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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
For the quarterly period ended June 30, 2004
Commission File Number 0-303000
ZAP
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 94-3210624
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
501 FOURTH STREET
SANTA ROSA, CA 95401
(707) 525-8658
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Shares
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 [_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
19,916,596 shares of common stock as of August 13, 2004.
Transitional Small Business Disclosure Format Yes [_] No [X]
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ZAP
FORM 10-QSB
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheet
as of June 30, 2004 ..................................... 2
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2004 and 2003.... 3
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003...................... 4
Notes to Condensed Consolidated Financial Statements..... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 11
Item 3. Controls and Procedures.................................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 17
Item 2. Changes in Securities and Use of Proceeds................ 17
Item 3. Defaults Upon Senior Securities.......................... 17
Item 4. Submission of Matters to a Vote of Security Holders...... 17
Item 5. Other Information - Subsequent Events.................... 18
Item 6. Exhibits and Reports on Form 8-K......................... 18
SIGNATURES .................................................................. 19
1
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZAP
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
June 30,
2004
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,467
Accounts receivable, net of allowance for doubtful accounts of $537 281
Inventories 1,548
Prepaid expenses and other current assets 1,707
------------
Total current assets 6,003
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,122 3,504
OTHER ASSETS
License and distribution fee, net 8,850
Patents and trademarks, net 170
Goodwill 476
Deposits and other 89
------------
Total assets $ 19,092
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,075
Accounts payable 99
Accrued liabilities 867
Deferred revenue 535
------------
Total current liabilities 2,576
LONG-TERM LIABILITIES
Long -term debt, less current portion, net of discount of $37 2,075
------------
Total liabilities 4,651
------------
SHAREHOLDERS' EQUITY
Preferred stock, authorized 50 million shares;
no par value, 9,047 shares issued and outstanding 9,750
Common stock, authorized 100 million shares;
no par value; 16,020,548 shares issued and outstanding 30,935
Notes receivable from shareholders, net (56)
Accumulated deficit (26,188)
------------
Total shareholders' equity 14,441
------------
Total liabilities and shareholders' equity $ 19,092
============
See accompanying notes to condensed consolidated
financial statements (Unaudited)
2
ZAP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET SALES $ 1,072 $ 1,366 $ 2,392 $ 2,894
COST OF GOODS SOLD 833 1,190 1,817 2,395
------------ ------------ ------------ ------------
GROSS PROFIT 239 176 575 499
------------ ------------ ------------ ------------
OPERATING EXPENSES
Sales and marketing 209 151 408 342
General and administrative (non-cash
of $1,278 in 2004 and $208 in 2003) 1,636 754 3,192 1,318
Loss on disposals of fixed assets 63 100 63 100
------------ ------------ ------------ ------------
1,908 1,005 3,663 1,760
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS BEFORE REORGANIZATION
ITEMS, OTHER INCOME (EXPENSE) AND INCOME TAXES (1,669) (829) (3,088) (1,261)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income (expense) (30) 1 (60) (7)
Other income (expense) 385 (207) 393 (207)
------------ ------------ ------------ ------------
355 (206) 333 (214)
------------ ------------ ------------ ------------
LOSS BEFORE REORGANIZATION ITEMS
AND INCOME TAXES (1,314) (1,035) (2,755) (1,475)
REORGANIZATION ITEMS:
Professional fees 5 15 13 15
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,319) (1,050) (2,768) (1,490)
------------ ------------ ------------ ------------
PROVISION FOR INCOME TAXES -- -- 2 2
------------ ------------ ------------ ------------
NET LOSS $ (1,319) $ (1,050) $ (2,770) $ (1,492)
============ ============ ============ ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.09) $ (0.09) $ (0.19) $ (0.14)
============ ============ ============ ============
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING --
BASIC AND DILUTED RESTATED FOR 2003 14,139 11,197 14,678 10,352
------------ ------------ ------------ ------------
See accompanying notes to condensed consolidated
financial statements (unaudited).
3
ZAP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
------------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before reorganization items $ (2,770) $ (1,490)
Adjustments to reconcile net loss to net cash used
for operating activities:
Issuance of stock and warrants for services 1,278 208
Loss on disposal of assets 63 100
Amortization on note discount 24 --
Depreciation and amortization 312 133
Allowance for notes receivable 111 --
Allowance for doubtful accounts 74 205
Changes in other items affecting operations
Receivables (40) (96)
Inventories 360 335
Prepaid expenses and other assets (147) (57)
Accounts payable (439) 262
Advances from related party -- (54)
Accrued liabilities (292) (24)
Deferred revenue 245 --
------------ ------------
Net cash used in operating activities (1,221) (478)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITES
Acquisiton of distribution license (1,000) --
Purchase of equipment (15) (5)
------------ ------------
Net cash used for investing activities (1,015) (5)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of preferred stock 1,128 --
Sale of common stock and warrants, net of stock offering costs 2,028 436
Proceeds from issuance of long-term debt 1,000 228
Payments on long-term debt (4) (78)
------------ ------------
Net cash provided by financing activities 4,152 586
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,916 103
CASH AND CASH EQUIVALENTS, beginning of period 551 350
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,467 $ 453
============ ============
See accompanying notes to condensed consolidated
financial statements (Unaudited)
4
ZAP
NOTES TO THE INTERIM UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The financial statements included in this Form 10-QSB have been prepared by us,
without audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted,
although management believes the disclosures are adequate to make the
information presented not misleading. The results of operations for any interim
period are not necessarily indicative of results for a full year. These
statements should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2003.
The financial statements presented herein, for the three and six months ended
June 30, 2004 and 2003 reflect, in the opinion of management, all material
adjustments consisting only of normal recurring adjustments necessary for a fair
presentation of the financial position, results of operations and cash flow for
the interim periods.
The Risks Related to Our Business
The Company has a history of losses, and the Company might not achieve or
maintain profitability. The Company's continuation as a going concern is
directly dependent upon our ability to increase sales and receive additional
financing. The Company has raised approximately $3.5 million in new capital thus
far in 2004 but will require substantial additional capital in the short term to
realize its business objectives, in particular the creation of a distribution
network for and sales of advanced transportation and SMART(R) Cars. There can be
no assurance that additional capital would be available, or if it is available,
that it would be on acceptable terms. A substantial portion of the Company's
growth in the past three years has come through acquisitions and the Company may
not be able to identify, complete and integrate future acquisitions.
Other risks include, but are not limited to, the following:
We face intense competition, which could cause us to lose market share. Changes
in the market for electrical or fuel-efficient vehicles could cause our products
to become obsolete or lose popularity. We cannot assure you that growth in the
electric vehicle industry or fuel-efficient cars will continue and our business
may suffer if growth in the electric vehicle industry or fuel-efficient market
decreases or if we are unable to maintain the pace of industry demands. We may
be unable to keep up with changes in electric vehicle or fuel-efficient
technology and, as a result, may suffer a decline in our competitive position.
The failure of certain key suppliers to provide us with components could have a
severe and negative impact upon our business. Product liability or other claims
could have a material adverse effect on our business. We may not be able to
protect our Internet address. Our success is heavily dependent on protecting our
intellectual property rights.
(2) SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING FOR 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 or its related interpretations.
The company accounts for its stock-based compensation to employees in accordance
with the provisions of APB opinion No. 25.
5
The Company has recorded deferred compensation for the difference, if any,
between the exercise price and the deemed fair market value of the common stock
for financial reporting purposes of stock options granted to employees. The
compensation expense related to such grants is amortized over the vesting period
of the related stock options on a straight-line basis.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues
Task Force (EITF) Issues No.96-18 Accounting for Equity Instruments that Are
Issued to other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
Had the Company determined compensation cost based on the fair value at the
grant date for its employee stock options and purchase rights under SFAS No.
123, the Company's net loss would have been increased to the pro forma amounts
indicated below for the three and six-month periods ended June 30.
IN THOUSANDS EXCEPT PER SHARE AMOUNTS THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net loss $ (1,319) $ (1,050) $ (2,770) $ (1,492)
Deduct: Employee stock-based compensation
expense determined under fair value (27) (10) (42) (60)
------------ ------------ ------------ ------------
Pro forma $ (1,346) $ (1,060) $ (2,812) $ (1,552)
============ ============ ============ ============
Basic and diluted per share:
As reported $ (0.09) $ (0.09) $ (0.19) $ (0.14)
============ ============ ============ ============
Pro forma $ (0.10) $ (0.09) $ (0.19) $ (0.15)
============ ============ ============ ============
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted loss per common share is based on the weighted average number
of common shares outstanding in each period. Potential dilutive securities
associated with stock options, warrants and conversion of debt have been
excluded from the diluted per share amounts, since the effect of these
securities would be anti-dilutive. At June 30, 2004, these potentially dilutive
securities include options for 3,425,000 common shares, warrants for 39,636,033
shares of common stock, debt convertible into 1,930,000 shares of common stock
and preferred shares that can be converted into 9,047,000 common shares.
The Company has also approximately 2.9 million shares of common stock
outstanding that were pledged as collateral for a long-term loan that has not
funded. The prospective lender notified the Company in December 2003 that the
shares have been lost, however they have not been cancelled to date. Thus the
net loss per common share and weighted average number of common shares
outstanding have been restated for 2003 and do not include the 2.9 million
shares that were lost.
PRINCIPLES OF CONSOLIDATION - The accounts of the Company and its consolidated
subsidiaries are included in the condensed consolidated financial statements
after elimination of significant inter-company accounts and transactions.
USE OF ESTIMATES - The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the Company's financial statements and accompanying notes. Actual
results could differ materially from those estimates.
Significant estimates include;
ACCOUNTS RECEIVABLE - The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
If the financial condition of the Company's customers should deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
INVENTORY - The Company maintains reserves for estimated excess, obsolete and
damaged inventory based on projected future shipments using historical selling
rates, and taking into account market conditions, inventory on-hand,
6
purchase commitments, product development plans and life expectancy, and
competitive factors. If markets for the Company's products and corresponding
demand were to decline, then additional reserves may be deemed necessary.
LEGAL ACCOUNTS - The Company estimates the amount of potential exposure it may
have with respect to litigation claims and assessments. The Company settled a
legal action in July 2004 for $42,000 plus legal fees and the case is now
dismissed. This settlement resulted in other income of $385,000 for the three
and six months ended June 30,2004.
RECOVERY OF LONG-LIVED ASSETS - The Company evaluates the recovery of its
long-lived assets periodically by analyzing its operating results and
considering significant events or changes in the business environment.
WARRANTY - The Company provides 30 to 90 day warranties on its personal electric
products and records the estimated cost of the product warranties at the date of
sale. The estimated cost of warranties has not been significant to date. Should
actual failure rates and material usage differ from our estimates, revisions to
the warranty obligation may be required.
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2003, the Securities and Exchange Commission (SEC) issue Staff
Accounting Bulletin No.104, Revenue Recognition (SAB 104), which superceded
Staff Bulletin No. 101 Revenue Recognition in Financial Statements (SAB 101).
SAB 104 rescinds accounting guidance contained in SAB 101 related to multiple
elements revenue arrangement, superceded as a result of the issuance of Emerging
Issues Task Force Issue No. 00-21 (EITF 00-21), Accounting for Revenue
Arrangement with Multiple Deliverables. Additionally, SAB 104 rescinds the SEC's
Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC topic 13,
Revenue Recognition. While the wording of SAB 104 has changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The Company adopted SAB 104 on the
first day of 2004. The adoption of SAB 104 did not have an impact on the
Company's condensed consolidated financial statements.
In April 2003, FASB issued SFAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. This statement amends and clarifies the
financial accounting and reporting requirements, as were originally establishing
in SFAS 133, for derivative instruments and hedging activities. SFAS 149
provides greater clarification of the characteristics of a derivative instrument
so that contracts with similar characteristics will be accounted for
consistently. This statement is effective for contracts entered into or modified
after June 30, 2003, as well as for hedging relationships designated after June
30,2003, excluding certain implementation issues that have been effective prior
to this date under SFAS 133. The Company's adoption of this statement has not
had a material impact on our results of operations or financial condition.
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 respect to its scope and application of the consolidation model,
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 principle 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 interest that expose their holder to the
risk 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
7
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.
(3) INVENTORIES - The Inventories at June30, 2004 are summarized as follows
(thousands):
Vehicles $ 602
Raw Materials 476
Finished Goods 780
------
1,858
Less-inventory reserve (310)
------
$1,548
======
(4) LICENSE AND DISTRIBUTION FEE
On April 19, 2004, ZAP entered into an Exclusive Purchase, License and Supply
Agreement with Smart-Automobile LLC, a California limited liability company
(Smart Auto), to distribute and manufacture "smart" cars. Smart cars is the
brand name of 3-cyclinder gas turbo engine cars manufactured by Daimler Chrysler
AG, which can achieve an estimated fuel economy up to 60 miles per gallon. Smart
Automobile LLC is not affiliated with Daimler Chrysler, but is a direct
importer.
Under the agreement ZAP will be the exclusive distributor and licensee of the
right to manufacture Smart(R) cars in the United States and the non-exclusive
distributor and licensee outside of the United States for a period of ten years
from Smart-Automobile LLC. However, it is rumored that in 2006 Mercedes Benz
plans to import a 4- door version of the Smart(R) Car that is produced in
Brazil. Subject to the terms of the agreement, ZAP will pay Smart-Auto a license
and distribution fee of $10,000,000: a $1 million payment in cash was made upon
execution of the agreement, $1 million payable in cash ratably with the delivery
of the first 1,000 smart cars, and $8 million payable in ZAP preferred stock.
The Company has recorded the License and Distribution based upon the agreed
value between the parties as outlined in the "Exclusive Purchase, License and
Supply Agreement" dated April 19, 2004 with Smart Automobile LLC to manufacture
and distribute the Smart(R) Car. An independent appraisal of the fair value of
the License and Distribution Fee has not as of yet been obtained since the
Company tests for impairment of intangible assets annually. The Company may
experience an adjustment to the value of the License and Distribution Fee at
year-end depending on the outcome of an independent appraisal. The License and
Distribution Fee is currently being amortized monthly over ten years, which is
the term of the agreement.
Sales of the Smart (R) Car cannot be made by the Company until approval is
received by the U. S. Environmental Protection Agency (EPA) who are presently
testing the automobile. Management is anticipating that approval will be
received in late August of 2004.
(5) CURRENT PORTION OF LONG-TERM DEBT - On April 12, 2004, the Company
received $1 million in cash in exchange for a convertible promissory note from a
private investor and shareholder. The note accrues interest at the rate of 1.47%
per annum with a due date of June 1, 2005 for the entire principal and interest.
After November 1, 2004, the note and accrued interest may be converted at the
holder's election into Series A-2 Preferred Stock.
(6) STOCKHOLDERS' EQUITY - On July 1, 2002, ZAP's 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.
8
During the second quarter ended June 30, 2004, the Company issued approximately
9,200 shares of preferred stock, which is convertible into 9.1 million shares of
Common Stock. The preferred stock was issued for the following: 8,000 shares
were issued to Smart-Automobile, Inc. for a license and distribution fee for the
Smart Car, 500 shares for the purchase of automobile inventory and 700 shares to
investors in exchange for cash.
The Company issued approximately 999,000 shares of restricted common stock
during the second quarter ended June 30, 2004. The stock was issued for the
following: 557,000 shares for the conversion of preferred into common, 102,000
shares were issued in exchange for investment funds by shareholders, 41,000
shares for rental expenses, 62,000 shares for repairs on the corporate building,
182,000 shares for legal, consulting and advertising, 22,000 for inventory
purchases and 33,000 for Employee bonuses and severance.
During the second quarter of 2004, the Company issued approximately 3,960,000 of
Series B Restricted Warrants with an exercise price of $1.07. The warrants were
issued for the following: 2,200,000 warrants for consulting, 1,260,000 warrants
in conjunction with investment funds received and 500,000 warrants for inventory
purchases. The warrants issued to consultants were valued between $0.15 and
$1.54 based on the stock price on the date of grant as valued under the
Black-Scholes pricing model. General and Administrative expenses of $190,000
have been recorded during the second quarter of 2004 related to these warrant
issuances.
The Company issued at an exercise price of $1.00 approximately 1,150,000 Series
K Warrants during the second quarter of 2004. The Warrants were issued for the
following: 1,000,000 warrants for consulting and 150,000 warrants for employee
bonuses. The warrants issued to consultants were valued at $0.51 based on the
stock price on the date of grant as valued under the Black-Scholes pricing
model. General and Administrative expenses of $85,000 have been recorded during
the second quarter of 2004 related to these warrant issuances.
Employees of the Company were also granted a total of 1.8 million stock options
under the 2002 ZAP Employee Stock Option Plan. The options are priced at $0.56
and $1.26 and vest over a period of three years.
The Company issued 1,035 shares of preferred stock in the first quarter ended
March 31, 2004, which is convertible into 1.0 million shares of common stock.
ZAP received $460,000 from investors in exchange for 460 shares of preferred
stock. Approximately 316 shares of preferred stock were issued in payment for
legal, consulting and professional services. In addition, 259 preferred shares
were issued to purchase inventory and selected assets.
During the first quarter of 2004, the Company issued approximately 3.8 million
Series B restricted Warrants priced at $1.07. The warrants were issued for the
following: 2.0 million for preferred investors mentioned above, 1.6 million for
consulting services and 200,000 for the purchase of inventory and electric
automobiles. The warrants issued to consultants were valued between $0.30 and
$0.39 based on the stock price on the date of grant as valued under the
Black-Scholes pricing model. General and Administration expenses of $530,000
have been recorded during the first quarter of 2004 related to these warrant
issuances.
On July 29, 2004, The Company filed a Form 8-K with the SEC to announce that the
Board of Directors has extended the expiration date of its Series B Warrants and
Series B-2 Restricted Warrants by an additional six months from July 1, 2004,
and increased the exercise price from $1.07 to $1.26. In addition, for each
warrant exercised before August 31, 2004, the Company will issue the holder of
the warrant an additional warrant for an equal amount of shares that are
exercisable for one year at an exercise price of $2.50 per share.
The Company has also approximately 2.9 million shares of common stock
outstanding that were pledged as collateral for a long-term loan that has not
funded. The prospective lender notified the Company in December 2003 that the
shares have been lost, however they have not been cancelled to date. These
shares were not included in the weighted average shares outstanding calculation.
The Company is still holding notes receivable from shareholders of $864,170,
less a reserve of $807,900 resulting in a net balance due of $56,270 at June 30,
2004. The notes were given to the Company last year by three shareholders in
exchange for restricted and unrestricted common stock. Reserves were established
for two of the shareholder notes, since one of the shareholders 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.
9
(7) 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.
A dormant complaint filed in 2002 against the RAP Group and Steve Schneider (CEO
of ZAP) individually was reactivated by the plaintiff (Jim Arnold Trucking). The
Compliant alleges Breach of Contract, Promissory Estoppel and Fraud and seeks
contract damages in the amount $71,000 plus monthly storage fees and punitive
damages. 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.
The RAP Group has been on probation with the California Department of Motor
Vehicles (DMV) for a period of two years that ended on June 12, 2004. The
probationary action was primarily due to the RAP Group's untimely transfers of
documents for sales of vehicles and lack of compliance with Motor Vehicle
Pollution Control guidelines on certain automobile sales. In June of 2004, the
California Department of Motor Vehicles filed an Accusation and Petition To
Revoke Probation and at present the RAP's Group probation has been extended
until the matters are resolved with the DMV. The Company has requested a hearing
date with the DMV and intends to refute the accusations. As part of ZAP's
original business plan, management is considering converting, depending upon the
sales volume, and the dealership into a wholesale distributor for its electric
cars.
The action that was 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 was settled in May 2004. This was 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. The Compromise and
settlement required the Company to issue Series A Warrants to the Plaintiffs
pursuant to ZAP's Second Amended Plan of Reorganization of June 17, 2002 no cash
damages were required to be paid.
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 was seeking damages in the
amount of $546,108 plus interest. The Company settled the action in July 2004
for $42,000 plus legal fees and the case is now dismissed. This settlement
resulted in other income of $385,000 for the three and six months ended June 30,
2004.
(8) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Six Months Ended
June 30,
---------------------
2004 2003
-------- --------
Cash paid during the period for interest $ -- $ --
Cash paid during the period for income taxes $ 2 $ 2
Non-cash investing and financing activities:
Stock issued to acquire distribution license $ 8,000 $ --
Note and stock issued to purchase land and building $ -- $ 3,292
Stock issued for:
Purchase of equipment $ 68 $ 13
Inventory purchases $ 480 $ 28
Prepaid expenses $ 1,083 $ 198
Repayment of long-term debt $ -- $ 56
Notes receivable $ -- $ 1,015
Advance on future inventory purchases $ -- $ 325
10
(9) SUBSEQUENT EVENTS-
On July 29, 2004, the Company filed a Form 8-K with the SEC to announce that it
had entered into a $24.5 million common stock purchase agreement with Fusion
Capital Fund II, LLC, a Chicago based institutional investor. In accordance with
the agreement, Fusion Capital has initially purchased 200,000 shares of ZAP's
common stock at a price of $2.50 per share. Fusion Capital has also committed to
purchase an additional $24 million of common stock over a 40-month period at a
purchase price based upon the market price of ZAP's common stock on the date of
each sale without any fixed discount to the market price. The proceeds will be
utilized to accelerate the development and commercialization of the Company's
full-line of advanced technology vehicles and to purchase additional inventory
of Smart Cars.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Special Note Regarding Forward-Looking Statements- Certain statements in this
Form 10-QSB, including information set forth under this Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). We desire to avail
ourselves of certain "safe harbor" provisions of the Act and are therefore
including this special note to enable us to do so. Forward-looking statements
included in this Form 10-QSB or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to our
stockholders and other publicly available statements issued or released by us
involve known and unknown risks, uncertainties, and other factors which could
cause our actual results, performance (financial or operating), or achievements
to differ from the future results, performance (financial or operating), or
achievements expressed or implied by such forward looking statements. Such
future results reflect our best estimates based upon current conditions and the
most recent results of operations.
OVERVIEW
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, electric vehicle power
systems, low emission vehicles and fuel efficient cars, such as the SMART(R)
Car, 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 2004, the Company
continued to enhance and broaden its electric vehicle and fuel-efficient 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.
The Company's business goal is to become the largest and most complete
distribution portal for advanced transportation (fuel efficient) and electric
vehicles. In 2004, the Company continued to accelerate its market
11
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 gas fuel economy
vehicles. Additionally, the Company produces the electric scooter, known as the
ZAPPY(R), which is manufactured by the Company, using parts supplied 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 three
locations on the main Casino strip in Las Vegas. The purchase was completed in
exchange for stock and warrants.
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. The Company intends to expand this
network to include the gasoline fuel efficient SMART(R) Car.
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:
Smart Cars-This vehicle has a gas turbo engine with estimated fuel economy of 60
miles per gallon. This car is a two-passenger coupe that is eight feet in length
that provides ample room for two adult passengers. Other "smart" features and
options of the Smart(R) car include a 61-hp, 3-cyclinder turbocharged engine,
equipped with an advanced electronic stabilization program, or ESP, an anti-skid
design that throttles the engine torque along with an anti-lock braking system.
The unique 6-speed automatic gear transmission with kick down function allows
the user to switch between "automatic" and "manual" gear shifting via a control
program that changes gears in response to varying driving characteristics.
ZAPCAR (TM) - This electric vehicle is made in China and is the first of its
kind to utilize an advanced drive train 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.
12
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 3 - This three-wheeled scooter uses a new, powerful drive technology built
into the hub of the front wheel, which offers increased stability while
enhancing the maneuverability. The riding platform has two smaller wheels on
either side with the larger wheel motor in front, so a person can ride in
standing position with both feet placed side-by-side, rather than
skateboard-style standing sideways like on the original ZAPPY(R).
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.
SUBSIDIARY 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.
The Company has a $123,500 backlog of orders and purchase contracts in hand for
various products and electric vehicles as of August 13, 2004. The Company
expects to fill these orders within the current fiscal year.
Some of the significant events for the Company that since the last quarterly
report were as follows:
1. On July 29, 2004, the Company entered into a $24.5 million common stock
purchase agreement with Fusion Capital Fund II, LLC, a Chicago based
institutional investor. In accordance with the agreement, Fusion Capital
has initially purchased 200,000 shares of ZAP's common stock at a price of
$2.50 per share.
2. The Company also secured a $45 million floor plan line of credit with Clean
Air Motor, LLC to provide financing to qualified ZAP dealers to purchase
their auto inventory.
3. ZAP signed an exclusive purchase, license and supply agreement with Smart
Automobile LLC (SA). The Smart Car has a 3-cylinder turbo gas engine with
estimated fuel economy up to 60 miles per gallon.
4. ZAP has raised approximately $1.5 million in new funds thus far as a result
of various fund raising and stock promotions. The Company also received
funds from shareholders exercising their Series B Warrants. The cash
position has increased to approximately $2.5 million at June 30, 2004.
5. Two pending legal matters were favorably settled by the Company with minor
effect on the financial statements.
13
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain items
included in the Company's Income Statements (see Financial Statements and Notes)
for the periods indicated:
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
STATEMENTS OF OPERATIONS DATA:
Net sales .............................. 100% 100% 100% 100%
Cost of sales .......................... 77.7 87.1 76.0 82.7
Gross profit ........................... 22.3 12.9 24.0 17.3
Operating expenses ..................... 178.0 73.6 153.1 60.8
Loss from operations before other
income and expense .................. (155.7) (60.7) (129.1) (43.6)
Other income (expenses) ................ 33.1 (15.1) 13.9 (7.4)
Loss before reorganization items ....... (122.6) (75.8) (115.3) (51.0)
Reorganization items-professional fees.. 0.4 1.1 0.5 0.5
Net loss ............................... (123.0) (76.9) (115.8) (51.5)
QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003
NET SALES for the quarter ended June 30, 2004 were $1.1 million compared to $1.4
million in 2003. RAP's net sales for the period were $780,000 versus $795,000 in
2003. The net sales for ZAP only were $292,000 versus $571,000 in 2003. The
sales were less than last year due to the slow economy for both consumer goods
and auto sales at RAP Group.
GROSS PROFIT was $239,000 for the second quarter ended June 30, 2004 compared to
$176,000 for the quarter ended June 30, 2003. The RAP Group accounted for
$133,000 of the gross profit for the quarter ended June 30, 2004 versus $54,000
in 2003. ZAP's gross profit excluding the RAP Group, decreased from $122,000 to
$106,000 in 2004. The increase in gross profit was due to product mix.
SALES AND MARKETING EXPENSES in the second quarter of 2004 were $209,000 as
compared to $151,000 in 2003. As a percentage of sales it represents an increase
from 11% to 19% in 2004. RAP's expenses were $41,000 versus $33,000 in 2003.
ZAP's expenses were $168,000 versus $118,000 in 2003. RAP's increase was due to
higher advertising costs during the second quarter of 2004. While ZAP's increase
in expenses was due to higher salaries and marketing expenses.
GENERAL AND ADMINISTRATIVE expenses for 2004 were $1,636,000 as compared to
$754,000 in 2003. RAP's portion of the expenses was $157,000 versus $172,000 in
2003. For ZAP the expenses increased from $582,000 to $1,479,000. As a
percentage of sales, general and administration expenses increased from 55% of
sales to 153% of sales. RAP's decrease of $15,000 was primarily due to lower bad
debt expenses. ZAP's increase of $897,000 was due to higher consulting,
professional fees and bad debt estimates.
LOSS ON DISPOSAL OF FIXED ASSETS was due to the write-off of certain leasehold
improvements where the Company has never utilized certain excess rental office
space that was renovated by the Company.
INTEREST EXPENSE increased by $31,000 in the second quarter of 2004 and is due
to the quarterly interest for the note payable for the building purchase on
March 31, 2003.
OTHER INCOME INCREASED from an expense of $207,000 in the second quarter of 2003
to an income of $385,000 in second quarter ended June 30, 2004 due to the
settlement of a lawsuit with a favorable adjustment of the legal reserves and
less expenses for problem shareholder notes in 2004.
REORGANIZATION ITEMS reflect the quarterly trustee fee.
14
NET LOSS - The Net Loss before reorganization fees and income taxes was
$1,314,000 for the quarter ended June 30, 2004 as compared to a loss of
$1,035,000 for June 30, 2003. The loss for the quarter was higher due to greater
general and administration expenses for consulting, professional fees and bad
debt estimates.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
NET SALES for the six months ended June 30, 2004 were $2.4 million compared to
$2.9 million in 2003. RAP's net sales for the period accounted were $1.7 million
versus $1.9 million in 2003. The net sales for ZAP were $702,000 versus $1
million in 2003. The sales were less than last year due to the slow economy.
GROSS PROFIT was $575,000 for the six months ended June 30, 2004 compared to
$499,000 for the six months ended June 30, 2003. The RAP Group accounted for
$382,000 of the gross profit for the period ended June 30, 2004 versus $270,000
in 2003. ZAP's gross profit excluding the RAP Group, decreased from $229,000 to
$193,000 in 2004. The change in gross profit was due to product mix.
SALES AND MARKETING EXPENSES in the first six months of 2004 were $408,000 as
compared to $342,000 in 2003. RAP's expenses were $68,000 versus $112,000 in
2003. For ZAP, the expenses were $340,000 versus $230,000 in 2003. As a
percentage of sales, total selling expenses increased from 12% of sales to 17%
of sales. RAP's decrease of $44,000 was due to less salaries and advertising
expenses. While ZAP's increase in expenses was due to higher salaries and
marketing expenses.
GENERAL AND ADMINISTRATIVE expenses through the period of June 30, 2004 were
$3.2 million as compared to $1.3 million in 2003. RAP's portion of the expenses
was $388,000 versus $267,000 in 2003. For ZAP, the expenses increased from $1.1
million to $2.8 million. As a percentage of sales, general and administration
expenses increased from 45% of sales to 133% of sales. RAP's increase of
$121,000 was primarily due to higher bad debt estimates for problem customer
accounts. ZAP's increase of $1.7 million was due to higher consulting,
professional fees and bad debt estimates.
LOSS ON DISPOSAL OF FIXED ASSETS was due to the write-off of certain leasehold
improvements where the Company has never utilized certain excess rental office
space that was renovated by the Company.
INTEREST EXPENSE increased by $53,000 for the period ended June 30, 2004 as
compared to the same period in 2003. This is primarily due to six months of
interest recorded in 2004 for the note payable for the building purchase on
March 31, 2003, versus only three months of interest expense recorded in 2003.
OTHER INCOME INCREASED from an expense of $207,000 in second quarter of 2003 to
an income of $393,000. The loss for the quarter was less due to higher other
income where the litigation reserve was reduced due to the favorable resolution
of a previous lawsuit against the Company.
REORGANIZATION ITEMS reflect the quarterly trustee fee.
NET LOSS -The Net Loss was $2.8 million for the six months ended June 30, 2004
as compared to a loss of $1.5 million for June 30, 2003. The increase was
primarily due to higher General and Administration expenses for consulting,
stock promotion and estimates for bad debts on problem customer accounts.
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 2004 net cash used by the Company for operating
activities was $1,221,000. In the first six months of 2003, the Company used
cash for operations of $478,000. Cash used in the first six months of 2004 was
comprised of the net loss incurred for the period of $2,770,000 plus net
non-cash expenses of $1,862,000 plus the net change in operating assets and
liabilities of $313,000. Cash used in operations in the first six months of 2003
was comprised of the net loss before reorganization items incurred for the
quarter of $1.5 million plus net non-cash expenses of $646,000, and the net
change in operating assets and liabilities resulting in a further use of cash of
$366,000.
15
Investing activities used cash of $1,015,000 in the first six months of 2004 and
used $5,000 during the first six months ended June 30, 2003. In 2004, the
majority of this cash was used to acquire a distribution license for the Smart
Cars and in 2003 the cash was used to purchase equipment.
Financing activities provided cash of $4,152,000 and $586,000 during the first
six months ended June 30, 2004 and 2003, respectively.
At June 30, 2004 the Company had cash of $2.5 million compared to $453,000 at
June 30, 2003. At June 30, 2004, the Company had working capital of $3.5 million
as compared to working capital of $1.6 million at June 30, 2003. The Company, at
present, does not have a credit facility in place with a bank or other financial
institution.
Even though we have raised approximately $3.5 million thus far in 2004, we will
need additional short term outside investments on a continuing basis to finance
our current operations. Our revenues for the foreseeable future may not be
sufficient to attain profitability. We expect to continue to experience losses
for the near future.
We do not have a bank operating line of credit and there can be no assurance
that any required or desired financing will be available through bank
borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If
future financing requirements are satisfied through the issuance of equity
securities, investors may experience significant dilution in the net book value
per share of common stock and there is no guarantee that a market will exist for
the sale of the Company's shares.
On July 29, 2004 ZAP entered into a $24.5 million common stock purchase
agreement with Fusion Capital Fund II, LLC, a Chicago based institutional
investor, whereby Fusion Capital has initially purchased 200,000 shares of ZAP's
common stock at a price of $2.50 per share. Fusion Capital has committed to
purchase an additional $24 million of common stock over a 40-month period at a
purchase price based upon the market price of ZAP's common stock on the date of
each sale without any fixed discount to the market price. The proceeds will be
utilized to accelerate the development and commercialization of the Company's
full-line of advanced technology vehicles and to purchase additional inventory
of Smart Cars.
In June of 2004, the Company also secured a $45 million floor plan line of
credit with Clean Air Motor, LLC (CAMCO) to provide financing to qualified ZAP
dealers to purchase their auto inventory. As part of this agreement, CAMCO will
enlist ZAP Dealers and arrange for initial Retail Floor Plan Lines for all
qualified ZAP dealers totaling approximately $45 million for the initial one
hundred fifty Dealers. Each Dealer would initially purchase a minimum of ten to
fifteen Smart Cars Americanized by ZAP per Dealer.
The Company's primary capital needs are to fund its growth strategy, which
includes creating an auto distribution network for the distribution of the SMART
(R) Car and electrical vehicles, increasing its internet shopping mall presence,
increasing distribution channels, establish company owned and franchised ZAP
stores, introducing new products, improving existing product lines and
development of a strong corporate infrastructure.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal influences. Sales volumes in this
industry typically slow down during the winter months, November to March in the
U.S. The Company intends to develop a wide auto distribution network to counter
any seasonality effects.
INFLATION
Our raw materials and finished products and automobiles are sourced from stable,
cost-competitive industries. As such, we do not foresee any material
inflationary trends for our product sources.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-QSB, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the
16
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
this Form 10-QSB.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect the internal controls subsequent
to the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. 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.
A dormant complaint filed in 2002 against the RAP Group and Steve Schneider (CEO
of ZAP) individually was reactivated by the plaintiff (Jim Arnold Trucking). The
Compliant alleges Breach of Contract, Promissory Estoppel and Fraud and seeks
contract damages in the amount $71,000 plus monthly storage fees and punitive
damages. 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.
The RAP Group has been on probation with the California Department of Motor
Vehicles (DMV) for a period of two years that ended on June 12, 2004. The
probationary action was primarily due to the RAP Group's untimely transfers of
documents for sales of vehicles and lack of compliance with Motor Vehicle
Pollution Control guidelines on certain automobile sales. In June of 2004, the
California Department of Motor Vehicles filed an Accusation and Petition To
Revoke Probation and at present the RAP's Group probation has been extended
until the matters are resolved with the DMV. The Company has requested a hearing
date with the DMV and intends to refute the accusations. As part of ZAP's
original business plan, management is considering converting, depending upon the
sales volume, and the dealership into a wholesale distributor for its electric
cars.
The action that was 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 was settled in May 2004. This was 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. The Compromise and
settlement required the Company to issue Series A Warrants to the Plaintiffs
pursuant to ZAP's Second Amended Plan of Reorganization of June 17, 2002 no cash
damages were required to be paid.
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 was seeking damages in the
amount of $546,108 plus interest. The Company settled the action in July 2004
for $42,000 plus legal fees and the case is now dismissed. This settlement
resulted in other income of $385,000 for the three months ended June 30,2004.
Item 2. Changes in Securities
There were no changes in rights of securities holders.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities.
Item 4. Submission of Matters to a Vote of Security Holders
17
At the Annual Meeting of Shareholders held on July 25, 2004, the following
proposals were requested and approved as follows:
(a) To elect five Directors, Louis Auletta, Renay Cude, Guy Fieri, Steve
Schneider and Gary Starr to serve until the next annual meeting and until
their successors are elected and qualified.
For: 9,754,823 Withheld: 217,341 Abstain: None
(b) To ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP as the
Company's independent accountant
For: 9,966,455 Against: 1,298 Abstain: 4,411
Item 5. Other Information
On June 1, 2004, the Company's Board of Directors appointed William Hill to be a
member of the Advisory Board. Mr. Hill is the CEO of Donahue Gallagher Woods
LLP, a law firm in the San Francisco Bay area with a diverse practice.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 ZAP Floor Line and Dealer Development Agreement with Clean
Air Motors, LLC for a $45 million Floor Plan Line of Credit
for Qualified ZAP Dealers.
31.1 Certificate of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On July 29, 2004 The Company filed an SEC Form 8-K to report a $24.5 common
stock purchase agreement with Fusion Capital Fund II, LLC. The Company also
reported the extension of the Company's Series B restricted warrants by an
additional six months from July 1, 2004 and to increase the exercise price from
$1.07 to $1.26.
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZAP
---------------------
(Registrant)
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Steve Schneider Director / CEO August 13, 2004
-------------------------
/s/ William Hartman CFO August 13, 2004
-------------------------
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