUED
On
1/5/2004, we issued 50 shares of preferred stock to our lawyers in settlement
of
indebtedness arising from the provision of legal services rendered to us valued
at $50,000. On 1/5/2004, we settled an obligation with a professional
organization, for $21,000, which was paid with 21 shares of preferred
stock. On 1/14/2004, we settled an obligation with our lessors, for
$14,400, which was paid with 14 shares of preferred stock. On
1/22/2004, we issued 50 shares of preferred stock to our lawyers in settlement
of indebtedness arising from the provision of legal services rendered to us
valued at $50,000. On 1/26/2004, we issued 2 shares of preferred
stock to professional contractors in payment for professional services valued
at
$2,000. On 1/26/2004, we entered into a consulting agreement with a
consultant, whereby we issued 2 shares of preferred stock with value of $2,000,
in consideration for professional services under the agreement. The shares
are
fully earned. On 1/28/2004, we issued 467 shares of preferred stock
to accredited investors for $467,000. On 1/28/2004, we entered into a
consulting agreement with a consultant, whereby we issued 60 shares of preferred
stock with value of $60,000 in consideration for professional services under
the
agreement. The shares are fully earned.
On
3/1/2004, we issued 250 shares of preferred stock to consultants in payment
for
professional services valued at $250,000. On 3/11/2004, we entered
into a consulting agreement with a consultant, whereby we issued 50 shares
of
preferred stock with value of $50,000 in consideration for professional services
under the agreement. The shares are fully earned. On 3/27/2004, we
issued 50 shares of preferred stock to our lawyers in settlement of indebtedness
arising from the provision of legal services rendered to us valued at
$50,000. On 3/31/2004, we issued 2 shares of preferred stock to
professional contractors in payment for professional services valued at
$2,500. On 3/31/2004, we purchased assets with value of $6,000 from
suppliers with 6 shares of preferred stock.
On
4/12/2004, we purchased assets with value of $250,000 from suppliers with 250
shares of preferred stock. On 4/19/2004, we entered into a consulting
agreement with suppliers, whereby we issued 8,000 shares of preferred stock
with
value of $8,000,000 in consideration for the License and Distribution Fee to
Smart Automobile LLC. On 4/21/2004, we issued 657 shares of preferred
stock to accredited investors for $656,500.
ZAP
ESOP OPTIONS ISSUED
On
4/12/2004, we issued 50,000 ESOP options to employees for employment
compensation.
On
6/23/2004, we issued 1,650,000 ESOP options to employees for employment
compensation.
On
8/30/2004, we issued 150,000 ESOP options to employees for employment
compensation.
On
11/16/2004, we issued 1,543,956 ESOP options to officers per their employment
agreements. We also issued 200,000 options to employees.
K2
RESTRICTED WARRANTS ISSUED
On
4/12/2004, we issued 50,000 K2 Warrants to employees for employment
compensation. On 4/21/2004, we issued 1,000,000 K2 Warrants to a
consultant for professional services.
On
6/23/2004, we issued 100,000 K2 Warrants to employees for employment
compensation.
On
8/30/2004, we issued 500,208 K2 Warrants to employees for employment
compensation.
On
10/26/2004, we issued 50,000 K2 Warrants to employees for employment
compensation.
On
11/8/2004, we issued 50,000 K2 Warrants to employees for employment
compensation. On 11/16/2004, we issued 1,543,956 K2 Warrants to our
officers per their employment agreement.
C2
WARRANTS ISSUED
On
5/20/2004, we issued 100,000 C2 Warrants to accredited investors in relation
to
an investment.
$2.50
WARRANTS ISSUED
On
9/1/2004, we settled an obligation with our suppliers by issuing 30,000 of
$2.50
warrants. On 9/1/2004, we issued 38,000 of the $2.50 Warrants to
accredited investors in relation to an investment. On 9/4/2004, we
issued 45,625 of the $2.50 Warrants to accredited investors in relation to
an
investment. On 9/22/2004, we issued 150,000 of the $2.50 Warrants to
accredited investors in relation to an investment.
On
10/11/2004, we issued 112,000 of the $2.50 Warrants to accredited investors
in
relation to an investment. On 10/26/2004, we issued 505,000 of the
$2.50 Warrants to suppliers in relation to a purchase agreement. On
10/26/2004, we issued 50,000 of the $2.50 Warrants to professional contractors
for professional services. On 10/27/2004, we issued 30,000 of the
$2.50 Warrants to our lessors for rental expense.
On
11/10/2004, we issued 16,800 of the $2.50 Warrants to accredited investors
in
relation to an investment. On 11/12/2004, we issued 250,000 of the
$2.50 Warrants to a consultant for professional services.
On
12/2/2004, we issued 10,000 of the $2.50 Warrants to accredited investors in
relation to an investment.
B2
WARRANTS ISSUED
On
1/8/2004, we issued 895,500 B2 Warrants to a consultant for professional
services. On 1/13/2004, we issued 54,533 B2 Warrants to accredited
investors in relation to an investment. On 1/23/2004, we issued
25,000 B2 Warrants to a consultant for professional services. On
1/28/2004, we issued 1,943,000 B2 Warrants to accredited investors in relation
to an investment. On 1/28/2004, we issued 100,000 B2 Warrants to
suppliers in relation to an inventory purchase.
On
3/24/2004, we issued 100,000 B2 Warrants to suppliers in relation to an
inventory purchase. On 3/24/2004, we issued 650,000 B2 Warrants to a
consultant for professional services.
On
4/8/2004, we issued 10,000 B2 Warrants to accredited investors in relation
to an
investment. On 4/12/2004, we issued 500,000 B2 Warrants to suppliers
in relation to an asset purchase agreement. On 4/21/2004, we issued
1,099,000 B2 Warrants to accredited investors in relation to an
investment. On 4/21/2004, we issued 2,150,000 B2 Warrants to a
consultant for professional services.
On
5/11/2004, we issued 50,000 B2 Warrants to a consultant for professional
services. On 5/20/2004, we issued 50,000 B2 Warrants to accredited
investors in relation to an investment. On 5/23/2004, we issued
100,000 B2 Warrants to accredited investors in relation to an
investment.
On
11/11/2004, we issued 150,000 B2 Warrants to a consultant for professional
services. On 11/16/2004, we issued 100,000 B2 Warrants to a
consultant for professional services. On 11/16/2004, we issued
2,000,000 B2 Warrants to accredited investors in relation to an
investment. On 11/17/2004, we issued 100,000 B2 Warrants to a
consultant for professional services.
$5.00
WARRANTS ISSUED
On
12/13/2004, we issued 272,386 of the $5.00 Warrants to accredited investors
in
relation to an investment. On 12/21/2004, we issued 476,194 of the
$5.00 Warrants to accredited investors in relation to an
investment.
$2.50
WARRANTS ISSUED TO FUSION CAPITAL II, LLC
On
12/31/2004, we reserved 1,000,000 Fusion $2.50 Warrants for Fusion Capital
II,
LLC in relation to a settlement agreement. They were issued to Fusion Capital
in
02/05.
$3.50
WARRANTS ISSUED TO FUSION CAPITAL II, LLC
On
12/31/2004, we reserved 500,000 Fusion $3.50 Warrants for Fusion Capital II,
LLC
in relation to a settlement agreement. They were issued to Fusion Capital in
02/05.
$4.50
WARRANTS ISSUED TO FUSION CAPITAL II, LLC
On
12/31/2004, we reserved 500,000 Fusion $4.50 Warrants for Fusion Capital II,
LLC
in relation to a settlement agreement. They were issued to Fusion Capital in
02/05.
$5.50
WARRANTS ISSUED TO FUSION CAPITAL II, LLC
On
12/31/2004, we reserved 500,000 Fusion $5.50 Warrants for Fusion Capital II,
LLC
in relation to a settlement agreement. They were issued to Fusion Capital in
02/05
On
December 20, 2004, we issued 476,194 shares of Common Stock and a warrant to
purchase up to an aggregate of 476,164 shares of Common Stock, to Platinum
Partners Value Arbitrage Fund LP (“Platinum”), pursuant to the terms and
conditions of the purchase agreement, dated as of December 20, 2004, by
and between us and Platinum for an aggregate purchase price of
$1,000,000. The warrant is exercisable for a period of three years at the per
share exercise price of $5.00.
On
December 10, 2004, we issued 240,279 shares of Common Stock and a warrant to
purchase up to an aggregate of 240,279 shares of Common Stock, to a group of
accredited investors (the “Accredited Investors”), pursuant to the terms and
conditions of the purchase agreement, dated as of December 10, 2004, by and
between us and each of the Accredited Investors for an aggregate purchase price
of $432,500. The warrant is exercisable for a period of three years at the
per
share exercise price of $5.00.
2005
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 our lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to us 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 a 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 our lawyers in
settlement of indebtedness arising from the provision of legal services rendered
to us valued at $5,000. On February 15, 2005 we issued 600,000 shares
of common stock to accredited investors for $1,250,125. 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 a
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 our lawyers in settlement of indebtedness
arising from the provision of legal services rendered to us 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 we 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 a 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 our lawyers in settlement
of
indebtedness arising from the provision of legal services rendered to us 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.
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 our lawyers in settlement of
indebtedness arising from the provision of legal services rendered to us 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 our lawyers in settlement of indebtedness
arising from the provision of legal services rendered to us valued at
$31,592.
On
August
5, 2005, we issued 9,259 shares of common stock to our lawyers in settlement
of
indebtedness arising from the provision of legal services rendered to us 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
our lawyers in settlement of indebtedness arising from the provision of legal
services rendered to us valued at $5,000. 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 a consultant in payment for professional services valued
at
$21,225. On September 15, 2005, we issued 35,000 shares of common stock to
a
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 employees
for employment compensation.
On
June
7, 2005, we issued 1,248,194 ESOP options with $0.93 exercise price to employees
for employment compensation.
On
September 14, 2005, we issued 250,000 ESOP options with $1.04 exercise price
to
employees for employment compensation.
On
December 1, 2005, we issued 50,000 ESOP options with $0.65 exercise price to
employees for employment compensation.
$1.50
WARRANTS ISSUED
On
September 20, 2005, we issued 750,000 shares of $1.50 warrants to our lawyers
in
connection with legal fees.
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 we 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 a 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 we 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 a consultant in payment for professional services.
On
March
3, 2005, we issued 1,000,000 shares of $3.25 warrants to our lawyers in
settlement of indebtedness arising from the provision of legal services rendered
us. On March 8, 2005, we issued 600,000 shares of $3.25 warrants to
consultants in payment for professional services.
On
April
1, 2005 we 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 a consultant in connection with professional
services. On April 19, 2005, we issued 500,000 shares of $3.25
warrants to a consultant in connection with professional services.
$4.00
WARRANTS ISSUED
On
February 15, 2005 we 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 a 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
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 a 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
a
consultant in connection with professional services.
On
November 7, 2005, we issued 50,000 shares of B2 warrants to a consultant in
connection with professional services.
On
February 17, 2005, we issued 600,000 shares of our common stock (“Common Stock”)
and three warrants to purchase up to an aggregate of 900,000 shares of Common
Stock, to Lazarus Investment Partners LLP (“Lazarus”), pursuant to the terms and
conditions of the purchase agreement, dated as of February 16, 2005, by and
between us and Lazarus for an aggregate purchase price of $1,260,000. Each
of
the warrants is exercisable for a period of five years, and will be exercisable
for 300,000 shares of Common Stock at the initial per share exercise prices
of
$2.50, $3.25, and $4.00, respectively.
2006
On
July
14, 2006, we issued 1,000,000 shares of our common stock and a warrant for
the
purchase of 1,000,000 shares of our common stock at an exercise price of $1.75
pursuant to an agreement with Thomas Heidemann and Smart Automobile
LLC. The securities were issued pursuant to certain exemptions from
registration provided by Rule 506 of Regulation D and
Section 4(2) of the Securities Act of 1933, as amended. The issuance
of stock and warrants was exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Act”) for the private placement of
these securities pursuant to Section 4(2) of the Act and/or Rule 506 of
Regulation D promulgated thereunder since, among other things, the transaction
did not involve a public offering, the investors had access to information
about
us and their investment, the investors took the securities for investment and
not resale, and we took appropriate measures to restrict the transfer of the
securities.
On
July
19, 2006, we issued 17,857 shares of our common stock to a service provider
as
payment for sponsorship fees valued at $12,500.
On
July
19, 2006, we issued 7,700 shares of our common stock to a service provider
as
payment for sponsorship fees valued at $5,000.
On
July
19, 2006, we issued 2,941 shares of our common stock as payment for a trailer
valued at $2,000. On July 25, 2006, we issued options for 100,000
shares of our common stock at an exercise price of $0.89 and warrants for
100,000 shares of our common stock at an exercise price of $1.00 to an executive
officer as compensation for services rendered to us.
On
August
11, 2006, we issued options for 1,066,272 shares of our common stock at an
exercise price of $0.91 and warrants for 1,066,272 shares of our common stock
at
an exercise price of $1.00 to three separate executive officers as compensation
for services provided for in each executive’s employment agreement where such
executive is entitled to the issuance of options totaling 1% of total
outstanding shares and warrants totaling 1% of total outstanding
shares. On August 11, 2006, we issued 42,231 shares of our common
stock as payment for leases for apartments valued at $38, 430. On August 11,
2006, we issued 1,500 shares of our common stock for the purchase of a trailer
valued at $1,230. On August 11, 2006, we issued 294,444 shares of our common
stock as payment for the cash shortfall for the purchase of property located
at
44720 Main Street in Mendocino, California. On August 11, 2006, we issued a
warrant for the purchase of 500,000 shares at $1.20 per share for real estate
consulting services.
On
September 5, 2006, we issued 150,000 shares of common stock for consulting
services valued at in connection with a Settlement Agreement dated September
5,
2006. The shares were issued out of shares that are being held as
collateral pursuant to a previously executed loan agreement. On September 15,
2006, we issued 3,720 shares of our common stock to three outside directors
as
compensation for their attendance at board meetings valued at $1,500 per
director. On September 15, 2006, we issued options for 100,000 shares of our
common stock at an exercise price of $1.03 and warrants for 100,000 shares
of
our common stock at an exercise price of $1.00 to an executive officer as a
bonus for services rendered to us. On September 15, 2006, we issued a warrant
for the purchase of 130,000 shares at $1.50 per share for consulting services.
On September 27, 2006, we issued 500,000 shares of common stock out of shares
that are being held as collateral pursuant to a previously executed loan
agreement.
On
October 20, 2006, we issued 5,000 shares of common stock as payment for
sponsorship fees valued at $5,700. On October 20, 2006, we issued
2,500 shares of common stock as payment for sponsorship fees valued at
$2,850. On October 20, 2006, we issued 460,000 shares of common
stock, one warrant for the purchase of 33,000 shares at $1.50 per share, and
five warrants for the purchase of 320,000 shares at $1.20 for a direct
investment in the amount of $460,000 to a group of qualified
investors.
On
November 9, 2006, we issued 8,523 shares of common stock as payment for
sponsorship fees valued at $7,500. On November 9, 2006, we issued
85,000 shares of common stock for consulting services valued at
$74,800. On November 10, 2006, we issued 600,000 shares of common
stock for a direct investment in the amount of $600,000 to a group of qualified
investors.
On
December 5, 2006, we issued three 8% convertible notes with par value totaling
$1.5 million and three warrants for the purchase of 450,000 shares at $1.10
per
share in connection with a direct investment. On December 12, 2006, we issued
106,667 shares of common stock for consulting services valued at $96,000. On
December 12, 2006, we issued 68,896 shares of common stock to a group of
qualified investors to ensure an agreed upon price for the purchase of
property. On December 12, 2006, we issued 2,202 shares of common
stock for professional services valued at $1,916. On December 12, 2006, we
issued 14,045 shares of common stock for as payment for room rentals valued
at
$12,500.
2007
On
January 2, 2007, we issued 625,000 shares of common stock, one warrant for
the
purchase of 100,000 shares at $1.50 per share, and two warrants for the purchase
of 1,150,000 shares at $1.20 for a direct investment in the amount of $625,000
to a qualified investor. On January 25, 2007, we issued 27,174 shares of common
stock for professional services valued at $25,000.
On
February 2, 2007, we issued 217,391 shares of common stock and one warrant
for
the purchase of 2,000,000 shares at $1.20 per share for a direct investment
in
the amount of $200,000 to a qualified investor. On February 20, 2007, we issued
four 8% convertible notes with par value totaling $1.2 million and four warrants
for the purchase of 360,000 shares at $1.32 per share in connection with a
direct investment. On February 23, 2007, we issued 8,532 shares of common stock
for professional services valued at $9,300.
On
March
30, 2007, we issued 45,565 shares of common stock for professional services
valued at $52,400. On March 30, 2007, we issued a warrant for the purchase
of
2,000,000 shares at $1.20 per share for a direct investment in the amount of
$200,000 to a qualified investor.
On
April
30, 2007, we entered into Certificates of Adjustments to the 8% convertible
notes and warrants issued in December 2006 and February 2007 to adjust certain
provisions of the notes and warrants as a consequence of the declaration by
the
Company of a ten percent (10%) common stock dividend to common shareholders
of
record on February 15, 2007, payable February 28, 2007. As a result
of the adjustments, the conversion price of the notes was reduced to $0.909
per
share, the initial warrants were increased to 495,000 at an exercise price
of
$1.00 per share, and the additional warrants were increased to 396,000 at an
exercise price of $1.20 per share.
On
June
26, 2007, we entered into an Amendment Agreement with the purchasers of the
8%
convertible notes and warrants to adjust certain provisions of the notes and
initial warrants as a consequence selling shares to a third party investor
for
per share consideration less than the conversion price of the notes and exercise
price of the initial warrants. As a result, the conversion price of
the notes was reduced to $0.727 per share and the initial warrants were
increased to 594,001 at an exercise price of $0.80 per share. We also agreed
to
pay the purchasers an aggregate of $113,000 in liquidation damages, payable
in
141,750 shares of common stock of the Company, and warrants to purchase an
aggregate of 200,000 shares of common stock of the Company at an exercise price
of $1.10 per share.
We
will
use the proceeds from the above transactions for general corporate
purposes.
ITEM
27. EXHIBITS.
EXHIBIT
INDEX
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)
|
|
|
5.1
|
Opinion
of Richardson & Patel LLP
|
|
|
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)
|
|
|
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)
|
|
|
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)
|
|
|
10.36
|
Agreement
dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile
(15)
|
|
|
10.37
|
Amendment
Agreement dated August 30, 2006 between ZAP and Smart Automobile
LLC
(16)
|
|
|
10.38
|
Exclusive
Distribution Agreement dated May 1, 2005, as supplemented by a letter
dated June 9, 2006 (17)
|
|
|
10.39
|
ZAP
Guarantee (18)
|
|
|
10.40
|
Shandong
Jindalu Vehicle Co., Ltd. Guarantee (19)
|
|
|
10.41
|
Joint
Venture Negotiations dated September 21, 2006 (20)
|
|
|
10.42
|
Security
Purchase Agreement between ZAP and Certain Institutional Investors
(21)
|
|
|
10.43
|
Memorandum
of Company’s Extension of Warrants issued to Executives dated January 26,
2007
|
|
|
10.44
|
Purchase
and Amendment Agreement, dated February 20, 2007, between ZAP and
Certain
Institutional Investors (22)
|
|
|
10.45
|
Form
of Convertible Note (22)
|
|
|
10.46
|
Form
or Warrant (22)
|
|
|
10.47
|
Form
of Certificate of Adjustment to December 5, 2006 8% Senior Convertible
Note dated April 30, 2007
|
|
|
10.48
|
Form
of Certificate of Adjustment to February 20, 2007 8% Senior Convertible
Note dated April 30, 2007
|
|
|
10.49
|
Form
of Certificate of Adjustment to December 5, 2006 Warrants dated April
30,
2007
|
|
|
10.50
|
Form
of Certificate of Adjustment to February 20, 2007 Warrants dated
April 30,
2007
|
|
|
10.51
|
Amendment
Agreement between ZAP and Certain Institutional Investors dated June
26,
2007
|
|
|
21.1
|
List
of subsidiaries (3)
|
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm (Odenberg, Ullakko,
Muranishi & Co. LLP)
|
|
|
24.1
|
Power
of Attorney (included at Page
II-16)
|
(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.
|
(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 8-K 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 10-QSB
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 8-K 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 8-K 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 8-K 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 8-K 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 10-KSB for
the period ended December 31, 2004 and incorporated herein by
reference.
|
(15)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on July 20, 2006 and
incorporated herein by reference.
|
(16)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 6, 2006
and
incorporated herein by reference.
|
(17)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(18)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(19)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(20)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on November 6, 2006 and
incorporated herein by reference.
|
(21)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 11, 2006
and
incorporated herein by reference.
|
(22)
|
Previously
filed as an exhibit to the Registrant’s Current Report on Form 8K filed
with the Securities and Exchange Commission on February 26, 2007
and
incorporated herein by reference.
|
All
other
exhibits are filed herewith.
(a)
The
undersigned registrant hereby undertakes:
|
(1)
|
To file, during any period in which offers or
sales are
being made, a post-effective amendment to this registration
statement:
|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933 (the “Securities Act”);
|
|
(ii)
|
To
reflect in the prospectus any facts or events which, individually
or
together, represent a fundamental change in the information in
this
registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar
value of securities offered would not exceed that which was registered)
and any deviation from the
|
|
|
low
or high end of the estimated maximum offering range may be reflected
in
the form of prospectus file with the Securities and Exchange
Commission
(“SEC”) pursuant to Rule 424(b), if in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement;
and
|
|
(iii)
|
Include
any additional or changed material information on the plan of
distribution.
|
|
(2)
|
For
purposes of determining liability under the Securities Act, to
treat each
post-effective amendment as a new registration statement of the
securities
offered, and the offering of the securities at that time to be
the initial
bona fide offering.
|
|
(3)
|
To
remove from registration by means of a post-effective amendment
any of the
securities being registered which remain unsold at the termination
of the
offering.
|
|
(4)
|
For
determining liability of the undersigned small business issuer
under the
Securities Act to any purchaser in the initial distribution of
the
securities, the undersigned small business issuer undertakes
that in a
primary offering of securities of the undersigned small business
issuer
pursuant to this registration statement, regardless of the underwriting
method used to sell the securities to purchaser, if the securities
are
offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be
a seller to
the purchaser and will be considered to offer or sell such securities
to
such purchaser:
|
|
(i)
|
any
preliminary prospectus or prospectus of the undersigned small
business
issuer relating to the offering required to be filed pursuant
to Rule
424;
|
|
(ii)
|
any
free writing prospectus relating to the offering prepared
by or on behalf
of the undersigned small business issuer or used or referred
to by the
undersigned small business issuer;
|
|
(iii)
|
the
portion of any other free writing prospectus relating to
the offering
containing material information about the undersigned small
business
issuer or its securities provided by or on behalf of the
undersigned small
business issuer; and
|
|
(iv)
|
any
other communication that is an offer in the offering
made by the
undersigned small business issuer to the
purchaser.
|
|
(5)
|
For
determining any liability under the Securities Act, treat
the information
omitted from the form of prospectus filed as part of
this registration
statement in reliance upon Rule 430A and contained in
a form of prospectus
filed by the small business issuer under Rule 424(b)(1),
or (4) or 497(h)
under the Securities Act as part of this registration
statement as of the
time the SEC declared it effective.
|
|
(6)
|
For
determining any liability under the Securities Act, treat
each
post-effective amendment that contains a form of prospectus
as a new
registration statement for the securities offered in
the registration
statement, and that offering of the securities at that
time as the initial
bona fide offering of those
securities.
|
(b)
Insofar as indemnification for liabilities arising under the Securities Act
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In
the event that a claim for indemnification against such liabilities (other
than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
[The
remainder of this page is left blank intentionally.]
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, as amended,
the
registrant certifies that it has reasonable grounds to believe that it meets
all
of the requirements for filing on Form SB-2 to be signed on its behalf by the
undersigned, in Santa Rosa, California on July 3, 2007.
|
ZAP |
|
|
|
|
|
Date:
July
3, 2007
|
By:
|
/s/ Steven
M. Schneider |
|
|
|
Steven
M. Schneider |
|
|
|
Chief
Executive Officer |
|
|
|
|
|
POWER
OF ATTORNEY
Each
person whose signature appears below constitutes and appoints Mr. Steven M.
Schneider as his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to the Registration Statement, and to
sign
any registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under
the
Securities Act of 1933, as amended, and all post-effective amendments thereto,
and to file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do
or
cause to be done by virtue hereof.
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Steven M. Schneider
Steven M. Schneider
|
|
Chief
Executive Officer and Director
|
|
July
3, 2007
|
|
|
|
|
|
/s/
Gary Starr
|
|
Chairman
of the Board of Directors
|
|
July
3, 2007
|
|
|
|
|
|
/s/
William Hartman
|
|
Chief
Financial Officer
|
|
July
3, 2007
|
|
|
|
|
|
/s/
Renay Cude
Renay
Cude
|
|
Secretary
and Director
|
|
July
3, 2007
|
|
|
|
|
|
/s/
Peter H. Scholl
Peter
H. Scholl
|
|
Director
|
|
July
3, 2007
|