WWW.EXFILE.COM, INC. -- 13755 -- ZAP -- FORM 10-QSB
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

-----------------------------

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, 2005

Commission File Number 0-303000


ZAP
(Name of small business issuer in its charter)

CALIFORNIA
94-3210624
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 

501 Fourth Street
Santa Rosa, CA 95401
(707) 525-8658
(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 o

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.

31,922,000 shares of common stock as of August 12, 2005.

Transitional Small Business Disclosure Format  Yes  o  No  x
 
 

 
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, 2005
2
 
 
 
 
 
 
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2005 and 2004
3
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004
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
19
 
 
 
 
PART II.
Other Information
 
 
 
 
 
 
 
 
 
 
Item 1.
Legal Proceedings
19
 
 
 
 
 
Item 2.
Changes in Securities and Use of Proceeds
20
 
 
 
 
 
Item 3.
Defaults Upon Senior Securities
21
 
 
 
 
 
Item 4.
Submission of Matters to a Vote of Security Holders
21
 
 
 
 
 
Item 5.
Other Information
21
 
 
 
 
 
Item 6.
Exhibits and Reports on Form 8-K
21
 
 
 
 
SIGNATURES
 
22
 
 
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
ZAP
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
     (In thousands) 
 
  
June 30,
2005
  
ASSETS 
  
 
  
CURRENT ASSETS
  
 
  
 Cash and cash equivalents  
  
$
3,584
  
Accounts receivable, net of allowance for doubtful accounts of $747
    
215
  
Advances on Smart Car inventory
    
1,378
  
Inventories
    
1,902
  
Prepaid non-cash professional fees
    
6,941
  
Prepaid expenses and other current assets
   
186
  
Total current assets
    
14,206
  
 
      
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $775
    
5,221
  
 
      
OTHER ASSETS
      
Smart Automobile license, net
    
9,346
  
Prepaid non-cash professional fees, less current portion
    
2,355
  
Notes Receivable Smart Automobile
    
1,000
  
Patents and trademarks, net   
    
89
  
Goodwill     
    
476
  
Deposits and other
    
441
  
Total assets
  
$
33,134
  
 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
      
 
      
CURRENT LIABILITIES
      
Current portion of long-term debt
  
$
104
  
Accounts payable
    
341
  
Accrued liabilities  
    
1,476
  
License fee payable
    
906
  
Deferred revenue
    
975
  
Total current liabilities
    
3,802
  
LONG-TERM LIABILITIES
      
Long-term debt, less current portion
   
1,959
  
Total liabilities
    
5,761
  
 
      
SHAREHOLDERS’ EQUITY 
      
Preferred stock, authorized 50 million shares; no par value,
7,500 shares issued and outstanding
   
7,500
  
Common stock, authorized 100 million shares;
      
no par value; 31,845,210 shares issued and outstanding
    
78,146
  
Common stock issued as loan collateral
    
(3,529
)
Notes receivable from shareholders, net
    
(56
)
Accumulated deficit
    
(54,688
)
Total shareholders’ equity
    
27,373
 
Total liabilities and shareholders’ equity
  
$
33,134
  
 
See accompanying notes to condensed consolidated financial statements (unaudited).
 
 
ZAP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Thousands, except share amounts)

   
Three Months ended June 30
    
Six Months ended June 30
  
   
2005
  
2004
  
2005
  
2004
  
 
                  
NET SALES
  
$
923
  
$
1,072
  
$
2,085
  
$
2,392
  
                           
COST OF GOODS SOLD
    
792
    
833
    
1,920
    
1,817
  
                           
GROSS PROFIT
    
131
    
239
    
165
    
575
  
                           
OPERATING EXPENSES
                          
Sales and marketing
    
299
    
209
    
492
    
408
  
General and administrative
    
1,790
    
1,636
    
4,650
    
3,192
  
(non-cash of $.1 million and $1.3 million and
                          
$.7million and $1.2 million for the three and six months
                          
ended June 30, 2005 and 2004)
                          
Research and development
    
60
    
—
    
100
    
—
  
Loss on disposals of fixed assets
    
—
    
63
   
—
    
63
  
     
2,149
    
1,908
    
5,242
    
3,663
  
 
LOSS FROM OPERATIONS BEFORE
                          
REORGANIZATION ITEMS, OTHER
                          
INCOME(EXPENSE)AND INCOME TAXES
    
(2,018
)
  
(1,669
)
  
(5,077
)
  
(3,088
)
                           
OTHER INCOME (EXPENSE)
                          
 Gain on revaluation of warrant liability
    
—
    
—
    
1,519
    
—
  
Interest income (expense)
    
5
    
(30
)
  
2
    
(60
)
Other income
   
129
    
385
    
125
    
393
  
     
134
    
355
    
1,646
    
333
  
LOSS BEFORE REORGANIZATION ITEMS
                          
AND INCOME TAXES
    
(1,884
)
  
(1,314
)
  
(3,431
)
  
(2,755
)
                           
Reorganization items:
                          
Professional fees
    
—
    
5
    
—
    
13
  
                           
LOSS BEFORE INCOME TAXES
    
(1,884
)
  
(1,319
)
  
(3,431
)
  
(2,768
)
                           
PROVISION FOR INCOME TAXES
    
—
    
—
    
4
   
2
  
NET LOSS
  
$
(1,884
)
$
(1,319
)
$
(3,435
)
$
(2,770
)
                           
                           
NET LOSS PER COMMON SHARE
                          
BASIC AND DILUTED 
  
$
(0.06
)
$
(0.09
)
$
(0.11
)
$
(0.19
)
                           
WEIGHTED AVERAGE OF
                          
COMMON SHARES OUTSTANDING --
                          
BASIC AND DILUTED
    
31,459
    
14,139
    
30,877
    
14,678
  
 
See accompanying notes to condensed consolidated financial statements (unaudited).
 


ZAP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
  
Six months ended June 30,
 
 
  
2005
  
2004
  
CASH FLOWS FROM OPERATING ACTIVITIES
  
 
  
 
  
Net loss
 
$
(3,435
)
$
(2,770
)
 
          
Items not requiring the use of cash:
          
Amortization of note discount
    
10
    
24
  
Stock-based compensation for consulting and other services
    
6,292
    
1,278
  
Loss on disposal of assets
    
—
    
63
  
Stock-based employee compensation 
    
(5,000
)
  
—
  
Gain on revaluation of warrant liability
    
(1,519
)
  
—
  
Depreciation and amortization
    
702
    
312
  
Allowance for doubtful accounts
    
199
    
74
  
Allowance for notes receivable
    
—
    
111
  
Changes in other items affecting operations:
          
Receivables
    
(220
)
  
(40
)
Advances on SmartCar
    
188
    
—
  
Inventories
    
362
    
360
  
Prepaid expenses and other assets
    
(88
)
  
(147
)
Accounts payable
    
191
    
(439
)
Accrued liabilities
   
313
    
(292
)
Deferred revenue
    
—
    
245
  
Net cash used in operating activities
    
(2,005
)
  
(1,221
)
CASH FLOWS FROM INVESTING ACTIVITES
          
Acquisition of distribution license
          
(1,000
)
Purchase of equipment
    
(419
)
  
(15
)
Net cash used for investing activities
    
(419
)
  
(1,015
)
 
          
CASH FLOWS FROM FINANCING ACTIVITIES
          
Repurchase of common stock
    
(500
)
  
—
  
Payments on note receivable to stockholder 
    
14
    
—
  
Issuance of preferred stock
    
—
    
1,128
  
Issuance of common stock and warrants, net of offering costs
    
2,225
    
2,028
  
Issuance of note receivable to Smart Auto
    
(1,000
)
  
—
  
Proceeds from issuance of long-term debt
    
—
    
1,000
  
Repayments of long-term debt
    
(85
)
  
(4
)
Net cash provided by financing activities
    
654
    
4,152
  
 
          
NET INCREASE ( DECREASE) IN CASH AND CASH EQUIVALENTS
    
(1,770
)
  
1,916
  
 
          
CASH AND CASH EQUIVALENTS, beginning of period
    
5,354
    
551
  
 
          
CASH AND CASH EQUIVALENTS, end of period
  
$
3,584
  
$
2,467
  

See accompanying notes to condensed consolidated financial statements (Unaudited)
 


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, 2004.

The financial statements presented herein, for the three and six months ended June 30, 2005 and 2004 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 profitability. 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 four 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.

The Company relies on Smart Automobile LLC to supply pre-Americanized Smart ®cars and other entities such as G&K Automotive to convert or Americanize Smart® cars for sale in certain states in the United States; and to provide services under warranties and all other maintenance and repair services. If Smart Automobile LLC is unable to supply Americanize or service Smart ® cars, and the Company is unable to obtain alternate sources of supply for these products and services, the Company might not be able to fill existing backorders and/or sell more Smart® cars. The Company also believes that certain competitors may have used un-business like tactics to harm the Company, and to slow the flow of Smart cars to ZAP.
 
(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.

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 period.


In thousands except per share amounts
  
Three months ended June 30
  
Six months ended June 30
  
   
2005
  
2004
  
2005
  
2004
  
 
Net Loss
  
$
(1,884
)
$
(1,319
)
$
(3,435
)
$
(2,770
)
Add: Employee stock-based compensation expense included in reported net loss,net of related tax effects
  
$
(3,355
)
  
—
  
$
(5,000
)
  
—
  
Deduct: Employee stock-based compensation expense determined under fair value
    
(1,432
)
  
(27
)
  
(1,850
)
  
(42
)
Pro forma
  
$
(6,671
)
$
(1,346
)
$
(10,285
)
$
(2,812
)
Basic and diluted per share:
                          
As reported
  
$
(0.06
)
$
(0.09
)
$
(0.11
)
$
(0.19
)
Pro forma
  
$
(0.21
)
$
(0.10
)
$
(0.33
)
$
(0.19
)

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 convertible preferred stock and debt have been excluded from the diluted per share amounts, since the effect of these securities would be anti-dilutive. At June 30, 2005, these potentially dilutive securities include options for 6,401,000 common shares, warrants for 53,385,083 shares of common stock, debt convertible into 930,000 shares of common stock and preferred shares that can be converted into 2.78 million common shares.
 
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.

REVENUE RECOGNITION
The Company records revenues only upon the occurrence of all of the following conditions:

-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)

-The purchase price has been fixed, based on the terms of the purchase order

-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

-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.
 
DEFERRED REVENUE-One of the Company’s subsidiaries, Voltage Vehicles, sold licenses to auto dealerships under the ZAP name. The license agreements call for the licensee to purchase a minimum number of vehicles from ZAP each year. The Company collected $975,000 related to these agreements, which is classified as deferred revenue until such time as the Company begins delivering vehicles to these dealerships.

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, 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.

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.

STOCK ISSUED AS COLLATERAL- In December 2004, the Company issued 2.9 million common shares as collateral for a $1 million loan . The $3.529 million market value of these shares at the date of issuance was recorded in common stock with an offsetting contra equity account. These shares were previously issued to Mercatus Partners LLP in January 2003 as collateral for a loan that never funded. The shares were reported as lost to the Company in December 2003. In December 2004, the shares were reissued to Mercatus Partners who then assigned the shares and their interests to Phi-Nest Fund, L.P. as collateral for the $1 million loan commitment.
 
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 November 2004, the FASB issued SFAS No. 151, Inventory Costs, An Amendment of ARB No. 43, Chapter 4 ("SFAS 151"). SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) be recognized as current period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a material impact on its results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-based Payment, ("SFAS 123R"). SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees.  

Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of operations. As a small business issuer, SFAS 123R will become effective for the Company for periods beginning after December 15, 2005. The Company has not yet determined which fair-value method and transitional provision it will follow, however, it expects that the adoption of SFAS 123R will have a significant impact on its results of operations. The Company does not expect the adoption of SFAS 123R to materially impact its overall financial position. See Stock-based Compensation earlier in this Note 1 for the pro forma impact on net loss and net loss per share from calculating stock-based compensation costs under the fair value alternative of SFAS 123. The determination of compensation cost for share-based payment transactions after the effective date of SFAS 123R may be different from the determination of compensation cost under SFAS 123; however the Company has not yet quantified such differences.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29 ("SFAS 153"). The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion No. 29, however, included certain exceptions to that principle. SFAS 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 153 will have a material impact on its results of operations or financial position.
 
 
(3)
INVENTORIES- The Inventories at June 30, 2005 are summarized as follows (thousands):

Vehicles
  
$
1,036
  
Parts and supplies
    
440
  
Finished Goods
    
626
  
 
    
2,102
  
Less-inventory reserve
    
(200
)
 
  
$
1,902
  

(4)
LICENSE AND DISTRIBUTION FEE

On April 19, 2004, ZAP entered into an Exclusive Purchase, License and Supply Agreement with Smart-Automobile LLC ("SA"), a California limited liability company, to distribute and manufacture Smart(R) cars. Smart is the brand name for a 3-cyclinder gas turbo engine car manufactured by Daimler Chrysler AG. SA is not affiliated with Daimler Chrysler, but is a direct importer.

Under the agreement, ZAP purchased the rights to be the exclusive distributor and licensee of the right to manufacture and distribute Smart(R) cars in the United States and the non-exclusive distributor and licensee outside of the United States for a period of ten years from SA. Subject to the terms of the agreement, ZAP will pay SA a license and distribution fee of $10,000,000: $1 million was paid in cash upon the execution of the agreement, $1 million will be payable in cash ratably commencing with the delivery of the first 1,000 smart cars, and $8 million was paid in ZAP preferred stock.

A more detailed agreement was signed and completed on October 25, 2004. Under this agreement SA exchanged their original Preferred Shares for new Preferred Shares with the designation of SA. These SA preferred shares convert to ZAP common shares under the following formula: For every 1,000 Smart(R) vehicles delivered to ZAP in the years 2004, 2005 and 2006 which are fully EPA compliant to sell in the United States as new cars, the holder may convert 500 shares of preferred stock SA to $500,000 of common stock, and the holder will receive 505,000 warrants with an exercise price of $2.50 per share exercisable through July 7, 2009, or when all the preferred have been converted. During 2004, ZAP allowed SA to convert 500 preferred shares to $500,000 of common stock prior to delivering any EPA compliant Smart Cars, and issued a warrant to purchase 505,000 common shares at $2.50 per share exercisable through July 7, 2009. As of August 2005, SA has only delivered a few cars to ZAP.

The Company recorded the cost of the Smart Automobile license at $10.6 million, based on: 1) the $10 million the Company paid to Smart Automobile LLC as consideration for a Purchase, License and Supply Agreement dated April 19, 2004; and 2) the fair value of five-year warrant issued under the Agreement for the purchase of 505,000 common shares at $2.50 per share and expiring on July 7, 2009. The warrant was valued at $1.16 per share using the Black Scholes option pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 3.08%; contractual life of 4.5 years; and volatility of 229.43%.

An independent valuation of the fair value of the Smart Automobile license exceeded the $10.6 million recorded cost of the license. The valuation of the license was based on the Company's discounted projected cash flows from projected sales of Smart Cars over the term of the license agreement. Should deliveries of Smart Cars be delayed, or less than anticipated, the Company may need to adjust the recorded cost of the license. The cost of the license is being amortized using the straight-line method over the ten year term of the agreement. However , as of August 12, 2005, only a few cars have been delivered to ZAP. At present , ZAP is exploring all options to rectify this situation.

(5)
NOTES RECEIVABLE SMART AUTOMOBILE LLC

In January 2005, the Company paid $1,000,000 to Smart Automobile, LLC and Thomas Heidemann (President of Smart Automobile, LLC) in exchange for a note receivable. The note bears interest at 5% per annum and is payable in 24 equal monthly installments beginning January 7, 2006. The loan was secured by an interest in certain equipment owned by Smart Automobile, LLC. The Company has also earlier prepaid $1.6 million to Smart Automobile, LLC as deposits on Smart cars.

(6)         SHAREHOLDERS’ 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. On July 1, 2005, the Company filed with the Commission a Current Report on Form 8-K to announce that the Company’s stock ticker symbol currently used on the Archipelago Exchange (ArcaEX) will change from “ZAPZ” to “ZP” effective July 7, 2005. ZAP recently switched from trading on the Over the Counter Bulletin Board (OTCBB) to the ArcaEx Exchange which is a facility of the Pacific Exchange and is the nation’s first totally open, all-electronic stock exchange.


 
The Company’s shareholder equity activity for the three and six months ended June 30, 2005 is summarized as follows:
 
 
  
 Common
  
 
  
 
  
 Shares
  
 Amount
  
Balance at December 31, 2004 
    
29,524,000
  
$
63,616,000
  
 
    
   
 
Issuances of Common Stock for: 
    
   
 
Automobile inventory
    
22,246
   
48,689
 
Furniture, fixtures and equipment
    
1,504
   
3,973
 
Exercise of warrants for cash
    
625,177
   
705,366
 
Repurchased shares from Fusion Capital
    
(200,000
)
  
(500,000
)
Legal fees
    
35,249
   
98,100
 
Repairs and maintenance
   
14,940
   
41,235
 
Rent
   
29,781
   
81,600
 
Consulting
    
137,775
   
337,451
 
Other services
    
13,675
   
39,400
 
Investment in joint venture in China
    
90,000
   
247,500
 
Private placement of shares and warrants for cash, including shares to
   
   
 
placement agents, net of issuance costs
    
630,000
   
1,250,125
 
Employee compensation
    
429
   
2,025
 
 
    
1,400,776
   
2,355,464
 
Warrant Transactions
    
   
 
Reclassification of warrant liability
    
   
6,711,250
  
Fair value of Warrants issued
for consulting and other services
    
   
8,317,750
 
Employee warrants variable
   
   
 
accounting adjustment
    
 
    
(1,644,500
)
 
      —    
13,384,500
 
Balance at March 31, 2005
    
30,924,776
 
$
79,355,964
  
Purchase of  land and building
    
455,442
    
1,100,000
  
Automobile inventory
    
3,349
    
4,785
  
Furniture, fixtures and equipment
    
42,235
    
95,681
  
Exercise of warrants for cash
    
250,333
    
270,400
  
Legal fees
    
56,859
    
122,578
  
Rent
   
42,000
    
63,000
  
Consulting
    
9,370
    
24,920
  
Other services
    
38,869
    
57,764
  
Employee compensation
    
21,977
    
57,539
  
 
    
920,434
  
 
1,796,667
  
Warrant Transactions
    
   
 
Fair value of warrants issued
   
   
 
for consulting and other services
    
   
409,000
  
               
Employee warrants variable accounting adjustment
    
   
(3,415,500
)
               
 
      —    
(3,006,500
)
Balance at June 30, 2005
    
31,845,210
 
$
78,146,131
  
 
    
   
 

The Company issued common shares and warrants to purchase common shares during the six months ended June 30, 2005. The stock grants were issued as consideration under agreements for consulting and other services; for real property, furniture, fixtures and equipment, automobile inventory and for employee services. For inventory and other assets, the Company recorded the cost as the market value of the stock or as the fair value of the assets, whichever was more reliably measurable. For the stock issued for
 
 
consulting and other services, and for employee compensation, the Company recorded the cost as the market value of the stock at the date of grant.

The Company also issued warrants for consulting and other services. During the six months ended June 30, 2005, the Company issued warrants to vendors and consultants to purchase 5.5 million common shares at prices ranging from $3.05 per share to $4.75 per share, with a contractual life ranging from .5 to 2.5 years. The warrants were nonforfeitable and fully vested at the date of issuance and were valued using the Black-Scholes option pricing model with the following range of assumptions:

 
Low
High
Exercise price per share
$3.05 
$4.75 
Market price
$2.74 
$3.41 
Assumptions:
 
 
Expected dividend yield
0.0% 
0.0% 
Risk free rate of return
2.87% 
3.34% 
Contractual life
.5 years 
2.5 years
Volatility
147.1% 
168% 
Fair market value
$1.00 
$2.06 

Under a purchase agreement dated February 16, 2005, the Company issued 600,000 shares of its common stock and 3 warrants for the purchase of 900,000 shares of its common stock to Lazarus Investment Partners LLP on February 17, 2005, for an aggregate purchase price of $1,260,000. Each of the 3 warrants is exercisable for 5 years, and will be exercisable for 300,000 shares of common stock at the initial exercise prices of $2.50, $3.25, and $4.00 per share. The Company also issued 30,000 shares and warrants to purchase 90,000 shares of stock to placement agents. The stock purchase agreement contains antidilution provisions under which the Company is obligated to issue additional common shares for no additional consideration if within 6 months the Company completes certain subsequent financing at less than $2.10 per share. 
 
On July 22, 2004, the Company entered into a stock purchase agreement with Fusion Capital Fund II, LLC (Fusion Capital). The stock purchase agreement provided for the issuance of $24.5 million in common stock over a 40-month period. The agreement provided for the immediate issuance of 300,000 common shares as commitment and signing shares at no cost and the immediate issuance of 5-year warrants for the purchase of 2.5 million shares of common stock at prices ranging from $2.50 to $5.50 per share. The stock purchase agreement required the Company to file a registration statement by August 20, 2004 for the resale of shares issued or issuable under the stock purchase agreement and have the registration statement declared effective within 120 days. The stock purchase agreement provided for cash liquidated damages if the Company failed to meet the registration deadline. The Company did not file the required registration statement. Pursuant to EITF 00-19, the warrants issuable under the stock purchase agreement were valued using the Black Scholes option pricing model and recorded as a liability. The warrant liability was revalued at December 31, 2004 with the marked to market adjustment recorded in other expense. On February 22, 2005, the Company terminated its stock purchase agreement with Fusion Capital. The Company revalued the warrant liability on February 22, 2005 and recorded the marked to market adjustment of $1.5 million in other income. The remaining warrant liability of $6.7 million was transferred to equity since the Company was no longer required to file a registration statement for the warrant shares.  Under the termination agreement, the Company repurchased 200,000 common shares from Fusion Capital for the original issuance price of $500,000. Fusion Capital retained certain commitment and signing common shares that were previously issued, and warrants to purchase up to 2.5 million shares of common stock.

In late 2004, the Company repriced B and B2 and C and C2 warrants, including warrants held by employees. As a result, the warrants held by current employees are being accounted for using the variable method of accounting under APB No. 25 and FIN 44. Accordingly, the intrinsic value of the employee warrants at March 31 and June 30, 2005 was used to calculate compensation expense for the and resulted in a reduction in compensation expense of $1.6 million and $3.4 million for the three and six month periods ended June 30, 2005 respectively.


(7)        LITIGATION- Other than the following, we are not party to any pending material legal proceedings and are not aware of any threatened or contemplated proceedings by any government authority against us.

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 of $750,000. The Company has cross-claimed against Plaintiffs seeking compensatory damages, attorneys' fees and equitable relief for breach of oral contract, common count for goods sold and delivered, conversion, liability of surety, violation of statue, and violation of the Unfair Practices Act. On February 17, 2005, the court referred the matter to non-binding arbitration. The non binding arbitration hearing was held on July 27, 2005 with no agreement reached. ZAP intends to assert its defenses vigorously and to litigate its cross-compliant aggressively. 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.
 

 
(8)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 
  
Six Months Ended
  
 
  
June 30,
  
 
  
2005
  
2004
  
 
  
 
  
 
  
Cash paid during the period for interest 
  
$
20
    
—
  
Cash paid during the period for income taxes
  
$
4
    
2
  
Non-cash investing and financing activities:
    
   
 
Stock and warrants issued for:
    
   
 
Stock issued to acquire distribution license
          
8,000
  
Purchase of equipment
  
$
1,200
    
68
 
Inventory purchases
  
$
54
    
480
  
Prepaid expenses
  
$
—
    
1,083
 
Other assets 
  
$ 
247
    
—
  
Reclassification of warrant liability
  
$
6,711
    
—
  

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS.

THIS QUARTERLY REPORT, INCLUDING THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE "FILINGS") CONTAIN FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH WORDS AND PHRASES SUCH AS "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT", "INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY RESULT", AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING FACTORS:

- WHETHER THE ELECTRIC AND GAS-EFFICIENT VEHICLE MARKET FOR OUR PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH IT MAY GROW;
- OUR ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENT OUR GROWTH STRATEGIES,
- OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OUR PRODUCTS;
- OUR ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY;
- OUR ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS;
- OUR ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGING MARKET FOR ELECTRIC AND GAS-EFFICIENT VEHICLES;
- CHANGES IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND
- OTHER RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS SECTIONS OF THIS REPORT.

 
Overview

ZAP stands for Zero Air Pollution®. ZAP was founded on September 23, 1994, during an era when government and industry were debating how to solve our growing transportation problems. ZAP forged ahead with a bold, grass-roots marketing campaign and innovative products like its zero-emission ZAP ® electric bicycles and ZAPPY ® folding electric scooters that were cost-effective and practical for world markets. Today ZAP is still moving forward with an aggressive campaign to stay at the forefront of fuel-efficient transportation with new technologies, including energy efficient gas systems, hydrogen, electric and other innovative power systems. ZAP is also investing in advanced energy solutions, utilizing advanced batteries and innovative fuel cell designs.

In the process of building ZAP, the Company has pioneered a growing niche for alternative transportation. In 1995, ZAP began marketing electric transportation on the Internet through its website at www.zapworld.com. In 1996-1998, ZAP continued to add to its product line; in 1999 ZAP added electric motorbikes; in 2001 it added electric dive scooters; in 2003 ZAP announced its first electric automobiles, including the first-ever production electric automobiles imported from its manufacturing partner in China; in 2004 ZAP introduced electric ATVs and the fuel-efficient Smart Car.

Today, ZAP is a one-stop portal for a diverse lineup of quality, affordable advanced automotive technologies. ZAP has delivered more than 90,000 vehicles to customers in more than 75 different countries. Our goal is to become the largest and most complete distribution portal in the United States for advanced technology vehicles. We are focused on creating a distribution channel for our automobile and consumer products by establishing qualified automobile-dealers and developing relationships with mass-merchandisers throughout the United States. We currently market and sell our automobile products through qualified automotive dealers including our subsidiary, Voltage Vehicles. We currently market and sell our consumer products directly to consumers through our Internet Web Site, independent representatives, retail outlets and qualified automobile dealers. We continue to develop new products independently and through development and acquisition agreements with companies and manufacturers, and by the purchase of products manufactured to our specifications but for which we do not have proprietary interest. We have grown from a single product line to a full line of electric vehicle and advanced transportation products. Most of ouir domestic manufacturing has been transferred to lower-cost overseas contract manufacturers.

ZAP was incorporated under the laws of the State of California, on September 23, 1994, as “ZAP Power Systems.” The name of the Company was changed to “ZAPWORLD.COM” on May 16, 1999 in order to increase our visibility in the world of electronic commerce. We subsequently changed our name to ZAP on June 18, 2001 in order to reflect our growth and entry into larger, more traditional markets. Our principal executive offices are located at 501 Fourth Street Santa Rosa, California, 95401. Our telephone number is (707) 525-8658.

Subsidiaries

We have several subsidiaries as follows: RAP Group, Inc., a California company (“RAP Group”), Voltage Vehicles, a Nevada company (“Voltage Vehicles”), ZAP Rental Outlet, a Nevada company (“ZAP Rentals”), ZAP Stores, Inc., a California company (“ZAP Stores”), ZAP Manufacturing, Inc., a Nevada company (“ZAP Manufacturing”) and ZAP World Outlet, Inc., a California company (“ZAP World”). We wholly own each of our subsidiaries. RAP Group is engaged primarily in the sale and liquidation of conventional automobiles; Voltage Vehicles is engaged primarily in the distribution and sale of advanced technology and conventional automobiles; ZAP Rentals is engaged primarily in rental of ZAP products, ZAP Stores is engaged primarily in consumer sales of ZAP products and ZAP Manufacturing is engaged primarily in the manufacture of ZAP products. ZAP World Outlet is not currently an operating subsidiary. RAP Group and Voltage Vehicles were acquired by the Company in a merger and acquisition transaction in July 2002. RAP Group has active operations and generated approximately 80% of the Company’s consolidated revenues in 2005.

Business Development

Our business strategy has been to develop, acquire and commercialize advanced transportation vehicles and technology, including electric vehicles and electric vehicle power systems, low emissions vehicles, fuel cell powered vehicles, and fuel-efficient vehicles which have fundamental, practical, environmental advantages over conventional internal combustion modes of transportation that can be produced commercially on an economically competitive basis.

In 2004, we continued to enhance and broaden our electric vehicle product line and we contracted for the exclusive right in the United States and the nonexclusive right world-wide to distribute the Smart Cars Americanized by ZAP. We acquired those rights in our agreement with Smart Automobile, LLC, a California limited liability company (“Smart Automobile”). Smart Automobile is importing the cars, assembled by Mercedez Benz in Europe, and then making them compliant for sale in the United States with all applicable Federal and state regulations concerning automobiles. In an effort to become the largest distributor of advanced technology vehicles in the United States, we are actively developing a network of automobile dealers that will be qualified to sell our automobile and consumer products. In connection with establishing such dealers, we have arranged for a secured inventory floor line of credit for the first 150 such dealers through our agreement with Clean Air Motor, LLC (CAMCO”). We have already established dealers in California, Oklahoma, Pennsylvania, New York, Florida, and Michigan.

In addition, we have introduced a new consumer product, the ZAP Portable Energy (PE), which is a portable power source and battery charger for consumer electronic devices.

We also announced in 2004, Voltage Vehicles' agreement with Apollo Energy Systems, Inc. ("Apollo") for the exclusive distribution rights in the United States of Apollo's automobile fuel-cells, and we announced our exclusive distribution agreement with Anuvu of Sacramento, California for its patented Power-X(TM) hydrogen fuel cell engine systems for on road applications in the United States. We continuously seek to develop new vehicle designs, products and technology to expand and compliment our current product offerings.
 
 
Product Summary

We market many forms of advanced transportation vehicles, including electric automobiles, fuel-efficient vehicles, motorcycles, bicycles, scooters, neighborhood electric vehicles and all terrain vehicles. We market products designed solely by us, as well as products we design together with other companies. Most of our products are manufactured in China. Our automobiles are assembled outside of the United States, but made to comply with United States laws inside the United States. The Smart Car Americanized by ZAP is manufactured and made compliant for sale in the United States by Smart Automobile, and we make the ZAP WORLD CAR compliant for the United States market. Our automobile products require registration with state vehicle registration departments and must be sold through licensed dealers, while our consumer vehicles can be sold directly to consumers without registration.

Our automobile vehicles are subject to environmental and safety compliance with various Federal and State governmental regulations, including regulations promulgated by the EPA, NHTSA and Air Resource Board of the State of California (CARB). The costs of these compliance activities can be substantial.

Our existing product line, which includes completed, market ready products and planned introductions, is as follows:

Automotive Line

The Company possesses exclusive licenses, know-how, and technology that enable the Company to import various foreign made vehicles.

SMART CAR AMERICANIZED BY ZAP. The Smart Car Americanized by ZAP, which is assembled by Mercedes Benz, is imported by Smart Automobile LLC through a registered importer and made compliant for sale in the United States by Smart Automobile LLC and G & K Automotive. As of this date and to our knowledge, Smart Automobile LLC is the only company, through its proprietary recalibration technology and its compliance contractor G & K Automotive, with clearance from the DOT and a letter of conformity from the EPA, that allowed a model of the Smart Car, as modified, to be sold in the U.S. ZAP is the exclusive distributor of these cars. Additional clearances will be needed to sell this vehicle in volumes and to sell other models of the Smart Car. The California Air Resources Board must certify the car before it could be sold in California and four other states. ZAP will need to set up large contractors to handle the demand for this vehicle. ZAP anticipates that the current EPA and DOT clearance will afford ZAP the opportunity to distribute Smart Cars as Americanized by ZAP in the U.S. Neither ZAP nor Smart Automobile is affiliated with, or authorized by, Smart Gmbh, the manufacturer of SMART automobiles, or the smartUSA division of Mercedes-Benz LLC, the exclusive authorized U.S. importer and distributor of those vehicles. ZAP purchases its vehicles from Smart Automobile LLC.

This Smart Car has a gas turbo engine. 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 Car Americanized by ZAP include a 61-hp, 3-cyclinder turbocharged engine, equipped with an advanced electronic stabilization program, or ESP, an anti-skid design that throttles the engine torque along with an anti-lock braking system. The unique 6-speed automatic gear transmission with kick down function allows the user to switch between "automatic" and "manual" gear shifting via a control program that changes `gears in response to varying driving characteristics. These cars will be sold through Voltage Vehicles to qualified ZAP dealers.

ZAP WORLDCAR(TM). This electric vehicle 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. We signed an exclusive agreement to import this nearly completed vehicle into the United States. This vehicle is assembled in China and we make it compliant with NHTSA, EPA, and various state regulatory standards. This vehicle is a "Neighborhood Electric Vehicle" or classified as a "Low Speed Vehicle." This new category of automobile was created for use in intra-city transportation, planned communities, commercial zones and tourist areas where the distances traveled are short and the need for large capacity is limited. The smaller, low-speed electric cars are a new transportation alternative for communities concerned with air and noise pollution, high fuel prices, traffic congestion or parking shortages. The ZAP Worldcar has speeds up to 25 mph, room for two and can be plugged into any normal household electric outlet to recharge its battery. This vehicle was certified by the Air Resources Board of the State of California as being a Zero Emission Vehicle in September 2004. This vehicle is subject to state vehicle registration laws and must be sold through an automobile dealer.

ZAP LIGHT UTILITY VEHICLE (LUV). This vehicle is also 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. 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.


 
 Personal Transportation

ZAPPY(R). This electric scooter is a stand-up, portable, lightweight scooter featuring a 12-volt battery with a built-in charger and a collapsible frame. The design includes a unique folding mechanism and proprietary circuitry, which increases the efficiency and range of the vehicle. In the fourth quarter of 2003, we introduced a new ZAPPY(R) Scooter which offered significant upgrades over the previous design with respect to performance, construction and appearance.

ZAPPY(R) Express Scooter. In the fourth quarter last year, we introduced a new which offered significant upgrades over the previous design, including a seat and carrying case. We exclusively own the design of this product. This product is not subject to state vehicle registration laws and may be sold directly to consumers.

ZAPPY 3. The ZAPPY 3 is a three-wheeled scooter that uses a wheel-motor drive technology built into the hub of the front wheel to enable increased stability while enhancing maneuverability. The riding platform has two smaller wheels on either side with the larger wheel motor in front, so a person can ride in standing position with both feet placed side-by-side, rather than skateboard-style standing sideways which was the design of the original ZAPPY(R). We exclusively own the design of this vehicle. This vehicle is not subject to state vehicle registration laws, and may be sold directly to consumers.

ZAP(R) SEASCOOTER(R). The ZAP SeaScooter (TM) is an 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.

POWERBIKE(R). The Powerbike resembles a mountain bicycle with an electric motor attached. This vehicle is not subject to state vehicle registration laws and may be sold directly to consumers.

OTHER ELECTRIC AND FUEL-EFFICIENT VEHICLES. Under various distribution agreements, we have the right to distribute a wide spectrum of personal and industrial electric vehicles. In 2004, we announced the introduction of our electric all-terrain vehicles, which we began selling at the end of 2004.

Energy Products

ZAP PORTABLE ENERGY(TM). This is a portable lithium energy power source and battery charger for low-voltage consumer electronic products. This device uses a "smart" microprocessor control system to power multiple hand-held electronic devices or to charge batteries. The ZAP PE can be used to power a variety of mobile consumer electronic devices, such as PDAs, digital cameras, cellular telephones, MP3 players, laptops and equivalent low-voltage devices. We manufacture the ZAP PE in China for distribution and sale in the United States under our name. We are marketing and planning to sell this product through independent representatives for resale and distribution to retail stores, as well as directly to consumers over our Internet sales portal.

MICROPROCESSOR DRIVE CONTROLLERS. We are working to develop, independently and in collaboration with other companies, a series of low cost proprietary controller microprocessors for all of our products. These devices will increase efficiency and lower costs of operation by providing more efficient use of power to charge our products.

FUEL CELL TECHNOLOGIES. In August 2004, Voltage Vehicles entered into an exclusive distribution agreement with Apollo to acquire certain exclusive rights to purchase, market and sell up to $100 million of Apollo products including Alkaline Fuel Cell products, Tri-Polar Lead-Cobalt battery technology, and certain propulsion systems, together with related advanced technology products owned by Apollo. We believe this agreement compliments our existing product line of environmentally friendly transportation and power products. Our Chief Executive Officer, Mr. Steven Schneider is a member of the Advisory Board of Directors of Apollo. The Company expects to demonstrate its first hybrid fuel cell vehicle in 2005. In December 2004, we entered into an exclusive purchase and distribution agreement with Anuvu for their patented fuel cell for on road applications.
 
 Distribution and Market Outlets

We employ the following methods to distribute our products:

ELECTRIC VEHICLE DEALER PROGRAM. The Company began establishing ZAP qualified electric vehicle dealers in various locations in the United States in the fourth quarter of 2003. Each dealer pays the Company a fee and in return that dealer may apply within their state to become a licensed new car electric vehicle dealer. We also receive a commitment from each qualified dealer to purchase a minimum number of electric automobiles annually. In 2004, we expanded this network to include the gas-efficient Smart Car Americanized by ZAP. Currently, we have qualified dealers in New York, Michigan, Oklahoma, Colorado, Pennsylvania, Florida and California. We intend to use these ZAP qualified dealers to sell the ZAP Worldcar and the Smart Car Americanized by ZAP. Some ZAPqualified dealers will also sell our consumer and other vehicle products, such as scooters and bikes, depending on demand.
 
 
RAP GROUP, INC. The Company distributes its conventional cars through RAP, a wholly owned subsidiary, located in Fulton, California.

MASS MERCHANDISE AND RETAIL OUTLETS. The Company markets its consumer products to independent representatives, mass merchandisers and retail outlets, as well as undertaking direct marketing activities with these entities.

ELECTRIC VEHICLE RENTAL PROGRAM. The Company established ZAP Rental Outlets in 2002 to rent neighborhood electric vehicles in tourist locations. In September 2003, we acquired a fleet of approximately 100 neighborhood electric vehicles. Some of these have been sold and others are being rented from time to time in various locations.

INTERNET SALES. The Company markets and sells its consumer products directly to consumers on its Web site.

Acquisition of New Businesses and Assets

The Company has acquired from Smart Automobile LLC the exclusive distribution, marketing, and technology rights throughout the United States to make the Smart Cars US compliant, through registered importer G & K Automotive, for a period of ten years. These rights also included the proprietary computer technology and process for making vehicles DOT and EPA compliant. These rights were acquired through the payment of $1 million in cash upon execution of the agreements, $1 million in cash upon delivery of the first 1,000 Smart Cars, and $8 million in preferred stock. A more detailed conversion agreement was completed and signed on October 25, 2004. Under this agreement Smart Automobile, LLC (SA) exchanged their original Preferred Shares for new Preferred Shares with the designation of SA. These SA preferred Shares convert to ZAP common shares under the following formula: For every 1,000 Smart vehicles delivered to ZAP in the years 2004, 2005, and 2006 that are fully EPA compliant to sell in the United States allow the holder of 500 preferred stock SA to convert to $500,000 of common stock and allow the holder to receive 505,000 warrants with an exercise price of $2.50 per share exercisable until July 7, 2009, or when all the preferred shares have been converted. Upon EPA compliance, and the legal right to sell the first 98 vehicles currently in inventory, the holder can convert 500 preferred shares to $500,000 common stock immediately, and received 505,000 warrants. These were issued in 2004. The Company delivered the first U.S. Compliant Smart Car Americanized by ZAP during May 2005.  Smart Automobile is not affiliated with Mercedes Benz. ZAP has not agreed to accept all orders for the Smart Cars Americanized by ZAP at this time. ZAP will need the support of a major manufacturer to be able to deliver this volume of cars. The Company is actively seeking this support. The delivery schedule has not yet been determined.
 
Environmental Initiatives and Legislation

In 1992, Federal legislation (United States Energy Policy Act of 1992) was enacted to promote the use of alternative fuel vehicles, including electric vehicles. Acquisition of a qualified electric vehicle entitles the owner to a Federal tax credit equal to 10% of the cost of the vehicle. Several states have also adopted legislation that sets mandates for the introduction of electric vehicles. Many foreign countries have also initiated either mandates or incentives for electric vehicles or are planning such programs in the future. As we commercialize new transportation technology, we have been required to expend our resources in educating legislators of the benefits of these vehicles. In November 2002, President Bush signed into law legislation, which transfers regulation of electric bicycles from the National Highway Traffic Safety Administration to the Consumer Product Safety Commission. This effectively changes the regulating standards for electric vehicles from motor vehicles standards to consumer standards such as those governing bicycles, relieving the need for regulatory compliance in connection with the sale of our bicycle products.

Although many government agencies are concerned about rising global air pollution, it is expected that we will need to continue to expend considerable resources in the future in the governmental process to continue the current favorable governmental climate for the zero emission vehicles. Any Research and Development activities for the Company are subcontracted to outside organizations.

Research and Product Development; Product Distribution

We are primarily a marketer and distributor of ZAP products and products manufactured for ZAP, such as the ZAP Worldcar and the Smart Car Americanized by ZAP. Thus, we do not currently require large expenditures for internal research and development costs. In order to maintain our competitive advantage, we search globally for the latest technological advances in advanced technology vehicles and then assess the feasibility of including the new item into our product lines. We have determined to rely less exclusively on internal research and development for the generation of new products and product enhancements, and instead look to acquire new technologies through development agreements, licenses and distribution agreements. We are primarily focused on developing ZAP qualified dealers throughout the United States that will sell our automobile and consumer products, in creating relationships with independent representatives and mass merchandisers for the distribution and sale of our products to consumers, and in direct sales to consumers through our Internet sales portal.

 
Sources and Availability of Parts and Supplies
aterials, parts, supplies and services used in our business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on our general operations, or our manufacturer's operations and production of ZAP products.

Backlog

As of August 12, 2005, the Company had $23,000 in backlog orders for our consumer products which it expects to fill within the current fiscal year. The Company also has over $1 billion in backlog orders from auto-dealer purchase contracts for the Smart Cars Americanized by ZAP. To date only a few cars have been delivered to selected dealers who have been trained in service,diagnostics and parts. At present, we have not accepted all the received orders from auto dealers and have not determined a current schedule to fill our current backlog orders for the Smart Cars Americanized by ZAP. The Company will need assistance from a major manufacturer and the full approval of all necessary governmental agencies to complete the existing volume of Smart Car orders. The Company is actively seeking this support however it cannot be assured that we will get this support.

 Competitive Conditions

The competition to develop and market advanced technology vehicles has been intense and is expected to continue to increase. Our principal competitive advantages over our competitors are our ownership of fundamental technology, our trade name and brand recognition, our ability to be a low cost manufacturer through domestic and international contract manufacturing arrangements and our growing distribution network. We benefit from our high name recognition in the advanced transportation vehicle industry coupled with a rapidly developing consumer sales business on our website. In order to reduce costs, our production activities have been transferred to lower cost contract manufacturers outside the United States, which enables us to offer our products at competitive prices. This also enables us to concentrate on our marketing and sales efforts and the growth of our distribution network. We offer one of the broadest lines of personal electric vehicles currently available, which we believe reinforces our name recognition in the market place.

In the advanced technology vehicle market in the United States, we compete with large manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have more significant financial resources, established market positions, longstanding relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, manufacturing, distribution and other resources than we do. Each of these companies is currently working to develop, market and sell advanced technology vehicles in the United States market. The resources available to our competitors to develop new products and introduce them into the market place exceed the resources currently available to our Company. We also face competition from smaller companies with respect to our consumer products, such as our electric bicycle and scooter. We expect to face competition from the makers of consumer batteries and small electronics with respect to the ZAP PE. This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution or marketing to develop, maintain and extend our current technology and market position.

Some of the significant events for the Company that occurred during the second quarter of 2005 and through the date of this report are as follows:
 
1.  
The Company delivered the first U. S. Compliant Smart Car Americanized by ZAP. The Company also delivered additional Smart Cars to qualified dealers in eight states. The future delivery schedule has not yet been determined. ZAP will need the support of a major manufacturer and additional governmental approvals to be able to deliver existing customer orders for Smart Cars.

2.  
The Company signed an agreement of intent with Advanced Battery Technologies to develop the next-generation of Lithium Polymer batteries and chargers to be used in its Electric Cars.. It is believed that if the density of the batteries can be increased the range of the batteries would also increase threefold.
 
3.  
In June ZAP received approval to list it’s common stock on the Archipelago Exchange (ArcaEx) under the symbol “ZP”. This exchange is a facility of the Pacific Exchange and is the nation’s first totally open, all-electronic stock exchange.
 
 
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 
  
   
2005
  
2004
  
2005
  
2004
  
Statements of Operations Data:
                  
Net sales
    
100
%
  
100
%
  
100
%
  
100
%
Cost of sales
    
85.8
    
77.7
    
92.1
    
76.0
  
Gross profit
   
14.2
   
22.3
    
7.9
    
24.0
  
Operating expenses
    
232.8
    
178.0
    
251.4
    
153.1
  
Loss from operations before other income and expense
   
(218.6
)
  
(155.7
)
  
(243.5
)
    (129.1 ) 
Other income
   
14.5
    
33.1
    
78.9
    
13.9
  
Net loss
    
(204.0
)
  
(123.0
)
  
(164.7
)
  
(115.8
)
 
Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004

Net sales for the quarter ended June 30, 2005 were $923,000 compared to $1.1 million in 2004. RAP’s net sales for the period accounted were $659,000 versus $780,000 in 2004. The net sales for ZAP were $267,000 versus $292,000 in 2004. The sales for RAP for gas automobiles were less than last year while ZAP experienced a decline in the sales of consumer products. ZAP has introduced new products that need more time to gain consumer demand.

Gross profit was $131,000 for the second quarter ended June 30, 2005 compared to $239,000 for the quarter ended June 30, 2004. The RAP Group accounted for $105,000 of the gross profit for the quarter ended June 30, 2005 versus $133,000 in 2004. ZAP’s gross loss excluding the RAP Group, decreased from $106,000 gross profit in 2004 to a gross loss of $6,397 in 2005. The decrease in gross profit was due to product mix and lower sales for ZAP.

Sales and marketing expenses in the second quarter of 2005 were $299,000 as compared to $209,000 in 2004. RAP’s expenses were $38,000 in 2005 and $41,000 in 2004 and ZAP’s expenses were $261,000 versus $168,000 in 2004. As a percentage of sales, total selling expenses increased from 19% of sales to 32% of sales. The higher expenses were primarily for the promotion of the Smart Car.

General and administrative expenses for 2005 were $1.8 million as compared to $1.6 million in 2004. RAP’s portion of the expenses was $383,000 versus $157,000 in 2004. For ZAP the expenses decreased from $1.5 million to $1.1 million As a percentage of sales, general and administration expenses increased from 153% of sales to 194 % of sales. RAP’s increase of $226,000 was primarily due to higher bad debt expenses . ZAP’s net decrease of $400,000 in general and administration expenses was net of a variable accounting adjustment for employee warrants.

Research and development expenses represents expenditures for the further development of hybrid fuel cell technology for automobiles.

Interest expense net of interest income decreased by $35,000 in the second quarter of 2005, is due to higher interest income from money market investments which reduces the interest expense as reported for the quarter ended June 30, 2005.

Other income decreased by $256,000 in the second quarter of 2005 since there were no favorable adjustments of legal reserves which occurred in the second quarter of 2004.

Reorganization items reflect the quarterly trustee fee in the prior year. 

Net Loss -The net loss was $1.9 million for the quarter ended June 30, 2005 as compared to a net loss of $1.3 million for period ended June 30, 2004. The increase was primarily due to higher general and administration expenses for consulting, advertising and professional fees.

 
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

Net sales for the six months ended June 30, 2005, were $2.1 million compared to $2.4 for the six months ended June 30 in the prior year. RAP accounted for $1.7 million of overall net sales for the six months ended June 30, 2005 versus $1.7 million for the six months ended June 30,2004. The net sales for ZAP excluding the RAP Group were $426,000 and $702,000 for the six months ended June 30, 2005 and 2004. ZAP experienced a decline in the sales of consumer products. ZAP has introduced new products that need more time to gain consumer demand.

Gross profit was $165,000 for the six months ended June 30, 2005 compared to $575,000 for the six months ended June 30, 2004. The RAP Group accounted for $158,000 of the gross profit for the six months ended June 30, 2005 versus $382,000 for the six months ended June 30, 2004. ZAP’s gross profit excluding the RAP Group, decreased from a $193,000 in 2004 to $6,000 in 2005. The decrease in RAP’s profits reflect lower margins on pre-owned cars due to a difficult consumer market with many car manufacturers offering rebates on new cars. ZAP’s decrease in gross profits was due to lower sales.

Sales and marketing expenses in the first six months of 2005 were 492,000 as compared to $408,000 in 2004. RAP’s expenses were $65,000 in 2005 versus $68,000 for the six months ended June 30, 2004. As a percentage of sales of the Company, sales and marketing expenses increased from 17% to 24% for the six months ended June 30, 2005. ZAP’s portion of selling expenses was $427,000 in 2005 compared to $340,000 in 2004. This was a increase of $87,000 or 26% from 2004 to 2005. The higher expenses were primarily for the promotion of the Smart Car.

General and administrative expenses for the six months ended June 30, 2005 were $4.6 million as compared to $3.2 million in the six months ended June 30, 2004. As a percentage of sales of the Company general and administration expenses increased from 133% to 223%. RAP’s portion of the expenses was $564,000 in 2005 versus $388,000 in 2004 . General and administration expenses for ZAP excluding the RAP Group increased from $2.8 million to $4.1 million, this is a increase of $1.3 million or 46% from 2004.
The $1.4 million increase in general and administration expenses was net of a reduction in warrant expenses for previous employment compensation of another $5.1 million. These warrants held by current employees are accounted for under variable accounting.
The primary increase for general and administration is due to expenses for the six months ended June 30, 2005 for non-cash professional fees where the Company has issued warrants and stock for services which reflected the increased activity in 2005 of stock and warrants issued for services.

Research and development expenses represents expenditures for the further development of hybrid fuel cell technology for automobiles.

Gain on revaluation of warrant liability of $1.5 million represents the difference between the fair market value of the warrant liability at December 31, 2004 and the fair market value on February 22, 2005 which was the date the warrant liability was settled and transferred to equity.

Interest expense net of income  decreased by $58,000 for the first six months of 2005 as compared to interest expense of $60,000 for the first six months of 2004. This is due to higher interest income from money market investments which reduces the interest as reported for the six months ended June 30, 2005.

Other income decreased from $393,000 of income in the first six months of 2004 to $125,000 in 2005, since there were no favorable adjustments of legal reserves which occurred in the first six months of 2004.
 
Net Loss - The net loss was $3.4 million for the six months ended June 30, 2005 as compared to a loss of $2.8 million for the six months period ended June 30, 2004. The increase was primarily due to higher general and administrative expense for consulting and professional fees.
 
Liquidity and Capital Resources
In the first six months of 2005 net cash used by the Company for operating activities was $2 million. In the first six of 2004, the Company used cash for operations of $1.2 million. Cash used in the first six months of 2005 was comprised of the net loss incurred for the first six months of $3.4 million plus net non-cash expenses of $684,000 plus the net change in operating assets and liabilities of $746,000. Cash used in operations in the first six months of 2004 was comprised of the net loss before reorganization items incurred for the quarter of $2.8 million plus net non-cash expenses of $1.9 million, and the net change in operating assets and liabilities resulting in a further use of cash of $313,000.

Investing activities used cash of $419,000 in the first six months of 2005 and used $1,015,000 during the first six months ended June 30, 2004. In 2005 the majority of the cash was used to acquire equipment and leashold improvements. While in 2004, the cash was primarily used for a distribution license for the Smart Cars respectively.

Financing activities provided cash of $654,000 and $4.2 million during the first six months ended June 30, 2005 and 2004, respectively.

 
At June 30, 2005 the Company had cash of $3.6 million compared to $2.5 million at June 30, 2004. At June 30, 2005, the Company had working capital of $10.4 million, as compared to working capital of $3.5 million at June 30, 2004. The Company, at present, does not have a credit facility in place with a bank or other financial institution.

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.

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® 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 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. The Company has recently engaged an outside accountant to assist in analyzing complex transactions which addresses a previous weakness noted by our auditors.

PART II - OTHER INFORMATION

Item 1.
Legal Proceedings
Other than the following, we are not party to any pending material legal proceedings and are not aware of any threatened or contemplated proceedings by any government authority against us.

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 complaint alleges Breach of Contract, Promissory Estoppel and Fraud and seeks contract damages in the amount $71,000 plus monthly storage fees and punitive damages of $750,000. The Company has cross-claimed against Plantiffs seeking compensatory damages, attorneys' fees and equitable relief for breach of oral contract, common count for goods sold and delivered, conversion, liability of surety, violation of statue, and violation of the Unfair Practices Act. On February 17, 2005, the court referred the matter to non-binding arbitration. The non binding arbitration hearing was held on July 27, 2005 with no agreement reached. ZAP intends to assert its defenses vigorously and to litigate its cross-compliant aggressively. 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. 
 
Item2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
During the second quarter ended June 30, 2005 the Company issued unregistered common stock and various series of warrants as outlined below.
Common Stock issued for the second quarter ended June 30, 2005 were as follows

On April 6, 2005, we issued 100,000 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On April 6, 2005, we issued 29,754 shares of common stock to Lawyers in settlement of indebtedness arising from the provision of legal services rendered to the Company valued at $85,986.
On April 7, 2005, we issued 41,095 shares of common stock to Contractors in payment for professional services valued at $92,681.
On April 14, 2005, we issued 16,716 shares of common stock to Employees for commission bonuses valued at $47,141.
 
 
On April 14, 2005, we issued 3,546 shares of common stock to Contractors in payment for professional services valued at $10,000.
On April 27, 2005, we issued 4,000 shares of common stock to Employees for commission bonuses valued at $11,802.
On April 29, 2005, we issued 177 shares of common stock to Contractors in payment for professional services valued at $500.
On April 29, 2005, we issued 333 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On May 3, 2005, we purchased real estate with a value of $1,100,000 from Property Owners with 355,442 shares of common stock.
On May 9, 2005, we purchased assets with value of $3,000 from Suppliers with 1140 shares of common stock.
On May 9, 2005, we issued 1826 shares of common stock to Employees for commission bonuses valued at $4,802.
On May 18, 2005, we purchased assets with value of $1,000 from Suppliers with 377 shares of common stock.
On May 19, 2005, we issued 150,000 shares of common stock to K Warrant Holders, in connection with its exercise of warrants.
On May 25, 2005, we issued 3,093 shares of common stock to Employees for commission bonuses valued at $6,000.
On May 25, 2005, we issued 258 shares of common stock to Consultants in payment for professional services valued at $500.
On June 1, 2005, we issued 19,108 shares of common stock to Contractors in payment for professional services valued at $30,000.
On June 7, 2005, we issued 3,571 shares of common stock to Contractors in payment for professional services valued at $3,321.
On June 7, 2005, we issued 1,000 shares of common stock to Employees for bonuses valued at $930.
On June 7, 2005, we issued 100,000 shares of common stock related to the May 3, 2005 real estate purchase.
On June 7, 2005, we purchased inventory with value of $1,639 from Suppliers with 844 shares of common stock.
On June 14, 2005, we purchased inventory with value of $3,000 from Suppliers with 2,128 shares of common stock.
On June 17, 2005, we settled an obligation with Lessors, for $63,000, which was paid with 42,000 shares of common stock.
On June 17, 2005, we issued 13,333 shares of common stock to Contractors in payment for professional services valued at $20,000.
On June 27, 2005, we settled an obligation with Contractors, for $1,784, which was paid with 1,166 shares of common stock.
On June 30, 2005, we issued 27,105 shares of common stock to Lawyers in settlement of indebtedness arising from the provision of legal services rendered to the Company valued at $36,592.
On June 30, 2005, we issued 941 shares of common stock to Contractors in payment for professional services valued at $1,270.
On June 30, 2005, we issued 1,481 shares of common stock to Contractors in payment for professional services valued at $2,000.
 
The $3.25 Warrants issued for the second quarter ended June 30, 2005 were as follows:

On April 1, 2005 the Company issued 300,000 shares of $3.25 warrants to Consultants for serving on the Advisory Board.
On April 14, 2005, we issued 100,000 shares of $3.25 warrants to Consultant in connection with professional services.
On April 19, 2005, we issued 500,000 shares of $3.25 warrants to the seller of real estate acquired by the Company.
 
The K2 Warrants issued for the second quarter ended June 30, 2005 were as follows:

On June 7, 2005, we issued 1,450,694 K-2 warrants to Employees for employment contracts and bonuses.
 
ZAP ESOP Options Issued during the second quarter ended June 30, 2005 were as follows

On June 7, 2005, we issued 1,248,194 ESOP options with $0.93 exercise price to ZAP Employees for employment compensation.
 
During the first quarter ended March 31, 2005 the Company issued unregistered common stock and various series of warrants as outlined below.

Common Stock issued for the first quarter ended March 31, 2005 were as follows:

On January 1, 2005, we issued 116,099 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On January 1, 2005, we issued 288 shares of common stock to C Warrant Holders, in connection with its exercise of warrants.
On January 5, 2005, we purchased assets with value of $15,989 from Suppliers with 5,420 shares of common stock.
On January 13, 2005, we issued 30,000 shares of common stock to Lawyers in settlement of indebtedness arising from the provision of legal services rendered to the Company valued at $83,100.
On January 14, 2005, we issued 51,376 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On January 14, 2005, we issued 42 shares of common stock to C Warrant Holders, in connection with its exercise of warrants.
On January 14, 2005, we purchased an interest in a China Joint Venture with value of $247,500 with 90,000 shares of common stock.
On January 20, 2005, we issued 100,000 shares of common stock to Consultant in payment for professional services valued at $235,000.
On January 20, 2005, we settled an obligation with a professional organization, for $13,600, which was paid with 5,787 shares of common stock.
On January 24, 2005, we issued 12,832 shares of common stock to B and B2 Warrant Holders, in connection with its exercise of warrants.
On January 28, 2005, we issued 382 shares of common stock to Professional Organization in payment for professional services valued at $1000.
On January 28, 2005, we issued 11,699 shares of common stock to Employees for employment bonuses valued at $30,651.
On January 28, 2005, we purchased assets with value of $3,500 from Suppliers with 1,336 shares of common stock.
On January 28, 2005, we issued 3,817 shares of common stock to Professional Contractors in payment for professional services valued at $10,000.
On January 28, 2005, we issued 84,527 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On February 2, 2005, we issued 70,000 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On February 2, 2005, we purchased assets with value of $72.75 from Suppliers with 25 shares of common stock.
On February 8, 2005, we issued 2,631 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On February 8, 2005, we issued 1,678 shares of common stock to Lawyers in settlement of indebtedness arising from the provision of legal services rendered to the Company valued at $5,000.
On February 15, 2005 the Company issued 600,000 shares of common stock to Lazarus Investment Partners LLLP for $1,260,000.
On February 15, 2005, we settled an obligation with lessors, for $81,600, which was paid with 29,781 shares of common stock.
On February 15, 2005, we issued 32,920 shares of common stock to various Consultants in payment for professional services valued at $90,200.
On February 23, 2005, we issued 727 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On February 23, 2005, we settled an obligation with a Dealer, for $10,000, which was paid with 12,000 shares of common stock.
On March 1, 2005, we issued 955 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On March 2, 2005, we purchased inventory with value of $7,250 from Suppliers with 3,593 shares of common stock.
On March 8, 2005, we settled an obligation with Professional Organization, for $10,000, which was paid with 2,932 shares of common stock.
On March 9, 2005, we issued 150,000 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
 
 
On March 11, 2005, we issued 100,000 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On March 14, 2005, we issued 5,000 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On March 14, 2005, we issued 3,571 shares of common stock to Lawyers in settlement of indebtedness arising from the provision of legal services rendered to the Company valued at $10,000.
On March 14, 2005, we purchased assets with value of $25,850 from Suppliers with 13,376 shares of common stock.
On March 14, 2005, we issued 929 shares of common stock to Employees for employment bonuses valued at $2,600.
On March 17, 2005 the Company cancelled 200,000 shares of common stock to Fusion Capital Fund 11,LLC in connection with cancellation of a financing deal. Money was returned to the institutional investor.
On March 23, 2005, we issued 700 shares of common stock to B Warrant Holders, in connection with its exercise of warrants.
On March 23, 2005, we issued 19,940 shares of common stock to Professional Contractors in payment for professional services valued at $55,035.
On March 28, 2005, we issued 30,000 shares of common stock to B2 Warrant Holders, in connection with its exercise of warrants.
On March 28, 2005, we issued 1,544 shares of common stock to Employees for employment bonuses valued at $4,600.
On March 28, 2005, we issued 5,369 shares of common stock to Consultant in payment for professional services valued at $16,000.

$2.50 Warrants issued for the first quarter ended March 31, 2005 were as follows:

On February 15, 2005 the Company issued 300,000 shares of $2.50 warrants to accredited investors in connection with an investment.
On February 15, 2005, we issued 30,000 shares of $2.50 warrants to Consultant in payment for professional services.

$3.05 Warrants issued for the first quarter ended March 31, 2005 were as follows:

On February 15, 2005, we issued 1,125,000 shares of $3.05 warrants to Consultants in connection to a consulting agreement.

The $3.25 Warrants issued for the first quarter ended March 31, 2005 were as follows:

On January 20, 2005, we issued 200,000 shares of $3.25 warrants to Consultants in connection to a consulting agreement.
On February 7, 2005, we issued 1,000,000 shares of $3.25 warrants to Consultants in connection to a consulting agreement.
On February 15, 2005 the Company issued 300,000 shares of $3.25 warrants to accredited investors in connection with an investment.
On February 15, 2005, we issued 30,000 shares of $3.25 warrants to Consultant in payment for professional services.
On March 3, 2005, we issued 1,000,000 shares of $3.25 warrants to Lawyers in settlement of indebtedness arising from the provision of legal services rendered to the Company.
On March 8, 2005, we issued 600,000 shares of $3.25 warrants to Consultants in payment for professional services.

The $4.00 Warrants issued for the first quarter ended March 31, 2005 were as follows:

On February 15, 2005 the Company issued 300,000 shares of $4.00 warrants to accredited investors in connection with an investment.
On February 15, 2005, we issued 30,000 shares of $4.00 warrants to Consultant in payment for professional services.
 
The $4.05 Warrants issued for the first quarter ended March 31, 2005 were as follows: 

On February 15, 2005, we issued 562,500 shares of $4.05 warrants to Consultants in connection to a consulting agreement.

The $4.75 Warrants issued for the first quarter ended March 31, 2005 were as follows:

On February 15, 2005, we issued 562,500 shares of $4.75 warrants to Consultants in connection to a consulting agreement.

On January 2, 2005, the Company modified its series C warrants to increase the $3.25 exercise price per warrant to $5.00 per warrant the expiration date of June 30, 2007.

Item 3.
Defaults Upon Senior Securities

There were no defaults upon senior securities.

Item 4.
Submission of Matters to a Vote of Security Holders

 At the Annual Meeting of Shareholders held on June 18, 2005, the following proposals were requested and approved as follows: 

(a) To elect six Directors, Louis Auletta, Renay Cude, Guy Fieri, Gerald Gallagher, Steve Schneider and Gary Starr to serve until the next annual meeting and until their successors are elected and qualified.

For: 18,240,270   Withheld: 190,296   Abstain: None 
 
(b) To ratify the appointment of Odenberg, Ullakko, Muranishi & Co. LLP as the Company’s independent
accountant

For: 18,384,992   Against: 30,901   Abstain: 14,723  
 
Gerald Gallagher resigned in July from the Board of Directors for personal reasons and has no disputes with the Company.
 
 
Item 5.
Other Information

There is no other information to report

Item 6. Exhibits and Reports on Form 8-K

A.  Exhibits
 
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2
Certification of Principal Financial and Accounting Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
B. Reports on Form 8-K

On May 9, 2005, the Company filed with the Commission a Current Report on Form 8-K to report the appointment of Gerald Gallagher to the Board of Directors. Mr. Gallagher was also appointed as a member of the Audit Committee of the Board of Directors. However, Gerald Gallagher resigned in July from the Board of Directors for personal reasons and has no disputes with the Company

On June 20, 2005, the Company filed with the Commission a Current Report on Form 8-K to announce the approval to list it’s common stock on the Archipelago Exchange (ArcaEx) under the symbol “ZAPZ”. This exchange is a facility of the Pacific Exchange and is the nation’s first totally open, all-electronic stock exchange. After listing on AcraEx, ZAP will ensure a smooth transition from the Over the Counter Bulletin Board (OTCBB) where the common stock is currently traded.

On July 1, 2005, the Company filed with the Commission a Current Report on Form 8-K to announce that the Company’s stock ticker symbol currently used on the Archipelago Exchange (ArcaEX) will change from “ZAPZ” to “ZP” effective July 7, 2005. ZAP recently switched from trading on the Over the Counter Bulletin Board (OTCBB) to the ArcaEx Exchange which is a facility of the Pacific Exchange and is the nation’s first totally open, all-electronic stock exchange.

On August 9, 2005, the Company filed with the Commission a Current Report on Form 8-K to announce the appointments of Mr. Matthias Heinze and Ms. Virginia Medeiros to the Board of Directors of ZAP. At the same time the Company accepted the resignation of Mr. Gerald Gallagher from the Board of Directors.
 
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
 
 
 
 
 
 
Dated August 12, 2005
By:  
/s/ Steven Schneider
 
Name: Steven Schneider
 
Title: Chief Executive Officer (Principal Executive Officer)


Dated August 12, 2005
By:  
/s/ William Hartman
 
Name: William Hartman
 
Title: Chief Financial Officer (Principal Accounting Officer)