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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended DECEMBER 31, 2003
[_] Transition Report under to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from ___________ to ___________
Commission File Number 0-303000
ZAP
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(Name of small business issuer in its charter)
CALIFORNIA 94-3210624
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
501 FOURTH STREET SANTA ROSA, CALIFORNIA 95401
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(Address of Principal Executive Offices) (Zip Code)
(707) 525-8658
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(Issuer's Telephone Number, Including Area Code)
Securities registered under section 12(b) of the Exchange Act:
NONE
Securities registered under section 12(g) of the Exchange Act:
COMMON STOCK
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $5,828,000
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. (SEE definition of affiliate in Rule
12b-2 of the Exchange Act.) Based on the average bid and ask price as of March
26, 2004, $10,956,520.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 16,231,882 shares of common stock as
of March 26, 2004.
DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated
by reference, briefly describe them and identify the part of the Form 10-KSB
into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities
Act"). The listed documents should be clearly described for identification
purposes. NONE.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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TABLE OF CONTENTS
PART I Page Number
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Item 1. Description of Business 1
Item 2. Description of Property 4
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters and Small Business Issuer Purchases of Securities 5
Item 6. Management's Discussion and Analysis or Plan of Operation 7
Item 7. Index to Financial Statements 11
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 12
Item 8A. Controls and Procedures 12
PART III
Item 9. Directors and Executive Officers of the Registrant 12
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 14
Item 12. Certain Relationships and Related Transactions 16
PART IV
Item 13. Exhibits and Reports on Form 8-K 16
Item 14. Principal Accountant Fees and Services 18
SIGNATURES 19
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE INFORMATION ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS BASED ON
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY,
MANAGEMENT'S BELIEFS AND CERTAIN ASSUMPTIONS MADE BY MANAGEMENT.
On June 20, 2002, the U.S. Bankruptcy Court confirmed ZAP's Second Amended Plan
of Reorganization (the "Plan"), which allowed the Company to emerge from Chapter
11 proceedings.
A. BUSINESS DEVELOPMENT
ZAP (the "Company" or "ZAP") was incorporated under the laws of the State of
California, on September 23, 1994, as "ZAP Power Systems." The name of the
Company was changed to "ZAPWORLD.COM" on May 16, 1999 in order to increase our
visibility in the world of electronic commerce. We subsequently changed our name
to ZAP on June 18, 2001 in order to reflect our growth and entry into larger,
more traditional markets. The Company has grown from a single product line to a
full line of electric vehicle and advanced transportation products. Most of the
Company's domestic manufacturing has been transferred to lower-cost overseas
contract manufacturers.
The Company's business strategy has been to develop, acquire and commercialize
advanced transportation including electric vehicles and electric vehicle power
systems, and low emission vehicles, which have fundamental, practical and
environmental advantages over available internal combustion modes of
transportation that can be produced commercially on an economically competitive
basis. In 2003, the Company continued to enhance and broaden its electric
vehicle product line. The Company intends to further expand its technological
expertise through an aggressive plan of acquisitions of companies with exciting
new products in the advanced transportation industry and strategic alliances
with certain manufacturers, distributors and sales organizations.
B. BUSINESS OF ISSUER
The Company's business goal is to become the largest and most complete
distribution portal for advanced transportation and electric vehicles. In 2003,
the Company continued to accelerate its market positioning in the electric
vehicle industry. The Company is now focused on creating a distribution channel
for its vehicles, with special emphasis on entrepreneurs in the power-sport and
independent auto industry.
According to various sources, the Company has developed perhaps the strongest
brand names in the electric vehicle industry.
PRODUCT SUMMARY- ZAP markets many forms of advanced transportation, including
electric automobiles, motorcycles, bicycles, scooters, personal watercraft,
neighborhood electric vehicles, commercial vehicles and more. Additionally, the
Company produces the electric scooter, known as the ZAPPY(R), which is
manufactured by the Company, using parts manufactured by various subcontractors.
ELECTRIC VEHICLE RENTAL PROGRAM- ZAP established ZAP Rental Outlet in 2002 to
rent neighborhood electric vehicles in tourist locations. ZAP plans to solicit
the participation of rental agencies and other locations for the program.
Neighborhood electric cars are a new category of 25 MPH automobiles designed for
short trips in urban areas, planned communities, commercial zones or tourist
districts. The smaller, low-speed electric cars are a new alternative in places
concerned with air and noise pollution, high fuel prices, traffic congestion or
parking shortages. In September 2003 the Company acquired a fleet of
approximately 100 electric cars, which are being rented to the public at two
locations on the main Casino strip in Las Vegas. The purchase was completed in
exchange for stock and warrants.
ELECTRIC VEHICLE DEALERSHIP PROGRAM - The Company began establishing Electric
Vehicle Dealerships in various locations in the United States in the fourth
quarter of 2003. The new car dealer pays the Company a fee and in return may
apply with the respective state to become a licensed new car electric vehicle
dealership. The Company also receives a commitment from the new car dealer to
purchase a minimum number of electric automobiles annually.
1
ACQUISITION OF NEW BUSINESSES-The Company completed its acquisition of Voltage
Vehicles ("VV") and RAP Group on July 1, 2002. Voltage Vehicles is a Sonoma
County-based Nevada Corporation with exclusive distribution contracts for
advanced transportation in the independent auto dealer network, including rights
to one of the only full-performance electric cars certified under federal safety
standards. The RAP Group ("RAP") owns an auto dealership focused on the
independent automotive and advanced technology vehicle markets. A Voltage
Vehicle authorized dealer, RAP showcases an array of advanced transportation at
its dealership in Fulton, California. Voltage Vehicles, which began business in
February 2001, is a relatively new enterprise. As noted in ZAP's Amended and
Confirmed Plan of Reorganization (see Financial Statement Note 3), the mergers
are expected to enhance ZAP's financial base by providing access to the two
companies' services and relationships. The move is expected to advance ZAP's
goal of becoming a leading full-service brand in the electric and alternate fuel
transportation industry. Since the acquisition, ZAP plans to step-up its role in
building a national distribution network to support its contract manufacturing
for its growing line of products. The merger enabled ZAP to immediately cut
overhead and other costs, and increase revenues. ZAP purchased VV and RAP
through the issuance of 500,000 and 4,000,000 (post-split) shares of common
stock, respectively, to the equity shareholders of VV and RAP. VV and RAP are
wholly owned subsidiaries of ZAP. The equity shareholders will also receive one
Warrant in Series B, C, D and K to purchase common stock in the Reorganized ZAP
for each common share issued to Voltage Vehicles and RAP Group, Inc. In
connection with the acquisition of RAP and VV the Company recorded goodwill or
the excess of the purchase price over the net assets acquired of approximately
$800,000. The goodwill recorded is primarily for RAP and Voltage Vehicles and is
based upon an independent appraisal of the fair value of the tangible and
intangible assets acquired in order to record and allocate the purchase price in
accordance with Financial Accounting Standards Board 141, "Business
Combinations."
ENVIRONMENTAL INITIATIVES AND LEGISLATION
Federal legislation was enacted to promote the use of alternative fuel vehicles,
including electric vehicles. Qualified electric vehicles are entitled to a 10%
federal tax credit. Several states have also adopted legislation that sets
mandates for the introduction of electric vehicles. However, there is strong
political opposition to this mandate. Foreign countries have also initiated
either mandates or incentives for electric vehicles or are planning such
programs in the future. As ZAP commercializes new transportation technology, it
has been required to expend Company resources in educating legislators of the
benefits of these vehicles. In November 2002, President Bush signed legislation
which transfers regulation of electric bikes from the National Highway Traffic
Safety Administration to the Consumer Product Safety Commission. This
effectively changes the regulatory standards from motor vehicles to consumer
standards such as bicycles.
Although many government agencies are concerned about rising global air
pollution, it is expected that the Company will need to continue to expend
considerable resources in the future in the governmental process, and there
cannot be assurance that the current favorable governmental climate for these
zero emission vehicles will remain in the future.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has primarily become a marketer and distributor of products and is
only involved in the manufacturing of the ZAPPY Scooters. Thus, we do not
require large expenditures for internal research and development costs. In order
to maintain our competitive advantage the Company searches globally for the
latest technological advances in electric transportation and then determines the
feasibility of including the new item into our product.
CURRENT PRODUCT LINE
The Company's existing product line, which includes new and planned
introductions, is as follows:
ZAPCAR (TM) - This electric vehicle is made in China and is the first of its
kind to utilize an advanced drivetrain powered by an asynchronous AC motor
system delivering up to four times the horsepower of other models in its class.
The Company signed an exclusive agreement to import this nearly completed
vehicle into the United States.
ZAP LIGHT UTILITY VEHICLE (LUV) - This vehicle is a new kind of automobile
called a Neighborhood Electric Vehicle (NEV). A new category of automobile was
created for the many car trips people take for inter-city transportation,
planned communities, commercial zones and tourist areas. The LUV sports a
European design that comes from Italy. The vehicle has speeds up to 25 mph, has
room for two and plugs into any normal household electric outlet. The LUV was
selected as a finalist for Tech-TV's Best of the Consumer Electronic Show held
in Las Vegas in January 2003.
2
ZAPPY(R)- This electric scooter is a stand-up, portable, lightweight scooter
featuring a 12-volt battery with a built-in charger and a collapsible frame. Its
patented design includes a unique folding mechanism and proprietary circuitry,
which increases the efficiency and range of the vehicle. In the fourth quarter
last year, we introduced a new 2002 ZAPPY(R) Scooter which offered significant
upgrades over the previous design, from performance and construction to look.
ZAPPY TURBO(TM) - The new ZAPPY TURBO is an improved version of the Company's
ZAPPY folding electric scooter. The ZAPPY TURBO's new electric propulsion system
offers improved acceleration and hill climbing, and has a "hi-performance" mode
that allows the scooter to reach speeds of 19.5 MPH. We started shipping this
item in March of 2002.
ZAP(R) SEASCOOTER(TM) - The ZAP SeaScooter (TM) is a revolutionary affordable
underwater propulsion device designed to pull swimmers and snorkelers through
the water. It can run at speeds up to 2 mph at a depth of 60 feet and has built
in buoyancy regulation for maximum comfort.
ZAPLIGHT - This product is a perpetual flashlight that has no need for batteries
or bulbs. With just 30 seconds of shaking the Faraday flashlight can generate
enough power for up to five minutes of light.
POWERBIKE(R) - The Powerbike is primarily a mountain bike with a new and
improved electric motor attached. It was designed to appeal to the low cost mass
merchant.
OTHER ELECTRIC VEHICLES - Commercial road and highway. Under various
distribution agreements, the Company has the rights to a wide spectrum of
personal and industrial electric vehicles.
MICROPROCESSOR DRIVE CONTROLLERS - The Company is working to develop a series of
low cost proprietary motor controller microprocessors for all of its electric
vehicles, which is believed to increase efficiency and lower costs of operation.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Materials, parts, supplies and services used in the Company's business are
generally available from a variety of sources. However, interruptions in
production or delivery of these goods could have an adverse impact on the
Company's operations.
LICENSES, PATENTS AND TRADEMARKS
The Company has a number of patents and trademarks covering its electric
vehicles. The Company was issued its first United States Patent on February 13,
1996 on its electric motor power system for bicycles, tricycles, and scooters
(Patent #5,491,390). On September 30, 1997, the Company was issued its second
United States Patent on its electric motor system (Patent #5,671,821). On
December 15, 1998, the Company was issued a United States Patent for its ZAPPY
scooter (Patent #5,848,660). On November 14, 2000, The Company was issued a
design patent on its ZAPPY(R) scooter (Des. #433,718). The Company also holds
several other patents in the electric vehicle industry. The Company also
acquired two patents as the result of the emPower acquisition in December 1999.
One patent was for the powered roller skates (Patent #6,059,062) and another for
the powered skateboard (Patent #6,050,357). The Company acquired all of the
assets of Electric Vehicles Systems Inc., including the PowerSki(R), trademark
(Registration #2,224,640) and two U.S. Patents, (Patent #5,735,361) and (Patent
#5,913,373). The Company also has a patent for the Powered Scooter (Patent
#115,434). With the purchase of Aquatic Propulsion Technology Inc. on July 1,
2000, the Company acquired the following six patents: submersible marine vessel
issued June 13, 1995 (Patent #5,423,278), personal submersible marine vehicle
issued June 3, 1997 (Patent #5,634,423), submersible marine vessel issued on
April 19, 1994 (Patent #5,303,666), scuba scooter issued on May 31, 1994 (Patent
Des. 347,418), scuba scooter issued June 6, 1995 (Patent Des. 359,022) and
submersible marine vehicle issued February 19, 2002 (Patent #US D453,726 S). The
Company also has several copyright registrations for various advertisements that
it uses to promote its products.
3
ZAP also holds several trademarks: the trademark ZAP(R)was assigned to the
Company on September 23, 1994, (Reg. No. 1,794,866); the ELECTRICRUIZER(R)mark
was registered on April 2, 1999 (Reg. No. 2,248,753); the ZAPPY(R)mark was
registered on March 21, 2000 (Reg. No. 2,330,894); the POWERBIKE(R)mark was
registered on June 1, 1999 under trademark ZAPWORLD.COM(R) which was registered
on July 25, 2000 (Reg. No. 2,371,240); the trademark ZAP Electric Vehicle
Outlet(R)was registered on March 28, 2000 (Reg. No. 2,335,090) and the mark Zero
Air Pollution(R)was registered on February 28, 2000 (Reg. No. 2,320,346).
BACKLOG
The Company has a $140,400 backlog of orders and purchase contracts in hand for
various products and electric vehicles as of March 26, 2004. The Company expects
to fill its backlog within the current fiscal year.
COMPETITIVE CONDITIONS
The competition to develop and market electric vehicles has increased during the
last year and is expected to continue to increase. There are also other
manufacturers, both large and small, of personal electric vehicles. The
principal competitive advantages of the Company are its ownership of fundamental
technology, its trade name and its potential ability to be a low cost
manufacturer through domestic and international connections, and its
distribution network. In order to reduce costs the Company's production
activities have been transferred to lower cost off shore outside contract
manufacturers. This move also enables the Company to concentrate on its
marketing and sales efforts. The Company also currently benefits from its high
name recognition in the electric vehicle industry coupled with a rapidly
developing business on its Internet website ZAPWORLD.COM. The Company offers one
of the broadest lines of personal electric vehicles currently available.
According to published reports, the Company believes it currently holds a
leading electric vehicle market position in the United States.
EMPLOYEES
As of March 26, 2004, the Company had a total of 42 employees. This is an
increase of 5 employees from 2003. The Company's performance is substantially
dependent upon the services of its executive officers and other key employees,
as well as on its ability to recruit, retain and motivate other officers and key
employees. Competition for qualified personnel is intense and there are a
limited number of people with knowledge of and experience in the electric
vehicle industry. The loss of services of any of its officers or key employees,
or its inability to hire and retain a sufficient number of qualified employees,
will harm the Company's business.
ITEM 2. DESCRIPTION OF PROPERTY
The chart below contains a summary of our principal facilities.
Location Use Square Feet
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501 Fourth Street, Santa Rosa Calif Corporate Office 20,000
6784 Sebastopol Avenue, Sebastopol Calif Distribution Center 9,800
3362 Fulton Road, Santa Rosa Calif Office, Auto Lot 10,000
2955 Las Vegas Blvd, Las Vegas NV Electric Rental Car Location 3,000
3771 S Las Vegas Blvd, Las Vegas NV Electric Rental Car Location 2,500
1815 E. Sahara Ave, Las Vegas NV Electric Car Location 5,050
The Company purchased the Fourth Street building in March of 2003 through the
issuance of common stock, warrants and a $2 million note payable. The rest of
the facilities are leased. All facilities are in good condition.
It is management's opinion that the Company's insurance policies cover all
insurance requirements of the landlords. The Company owns the basic tools,
machinery and equipment necessary for the conduct of its repairs, research and
development, and vehicle prototyping activities. Management believes that the
above facilities are generally adequate for present operations.
4
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business, including employment-related and trade related
claims.
On May 20, 2003, the RAP Group, Inc., a wholly owned subsidiary of ZAP was named
as a defendant in a lawsuit filed in the Superior Court of California by
Fireside Thrift Co. The suit alleges breach of contract and misrepresentation
with respect to the Dealer Agreement. The plaintiff is seeking damages in the
amount of $546,108 plus interest. The pending action is in the preliminary
stage. The Company intends to mount a vigorous defense in this action.
Management believes that the ultimate resolution of these claims will not have a
material adverse effect on our financial position or on results of operations.
The RAP Group is currently on probation with the California Department of Motor
Vehicles for a period of two years ending June 12, 2004. The probationary action
was primarily due to the RAP Group's untimely transfers of pink slips for sales
of vehicles and lack of compliance with Motor Vehicle Pollution Control
guidelines on certain automobile sales. As part of ZAP's original business plan,
management is considering converting, depending upon the sales volume, the
dealership into a wholesale distributor for its electric cars.
There is an action pending against ZAP in the United States Bankruptcy Court for
the Northern District of California, Santa Rosa Division, entitled Esquire Trade
and Finance, Ltd., and Celeste Trust Reg. v. ZAP, Adversary Proceeding Number
03-1187. This is an action brought by the Plaintiffs against ZAP for declaratory
relief in which they ask the court to issue a declaratory judgment that ZAP's
purported redemption of the Plaintiff's Class A Warrants in February of 2003 is
ineffective. Management believes that the ultimate resolution of this claim will
not have a material adverse effect on our financial position or on results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year-ended December 31, 2003.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF SECURITIES
On July 1, 2002, our common stock began trading on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board (the "OTC Bulletin Board")
under the new stock symbol of ZAPZ. According to the OTC Bulletin Board, the
symbol change is to indicate that ZAP is no longer in Chapter 11 Reorganization,
and that the stock has undergone a reverse split effective July 1, 2002. ZAP's
common stock of 6,693,643 shares was converted to 2,231,214 shares of common
stock in the Reorganized ZAP, which was then reversed split on a 2:1 basis. The
final result of the conversion and the reverse split equates to 6:1 or in other
words for every six shares a common stock held on June 20, 2002 (ZAP's Plan of
Reorganization Date) the individual received one share of common stock in the
Reorganized ZAP. The resulting shares of common stock after the split were
1,115,607. All shares and per share data have been restated to reflect the stock
splits. The Common Shareholders' also received one Warrant in Series B, C and D
to purchase common stock in the Reorganized ZAP for each common share issued to
the claimant.
During the year ended December 31, 2003, the Company issued approximately 7.1
million shares of restricted and unrestricted common stock for the following
reasons: 2.9 million shares as collateral for a loan that did not fund (the
prospective lender notified the Company in December 2003 that the shares have
been lost, however they have not been cancelled as of yet); 1.5 million shares
of unrestricted and restricted stock in exchange for shareholder notes; 678,000
shares for the purchase of automobiles and other inventory items; 947,000 shares
for consulting, advertising and other outside services; 581,000 shares for the
purchase of the corporate headquarters building; 370,000 shares in exchange for
cash and shareholder warrants; 65,000 shares to extinguish debt; 29,000 shares
for the exercise of employee stock options and bonuses and 30,000 shares as
payment of interest on a short-term note.
During the year ended December 31, 2003, the Company issued the following
warrants:
o Approximately 1.4 million of Series B-2 Restricted Warrants at $1.07,
which expire on June 30, 2004. The warrants were issued for the
following reasons: 505,000 warrants for consulting services; 315,000
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warrants issued in exchange for cash; 300,000 warrants for the purchase
of the corporate headquarters building; 100,000 warrants for the
purchase of electric automobiles and 64,000 warrants for building
improvements.
o Approximately 50,000 Series C-2 Restricted Warrants, which are priced
at $4.00 and expire on July 1, 2004. The warrants were issued to
purchase inventory items.
o Approximately 50,000 Series D-2 Restricted Warrants, which are priced
at $8.00 and expire on July 1, 2005. The warrants were issued to
purchase inventory items.
o 300,000 Series K-2 Restricted Warrants, which are priced at $1.00 and
expire on July 1, 2005. The warrants were issued to the CEO and the
Chairman.
o Approximately 200,000 of $1.50 Warrants, which are priced at $1.50 and
expire on August 26, 2004. The warrants were issued to purchase
electric automobiles.
As of March 26, 2004, there were 16,231,882 shares of common stock outstanding
held by 3,390 shareholders (not including those held in street names). The table
below sets forth the range of high and low bid quotes of our common stock as
reported by the OTC Bulletin Board. The bid prices represent inter-dealer
quotations, without adjustments for retail mark-ups, markdowns or commissions
and may not necessarily represent actual transactions.
2004 2003 2002
High Low High Low High Low
(through
3/26/2004)
----- ----- ----- ----- ----- -----
First Quarter....... $0.90 $0.60 $2.59 $1.16 $0.33 $0.09(1)
Second Quarter...... - - 1.90 1.15 0.21 0.01
Third Quarter....... - - 1.75 1.20 1.98 (2) 0.30(2)
Fourth Quarter...... - - 1.35 0.47 1.80 1.09
(1) During this quarter, the stock was briefly halted from trading on
NASDAQ as the result of ZAP's filing for Chapter 11 Reorganization
protection
(2) Reflects a 6:1 reverse stock split on July 1, 2002.
Dividend Policy
The Company has not declared or paid any cash dividends on its common stock and
presently intends to retain its future earnings, if any, to fund the development
of its business and, therefore, does not anticipate paying any cash dividends in
the future.
RECENT SALES OF UNREGISTERED SECURITIES.
Since its inception in 1994, the Company has issued or sold unregistered
securities in the amounts, at the times, for the consideration and pursuant to
the exemptions from registration provided by the Securities Act of 1933, as
amended (the "Act"), as follows:
During the month of January, 2003 on various dates a total of 3,069,054 shares
of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act,
the Company issued the following: purchase of assets of ZAP Latin America -
30,000 shares; cancellation of a subsidiary's debt - 65,000 shares; outside
services - 5,000 shares; and collateral for a working capital loan - 2,941,176
shares. The loan did not fund and the shareholder reported to the Company in
December 2003 that the shares have been lost. However, as of March 26, 2004 the
transfer agent has not cancelled the shares. Pursuant to ZAP's Amended and
Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the
Bankruptcy Code, the Company issued 27,878 shares of common stock for the
conversion of Shareholder warrants. In addition, the Company issued the total of
approximately 140,000 Series B-2 Restricted Warrants at $1.07 for the following
reasons: 50,000 warrants for consulting; 50,000 for the purchase of inventory;
25,000 for building improvements and 15,000 to a shareholder. The Company also
issued 49,692 of Restricted C-2 Warrants at $4.00 for inventory purchases and
49,692 of Restricted D-2 Warrants at $8.00 for inventory purchases.
6
During the month of February, 2003 on various dates a total of 445,984 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: purchase of inventory and automobiles - 65,405
shares and outside services, consulting and advertising - 57,137 shares.
Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002
and Section 1145 of the Bankruptcy Code, the Company issued 300,000 shares of
unrestricted stock in return for a note receivable from a shareholder and 23,442
shares of stock for the conversion of Shareholder warrants. In addition, the
Company issued a total of approximately 75,000 Series B-2 Restricted Warrants at
$1.07 for the following reasons: 25,000 warrants for consulting and 50,000 for
the purchase of automobiles.
During the month of March, 2003 on various dates a total of 956,836 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: purchase of corporate headquarters building -
581,395 shares; purchase of inventory and automobiles - 264,309 shares and
outside services and consulting - 432 shares. Pursuant to ZAP's Confirmed Plan
of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the
Company issued 110,700 shares of restricted stock in return for a note
receivable from a shareholder. In addition, the Company issued a total of
approximately 355,000 Series B-2 Restricted Warrants at $1.07 for the following
reasons: 300,000 warrants for the purchase of the corporate headquarters
building, 30,000 for consulting and 25,000 for building improvements.
During the month of April, 2003 on various dates a total of 673,620 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: purchase of inventory and automobiles - 98,720
shares; outside services, consulting and advertising - 133,500 shares; and
issuance of 41,400 shares for cash. Pursuant to ZAP's Amended and Confirmed Plan
of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the
Company issued 400,000 shares of restricted stock in return for a note
receivable from a shareholder.
During the month of May, 2003 on various dates a total of 73,818 shares of stock
were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: exercise of an employee stock option - 25,000
shares; outside services, consulting and rent - 23,718 shares and issuance of
25,100 shares for cash.
During the month of June, 2003 on various dates a total of 265,828 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: purchase of inventory and automobiles - 19,227
shares; outside services, consulting and advertising - 11,800 shares and payment
of interest for short-term note payable - 30,000 shares. Pursuant to ZAP's
Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145
of the Bankruptcy Code, the Company issued 200,000 shares of unrestricted stock
in return for a note receivable from a shareholder, conversion of shareholder
warrants to stock - 4,000 shares and forgiveness of unsecured creditors debt for
stock - 801 shares. In addition, the Company issued approximately 5,000 Series
B-2 Restricted Warrants at $1.07 for consulting services.
During the month of July, 2003 on various dates a total of 197,752 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: purchase of inventory and automobiles - 52,676
shares; outside services, consulting and advertising - 143,076 shares and
payment for employee bonuses - 2,000 shares. In addition, the Company issued
approximately 300,000 Series B-2 Restricted Warrants at $1.07 in exchange for
cash.
During the month of August, 2003 on various dates a total of 916,110 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: purchase of inventory and automobiles (electric
car fleet in Las Vegas) - 226,418 shares; outside services, consulting and
advertising - 59,692 shares and issuance of 230,000 shares in exchange for cash.
Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002
and Section 1145 of the Bankruptcy Code, the Company issued 400,000 shares of
unrestricted stock in return for a shareholder's notes.
During the month of September, 2003 on various dates a total of 244,119 shares
of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act,
the Company issued the following: purchase of inventory and automobiles - 36,666
shares; outside services, consulting and advertising - 149,978 shares; payment
for employee bonuses - 1,500 shares and payment of rent - 55,975 shares. In
addition, the Company issued a total of approximately 24,000 Series B-2
Restricted Warrants at $1.07 for the following reasons: 10,000 warrants for
consulting and 14,000 for building improvements. The Company also issued 196,000
warrants at $1.50 for the purchase of electric automobiles (electric automobile
fleet-Las Vegas).
7
During the month of October, 2003 on various dates a total of 161,568 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: outside services, consulting and advertising -
89,991 shares; payments of rents - 50,000 shares; and payment of employee bonus
- 650 shares. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of
June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 20,927
shares of stock for the conversion of Shareholder warrants. In addition, the
Company issued a total of approximately 150,000 Series B-2 Restricted Warrants
at $1.07 for consulting services.
During the month of November, 2003 on various dates a total of 192,404 shares of
stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the
Company issued the following: outside services, consulting and advertising -
24,237 shares and payment for inventory and automobiles - 66,667 shares.
Pursuant to ZAP's Confirmed Plan of Reorganization of June 20, 2002 and Section
1145 of the Bankruptcy Code, the Company issued 1,500 shares of stock for the
conversion of Shareholder warrants and 100,000 shares of unrestricted stock for
a note receivable from a shareholder. In addition, the Company issued 100,000
Series B-2 Restricted Warrants to a cousin of the CEO for consulting services.
See Note 13 of the financial statements.
During the month of December, 2003 on various dates pursuant to ZAP's Amended
and Confirmed Plan of Reorganization of June 20, 2002 the Company issued 312
shares of the Company's preferred stock that is convertible into 338,650 common
stock shares, up to 30 days after issuance. No shares of common stock were
issued in December 2003. In addition, the Company issued approximately 235,000
Series B-2 Restricted Warrants at $1.07 for the following reasons: 210,000
warrants for consulting and 25,000 for web design services. The Company also
issued 300,000 of Restricted K-2 Warrants at $1.00. Both the CEO and Chairman
were each issued 150,000 of these warrants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE MADE PURSUANT TO THE SAFE HARBOR
PROVIDED IN SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS
AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, CONTINUED ACCEPTANCE OF THE
COMPANY'S PRODUCTS, INCREASED LEVELS OF COMPETITION FOR THE PRODUCTS AND
TECHNOLOGICAL CHANGES, THE COMPANY'S DEPENDENCE UPON THIRD PARTY SUPPLIERS,
INTELLECTUAL PROPERTY RIGHTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE
COMPANY'S PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
Management's discussion and analysis of results of operations and financial
condition are based on our financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates based on
historical experience and various other assumptions that are believed to be
reasonable under the circumstances, 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 under different assumptions or conditions.
Our company, ZAP, was incorporated in California in 1994 under the name "ZAP
Power Systems." We distribute electric vehicles, including electric automobiles,
electric scooters, electric bicycle power kits, electric bicycles, electric
motorcycles, and electric water scooters, and other personal electric and
non-electric transportation vehicles.
The Company sells its electric vehicles to retail customers, international
distributors, law enforcement agencies, electric utility companies, bicycle
dealerships, motorsport dealers, its dealers and mail order catalogs. Products
are also available for purchase on the Company's Internet site, which is
ZAPWORLD.COM. The Company sells to mail order catalogs and selected customers on
various credit terms. Many of the smaller dealerships are sold on a cash-on
-delivery basis. The Internet and retail sales are primarily paid for with a
credit card or personal check before shipment of the product.
The Company's overall goal is to dominate the personal electric vehicle industry
market. The Company's primary growth strategy is to increase net sales by
augmenting its marketing and sales force, by increasing distribution channels
through mass retail organizations and wholesale distributors both domestically
and overseas. We also intend to expand our electric vehicle dealerships
throughout the United States. Through the acquisition of RAP Group, Inc., the
Company has a proof of concept and showcase successful retailer of electric
vehicles. Strategic alliances with leaders in the industry are also of equal
importance, and these alliances will be broadened throughout the coming year.
7
The Company intends to function as a sales and marketing organization with any
manufacturing of its products done by overseas contract manufacturers. Product
improvements, new product introductions, and the expansion of the ZAP electric
outlet network will continue to enlarge ZAP's presence in the electric vehicle
industry.
SUMMARY OF KEY ACCOMPLISHMENTS DURING 2003
The Company completed the following transactions, acquisitions and strategic
alliances during the period of this report:
The Company purchased a three-story 20,000 square foot office building in
downtown Santa Rosa, California for $2.9 million in convertible debt, stock and
warrants. The new facility became the corporate headquarters of ZAP.
A $650,000 Financing agreement with Daka Development was signed by the Company
for inventory purchases; the terms were 50% Common stock and 50% in cash. Daka
had previously provided the Company with $500,000 of inventory financing last
year, which was also converted to equity.
The Company acquired a fleet of approximately 100 electric cars which are being
rented to the public at two locations on the main Casino strip in Las Vegas. The
purchase was completed in exchange for stock and warrants.
An exclusive agreement was signed by the Company to import nearly completed
electric automobiles from China. The new ZAPCAR (TM) is the first vehicle of its
kind to utilize an advanced drivetrain powered by an asynchronous AC motor
system delivering up to four times the horsepower of other models in its class.
A subsidiary of ZAP, Voltage Vehicles, signed an agreement with a European-based
group of companies involved in the design and manufacturing of electric
automobiles. The group started production on several different types of light
electric utility vehicles for urban transportation and commercial use, including
a 25 MPH neighborhood electric car that is now available. The ZAP LIGHT UTILITY
VEHICLE (LUV)(TM) is a new kind of automobile called a Neighborhood Electric
Vehicle (NEV). This new category of automobile was created for the many car
trips people take for inter-city transportation, planned communities, commercial
zones and tourist areas. The vehicle has speeds up to 25 mph, has room for two
and plugs into any normal household electric outlet. The LUV was selected as a
finalist for Tech-TV's best of the Consumer Electronic Show held in Las Vegas in
January 2003. ZAP is working to launch a ZAP "L.U.V.-Line" of electric
automobiles, which includes freeway-capable vehicles as well as vans, pickups
and tractors.
In the later part of the year, Voltage Vehicles, a subsidiary of ZAP, began
establishing electric vehicle dealerships with independent parties in various
geographic parts of the United States. The Company intends to expand this
network throughout the United States in the future.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Note: The results for 2003 include an entire year's activity for the RAP Group
Inc. and Voltage Vehicles while 2002 only includes activity for the newly
acquired companies of RAP Group Inc., and Voltage Vehicles as of July 1, 2002.
Since Voltage Vehicles is still in the development stage the majority of the
results of the combined ZAP are affected by RAP.
NET SALES increased by $1.4 million from $4.4 million in 2002 to $5.8 million
over the year ended December 31, 2003. The increase was primarily due to the
inclusion of twelve months of net sales for the RAP Group in 2003 while only six
months were recorded in 2002 (see above). Included in the 2003 net sales of $5.8
million were $3.7 million for RAP and $2.1 million for ZAP. The net sales for
ZAP increased by $300,000 from $1.8 million in 2002 to $2.1 million in 2003. The
primary reason for the increase was to increased shipments of SeaScooters.
GROSS PROFIT dollars increased by $1.1 million from $254,000 in 2002 to $1.3
million for the year-ended 2003.
8
Approximately $270,000 of the increase was primarily due to the inclusion of
twelve months of gross profit for the RAP Group in 2003 while only six months
were recorded in 2002 (see above). Included in the 2003 gross profit of $1.3
million was $906,000 for RAP and $389,000 for ZAP. Gross profit in 2003
increased over 2002 for both RAP and ZAP individually. The primary reason for
RAP's increase was sales of higher margin automobiles. ZAP's increase was due to
product mix with more shipments of higher margin SeaScooters in 2003.
SELLING expenses in 2003 were $1.0 million compared to $541,000 in 2002. RAP's
expenses were $222,000 in 2003. ZAP's expenses were $731,000 in 2003 versus
$349,000 in 2002. ZAP had an increase of $382,000 or 110% from 2002 to 2003. As
a percentage of sales, selling expenses increased from 12% of sales to 17%. The
increase was due to higher salaries, as the sales department was reorganized
with new employees hired in 2003. Also advertising and marketing expenses were
higher, as the result of more print media being used to promote the products.
GENERAL AND ADMINISTRATIVE expenses for 2003 were $4.7 million as compared to
$2.3 million in 2002. RAP's portion of the expenses were $1.4 million in 2003.
For ZAP, the expenses increased $1.0 million from $2.0 million in 2002 to $3.0
million in 2003. As a percentage of sales, general and administrative expenses
increased from 52% to 81%. The major items that contributed to the increase were
higher consulting services to promote the Company's stock and higher salaries
and benefits, where 2003 represents a full year for the new hires of 2002. In
addition, the Company also had an increase in legal and professional fees during
2003.
RESEARCH AND DEVELOPMENT expenses decreased from $30,000 in 2002 to no major
expenses in 2003. Since ZAP has transitioned from a manufacturing to a sales
marketing organization, R&D expenses have decreased.
IMPAIRMENT OF INTANGIBLES was $375,000 in 2003 versus $50,000 in 2002. The
increase was due to a writedown of RAP's goodwill.
INTEREST EXPENSE, net increased from $12,000 in 2002 to $108,000 in 2003. The
primary reason for the increase was interest accrued on the note payable of $2
million to purchase the Company's corporate headquarters in March of 2003.
Allowance for notes receivable to shareholders is due to the doubtful collection
of notes receivable from two investors. The Company has engaged an attorney to
collect on the notes since the makers have not met the required payment terms or
collateral requirements.
REORGANIZATION EXPENSES decreased in 2003 since the Company completed its
reorganization in June of 2002.
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash from operations of $625,000 and $307,000 during the years
ended December 31, 2003 and 2002, respectively.
Cash used in operations in 2002 was the result of the net loss incurred for the
year of $2.8 million, offset by net non-cash income of $492,000 and the net
change in operating assets and liabilities resulting in a cash increase of $1.8
million. The increase in cash was due to a decrease in accounts receivable of
$903,000 and a decrease in inventory of $875,000. Investing activities used cash
of $29,000 during the year ended 2003. Investing activities used cash for the
purchase of fixed assets. In the year ended December 31, 2002, investing
activities used cash of $204,000, which was also for the purchase of fixed
assets.
Financing activities provided cash of $855,000 for the year ended December 31,
2003 and used cash of $19,000 during the year ended December 31, 2002.
At December 31, 2003 the Company had cash of $ 551,000 as compared to $350,000
at December 31, 2002. The Company's working capital at December 31, 2003 was
$687,000 compared to $1,554,000 at December 31, 2002. The decrease in working
capital is primarily due to funding of ongoing corporate operations.
9
The Company has recorded notes receivable from shareholders of $864,170, less a
reserve of $697,200 resulting in a net due of $166,970 at December 31, 2003. The
notes were given to the Company by three shareholders in exchange for restricted
and unrestricted common stock. Reserves were established for two of the
shareholders, and one has not met the agreed upon payment terms and the other
shareholder has not assigned collateral as required by the notes. The Company
has hired an attorney to pursue collection from the shareholders.
In March of 2003, the Company purchased a three-story 20,000 square foot office
building in downtown Santa Rosa for $2.9 million in convertible debt, stock and
warrants. The building is the corporate headquarters of the Company. Terms of
the transaction included a convertible promissory note for $2 million payable
over 22 years with interest only for the first two years. No payments of
interest are due until after two years. At that time, the payee has the option
to convert some or all of the unpaid principal and accrued interest to shares of
ZAP's common stock at an agreed upon conversion price. The seller also received
a certain amount of common stock and warrants in connection with the
transaction.
In order to finance our working capital requirements, we are currently seeking
both debt and equity investments with several investors, but there can be no
assurances that we will obtain this capital or that it will be obtained on terms
favorable to us. We do not have a bank 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 the Company's shares.
In addition to the above working capital needs, our other capital needs are to
fund our growth strategy, which includes increasing our shopping mall presence,
improving and increasing distribution channels, establishing company owned and
franchised ZAP stores, expanding our electric vehicle dealerships, introducing
new products, improving existing product lines, and developing a strong
corporate infrastructure.
SEASONALITY AND QUARTERLY RESULTS
Our business is subject to seasonal influences. Sales volumes in our industry
typically slow down during the winter months, November to March, in the U.S. As
we are marketing worldwide, we are not impacted 100% by U.S. seasonality.
INFLATION
Our raw materials and finished products are sourced from stable,
cost-competitive industries. As such, we do not foresee any material
inflationary trends for our raw materials and finished goods sources.
GOODWILL
Goodwill consists of the excess consideration paid over net assets acquired.
Impairment of goodwill is evaluated whenever a triggering event is encountered.
The impaired value is determined by reference to cash flows anticipated from
estimated proceeds from selling the related technology and/or sales of products
directly linked to the technology and assets that gave rise to the goodwill.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management of the
Company to make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as revenues and expenses during
the reporting period. The amounts estimated could differ from actual results.
10
Risks Related to Our Business
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 electric vehicles could cause our products to become obsolete
or lose popularity. We cannot assure you that growth in the electric vehicle
industry will continue and our business may suffer if growth in the electric
vehicle industry ceases 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. 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.
ITEM 7. FINANCIAL STATEMENTS.
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. F-1
FINANCIAL STATEMENTS
Consolidated Balance Sheet.......................................... F-2
Consolidated Statements of Operations............................... F-3
Consolidated Statement of Shareholders' Equity...................... F-4
Consolidated Statement of Cash Flows................................ F-5
Notes to Consolidated Financial Statements.......................... F-6
11
To the Board of Directors
and Shareholders of ZAP
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheet of ZAP and its
subsidiaries as of December 31, 2003, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of ZAP and its
subsidiaries at December 31, 2003, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has suffered recurring operating losses and negative cash flows from operations,
and has an accumulated deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Odenberg, Ullakko, Muranishi & Co. LLP
San Francisco, California
March 26, 2004
F-1
ZAP AND SUBSIDIARIES
--------------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 2003
-----------------
(In thousands, except share data)
ASSETS
------
Current assets:
Cash and cash equivalents $ 551
Accounts receivable, net of allowance of $698 315
Inventories 1,428
Prepaid expenses and other current assets 458
------------
Total current assets 2,752
Property and equipment, net 3,631
Other assets:
Patents and trademarks, net 187
Goodwill 476
Deposits and other 108
------------
$ 7,154
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 88
Accounts payable 538
Accrued liabilities 1,149
Deferred revenue 290
------------
Total current liabilities 2,065
------------
Long-term debt, less current portion 2,055
------------
Total Liabilities 4,120
------------
Commitments and contingencies
Shareholders' equity:
Preferred stock; 50 million shares authorized; no par value;
312 shares issued and outstanding 165
Common stock; 100 million shares authorized; no par value;
13,228,206 shares issued and outstanding 26,455
Notes receivable from shareholders, net (167)
Accumulated deficit (23,419)
------------
Total shareholders' equity 3,034
------------
$ 7,154
============
See accompanying notes to consolidated financial statements.
F-2
ZAP AND SUBSIDIARIES
--------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(In thousands; except per share data)
Year ended December 31
-------------------------
2003 2002
---------- ----------
Net sales $ 5,828 $ 4,413
Cost of goods sold 4,497 4,159
---------- ----------
Gross profit 1,331 254
---------- ----------
Operating expenses:
Sales and marketing (non-cash of $213 and $0 in
2003 and 2002, respectively) 998 541
General and administrative (non-cash of $1,425
and $182 in 2003 and 2002, respectively) 4,678 2,302
Research and development 1 30
Impairment write-off 375 50
---------- ----------
Total operating expenses 6,052 2,923
---------- ----------
Loss from operations (4,721) (2,669)
---------- ----------
Other income (expense):
Interest expense (non-cash of $18 and $0 in 2003
and 2002, respectively) (108) (12)
Other income 14 39
Allowance for notes receivable to shareholders (697) --
---------- ----------
(791) 27
Loss before reorganization fees, extraordinary
gain and income taxes (5,512) (2,642)
Reorganization fees 28 170
---------- ----------
Loss before extraordinary gain and income taxes (5,540) (2,812)
Provision for income taxes 2 2
---------- ----------
Loss before extraordinary gain (5,542) (2,814)
Extraordinary gain -- 3,964
---------- ----------
Net income (loss) $ (5,542) $ 1,150
========== ==========
Loss per share before extraordinary gain:
Basic and Diluted $ (0.49) $ (0.69)
Earnings (loss) per share:
Basic $ (0.49) $ 0.28
Diluted $ (0.49) $ 0.17
Weighted average number of common shares outstanding:
Basic 11,246 4,051
Diluted 11,246 6,945
See accompanying notes to consolidated financial statements.
F-3
ZAP AND SUBSIDIARIES
--------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
----------------------------------------------
(In thousands)
Convertible
preferred stock Common stock Receivable
--------------------- ---------------------- from Accumulated
Shares Amount Shares Amount Shareholders Deficit Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2001 2 $ 1,133 1,103 $ 18,101 $ -- $ (19,001) $ 233
Issuance of common stock:
Employee stock purchase plan 12 14 14
Reverse accrued dividends 267 (26) 241
Repurchase of Ridgewood stock (104) (1,500) (1,500)
Preferred stock conversion (2) (1,133) 630 1,133 --
Ridgewood stock note
conversion 995 199 199
Rap and Voltage Vehicles
acquisition 4,500 1,580 1,580
Stock issued for Daka note 1,176 500 500
Conversion of unsecured
creditor's debt to stock 295 236 236
Stock issued for professional
services and equipment 351 325 325
Exercise of with warrants 32 34 34
Net income -- -- -- -- -- 1,150 1,150
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2002 -- -- 8,990 20,889 -- (17,877) 3,012
Issuance of common stock:
Purchase building and
improvements 581 993 993
Acquisition of rental car fleet 327 490 490
For inventory, equipment
and services 1,678 1,811 1,811
Stock issued for cash 594 671 671
Exercise of warrants and
options 101 114 114
For notes receivable 892 864 (167) 697
Debt converted to common stock 65 78 78
Fair value of warrants issued
for services 545 545
Issuance of preferred stock: --
For cash 0.10 50 50
For equipment 0.01 6 6
For services 0.20 109 109
Net loss -- -- -- -- -- (5,542) (5,542)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 0.31 $ 165 13,228 $ 26,455 $ (167) $ (23,419) $ 3,034
========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
ZAP AND SUBSIDIARIES
--------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(In thousands)
Year ended December 31
--------------------------
2003 2002
---------- ----------
Operating activities:
Net income (loss) $ (5,542) $ 1,150
Items not requiring the current use of cash:
Depreciation and amortization 370 260
Loss on disposal of fixed asset 85 --
Impairment of intangibles 375 50
Extraordinary gain on debt forgiveness -- (3,964)
Allowance for notes receivable 697 --
Stock and warrants issued for goods
and services 1,454 182
Amortization of note discount 89 --
Changes in other items affecting operations:
Accounts receivable 89 903
Inventories 788 875
Prepaid expenses (1) 36
Other assets (87) 83
Accounts payable 40 238
Accrued liabilities 728 (120)
Deferred revenue 290 --
---------- ----------
Cash used for operating activities (625) (307)
---------- ----------
Investing activities:
Acquisition of property and equipment (29) (204)
---------- ----------
Cash used for investing activities (29) (204)
---------- ----------
Financing activities:
Issuance of common stock 671 --
Issuance of common stock under employee
purchase plan 8 14
Exercise of warrants and options 106 34
Proceeds from debt 228 --
Payments on long-term debt (158) (29)
---------- ----------
Cash provided by financing activities 855 19
---------- ----------
Increase (decrease) in cash and cash equivalents 201 (492)
Cash and cash equivalents at beginning of year 350 842
---------- ----------
Cash and cash equivalents at end of year $ 551 $ 350
========== ==========
See accompanying notes to consolidated financial statements.
F-5
ZAP AND SUBSIDIARIES
--------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - ORGANIZATION AND OPERATIONS:
ZAP (the "Company" or "ZAP"), was incorporated in California in September, 1994.
ZAP markets many forms of advanced transportation, including electric
automobiles, motorcycles, bicycles, scooters, personal watercraft, neighborhood
electric vehicles, commercial vehicles and more. Additionally, the Company
produces an electric scooter, known as the ZAPPY(R), using parts manufactured by
various contractors. The Company has also established a rental program to rent
neighborhood electric cars, primarily through agencies.
The Company's business strategy has been to develop, acquire and commercialize
electric vehicles and electric vehicle power systems, which have fundamental
practical and environmental advantages over available internal combustion modes
of transportation that can be produced commercially on an economically
competitive basis. In 2003, the Company continued to enhance and broaden its
electric vehicle product line.
On March 1, 2002 the Company filed a voluntary petition for reorganization under
Chapter 11 of the U. S. Bankruptcy Code with the U.S. Bankruptcy Court. On June
20, 2002, the Company emerged from Chapter 11 proceedings (see Note 3).
Basis of presentation
---------------------
For the year ended December 31, 2003, the Company incurred a loss from
operations of $5.5 million and cash used in operating activities was $625,000.
In 2002, the Company also incurred substantial operating losses and negative
cash flows from operations. Based upon the Company's operating budget and cash
flow projections, the Company expects to continue to experience negative cash
flows from operations through 2004.
The recurring losses and expected continued negative cash flows from operations
raise substantial doubt about the Company's ability to continue as a going
concern.
Management believes the Company will be able to raise sufficient working capital
to fund its operating plan at least through 2004. During the period from January
1, 2004 to March 26, 2004, the Company has raised $460,000 through the sale of
preferred stock. The Company has received a funding proposal letter. The
proposal calls for the investor to make a $2 million dollar equity investment
and provide an $8 million convertible revolving line of credit to purchase
vehicles. The Company has not closed on the proposal as of yet and is also
considering other alternatives. There can be no assurance that the foregoing
proposed financing, or other necessary financing, will be available, or if it is
available, that it would be available on acceptable terms.
A summary of significant accounting policies is as follows:
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of ZAP,
RAP Group, Voltage Vehicles, ZAP Rentals and ZAP Stores for the years ended
December 31, 2003 and 2002. All subsidiaries are 100% owned by ZAP. All
significant intercompany transactions and balances have been eliminated.
F-6
Revenue recognition
-------------------
The Company records revenues only upon the occurrence of all of the following
conditions:
o The Company has received a binding purchase order or similar
commitment from the customer or distributor authorized by a
representative empowered to commit the purchaser (evidence of a sale).
o The purchase price has been fixed, based on the terms of the purchase
order.
o The Company has delivered the product from its distribution center to
a common carrier acceptable to the purchaser. The Company's customary
shipping terms are FOB shipping point.
o The Company deems the collection of the amount invoiced probable.
The Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances.
Extraordinary gain on forgiveness of debt
-----------------------------------------
Under ZAP's confirmed plan of reorganization, a $3 million note payable was
converted to common stock (see Note 3). This transaction resulted in the Company
recognizing an extraordinary gain of approximately $2.9 million. The remainder
of the extraordinary gain of $1.1 million was due to the cancellation of
indebtedness to unsecured creditors. Also, in accordance with ZAP's confirmed
plan of reorganization, certain unsecured creditors have elected to receive
common stock rather than cash for their claims. The confirmed plan of
reorganization also provides for a twelve-month period following June 20, 2002
for the unsecured creditors to still elect to receive equity. Those unsecured
creditors that elected to receive cash will share in a fund of $300,000 which is
payable over three years, with each creditor receiving their pro-rata share (see
Note 7).
Deferred revenue
----------------
During 2003, one of the Company's subsidiaries, Voltage Vehicles, began
licensing auto dealerships under the ZAP name. The license agreements call for
the licensee to purchase a minimum number of electric vehicles from ZAP each
year. The Company collected $290,000 related to these agreements, which is
classified as deferred revenue until such time as the Company begins delivering
electric vehicles to these dealerships.
Allowance for doubtful accounts
-------------------------------
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at December 31, 2003 and 2002. If the
F-7
financial condition of the Company's customers should deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. The Company maintains
the majority of its cash balances with a major financial institution. At times
the balances may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Inventories
-----------
Inventories consist primarily of vehicles, raw materials, and finished goods,
which are carried at the lower of cost (first-in, first-out method) or market.
Property and equipment
----------------------
Property and equipment is stated at cost and is depreciated or amortized using
straight-line and accelerated methods over the asset's estimated useful life.
Costs of maintenance and repairs are charged to expense as incurred; significant
renewals and betterments are capitalized. Estimated useful lives are as follows:
Machinery and equipment 3-7 years
Computer equipment and software 3-5 years
Office furniture and equipment 3-7 years
Vehicles 5 years
Leasehold improvements 15 years or life of lease, whichever is shorter
Building 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. Amortization expense for
the years ended December 31, 2003 and 2002 was approximately $67,000 and
$38,000, respectively.
Goodwill
--------
Goodwill results primarily from the Company's acquisition of the RAP Group Inc.,
and Voltage Vehicles in 2002 (See Note 2).
F-8
The Company tests for goodwill impairment annually in December, absent earlier
indicators of impairment. The valuation of goodwill is based on the Company's
discounted projected cash flows of the RAP Group Inc., Voltage Vehicles and EMC.
The valuation of goodwill related to RAP and EMC indicated that the fair value
of goodwill at December 31, 2003 was less than its carrying value. Accordingly,
the Company recorded a goodwill impairment charge of approximately $375,000 and
$50,000 in 2003 and 2002 respectively.
Goodwill consists of the following (in thousands):
December 31,
2003
----
RAP $200
Voltage Vehicles 276
----
$476
====
Advertising
-----------
The cost of advertising is expensed as incurred. Advertising and marketing
expenses amounted to $552,000 and $162,000 in the years ended December 31, 2003
and 2002, respectively.
Warranty
--------
The Company provides for estimated future warranty costs upon product shipment.
The specific terms and conditions of those warranties vary depending upon the
product sold and range from 30 to 90 days. The estimated cost of warranties
has not been significant to date.
Changes in the Company's warranty liability, which is included as a component of
"Accrued expenses" on the Balance Sheet, during the year ended December 31, 2003
are as follows (in thousands):
Balance as of December 31, 2002 $ 32
Provision for warranty liability for sales during the year 10
Settlements made during the year (16)
-----
Balance as of December 31, 2003 $ 26
=====
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.
F-9
Income taxes
------------
The Company accounts for income taxes using an asset and liability method for
financial accounting and reporting purposes. Deferred income tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities, and operating loss and tax credit
carryforwards and are measured using the currently enacted tax rates and laws.
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.
Fair value of financial instruments
-----------------------------------
For the Company's financial assets and short-term liabilities, including cash
and 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.
Stock-based compensation
------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, establishes a fair-value method of
accounting for stock options and similar equity instruments. The fair-value
method requires that compensation cost be measured on the value of the award at
the grant date, and recognized over the service period. SFAS No. 123 as amended
allows companies to either account for stock-based compensation to employees
under the provisions of SFAS No. 123 as amended or under the provisions of
Accounting Principles Board (APB) Opinion No. 25 and its related
interpretations. The Company accounts for its stock-based compensation to
employees in accordance with the provisions of APB Opinion No. 25.
The Company has recorded deferred compensation for the difference, if any,
between the exercise price and the deemed fair market value of the common stock
for financial reporting purposes of stock options granted to employees. The
compensation expense related to such grants is amortized over the vesting period
of the related stock options on a straight-line basis.
F-10
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues
Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
2003 2002
============ ============
Net income (loss) attributable to common
stockholders, as reported $ (5,542) $ 1,150
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (368) (304)
------------ ------------
Pro forma net income (loss) attributable to common
stockholders $ (5,910) $ 846
============ ============
Net (loss) per share attributable to common
stockholders:
As reported $ (0.49) $ 0.28
============ ============
Pro forma (0.53) 0.17
============ ============
Net income (loss) per share attributable to common stockholders
----------------------------------------------------------------
Basic net loss per share is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic net loss per share attributable to
common stockholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of options and warrants to
the extend they are dilutive using the treasury stock method. The weighted
average shares used in computing basic and diluted net loss per share
attributable to common stockholders were the same for the two years ended
December 31, 2003 and 2002. Options and warrants for 1,650,000 shares and
33,209,000 shares convertible preferred stock of 339,000 and convertible debt of
930,000 were excluded from the computation of loss per share at December 31,
2003 and 2002, respectively, as their effect is anti-dilutive.
Reclassifications
-----------------
Certain previously reported amounts in the financial statements have been
reclassified to conform to the current year presentation.
Recent accounting pronouncements
--------------------------------
In December 2003, the Financial Accounting Standard Board issued SFAS No. 132
(Revised 2003), Employers' Disclosures about Pensions and Other Postretirement
Benefits. This Statement amends Statements No. 87, Employers' Accounting for
Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions. However,
the Statement does not change the recognition and measurement requirements of
those Statements. This Statement retains the disclosure requirements contained
in SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces and requires additional disclosure. Additional new
disclosure includes actual mix of plan assets by category, a description of
investment strategies and policies used, a narrative description of the basis
for determining the overall expected long-term rate of return on asset
assumption and aggregate expected contributions. The Company does not expect
that the adoption of SFAS 132 will have a material affect on its financial
statements.
F-11
In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The Statement
improves the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. The new Statement requires that
those instruments be classified as liabilities in statements of financial
position. This statement is effective for interim periods beginning after June
15, 2003. The Company does not expect that the adoption of SFAS 150 will have a
material effect on its financial positions.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS 133. In particular, this
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative and when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. This Statement is generally effective for contracts entered into
or modified after June 30, 2003 and is not expected to have a material impact on
the Company's financial statements.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51. FIN 46 provides guidance on how to apply the controlling financial
interest criteria in ARB 51 to variable interest entities ("VIE"). Given the
complexity of FIN 46 and implementation issues after its original issuance,
particularly with respect to its scope and application of the consolidation
model, the FASB staff issued several FASB staff positions throughout 2003 to
clarify the Board's intent on certain of the interpretation's provisions. In
December 2003, the Board issued FIN 46R to address certain technical corrections
and clarify the implementation issues that had arisen.
In general, a VIE is subject to consolidation if it has (1) an insufficient
amount of equity for the entity to carry on its principal operations without
additional subordinated financial support provided by any parties, (2) a group
of equity owners that are unable to make decisions about the entity's activities
or (3) equity that does not absorb the entity's losses or receive the entity's
benefits. Variable interest entities are to be evaluated for consolidation based
on all contractual, ownership or other interests that expose their holders to
the risks and rewards of the entity. These interests may include equity
investments, loans, leases, derivatives, guarantees, service and management
contracts and other instruments whose values change with changes in the VIE. Any
of these interests may require its holder to consolidate the entity. The holder
of a variable interest that receives the majority of the potential variability
in gains or losses of the VIE is the VIE's primary beneficiary and is required
to consolidate the VIE. FIN 46R became effective immediately for entities
created after January 31, 2003. It applies in the first fiscal year or interim
period beginning after December 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before February 1,
2003. The Company has determined that the adoption of the provisions of FIN 46
will not have an impact upon its financial condition or results of operations.
F-12
NOTE 2 - ACQUISITION OF NEW BUSINESSES
Acquisition of auto dealerships
-------------------------------
The Company completed an acquisition of Voltage Vehicles ("VV") and RAP Group,
Inc. ("RAP") on July 1, 2002. VV and RAP became wholly owned subsidiaries of the
Company through a purchase from the equity shareholders of Voltage Vehicles and
RAP Group, Inc. all of the shares of VV and RAP in exchange for 4,500,000
(post-split) shares of the Company, as follows: 500,000 shares of the Company to
the equity shareholders of VV and 4,000,000 shares to the shareholders of RAP.
The equity shareholders of VV and RAP also received, for each common share of
the Company issued to them, four warrants (one in Series B, Series C, Series D,
and Series K) to purchase common stock in Reorganized ZAP. In connection with
its acquisition of RAP and VV, the Company recorded goodwill or the excess of
the purchase price over the net assets acquired of approximately $525,000 and
$276,000 for RAP and VV, respectively. The Company obtained an independent
appraisal of the fair value of the tangible and intangible assets acquired in
order to record and allocate the purchase price in accordance with Financial
Accounting Standards Board 141, "Business Combinations."
The purchase price was allocated as follows (thousands):
Voltages
RAP Group, Inc. Vehicles
--------------- --------
Accounts receivable $ 630 $ 5
Inventory 442 129
Property and equipment 24 --
Goodwill 525 276
Liabilities assumed (221) (235)
------ ------
$1,400 $ 175
====== ======
VV is a Sonoma County-based Nevada Corporation with exclusive distribution
contracts for advanced transportation in the independent auto dealer network,
including rights to one of the only full-performance electric cars certified
under federal safety standards. RAP owns an auto dealership focused on the
independent automotive and advanced technology vehicle markets. As a Voltage
Vehicles authorized dealer, RAP showcases an array of advanced transportation at
its dealership in Fulton, California.
The results of operations of RAP and Voltage Vehicles are included in the
accompanying financial statements from the date of acquisition, July 1, 2002.
The following summarized unaudited pro forma financial information assumes the
acquisition occurred on January 1 of 2002:
F-13
Year ended
December 31
-----------
2002
-----------
Net sales $ 8,397
Loss before extraordinary gain (2,627)
Loss per share before extraordinary gain (0.65)
The pro forma results do not necessarily represent results which would have
occurred if the acquisition had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
Neighborhood electric vehicle rental program
--------------------------------------------
ZAP established ZAP Rentals in 2002 to rent neighborhood electric vehicles
throughout California. In September 2003, ZAP purchased 98 rental cars for
326,644 shares of ZAP common stock valued at $1.50 per share (See Note 5 and
12). Neighborhood electric cars are a new category of 25 MPH automobiles
designed for short trips in urban areas, planned communities, commercial zones
or tourist districts. The smaller, low-speed electric cars are a new alternative
in places concerned with air and noise pollution, high fuel prices, traffic
congestion or parking shortages.
NOTE 3 - PLAN OF REORGANIZATION
On March 1, 2002 the Company filed a voluntary petition for reorganization under
Chapter 11 of the U. S. Bankruptcy Code with the U.S. Bankruptcy Court. The
first impact of the Chapter 11 filing was to stay certain legal proceedings that
had been instituted against the Company. Management also believed that the
Chapter 11 filing would allow the Company to reorganize and rethink its
direction, and to seek debtor-in-possession financing.
On June 20, 2002, the Bankruptcy Court entered an order confirming a second
amended plan of reorganization (the "confirmed plan of reorganization").
The primary objectives of the confirmed plan of reorganization are to: (a) alter
the Company's equity and debt structures to permit the Company to emerge from
the reorganization proceedings with a viable capital structure; (b) maximize the
value of the ultimate recoveries to all creditor groups on a fair and equitable
basis; and (c) settle, compromise, or otherwise dispose of certain claims and
interests on terms that the Company believed to be fair and reasonable and in
the best interests of their respective estates, creditors, and stakeholders. The
confirmed plan of reorganization provides for, among other things:
o The cancellation of certain indebtedness in exchange for cash, common
stock, no par value, in Reorganized ZAP, and/or warrants to purchase shares
of common stock. The warrants were issued to each claimant during 2002;
o Payment of $50,000 to a claimant of secured pre-petition debt. $50,000 is
the estimated value of the collateral, plus 5% interest on a declining
balance, payable monthly over three years, commencing August 20, 2002;
F-14
o Conversion of 2,250 shares of ZAP preferred stock, originally valued at
$1,000 per share, into 630,000 shares of common stock in Reorganized ZAP
after all reverse stock splits. The preferred shareholders also received
2.5 million Series A warrants, to vest in accordance with a schedule
outlined in the Plan and one warrant in Series B, C and D to purchase
common stock in the Reorganized ZAP for each common share issued to the
claimant;
o Conversion of 6,693,643 shares of ZAP at June 20, 2002 into 1,115,607
shares of common stock in the Reorganized ZAP, after all reverse stock
splits. The common shareholders also received one warrant in Series B, C
and D to purchase common stock in the Reorganized ZAP for each common share
issued to the claimant;
o The assumption and assignment, or rejection of executory contracts or
unexpired leases to which the Company was a party;
o Authorization to issue 100 million shares of common stock and 50 million
shares of preferred stock.
o Authorization to issue 10 million common shares each for the following
warrants: Series A, B, C, D and K for a total of 50 million warrants, with
the expiration dates for the warrants ranging from 12 to 36 months;
O The creation of an Incentive Stock Option Plan for employees within the
meaning of Section 423 of the Internal Revenue Code of 1986, as amended,
with an option by the Incentive Stock Option Plan to purchase 10 million
shares of ZAP common stock at an exercise price equal to the closing price
on the date of issue (see Note 9);
o Authorization to execute a $500,000 convertible debenture for the
purchase of inventory from a new supplier in exchange for a note with
interest at 6% per annum; or shares of common stock at $0.50 per share or
15% of the outstanding shares of the Reorganized ZAP, whichever amount is
greater. The supplier was also given warrants in Series B, C and D for each
common share owned (The entire debt was converted to common stock during
2002; see Note 12).
o Authorization to complete the acquisition of VV and RAP effective July 1,
2002 (see Note 1).
NOTE 4 - INVENTORIES
Inventories at December 31, 2003 are summarized as follows (thousands):
Vehicles $ 733
Raw material 338
Finished goods 734
------------
1,805
Less - inventory reserve 377
------------
$ 1,428
============
F-15
Inventory reserve policy
------------------------
The Company records inventory at the lower of cost or market and establishes
reserves for slow moving or excess inventory, product obsolescence and valuation
impairment. In determining the adequacy of its reserves, at each reporting
period the Company analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecasted sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to the Company's estimates of its reserves are reflected in
cost of goods sold within the Statement of Operations during the period in which
such modifications are determined by management. Changes in the Company's
inventory reserve during the year ended December 31, 2003 is as follows (in
thousands):
Balance as of December 31, 2002 $ 589
Provision for slow moving inventory 141
Write-off of slow moving inventory (353)
-------
Balance as of December 31, 2003 $ 377
=======
F-16
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 are summarized as follows
(thousands):
Land $ 260
Building and improvements 2,668
Machinery and equipment 494
Computer equipment and software 319
Office furniture and equipment 178
Leasehold improvements 89
Vehicles available for rent 475
Other vehicles 148
------------
4,631
Less - accumulated depreciation and amortization 1,000
------------
$ 3,631
============
The land and building and certain equipment, with a net book value of $2,857,000
at December 31, 2003, are pledged as security for certain indebtedness (see Note
7).
Depreciation and amortization expense for the years ended December 31, 2003 and
2002 was approximately $289,000 and $222,000, respectively.
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities at December 31, 2003 consisted of the following (in
thousands):
Professional and legal fees $ 697
Advances 100
Customer deposits 76
Sales and use tax 37
Warranty 26
Payroll 23
Other 190
------------
$ 1,149
============
F-17
NOTE 7 - LONG-TERM DEBT
The Company has a $2 million in convertible note due in 22 years, with annual
interest at 2% for the first two years, and thereafter at the prime rate (as
defined) plus 2%. No payments are due until after two years, 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 Company recorded a
discount to the face value of the note of approximately $150,000 and is
amortizating the discount over the term of the note using the interest method.
The note discount was recorded to reflect value of the below market interest
during the first two years and the value of the warrants (warrants to purchase
250,000 shares of common stock at $1.07 per share) issued to the seller. The
warrants were valued at the date of issuance at $.65 per share using the Black
Scholes option-pricing model with the following assumptions: expected dividends
yield 0%, risk-free interest rate of 2%, the contractual life of 1.25 years and
volatity of 160%. 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 net balance of $1,939,000 at December 31, 2003 ($2 million note, less the
discount of $91,000 plus accrued interest of $30,000).
The Company's debt also consisted of approximately $147,000 in notes payable to
unsecured creditors as a result of the confirmed plan of reorganization (see
Note 3). These notes bear interest at 5% per annum and have an annual
distribution on June 1 of approximately 1/3 the original balance plus accrued
interest. The current portion of these notes is approximately $60,000.
Long-term debt also consists of a several note payable secured by equipment
totaling $55,000. These notes bear interest ranging from 5% to 18% per annum and
have monthly payments of approximately $3,200 with maturities from July 2005 to
November 2006.
Scheduled annual maturities for long-term debt for years ending after December
31, 2003 are as follows: $77,000 - 2004; $153,000 - 2005; $67,000 - 2006;
$60,000 - 2007; $64,000 - 2008 and $1,812,000 - thereafter.
NOTE 8 - INCOME TAXES
The provision for income tax for 2003 and 2002 represents minimum California
franchise tax. The Company made no provision for income taxes on the
extraordinary gain resulting from the extinguishment of debt in 2002 (see Notes
1 and 3), due to the relevant tax regulations governing the treatment of debt
extinguishment income in Chapter 11 bankruptcy proceedings.
A reconciliation of the provision for income tax expense with the expected
income tax is computed by applying the federal statutory income tax rate
follows:
F-18
Year ended December 31
-------------------------
2003 2002
---------- ----------
Expected federal statutory rate (34.00%) (34.00%)
State, net of federal benefit (5.84%) (5.84%)
Other, net (.50%) (.30%)
Net operating loss carryforward 40.33% 40.13%
---------- ----------
Effective tax rate (0.01%) (0.01%)
========== ==========
Significant components of the Company's deferred tax assets at December 31, 2003
consist of the following (thousands):
Deferred tax assets:
Net operating loss carryforwards $ 5,219
Inventory capitalization 275
Depreciation and amortization 9
Other accruals and allowances 278
Tax credits 44
----------
Total deferred tax asset 5,825
Valuation allowance (5,825)
----------
Net deferred tax asset $ --
==========
The Company has available for carryforward approximately $14.5 million and $4.9
million of federal and state net operating losses, respectively, expiring
through 2017 for federal purposes and 2008 for state purposes. The Tax Reform
Act of 1986 and the California Conformity Act of 1987 impose restrictions on the
utilization of net operating losses in the event of an "ownership change" as
defined by Section 382 of the Internal Revenue Code. There has been no
determination whether an ownership change, as defined, has taken place, or the
extent of any limitation on the use of the net operating loss carryforwards.
Because of the uncertainty regarding the Company's ability to realize its
deferred tax assets, a 100% valuation allowance has been established. The
valuation allowance for the year ended December 31, 2003 increased $1,994,000
and decreased $1,435,000 for the year ended December 31, 2002.
NOTE 9 - EMPLOYEE STOCK OPTIONS
During 2002 as part of the confirmed plan of reorganization, ZAP created a new
Incentive Stock Option Plan ("2002 Plan").
Options to purchase common stock are granted by the Board of Directors under two
Stock Option Plans, referred to as the 2002 and 1999 plans. Options granted may
be incentive stock options (as defined under Section 422 of the Internal Revenue
Code) or nonstatutory stock options. The numbers of shares available for grant
under the 2002 and 1999 Plans are 10,000,000 and 1,500,000 respectively. Options
are granted at no less than fair market value on the date of grant. Options
granted in 2003 and 2002 generally become exercisable as they vest over a three
year period, and expire ten years after the date of grant.
F-19
Option activity under the 2002 and 1999 plans is as follows (thousands):
2002 Plan 1999 Plan
-------------------- --------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
--------- -------- --------- --------
Outstanding at January 1, 2002 -- -- 282 1.20
Granted 1,908 $ 0.32 -- --
Exercised -- -- -- --
Canceled (117) 1.20
--------- -------- --------- --------
Outstanding at December 31, 2002 1,908 $ 0.32 165 1.20
Granted 462 0.76
Exercised (25) 0.30
Canceled (855) 0.67 (4) 1.20
--------- ---------
Outstanding at December 31, 2003 1,490 $ 0.38 161 $ 1.20
========= =========
The weighted average fair value of options granted during the years ended
December 31, 2003 and 2002 was $0.50 and $0.32, respectively.
The following information applies to options outstanding at December 31, 2003:
2002 Plan 1999 Plan
------------- -------------
Range of exercise prices $0.30 - $1.20 $1.20
Weighted average remaining life (years) 3.6 4
Options exercisable 656,000 182,500
Weighted average exercise price $0.38 $1.20
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
F-20
2003 2002
-------- --------
Dividends None None
Expected volatility 160% 200%
Risk free interest rate 2.75% 4.0%
Expected life 5 years 5 years
At December 31, 2003, the Company has outstanding stock options for employees to
purchase 1,270,000 shares, for directors to purchase 541,000 shares, at exercise
prices ranging from $0.30 to $1.20.
NOTE 10 - MAJOR CUSTOMERS
During 2003 and 2002, no single customer accounted for more than 10% of the
Company's net sales, nor receivables.
NOTE 11 - COMMITMENTS
The Company presently rents its warehouse under an operating lease that expires
in 2005. The monthly rent is adjusted annually to reflect the average percentage
increase in the Consumer Price Index. The Company leases the location of its car
outlet and another warehouse from the Company's CEO (see Note 13). Rent expenses
under all leases were approximately $241,186 and $145,000 in 2003 and 2002,
respectively.
Future minimum lease payments due under the leases are as follows (thousands):
Year ending
December 31
2004 $ 138
2005 107
2006 40
----------
Total $ 285
==========
NOTE 12 - EQUITY
Common stock
------------
On July 1, 2002, ZAP's stock began trading on the Over-the-Counter (OTC)
Bulletin Board under the new stock symbol of ZAPZ. According to the OTC Bulletin
Board, the symbol change is to indicate that ZAP is no longer in Chapter 11
Reorganization, and that the stock has undergone a reverse split effective July
1, 2002. ZAP's 6,693,643 shares of common stock outstanding were converted on a
3:1 basis to 2,231,214 shares of common stock in the Reorganized ZAP, which was
then reverse split on a 2:1 basis into 1,115,607 total shares outstanding. The
final result of the conversion and the reverse split equates to a ratio of 6:1.
Thus, for every six shares a common shareholder held on June 20, 2002 (date of
court confirmation of plan of reorganization) the individual received one share
of common stock in the Reorganized ZAP. All shares and per share data have been
restated to reflect the stock splits. The common shareholders also received, for
each common share issued to the claimant, one warrant in Series B, C and D to
purchase common stock in the Reorganized ZAP.
During 2002, the Company issued 4.5 million shares for the acquisition of RAP
and Voltage Vehicles (see Note 2), and approximately 1.2 million shares of
common stock for a conversion by Daka of a note payable into equity (see Note
3). During 2002, ZAP also issued approximately 351,000 shares of common stock to
satisfy professional fees and the acquisition of equipment, and approximately
295,000 shares to satisfy $133,000 in unsecured debt holders' claims and other
payables. In addition, the Company issued approximately 44,000 shares in
exchange for $48,000 in cash as a result of the exercise of warrants and stock
options.
During 2003, the Company issued approximately 4.3 million shares of common
stock. Approximately 581,000 of these shares (including debt and warrants) were
issued to purchase the new corporate headquarters (See Note 7) at $1.30 per
share and 327,000 shares (including warrants) were issued to acquire an electric
car rental fleet at $1.50 per share. The Company obtained an independent
appraisal of the value of the land and building and car rental fleet. The
appraised values were used to record these asset purchases.
During 2003, the Company also issued approximately 678,000 shares for inventory,
162,000 shares for building improvements and other equipment, and 617,000 shares
for rent, advertising, interest expense, professional services, consulting
services, stock promotion and other services. The price per share for these
transactions ranged from $0.50 to $1.50. The stock issuances were recorded as
noncash operating interest and assets based on the intrinsic value of the stock
on the date granted.
The Company also issued approximately 1.5 million shares for cash and notes
receivable during 2003. The Company issued approximately 600,000 unrestricted
shares in exchange for $100,000 cash and note receivable of $492,000 and
approximately 300,000 unrestricted shares in exchange for $95,000 in cash and
note receivable of $205,000. All of these notes are due and payable and have
been fully reserved at December 31, 2003. The Company also issued 111,000
restricted shares for an $111,000 note receivable with interest at 7% and
payable in May 2004. The Company also issued 400,000 shares for $100,000 note
receivable which was repaid during 2003 with $50,000 in cash and $50,000 in
equipment and inventory. The Company also issued 76,000 shares for a $56,000
note receivable to a related party. This note bears interest at 3% and is
payable in November 2005.
During 2003, the Company also issued approximately 269,000 shares for $426,000
in cash and 101,000 shares for $114,000 from the exercise of warrants and stock
options. The Company also issued 65,000 shares to settle debt of approximately
$78,000.
In 2003, the Company issued approximately 2.9 million shares of restricted
common stock to be pledged as collateral for a long-term loan that has not
funded. The prospective lender has instructed the Company to cancel the shares,
and accordingly, the shares have not been reflected as issued or outstanding in
the financial statements.
Preferred stock
---------------
Under the confirmed plan of reorganization the Company was authorized to issue
50 million shares of preferred stock. In December 2003, the Board of Directors
established four classes of preferred stock with 4 separate timelines. The four
classes of preferred shares convert to common shares as follows Class B converts
to 2000 shares, Class C converts to 1,500 shares, Class D converts to 1,000
shares and Class F converts to 500 shares. Four time-line definitions were also
established. Each time line gives the bearer the right to convert the preferred
shares to common a certain number of days after issuance as follows II after 30
days, III after 90 days, IV after 180 days and V after 1 year. Each share of
preferred stock also has a warrant attached to each share converted into common
stock at the price on the date that the preferred share is issued.
Dividends are cumulative and accrue at 6% per year and payable on June 30th of
each year or on conversion date. Dividends are payable in cash or in common
stock at the Company's option. The Preferred Stock holders have no voting
rights. The liquidation value is its stated value plus accrued and unpaid
dividends thereon.
F-21
Warrants
--------
During 2002, the Company issued warrants for the acquisition of RAP and Voltage
Vehicles (See Note 2), to settle debt obligations (See Note 3) and for equipment
and services.
During 2003, the Company issued warrants in connection with the acquisition of
its new corporate headquarters and rental car fleet, and the issuance of
preferred and common stock for cash. In addition, during 2003, the Company
issued warrants to purchase an aggregate 639,000 shares of its common stock
under agreements with vendors 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 $ 1.50
Market price .50 2.40
Assumptions:
Expected dividend yield 0% 0%
Risk free rate of return 1.0% 2.75%
Contractual life 1 year 3 years
Volatility 100% 200%
Fair market value 0.30 1.90
Pursuant to the requirements of FASB Statement No. 123 and EITF 96-18 and 00-18
related to accounting for stock-based compensating, the Company recognized
non-cash operating expense in the amounts of $545,000 attributable to the
warrants issued to vendors and consultants at the date of grant in 2003.
Total warrants outstanding at December 31, 2003 are summarized as follows (in
thousands):
Number of
Warrants
--------
Series A-Unrestricted 396
Series A-2-Restricted 915
Series B-Unrestricted 6,688
Series B-2- Restricted 2,906
Series C-Unrestricted 7,403
Series C-2- Restricted 1,451
Series D-Unrestricted 7,403
Series D-2- Restricted 1,351
Series K-Unrestricted 4,200
Series K-2-Restricted 300
$1.50 Warrants Restricted 196
--------
33,209
========
The Company is authorized to issue 10 million shares each of Series A, B, C, D
and K Unrestricted Warrants. Series A warrants give the holder the right, for a
period of 1,095 days from the issuance, to purchase ZAP's common stock at an
exercise price of $1.05 for the life of the warrant. Series B warrants give the
holder the right to purchase one share of ZAP common stock at an exercise price
of $1.07 and expires on June 30, 2004, Series C warrants give the holder the
right to purchase one share of ZAP common stock for a period of 730 days from
the date of issuance, at an exercise price of $4.00 for the first 547 days,
$4.50 for the next 90 days, and $5.00 for the remaining life of the warrant.
Series D warrants give the holder the right to purchase one share of ZAP common
stock for a period of 1,095 days, from the date of issuance, at an exercise
price of $8.00 for the first 730 days, $9.00 for the next 190 days, and $10.00
for the remaining life of the warrant. Series K warrants give the holder the
right to purchase one share of ZAP common stock for a period of 1,095 days from
the date of issuance, at an exercise price of $1.00 for the life of the warrant.
The Board of Directors of ZAP shall have the right to (i) decrease the exercise
price of the warrants, (ii) increase the life of the warrants in which event the
exercise price may be increased, or (iii) make such other changes as the Board
of Directors of ZAP deems necessary and appropriate under the circumstances
provided the changes contemplated do not violate any statutory or common law.
F-22
During 2003, the Board of Directors established the following restricted classes
of warrants: Series A-2, B-2, C-2, D-2, K-2 and $1.50 Warrants Restricted. These
warrants give the holder the right to purchase one share of ZAP common stock for
the following prices and have the respective expiration dates: Series A-2 at
$1.05 expires on July 1, 2005, Series B-2 at $1.07 expires on June 30, 2004,
Series C-2 at $4.00 expires on July 1, 2004, Series D-2 at $8.00 expires on July
1, 2005, Series K-2 at $1.00 expires on July 1, 2005 and $1.50 Warrants at $1.50
expires on August 26, 2004.
Warrants for all Series may be assigned, sold, or transferred by the holder
without restriction. The stock received from the exercise of a warrant for any
Series will be without restriction and as a free trading stock exempt from the
Securities Act of 1993 pursuant to Section 1145 of the Bankruptcy Code.
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of
$0.01 per warrant upon thirty (30) days' written notice to the holders thereof;
provided, however, that if not all unexercised warrants in a particular series
are redeemed, then the redemption shall be pro-rated equally among the holders
of unexercised warrants in the series. The Series A warrants may be redeemed by
ZAP for $0.01 per warrant only if the post-confirmation, post-reverse split
trading price of the ZAP stock is 200% or more than the strike price of the
affected warrant, (i) at the time written notice is issued, and (ii) for at
least 30 consecutive calendar days prior to that time. Otherwise, the Series A
warrants may be redeemed upon thirty days' written notice for $0.75 per warrant.
If not all unexercised warrants in Series A are redeemed, then the redemption
shall be pro rated equally among the holders of unexercised warrants in Series
A. The Board may not change the terms of the Series A warrants without the
consent of the holders of Series A warrants. In February 2003, the Company
redeemed 2.5 million outstanding Series A warrants that were issued to the
preferred shareholders in accordance with ZAP's confirmed plan of
reorganization. However, the warrant holders are currently disputing the
redemption (See Note 14).
NOTE 13 - RELATED PARTY
Rental agreements
-----------------
The Company leases land, office 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 leases was approximately $95,000 and
$49,000 for the years ended December 31, 2003 and 2002, respectively.
Consulting services and fund raising agreements
-----------------------------------------------
In November and December 2003, the Company entered into certain agreements with
two relatives of our CEO. In December 2003 the first relative received 25,000
B-2 Restricted warrants and 25 shares of Class B preferred stock, which was
later converted into 50,000 shares of restricted common stock. The stock and
warrants were issued for website design services to be performed over the next
year. The second relative received 100,000 shares of unrestricted common stock
in November of 2003 and an additional 100,000 shares of unrestricted stock in
January 2004. The 100,000 shares issued in November were for a media production
valued at $17,000 and for a note receivable from shareholder of approximately
$57,000, which is due in November 2005. The 100,000 shares issued in January of
2004 were an advance on fees for fund raising activities (See Note 17). The
second relative received the 100,000 Series B-2 Restricted Warrants in November
2003 for consulting services.
F-23
NOTE 14 - LITIGATION
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business, including employment-related and trade related
claims.
On May 20, 2003 the RAP Group, Inc, a wholly owned subsidiary of ZAP was named
as a defendant in a lawsuit filed in the Superior Court of California by
Fireside Thrift Co. The suit alleges breach of contract and misrepresentation
with respect to the Dealer Agreement. The plaintiff is seeking damages in the
amount of $ 546,108 plus interest. The pending action is in the preliminary
stage. The Company intends to mount a vigorous defense in this action.
Management believes that the ultimate resolution of these claims will not have a
material adverse effect on our financial position or on results of operations.
The Company, during the first quarter of 2002, became aware that the California
Department of Motor Vehicles (DMV)-Investigations Division is conducting an
inquiry into the activities of certain employees of the RAP Group. If any
adverse findings did result, the Auto Dealer's License for the RAP Group could
be jeopardized, since RAP is currently on probation by the California Department
of Motor Vehicles for a period of two years ending June 12, 2004. The
probationary action was primarily due to the RAP Group's untimely transfers of
pink slips for sales of vehicles and lack of compliance with Motor Vehicle
Pollution Control guidelines on certain automobile sales. As part of ZAP's
original business plan, management is considering converting, depending upon the
sales volume, the dealership into a wholesale distributor for its electric cars.
The RAP Group has had no additional inquiries from the DMV since last year.
There is an action pending against ZAP in the United States Bankruptcy Court for
the Northern District of California, Santa Rosa Division, entitled Esquire Trade
and Finance, Ltd., and Celeste Trust Reg. v. ZAP, Adversary Proceeding Number
03-1187. This is an action brought by the Plaintiffs against ZAP for declaratory
relief in which they ask the court to issue a declaratory judgment that ZAP's
purported redemption of the Plaintiff's Class A Warrants in February of 2003 is
ineffectual. The Plaintiffs also ask that the court order ZAP to issue written
certificates for each share of stock and each Warrant to be given to the
Plaintiffs pursuant to ZAP's confirmed Chapter 11 Plan of Reorganization.
Management believes that the ultimate resolution of this claim will not have a
material adverse effect on our financial position or on results of operations.
NOTE 15 - SEGMENT REPORTING
In accordance with the provisions of SFAS No. 131, the Company has identified
four reportable segments consisting of sales and marketing of electric products,
operation of a retail car outlet, sales and marketing of electric car
dealerships and electric car rental outlets. These segments are strategic
business units that offer different services. They are managed separately
because each business requires different resources and strategies. The Company's
chief operating decision making group, which is comprised of the Chief Executive
Officer and the senior executives of each of the Company's segments, regularly
evaluates financial information about these segments in deciding how to allocate
resources and in assessing performance. The performance of each segment is
measured based on its profit or loss from operations before income taxes.
Segment results are summarized as follows (in thousands):
F-24
Electric Car Rental
products Car outlet dealerships outlets Total
---------- ---------- ---------- ---------- ----------
Year ended December 31,2003:
Net sales $ 1,954 $ 3,777 $ -- $ 97 $ 5,828
Gross profit 388 906 (56) 93 1,331
Depreciation, amortization and impairment 281 50 6 33 370
Net income (loss) (4,267) (1,025) (142) (108) (5,542)
Total assets 4,607 1,343 560 644 7,154
Year ended December 31,2002:
Net sales 1,811 2,602 -- -- 4,413
Gross profit 140 114 -- -- 254
Depreciation, amortization and impairment 295 15 -- -- 310
Net income (loss) 1,498 (348) -- -- 1,150
Total assets $ 2,342 $ 1,765 $ -- $ -- $ 4,107
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
A summary of non-cash investing and financing information is as follows:
Year ended December 31
----------------------
2003 2002
-------- --------
Cash paid during the year for:
Income taxes $ 2 $ 2
Interest 1 1
Non-cash investing and financing activities:
The Company entered into numerous common and
preferred stock transactions which resulted
in the following non-cash entries:
Inventory 617 --
Prepaids 303 --
Property and equipment 3,516 133
Debt (1,808) --
Notes receivable 1,109 --
Common stock (3,731) (133)
Preferred Stock (6) --
Issuance of common stock and assets and
liabilities recognized upon acquisition
of RAP and Voltage Vehicles:
Common stock 1,575
Accounts receivable 685
Inventory 571
Property and equipment, net 24
Goodwill 801
Accounts payable and accrued liabilities (506)
F-25
NOTE 17 - SUBSEQUENT EVENTS
The Company has engaged various outside consultants in early 2004 to assist in
fund raising activities. Efforts from January through March 26, 2004 have
resulted in cash investments to the Company of $460,000. The Company has
received a funding proposal letter. The proposal calls for the investor to make
a $2 million dollar equity investment and provide an $8 million convertible
revolving line of credit to purchase vehicles. The Company has not closed on the
proposal as of yet and is also considering other alternatives.
During March 2004, the Company has agreed to purchase vehicles of another
electric transportation company for the sum of $250,000, to be paid entirely
with preferred stock (500 Class B shares) and 100,000 Class B warrants, which
may be used to purchase common stock.
F-26
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes or disagreements with our Accountants during the last two
years. During 2002 our principal independent accountant was dismissed with a new
firm appointed. This change in accountants was approved by our audit committee
and board of directors.
ITEM 8A. CONTROLS AND PROCEDURES.
We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report. The
evaluation was undertaken in consultation with our accounting personnel. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There were no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of
their evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth the names, ages, and positions of our directors
and officers.
MANAGEMENT
Directors and Management
------------------------
Name Age Position
---- --- --------
Steven M. Schneider 43 Director, Chief Executive Officer
Gary Starr 48 Director, Chairman of the Board
William R. Hartman 56 Chief Financial Officer
Renay Cude 27 Corporate Secretary
Louis Auletta 53 Director
The directors named above will serve until the next annual meeting of our
shareholders or until their successors are duly elected and have qualified.
Directors will be elected for one-year terms at the annual shareholders meeting.
Officers will hold their positions at the pleasure of the board of directors,
absent any employment agreement, of which none currently exists. There is no
arrangement or understanding between any of our directors or officers and any
other person pursuant to which any director or officer was or is to be selected
as a director or officer, and there is no arrangement, plan or understanding as
to whether non-management shareholders will exercise their voting rights to
continue to elect the current board of directors. There are also no
arrangements, agreements or understandings between non-management shareholders
that may directly or indirectly participate in or influence the management of
our affairs.
There is no family relationship among any of our directors and executive
officers.
BIOGRAPHICAL INFORMATION
STEVEN M. SCHNEIDER - CHIEF EXECUTIVE OFFICER AND DIRECTOR was the founder of
Voltage Vehicles, a full-service fuel vehicle distributor specializing in the
full spectrum of electric vehicles (EV) and full-performance alternative fuel
vehicles (AFV) including automobiles, motorcycles, bicycles, scooters,
hovercraft, neighborhood electric vehicles (NEV), commercial vehicles and
accessories. He also founded Auto Distributors, Inc., which is the promotion and
distribution arm of Voltage Vehicles dealership. He is also on the Advisory
Board of Directors to Apollo Energy Systems. Apollo is in the business of
12
developing and manufacturing fuel cell technology and propulsion systems. He is
also active in legislative issues regarding alternative fuel vehicles. Mr.
Schneider recently lobbied at the nation's capital on behalf of the Clear Act
(S.760/H.R. 1864: "Clean Efficient Automobiles Resulting From Advanced Car
Technologies"). He also supported Representative Sherwood Boehlert (R-NY)
efforts to introduce new legislation called the "Alternative Fueled Acceleration
Act of 2001" along with actively supporting numerous other related state and
federal initiatives. He is an active member on the electrical low speed vehicle
subcommittee in Washington D.C., where his ideas have spawned new innovative
markets for low speed vehicles.
Mr. Schneider's automotive career spans more than 17 years experience in varying
roles including that of owner, partner, sales representative, business manager,
creditor, and adjustor. His successes also include the formation of two Northern
California automobile sales companies, as well as stints in the financial, real
estate, and electronics industries. He has also received extensive education and
training in sales and marketing, banking, insurance, and automotive training.
During 2003, Mr. Schneider was recognized as a spokesman for the electric
vehicle industry appearing on multiple national news shows.
GARY STARR - CHAIRMAN OF THE BOARD was previously the Chief Executive Officer of
ZAP and has been a director since its inception in 1994. He has been building,
designing, and driving electric cars for more than 25 years. In addition to
overseeing the marketing of more than 85,000 electric vehicles, Mr. Starr has
invented several solar electric products and conservation devices. Mr. Starr
founded U.S. Electricar's electric vehicle operation in 1983. In 1993, Mr. Starr
earned a Private Industry Council Recognition Award for creating job
opportunities in the EV industry and was named as one of the ten most
influential electric car authorities by Automotive News. He has also received
recognition awards for his contributions toward clean air from the American Lung
Association of San Francisco, CALSTART and U.S. Senator Barbara Boxer. Mr. Starr
has several publications: Electric Cars: Your Guide to Clean Motoring, The
Shocking Truth of Electric Cars, and The True Cost of Oil. In addition, he has
appeared on more than 300 radio and television talk and news shows (including
Larry King Live, The Today Show, Inside Edition, CNN Headline News, Prime Time
Live, and the CBS Evening News and the McNeil Lehrer News Hour) as a recognized
authority in the field of electric vehicles. Mr. Starr has a Bachelor of Science
Degree from the University of California, Davis in Environmental Consulting and
Advocacy.
WILLIAM R. HARTMAN - CHIEF FINANCIAL OFFICER was appointed Chief Financial
Officer in March 2001. He had been engaged as a financial consultant at our
Company since January 2001. He has over 15 years of CFO or Controller experience
in various industries. While in a previous position as Division Controller for
Sega of America he obtained extensive experience in the consumer products
manufacturing and distribution business. Prior to his engagement at ZAP, Mr.
Hartman had been providing financial and accounting consulting services to
various Internet start-ups in the SF Bay area. 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- CORPORATE SECRETARY and Director was appointed Corporate Secretary
in August 2002. Prior to joining our company, Ms. Cude was working as a legal
secretary for a law firm. Ms. Cude has over five years experience working in the
bankruptcy field with helping companies through the reorganization process. Ms.
Cude holds an Associates Degree in Business Administration from Sonoma State
University.
LOUIS AULETTA - DIRECTOR has been involved in various entrepreneurial business
ventures for the past 35 years. Currently, he is engaged in real estate
development. An avid environmentalist all his life, he has also served as the
executive director of the Earth Options Institute. Mr. Auletta holds a Bachelors
degree in Business from Wagner College, New York.
No individual on our Board of Directors possesses all of the attributes of an
audit committee financial expert and no one on our Board of Directors is deemed
to be an audit committee financial expert. In forming our Board of Directors, we
sought out individuals who would be able to guide our operations based on their
business experience, both past and present, or their education. Our business
model is not complex and our accounting issues are straightforward.
Responsibility for our operations is centralized within management, which is
comprised of four people. We rely on the assistance of others, such as our
accountant, to help us with the preparation of our financial information. We
recognize that having a person who possesses all of the attributes of an audit
committee financial expert would be a valuable addition to our Board of
Directors, however, we are not, at this time, able to compensate such a person
therefore, we may find it difficult to attract such a candidate.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act requires our directors, executive
officers and persons who own more than 10% of our common stock to file reports
of ownership and changes in ownership of our common stock with the Securities
and Exchange Commission. Directors, executive officers and persons who own more
than 10% of our common stock are required by Securities and Exchange Commission
regulations to furnish to us copies of all Section 16(a) forms they file.
13
To our knowledge, based solely upon review of the copies of such reports
received or written representations from the reporting persons, we believe that
during our 2003 fiscal year our directors, executive officers and persons who
own more than 10% of our common stock complied with all Section 16(a) filing
requirements, except that Mr. Schneider and Mr. Starr filed Form 3 and 5 late.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Such code of ethics will be
provided to any person without charge, upon request, a copy of such code of
ethics by sending such request to us at our principal office.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth information concerning the compensation we paid
for services rendered during our fiscal years ended December 31, 2003, 2002 and
2001, by the Named Executive Officers. The Named Executive Officers are our
company's Chief Executive Officer, regardless of compensation level, for the
salary and bonus for the fiscal years ended December 31, 2003, 2002 and 2001.
Steven M. Schneider was elected the Chief Executive Officer on October 26, 2002,
with Gary Starr appointed Chairman of the Board on the same date.
SUMMARY COMPENSATION TABLE
Annual Compensation Long -Term Compensation
Awards Payouts
------------------------- ---------- ------------
Other Restricted Stock
Annual Stock Underlying All Other
Salary Bonus Compensation Award Options LTIP Compen-
/SARs Payouts sation
Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($)
--------------------------- ---- ------ ----- ------------ ------------ ------------ ---------- ------------
Steven M. Schneider 2003 74,100 150,000(1)
Chief Executive Officer 2002 31,300 200,000 3,000
Effective 10/26/02
Gary Starr
Chairman of the Board 2003 74,100 150,000(1)
Former Chief Executive 2002 61,600 200,000
officer 2001 66,700 116,667
(1) The restricted warrant awards in represents K-2 Restricted Warrants, each
one of which may be exchanged for one share of ZAP common stock at an exercise
price of $1.00. The warrants expire on July 01, 2005.]
We have employment agreements with three of our officers that expire October 1,
2008. These employees are Steve Schneider, CEO, Gary Starr, Chairman and Renay
Cude, Corporate Secretary who is also a director.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
No Options/SAR Grants were made to the executive officers during the fiscal year
ended December 31, 2003.
COMPENSATION OF DIRECTORS
Our directors do not receive any cash compensation for their service on our
Board of Directors, but they may be reimbursed for certain expenses in
connection with their attendance at board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table presents information with respect to beneficial ownership of
our common stock as of March 26, 2004 by:
o Each person or entity who beneficially owns more than 5% of common stock;
14
o Each of our directors;
o Each of our Named Executive Officers; and
o All Executive Officers and directors as a group.
Unless otherwise indicated, the address for each person or entity named below is
c/o ZAP, 501 Fourth Street, Santa Rosa, California 95401. The table includes all
shares of common stock issuable upon the exercise of options and other rights
beneficially owned by the indicated shareholders on that date. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Except as indicated by footnote, and except for community
property laws where applicable, the persons named in the table below have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them.
The applicable percentage of ownership is based on 50,232,696 shares of common
stock outstanding on a fully diluted basis as of March 26, 2004. The number of
shares of common stock outstanding on a fully diluted basis includes 33,128,176
shares of common stock issuable upon the exercise of certain warrants, and
934,553 shares of common stock issuable upon the exercise of certain options.
SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER NUMBER PERCENT
Steven M. Schneider (1) 13,027,806 25.9
Gary Starr (2) 5,447,847 10.9
Ridgewood ZAP LLC (3) 3,361,057 6.9
Ridgewood Power
947 Linwood Avenue
Ridgewood NJ
Mercatus & Partners (4) 2,941,176 5.9
188 Green Lane
Northwood
Middlesex
United Kingdom
All Executive Officers and directors 18,575,582 37.0
as a group (4 persons)
(1) Includes 10,000,000 shares of common stock issuable upon the exercise of
various warrants and 127,810 shares of stock upon the exercise of stock options.
(2) Includes 4,152,535 shares of common stock issuable upon the exercise of
various warrants and 244,467 shares of stock upon the exercise of stock options.
(3) Includes 2,983,500 shares of common stock issuable upon the exercise of
certain warrants.
(4) Stock was provided as collateral for a working capital loan, which did not
fund. In December 2003, the shareholder reported to the Company that the stock
certificates were lost which has been reported to the transfer agent. The stock
certificates have not been cancelled as of March 26, 2004.
On June 21, 2002, our Board of Directors adopted and our shareholders approved
the 2002 Incentive Stock Plan (the "Equity Incentive Plan"). The Equity
Incentive Plan has a term of 10 years and is administered by our Board of
Directors. Pursuant to the Equity Incentive Plan, the Board of Directors may
grant to eligible persons, which include employees, officers, directors,
consultants and agents, awards of options (which may be qualified or
non-qualified) or common stock. 10,000,000 shares of our common stock were
originally set aside for grants made under the Equity Incentive Plan. As of
December 31, 2003, we had issued options to employees to purchase a total of
934,553 shares of our common stock. The options will expire 10 years from the
date of grant, The price for each share of common stock purchased pursuant to
15
the options varies. The exercise price per share for the options granted is the
fair market value of our common stock on the date of grant. The following table
sets forth, as of December 31, 2003, the number of securities to be issued upon
exercise of outstanding options, the weighted average exercise price of the
outstanding options and the number of securities remaining available for future
issuance under the Equity Incentive Plan.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ---------------------------- -------------------------
Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options warrants and rights future issuance under the
warrants and rights equity compensation plan
(excluding securities
reflected in column (a)
Plan Category (a) (b) (c)
------------------------------- ---------------------------- ---------------------------- -------------------------
------------------------------- ---------------------------- ---------------------------- -------------------------
Shareholder Approved 934,553 $0.52 9,065,447 (1)
------------------------------- ---------------------------- ---------------------------- -------------------------
------------------------------- ---------------------------- ---------------------------- -------------------------
Not Approved by Shareholders 0 N/A N/A
------------------------------- ---------------------------- ---------------------------- -------------------------
------------------------------- ---------------------------- ---------------------------- -------------------------
(1) Pursuant to the terms of the Equity Incentive Plan, awards may be granted
for options (both incentive stock options and non-qualified stock options) and
for restricted stock and stock bonuses.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Rental Agreements
-----------------
The Company leases office space, land and also warehouse space from Steven M.
Schneider, our CEO and major shareholder (See Financial Statements Note 13).
These properties are used to operate the car outlet and to store inventory.
Rental expense under these leases was approximately $95,000 and $49,000 for the
years ended December 31, 2003 and 2002, respectively.
Consulting Services and Fund Raising Agreements
-----------------------------------------------
In November and December 2003, the Company entered into certain agreements with
Kevin and Andrew Schneider, each cousins of Steven M. Schneider, the CEO. Kevin
Schneider 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 to be performed
over the next year. Andrew Schneider received 100,000 shares of unrestricted
common stock in November of 2003 and an additional 100,000 shares of
unrestricted common stock in January 2004. The 100,000 shares issued in November
were for a media production valued at $17,000 and for a note receivable from
shareholder of approximately $57,000, which is due in November 2005. The 100,000
shares issued in January of 2004 were advance fees for fund raising activities
(See Financial Statements Note: 17 - Subsequent Events). Andrew Schneider also
received 100,000 Series B-2 Restricted Warrants in November 2003 for consulting
services.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
Exhibit Description
No.
3.1 Articles of Incorporation of ZAP Power Systems, endorsed and filed on
September 23, 1994. (1)
3.2 Certificate of Amendment to Articles of Incorporation of ZAP Power
Systems, endorsed and filed on November 8, 1996. (2)
3.3 Certificate of Amendment of Articles of Incorporation of ZAP Power
Systems, endorsed and filed on June 2, 1999. (3)
3.4 Certificate of Amendment of Articles of Incorporation of ZAPWORLD.COM,
endorsed and filed June 28, 2000. (1)
16
3.5 Certificate of Amendment of Articles of Incorporation of ZAPWORLD.COM,
endorsed and filed February 26,2001. (5)
3.6 Amended Bylaws of ZAPWORLD.COM dated June 24, 2000. (3)
3.7 Certificate of Determination of Rights and Preferences of the Series B
Convertible Preferred Stock, Endorsed and filed June 26, 2001(5)
3.8 Amended and Restated Certificate of Determination of the rights,
Preferences, Privileges of the Series B Convertible Preferred Stock,
filed on October 2, 2001. (5)
3.9 Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC
and ZAP.*
3.10 Promissory Note $2,000,000 - ATOCHA Land LLC and ZAP.*
10.1 Settlement Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the
Shareholders dated June 27, 2001 (5)
10.2 ZAP's Approved Second Amended Plan of Reorganization of June 20, 2002
(6)
21 Subsidiaries of the small business issuer*
14 Code of Business Conduct and Ethics*
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP*
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a)*
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a)*
32.1 Certification of Chief Executive Officer pursuant to Section 1350*
32.2 Certification of Chief Financial Officer pursuant to Section 1350*
* Filed herewith.
(1) Filed and endorsed on September 23, 1994. Included as an exhibit to the
Registrant's Annual Report on Form 10-KSB for the year ended December
31,2000.
(2) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1999.
(4) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2000.
(5) 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.
(6) Previously filed as an exhibit to the Registrant's Form 8-K of October 20,
2002.
REPORTS ON FORM 8-K.
We did not file any reports on Form 8-K during the last quarter of the period
covered by this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth fees billed to us by our auditors during the
fiscal years ended December 31, 2003 and December 31, 2002 for: (i) services
rendered for the audit of our annual financial statements and the review of our
quarterly financial statements, (ii) services by our auditor that are reasonably
related to the performance of the audit or review of our financial statements
and that are not reported as Audit Fees, (iii) services rendered in connection
with tax compliance, tax advice and tax planning, and (iv) all other fees for
services rendered.
17
December 31, 2003 December 31, 2002
(i) Audit Fees $ 71,500 $ 65,000
(ii) Audit Related Fees $ ________ $ _______
(iii) Tax Fees $ ________ $ _______
(iv) All Other Fees $ ________ $ _______
18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZAP
By /s/ STEVEN M. SCHNEIDER
-----------------------
Steven M. Schneider,
Chief Executive Officer
Date March 26, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ STEVEN M. SCHNEIDER Chief Executive Officer March 26, 2004
------------------------
Steven M. Schneider
/s/ WILLIAM R. HARTMAN Chief Financial Officer March 26, 2004
------------------------
William R. Hartman
/s/ GARY STARR Director and Chairman of the Board March 26, 2004
------------------------
Gary Starr
/s/ LOUIS AULETTA Director March 26, 2004
------------------------
Louis Auletta
/s/ RENAY CUDE Secretary and Director March 26, 2004
------------------------
Renay Cude
19