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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to________________
Commission file number 0-303000
ZAP
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(Name of small business issuer in its charter)
California 94-3210624
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
501 Fourth Street, Santa Rosa California 95401
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (707) 525-8658
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, no par value OTC BB
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Title of Each Class Name Exchange on Which Registered
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. Yes [ ] No [x]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year $10,830,000
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant's as of March 26, 2007 was $40,393,477 computed
by reference to the price at which the registrant's Common Stock was last traded
on that date.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [_]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date 43,973,721 shares of Common Stock, no
par value, outstanding as of March 26, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1990).
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS....................................... 4
ITEM 2. DESCRIPTION OF PROPERTY....................................... 17
ITEM 3. LEGAL PROCEEDINGS............................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 21
PART II
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ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES .......... 22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...... 23
ITEM 7. FINANCIAL STATEMENTS........................................... 32
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................... 65
ITEM 8A. CONTROLS AND PROCEDURES........................................ 65
ITEM 8B. OTHER INFORMATION.............................................. 66
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT ........... 66
ITEM 10. EXECUTIVE COMPENSATION ........................................ 69
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ............................... 72
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 75
ITEM 13. EXHIBITS....................................................... 76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES......................... 79
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PART I
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 10-KSB and the documents incorporated by reference
herein contain forward-looking statements that are not statements of historical
fact and may involve a number of risks and uncertainties. These statements
relate to analyses and other information that are based on forecasts of future
results and estimates of amounts not yet determinable. These statements may also
relate to our future prospects, developments and business strategies.
We have used the words "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "will," "plan," "predict," "project" and similar terms and
phrases, including references to assumptions, in this annual report on Form
10-KSB and our incorporated documents to identify forward-looking statements.
These forward-looking statements are made based on expectations and beliefs
concerning future events affecting us and are subject to uncertainties and
factors relating to our operations and business environment, all of which are
difficult to predict and many of which are beyond our control, that could cause
our actual results to differ materially from those matters expressed in or
implied by these forward-looking statements. The following factors are among
those that may cause actual results to differ materially from our
forward-looking statements:
o general economic and industry conditions;
o our history of losses, deficits and negative operating cash flows;
o our limited operating history;
o industry competition;
o environmental and government regulation;
o protection and defense of our intellectual property rights;
o reliance on, and the ability to attract, key personnel;
o other factors including those discussed in "Risk Factors" in this
annual report on Form 10-KSB and our incorporated documents.
You should keep in mind that any forward-looking statement made by us in this
annual report or elsewhere speaks only as of the date on which we make it. New
risks and uncertainties arise from time to time, and it is impossible for us to
predict these events or how they may affect us. We have no duty to, and do not
intend to, update or revise the forward-looking statements in this annual report
after the date of filing, except as may be required by law. In light of these
risks and uncertainties, you should keep in mind that any forward-looking
statement made in this annual report or elsewhere might not occur.
In this annual report on Form 10-KSB the terms "ZAP," "Company," "we," "us" and
"our" refer to ZAP and its subsidiaries.
GENERAL
ZAP stands for Zero Air Pollution(R). With its new product offerings, the
Company is positioned to become a leading brand and distribution portal of
electric and other advanced technology vehicles. ZAP is committed to running its
business based on a strong philosophical foundation that supports the
environment, social responsibility and profitability.
ZAP's strategy is to serve the growing and underrepresented consumer that seeks
electric and fuel efficient vehicles. With the recent increases in the cost of
oil and increasing concern about the environment and the effects of global
warming, we believe there is a large and untapped demand in the areas of
transportation and consumer products. During the energy crisis of the 1970s,
Japanese automobile manufacturers penetrated the United States market when
domestic automobile manufacturers failed to anticipate changes. ZAP believes a
similar opportunity is present today, enhanced by heightened environmental
awareness, climate changes and economic pressures. ZAP has assembled a complete
line of products to meet the growing demands of the environmentally conscious
consumer focused on two primary businesses: ZAP Automotive and ZAP Power
Systems.
ZAP was incorporated as "ZAP Power Systems" under the laws of the State of
California on September 23, 1994, and we changed our name to ZAP on June 18,
2001. On March 1, 2002, the Company filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code with the United
States Bankruptcy Court for the Northern District of California, Santa Rosa
Division. The plan of reorganization was confirmed on June 20, 2002 and the
Bankruptcy Court closed the bankruptcy case on June 14, 2004. Our principal
executive offices are located at 501 Fourth Street, Santa Rosa, California,
95401 and our telephone number is (707) 525-8658.
SUBSIDIARIES
We have the following wholly owned subsidiaries : Voltage Vehicles, a Nevada
company ("Voltage Vehicles"), RAP Group, Inc., a California company ("RAP
Group"), ZAP Rental Outlet, a Nevada company ("ZAP Rentals"), ZAP Stores, Inc.,
a California company ("ZAP Stores"), ZAP Manufacturing, Inc., a Nevada company
("ZAP Manufacturing") and ZAP World Outlet, Inc., a
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California company ("ZAP World"). RAP Group was engaged primarily in the sale
and liquidation of conventional automobiles; Voltage Vehicles is engaged
primarily in the distribution and sale of advanced technology and conventional
automobiles; ZAP Stores is engaged primarily in consumer sales of ZAP products
and ZAP Manufacturing is engaged primarily in the distribution of ZAP products.
ZAP World Outlet and ZAP Rental Outlet are not currently operating subsidiaries.
RAP Group and Voltage Vehicles were acquired by the Company in July 2002. On
October 1, 2006, the RAP Group surrendered its Dealer Vehicle License and ceased
operations. A new Electric Vehicle Dealership opened on the old automobile lot
location. All subsidiaries are 100% owned by ZAP.
BUSINESS DEVELOPMENT
Founded in 1994, ZAP has invented, designed, manufactured, and marketed numerous
innovative products since the Company's inception. In 1995, ZAP began marketing
electric transportation on the Internet through our website, www.zapworld.com.
ZAP has been a pioneer in developing and marketing electric vehicles such as a
zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to most
bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through 1998, we
continued to add to our product line; in 1999, ZAP added electric motorbikes; in
2001, it added electric dive scooters; in 2003, ZAP announced its first electric
automobiles, including the first-ever production electric automobile imported
from its manufacturing partner in China; in 2004 ZAP introduced electric
all-terrain vehicles and the fuel-efficient Smart Car; and in 2005 ZAP
introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline.
To date, we have delivered more than 90,000 electric vehicles and consumer
products to customers in more than 75 countries, which we believe establishes us
as one of the leaders in the alternative transportation marketplace.
Today, ZAP is renewing its focus as one of the pioneers of advanced
transportation technologies and leveraging its place in the market as a magnet
for new technologies. The Company believes there is a growing and
underrepresented market for fuel efficient transportation vehicles and we are
capitalizing on the opportunities, enhanced by heightened environmental
awareness, climate changes and economic pressures. The technology is available
to deliver transportation solutions that are practical and affordable. With our
recently introduced products such as the XEBRA and ZAPPY 3, ZAP is already
delivering such solutions to the market. Our goal is to become one of the
largest and most complete brand and distribution portals in the United States
for advanced technology vehicles.
To distribute our practical, affordable and advanced transportation
technologies, we have established and are growing both our portal of qualified
automotive dealers and our relationships with specialty dealers/distributors for
our power system products. Through these distribution channels, coupled with the
continued establishment of partnerships with select manufacturers, we intend to
expand our market recognition by building awareness of the evolving technologies
available for automotive transportation and in reducing our nation's dependency
on foreign oil.
PRODUCT SUMMARY
We market many forms of advanced transportation vehicles, including electric
automobiles, fuel-efficient vehicles, motorcycles, bicycles, scooters,
neighborhood electric vehicles and all terrain vehicles. We market products
designed solely by us, as well as products we design together with other
companies. Most of our products are manufactured in China. Our automobiles are
assembled outside of the United States, but made to comply with United States
laws. The Smart Car Americanized by ZAP is manufactured and made compliant for
sale in the United States by a registered importer. As of September 30, 2006,
the Company no longer distributes the Smart Car Americanized by ZAP due to the
unavailability of Smart Cars. We also make the Xebra compliant for the United
States market. Our automobile products require registration with state vehicle
registration departments and must be sold through licensed dealers, while our
consumer vehicles can be sold directly to consumers without registration.
Our automobile vehicles are subject to environmental and safety compliance with
various Federal and State governmental regulations, including regulations
promulgated by the Environmental Protection Agency, National Highway Traffic
Safety Administration and Air Resource Board of the State of California (CARB).
The costs of these compliance activities can be substantial.
Our existing product line, which includes completed, market ready products and
planned introductions, is as follows:
ZAP AUTOMOTIVE
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ZAP believes it is positioned to become one of the leading distributors of fuel
efficient alternative energy vehicles in the United States. We believe that we
are one of only a few companies distributing a 100% production electric vehicle
capable of speeds up to 40 mph. Within the next twelve to thirty-six months, we
hope to have distribution agreements in place with three to four vehicle
manufacturers whose products fit ZAP's mission. To distribute our product to end
consumers and fleets, we have established more than 20 licensed automotive
dealers and intend to grow this base significantly over the next several years.
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In 2006, ZAP Automotive introduced the following automobile products:
o the 100% electric XEBRA sedan with an MSRP of approximately $10,000;
o the 100% electric XEBRA utility vehicle truck with an MSRP of
approximately $10,500; and
o the Smart micro-car with an MSRP of approximately $25,000 (no longer
distributed after September 30, 2006).
Our future offerings that are currently in the developmental stage include:
o the OBVIO 828, an economy micro-car from Brazil with an estimated
MSRP of $14,000,
o the OBVIO 012, a sports-coupe from Brazil with an estimated MSRP of
$28,000; and
o the ZAP-X, a 100% electric vehicle which will use Lotus Engineering's
Aluminum Performance Crossover ("APX") design .
We are also in discussions with a number of other foreign manufacturers and hope
to establish additional relationships within the next twelve to thirty-six
months.
XEBRA
We believe that XEBRA is the only series production electric vehicle in the
United States that can legally travel faster than 25 mph. The car's suggested
retail price of $10,000 is significantly less expensive than most of its
competitors, some of which cost more than $100,000 and are not yet widely
available today. XEBRA has three wheels and is being imported as a motor-driven
cycle, yet, unlike most other motor-driven cycles, the XEBRA is enclosed with
windows and a roof, affording it protection from inclement weather.
Working with our Chinese manufacturing partner, we have designed two XEBRA
models: a sedan and a utility pick-up truck. The Chinese manufacturer's current
manufacturing capacity is approximately 1,000 vehicles per month. Subject in
large part to the level of financing secured, our current target is to
distribute approximately 200 vehicles per month over the next 12 months. Initial
market demand has been overwhelming, both from end consumers using the vehicle
as a "city-car" and from fleet managers of municipalities, states, green
friendly corporations, and universities who have a preference or mandate to
purchase zero emission vehicles.
We are working closely with our manufacturing partner to continually upgrade the
XEBRA, adding features while balancing the goal of maintaining an affordable
price level. We are in the process of looking into incorporating options to
enhance the consumer's experience, including providing lithium battery packs for
additional (up to 100 mile) range and solar panels for low cost and true zero
air pollution charging. These options are expected to be available by the second
quarter of 2007.
XEBRA Sedan (ZAPCAR (R))
ZAP launched the sedan version of its XEBRA on July 11, 2006. The sedan has a
seating capacity for four and is being targeted for city/commuter use. Based on
initial feedback, ZAP will be marketing the XEBRA sedan to government and
corporate fleets as well as to families with two or more cars, but with plenty
of occasion to use their vehicles for short, city drives.
XEBRA PK (ZAPTRUCK (TM))
ZAP launched its utility pick-up truck version of the XEBRA, the XEBRA PK, on
August 24, 2006. This electric vehicle seats two with a multi-purpose platform
behind the passenger compartment that serves as a hauler, dump truck or flatbed.
The XEBRA PK is targeted to municipalities, maintenance facilities,
universities, ranches and warehouses. Since its launch, we have received
overwhelming inquiries for test drives. To date, we have focused on our west
coast market and sales have exceeded our initial distribution and sales plans.
Smart Car
The Smart Car was our initial automotive product. The project provided us with
an excellent entry level opportunity in the micro-car market in the United
States and confirmed our belief that there is a sizable demand for smaller, more
fuel efficient (or alternatively fueled) vehicles. The Smart Car is manufactured
by Daimler Chrysler Corporation, who we believe failed to identify the United
States as a potential market. In Daimler Chrysler's absence, we contracted with
a third party unaffiliated with Daimler Chrysler to have the Smart Car imported
and "Americanized" to meet the growing demand for micro-cars. The process of
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Americanizing the Smart Car involve having the car modified to meet all Federal
Motor Vehicle Safety Standards, United States Department of Transportation
requirements, and Environmental Protection Agency regulations and applicable
state requirements.
We have sold over 300 Smart Cars to date, but due to the conflict with
Daimler-Chrysler and others, and the uncertainty of auto supply we discontinued
distribution of the Smart Car in September of 2006.
OBVIO!
In September 2005, we entered into an exclusive (in North America) distribution
contract with the Brazilian automobile manufacturer OBVIO! for the future
importation of two models of micro-cars - an economy 828 model and a full
performance 012 model. The cars will have butterfly doors, seating capacity to
accommodate three persons, up to 250 horsepower output and accessories such as
iMobile and air conditioning. This car will function on multi-fuel technology,
meaning they will have the ability to be powered by ethanol, gasoline, or any
combination thereof. We are also working with OBVIO! to produce a 100% electric
version. OBVIO!expects to deliver its first cars into the United States market
in 2008.
There are currently over four million flex-fuel vehicles in the United States
and most of these vehicles are sport-utility vehicles or others in the "light
truck" class. Sedans, wagons, and others are usually only available in flex-fuel
configurations as part of fleet vehicle purchases by corporations. A recent poll
conducted by Maritz(R) showed that 84% of consumers would consider purchasing a
vehicle capable of running on E85, a fuel blend of 15% gasoline and 85% ethanol,
and consumers were willing to pay a median premium of $1,000 more than for a
gasoline only vehicle. Unlike most flex-fuel vehicles in the U.S. which can run
on up to 85% ethanol, OBVIO!vehicles will have the capability to run on 100%
ethanol.
The initial retail price of the 828 model is expected to be approximately
$14,000 and the retail price of the 012 model is expected to be $28,000. OBVIO!
is scheduled to deliver 7,500 cars during the first year of production, 17,500
cars during the second year and 25,000 thereafter. We intend to capture market
share of the flex-fuel segment by offering cars that are sporty, fun to drive,
and high-performance, but yet efficient and economical.
LOTUS
On January 30, 2007, we announced a contract with Lotus Engineering to develop a
production-ready electric all-wheel drive crossover high performance vehicle for
the US market. A combination of the lightweight aluminum vehicle architecture, a
new efficient drive and advanced battery management systems is intended to
enable a range of up to 350 miles between charges, with a rapid 10-minute
recharging time. An auxiliary power unit is planned to support longer distance
journeys.
Lotus' APX will be powered by revolutionary in-hub electric motors, delivering
644 horsepower in all wheel drive mode, theoretically capable of powering the
ZAP-X to a potential top speed of 155mph. A new strong, lightweight and highly
efficient structure based on the Lotus technology is planned to give the car a
very attractive power-to-weight ratio.
Future Automotive Offerings
Over the next 36 months, we hope to establish relationships with two to four
additional manufacturers who can supply automobiles and related vehicles that
meet our mission of affordable, advanced transportation technologies that are
socially responsible and environmentally sustainable. In 2007, we have
identified the following products as potential future offerings for the Company:
(1) an affordable 100% electric two-seater sports coupe; (2) a 100% electric
"Vespa"-type scooter with brushless hub/wheel motors; and (3) a 100% electric,
four-wheel low-speed utility truck. There can be no assurances that any of these
future product offerings will be realized.
ZAP Power Systems
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We launched the Company in 1994 with the invention of the ZAPPY electric scooter
and quickly established a presence as one of the market leaders in the electric
"personal" transportation product segment. Since inception, the Company has been
able to maintain a steady business and committed buyers in this segment. In
keeping with our initial product offerings, at the beginning of 2006, we
revitalized our consumer products line (recently renamed "Power Systems"),
including an updated version of the electric scooter. As part of the segment's
revitalization, we reduced the number of suppliers and placed more emphasis on
upgrading existing models with newer component technology and more robust
features in order to provide a higher quality consumer experience and product.
Our goal for our consumer product line is to sell an average of 10,000 units per
year. At $350 to $500 average unit prices, the business represents a strategic
compliment to the automotive portal by providing stable and increasing cash
flows, facilitating access to, and use of, new technologies, and continuing to
foster loyalty of ZAP's brand.
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Our current product offerings include:
o Three-wheeled personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3 EZ);
o Off road vehicles (electric quads and motorcycles); and
o Portable energy (universal recharge-it-all batteries and ipod
auxiliary batteries).
The ZAPPY3 Personal Transporters
Segway's highly publicized "human transporter to change the world" unearthed a
growing need for a "scooter for adults," better known as personal electric
transportation. The Company responded to this demand by designing the ZAPPY3.
Unlike the Segway, the ZAPPY3's 3-wheeled vehicle design provides stability and
maneuverability allowing just about anyone to ride this vehicle without
training. It has a top speed of 15 mph, and the Pro has the farthest range of
any personal transporter available today at 25 miles range per charge.
The Company initially thought that the ZAPPY3 would be great for the consumer
market. Over the past year, the Company has revisited its sales strategy and
come to recognize that the largest market opportunities are in the industrial
and commercial applications. The Company's primary sales channels are now more
clearly defined as security, sporting goods and material handling.
With the increased emphasis on homeland security, there are several product
competitors in the security and police market segment. Segway, the most well
known, can be found in select police departments and airports and sells for
about $5,500. American Chariot which is a chariot-like transporter has entered
the market selling for between$1,500 to $2,500. Newest to the security
transporter business is T3Motion, which is built like a small tank and priced at
up to $8,000. The ZAPPY3 meets the need of a majority of the security
transportation needs and with an average selling price of $850, depending on the
model purchased, we believe is the most economical of all offerings.
The ZAPPY3 retail focus has continued strong in 2006. In early 2006, the Company
rolled out a new dealer development program that emphasized the Company's
commitment to a nationwide distribution strategy coupled with consistent and
responsive customer service. As the product line has gained momentum and market
acceptance, we plan to grow distribution in the retail channel through larger
regional and specialized chain stores.
The material handling, warehousing, fabrication, and construction industries are
the ideal markets for the ZAPPY3 Pro. We are not currently aware of any major
competitors in this market. The traditional solution for short distance
transportation has been bicycles. The ZAPPY Pro offers the perfect utility
vehicle for shuttling, picking and packing and getting into small areas like
elevators. While the Company's entrance into this market is still in the early
stages, the product response has been very favorable, demonstrated by our newly
established relationship with Indoff, the largest distributor of material
handling equipment in the United States.
Off Road Vehicles
All terrain vehicle ("ATV") manufacturers recognized in excess of $5.5 billion
in revenues in 2005 with the market for ATVs and off road vehicles growing
steadily since 2003. In the United States alone, approximately 800,000 units
were sold in 2005. To date, all of the ATV on the market are gas-powered. We
believe electric ATV have practical environmental benefits over their
gas-powered counterparts: they are silent and generate no emissions. Moreover,
there are now over 8,000 organic farms in the United States which are committed
to reducing pollutants that may put organic certification at risk. The electric
ATVs can provide the ruggedness of the traditional ATV in areas never before
accessible, while being more versatile than golf carts.
We entered the electric ATV market in 2006 with our ZAP Buzzz mini ATV. The
Buzzz has a 450 watt geared-motor and a top speed of 15 mph with a range of
approximately 20 miles. By the second quarter of 2007, we anticipate the 800
watt "mid size" ATV will be available for sale in the United States and some of
our existing ZAP dealers already have placed preorders. We hope to launch a
heavy duty ATV in late 2007 with product features and styling comparable to
existing gas-models. We believe our position as an innovator in the electric
vehicle market, coupled with first-mover advantage in the electric ATV market,
will allow us to capitalize on this market segment. If we are able to capture 1%
of the all terrain vehicle market share, it could equate to over $40 million in
revenues per year. However, there can be no assurances that we will be able to
achieve such market share.
Portable Energy - Recharge-It -All Batteries
We believe we were one of the first and now one of the leading producers of
rechargeable battery sources using lithium-ion and lithium polymer technology.
Through our Recharge-It-All line, we sell battery packs to power or charge a
wide range of mobile electronics such as cellular phones, digital cameras and
laptops, providing significantly more charge time than currently available
technologies.
Our Portable Energy devices fall under two product lines: universal chargers and
made-for iPOD models. The universal chargers are rechargeable battery packs that
extend the use of most small and medium-sized electronic devices up to 2 to 5
times their normal battery life. The made-for iPOD models, which we begun
selling are a series of portable energy devices designed to work specifically
with all the major iPOD products, including the iPOD nano, iPOD shuffle and the
iPOD with video.
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We launched our Portable Energy products at the end of 2006 with marketing
targeted to large electronic retailers. Market statistics indicate that there
will be over two billion users of mobile electronic devices by 2007. Our goal
with Portable Energy is to provide a solution that helps solve the energy
management challenge for electronic and mobile internet users. Today, there are
only a few companies that have begun to address the mobile device backup
power/charge market. The currently available products include Energizer's
"Energi to Go", Charge 2 Go, Cell Boost, and Medis Power Pack. We believe that
no manufacturer offers rechargeable devices and we believe that none offer the
ability to re-charge a myriad of electronic devices from the same device as
effectively as ZAP's Portable Energy.
DISTRIBUTION AND MARKET OUTLETS
We employ the following methods to distribute our products:
AUTO DEALER PROGRAM. The Company began establishing ZAP qualified auto dealers
in various locations in the United States in the fourth quarter of 2003. We
started to receive commitments from each qualified dealer to purchase a minimum
number of vehicles annually. In 2004, we expanded this network to include the
gas-efficient Smart Car Americanized by ZAP. Currently, we have qualified
dealers in several states. We intend to use these ZAP qualified dealers to sell
all ZAPCAR's (TM) . Some dealers will also sell other vehicle products, such as
scooters and bikes, depending on demand.
VOLTAGE VEHICLES. The Company distributes its conventional cars through a wholly
owned subsidiary, located in Fulton, California. Voltage also serves as being a
"beta" dealer for its Xebra vehicles.
RETAIL OUTLETS. The Company markets its consumer products to independent
representatives and retail outlets, as well as undertaking direct marketing
activities with these entities.
ELECTRIC VEHICLE RENTAL PROGRAM. The Company established ZAP Rental Outlets in
2002 to rent electric vehicles in tourist locations. These vehicles are being
rented in Mendocino and we are seeking other tourist locations for potential
rental locations.
INTERNET SALES. The Company markets and sells its consumer products directly to
consumers on its Web site.
Market Opportunity
Oil Dependency - Strategic Issues
The United States has only 2% of the world's oil reserves, but consumes 25% of
the world's production. In 1973, 35% of our oil was coming from foreign sources,
while today it is approximately 60% and expected to equal 64% by 2020. The
number one contributor to our foreign trade deficit is imported oil. The
International Energy Agency expects that world demand for oil will continue to
rise as China and India become more industrialized. China recently became the
third largest producer of cars and trucks with nearly 6 million new vehicles
each year entering the market. ZAP believes that the need for non-petroleum
based transportation options is critical and that its vehicle offerings can fill
this need.
Escalating Concerns over Environmental Issues and Increasing Demand for Cleaner
Cars
Air pollution and global warming issues have raised public awareness and
increased Americans' environmental consciousness to levels never seen before.
According to a May 2006 Consumer Reports study, 37% of respondents surveyed
reported that they were considering replacing their current vehicle with one
with greater fuel economy. According to an August 2006 Consumer Reports survey,
nearly two-thirds of respondents are considering purchasing vehicles with
alternative power-trains and 51% are considering a flexible-fuel vehicle for
their next purchase. Many buyers of hybrids have stated that they prefer to buy
a plug-in hybrid or pure electric car. We believe this type of consumer
sentiment represents a large opportunity for us as we believe that we sell the
only production city class electric vehicle currently available in the United
States. An electric car can displace 10,000 pounds of CO2 a year.
Electric Vehicle Market
The electric vehicle industry, which provides an alternative to petroleum driven
cars, is still in its nascent stage with only approximately 56,000 EV vehicles
on the road today. However, according to a recent report titled "Electric
Vehicles Forecasts, Players and Opportunities 2005-2015," the EV industry is
large and prosperous with $31.1 billion in sales globally in 2005 and current
estimates project that by 2015, the industry will have grown to 7.3 times its
2005 value.
Electric cars run on electricity stored in batteries. The common reason cited
against the widespread use of electric cars is their limited range capabilities.
To date, these Low Speed Vehicles or neighborhood electric vehicles are being
used for making short trips. Studies have shown that 90% of all second car
driving is less than 21 miles per day. According to another study, the majority
of these vehicles travel less than 10 miles a day, so, for the current market,
range is not a real objection. Additionally, we
9
have developed relationships with advanced battery companies and anticipate
having optional battery systems available by the second quarter of 2007, which
will allow for longer range capabilities of our electric vehicle offerings, and
faster charging solutions.
There are many benefits to purchasing, owning and operating an electric vehicle,
as opposed to their petro-combustion engine counterparts.
CLEANER VEHICLES - An electric vehicle is a zero emission vehicle
and its motor produces no exhaust or emissions. While the production
of electricity does produce emissions, this production is still over
90% more efficient than the internal combustion engine.
NATIONAL SECURITY AND OIL INDEPENDENCE - One of the largest segments
of our national military budget is the defense of foreign oil
fields. The largest segment of the foreign trade deficit is foreign
oil. Electric vehicles are powered by off peak electrical power that
is typically from hydro, solar, nuclear or domestic coal production.
GLOBAL WARMING MITIGATION - CO2 has been identified as a major gas
contribution to global warming. Electric cars can displace up to
10,000 pounds of CO2 per unit per year.
OPERATING COST - The cost to operate an electric vehicle is
approximately $0.03 per mile, compared to $0.17 or more for gas
cars. Individuals and businesses that purchase electric vehicles may
also qualify for various tax credits and other incentives from
governmental agencies.
MAINTENANCE - Service requirements for electric vehicles are much
less than those for gas powered vehicles. Electric vehicles do not
require tune-ups, oil changes, timing belts, water pumps, radiators,
fuel injectors, or tailpipes. The primary ongoing maintenance is
replacement of the battery, which will typically occur every 3 to 5
years.
HEALTH - Many types of cancer have been linked directly to Benzene a
known carcinogen in gasoline. Air pollution has been named as the
largest health threat to Americans by the American Lung Association.
Electric cars do not use or burn gasoline.
Positioning in the Market
Our goal is to deliver approximately 200 XEBRA vehicles per month over the next
twelve months. We believe we have the advantage of expanding our overall market
share with the launch of a wider variety of XEBRAs and other low cost electric
vehicles. We believe that we currently have the only production electric vehicle
that is capable of reaching speeds of greater than those offered by vehicles in
the Low Speed Vehicle market.
We believe that pure electric vehicles have not been identified as a potential
market by large domestic automobile manufacturers primarily because of the
significant investment required. Further, their business models tend to require
sales volumes that exceed 100,000 units per year to provide adequate returns.
Due to our unique relationship with a Chinese manufacturer, we believe we will
be able to profitably provide an electric car at a retail price of approximately
$10,000.
Growing Distribution Network
We have developed a dealer network across the United States for the distribution
of our products. This established dealership network provides a cost-efficient
method of distribution. Once a vehicle becomes available for distribution, such
as the OBVIO! in 2008, this established network will enable timely and scheduled
deliveries. We intend to strategically manage the growth of the distribution
network and enter into long term agreements with authorized distributors.
Energy Resources
Today, most cars run on gasoline. But, within the next few years, it is
projected that electric, ethanol and other alternative fuels are expected to
replace gas. Ethanol is an alcohol fuel made from corn, sugar cane or any
biomass. Currently, there are few producers of ethanol in the United States and
only about 700 American gas stations that offer ethanol. However in countries
like Brazil, approximately 34,000 gas stations offer both gas and ethanol. As
more countries mass-produce ethanol, it will become more available. We believe
we are positioned to be a leading distributor of alternative energy
transportation, specifically vehicles that run on electricity and ethanol.
Government Incentives
Purchasers of alternative energy vehicles receive numerous incentives from the
government. For instance, the federal government provides a 10% tax credit for
the cost of certain alternative energy vehicles. In addition, many states have
enacted or are in the process of enacting their own incentives, including
parking privileges, access to special lanes on highways, and discounted/free
tolls. California has just become the first state to require industries to lower
their greenhouse gas emissions by the year 2025. Violators face stiff fines and
penalties. Many states and municipalities require vehicle fleets to run on the
most cost effective
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alternative fuel. ZAP's micro cars and vehicles like the XEBRA Sedan, XEBRA PK
Truck and the to be developed OBVIO!, are ideal vehicles for lowering emissions,
and, at the same time, lowering the purchase cost to the fleet buyer.
RESEARCH AND PRODUCT DEVELOPMENT; PRODUCT DISTRIBUTION
We are primarily a marketer and distributor of ZAP products and products
manufactured for ZAP, such as the ZAP Xebra and the Smart Car Americanized by
ZAP. Thus, we do not currently require large expenditures for internal research
and development costs. In order to maintain our competitive advantage, we search
globally for the latest advanced technology vehicles and then assess the
feasibility of including the new item into our product lines. We look to acquire
new technologies through development agreements, licenses and distribution
agreements. We are primarily focused on developing ZAP qualified dealers
throughout the United States that will sell our automobile and consumer
products, in creating relationships with independent representatives and mass
merchandisers for the distribution and sale of our products to consumers, and in
direct sales to consumers through our Internet sales portal.
SOURCES AND AVAILABILITY OF PARTS AND SUPPLIES
Materials, parts, supplies and services used in our business are generally
available from a variety of sources. However, interruptions in production or
delivery of these goods could have an adverse impact on our general operations,
or our manufacturer's operations and production of ZAP products. We strive to
have dual sources.
LICENSES, PATENTS AND TRADEMARKS
We have the following patents covering our electric vehicles:
----------------------------- ------------- ------------------------------------
United States Patent Date Subject
----------------------------- ------------- ------------------------------------
Patent No. 5,491,390 2/13/1996 Electric motor power system for
bicycles, tricycles, and scooters
----------------------------- ------------- ------------------------------------
Patent No. 5,671,821 9/30/1997 Electric motor system
----------------------------- ------------- ------------------------------------
Patent No. 5,848,660 12/15/1998 Portable Collapsible Scooter (ZAPPY)
----------------------------- ------------- ------------------------------------
Patent No. 5,634,423 6/3/1997 Personal Submersible Marine Vehicle
----------------------------- ------------- ------------------------------------
Patent No. 5,423,278 6/13/1995 Submersible Marine Vessel
----------------------------- ------------- ------------------------------------
Patent No. 5,303,666 4/19/1994 Submersible Marine Vessel
----------------------------- ------------- ------------------------------------
Patent No. 6,748,894 6/15/2004 Submersible Marine Vessel (sea
scooter)
----------------------------- ------------- ------------------------------------
Patent No. 6,588,528 7/8/2003 Electric Vehicle Drive System
----------------------------- ------------- ------------------------------------
Patent No. 5,842,535 12/1/1998 Electric Drive Assembly for Bicycles
----------------------------- ------------- ------------------------------------
Patent No. 6,050,357 4/18/2000 Powered Skateboard
----------------------------- ------------- ------------------------------------
Patent No. 6,059,062 5/9/2000 Powered Roller Skates
----------------------------- ------------- ------------------------------------
Patent No. 5,735,361 4/7/1998 Dual-Pole Personal Towing Vehicle
----------------------------- ------------- ------------------------------------
Patent No. 5,913,373 6/22/1999 Dual-Pole Dual-Wheel Personal Towing
Vehicle
----------------------------- ------------- ------------------------------------
Patent No. DS40400 Pending Three-Wheeled Vehicle (ZAPPY 3
Scooter)
----------------------------- ------------- ------------------------------------
Patent No. D433,718 11/14/2000 Portable Collapsible Scooter (ZAPPY)
----------------------------- ------------- ------------------------------------
Patent No. D347,418 5/31/1994 Scuba Scooter
----------------------------- ------------- ------------------------------------
Patent No. D359,022 6/6/1995 Scuba Scooter
----------------------------- ------------- ------------------------------------
We have the following trademarks covering our electric vehicles:
----------------------------- ------------- ------------------------------------
United States Trademark Subject
----------------------------- ------------- ------------------------------------
Trademark No. 2759913 Cap'n Billy's Wiz-Bang and design
----------------------------- ------------- ------------------------------------
Trademark No. 2240270 Electricruizer
----------------------------- ------------- ------------------------------------
Trademark No. 2534197 ETC Express
----------------------------- ------------- ------------------------------------
Trademark No. 2878219 ETC Traveler
----------------------------- ------------- ------------------------------------
Trademark No. 2248753 Powerbike
----------------------------- ------------- ------------------------------------
Trademark No. 2224640 Powerski
----------------------------- ------------- ------------------------------------
Trademark No. 2329466 The Future is Electric
----------------------------- ------------- ------------------------------------
Trademark No. 1794866 ZAP
----------------------------- ------------- ------------------------------------
Trademark No. 2912329 ZAP Car
----------------------------- ------------- ------------------------------------
Trademark No. 2335090 ZAP Electric Vehicle Outlet
----------------------------- ------------- ------------------------------------
Trademark No. 2885816 ZAP Seascooter
----------------------------- ------------- ------------------------------------
Trademark No. 2330894 ZAPPY
----------------------------- ------------- ------------------------------------
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----------------------------- ------------- ------------------------------------
Trademark No. 2371240 Zapworld.com
----------------------------- ------------- ------------------------------------
Trademark No. 2320346 Zero Air Pollution
----------------------------- ------------- ------------------------------------
Trademark No. 2689203 Swimmy
----------------------------- ------------- ------------------------------------
BACKLOG
As of March 30, 2007, the Company has approximately $95 million in backlog
orders from auto-dealer purchase contracts for Xebra(TM)Electric vehicles
including a signed purchase order from an electric vehicle company for 10,000
Xebra (TM) Electric vehicles valued at $79 million that expires on March 28,
2008. Over the next few months, the Company will be revaluating these dealers
for qualification. Since its product launch, ZAP has sold and delivered
approximately $1.3 million in Xebra(TM) vehicles through March 30, 2007. The
backlog for our consumer products on the same date was $179,000. We anticipate
shipping the consumer products throughout the year of 2007.
COMPETITIVE CONDITIONS
The competition to develop and market advanced technology vehicles has been
intense and is expected to continue to increase. Our principal competitive
advantages over our competitors are our ownership of fundamental technology, our
trade name and brand recognition, our ability to be a low cost manufacturer
through domestic and international contract manufacturing arrangements and our
growing distribution network. We benefit from our high name recognition in the
advanced transportation vehicle industry coupled with a rapidly developing
consumer sales business on our website. In order to reduce costs, our production
activities have been transferred to lower cost contract manufacturers outside
the United States, which enables us to offer our products at competitive prices.
This also enables us to concentrate on our marketing and sales efforts and the
growth of our distribution network. We offer one of the broadest lines of
personal electric vehicles currently available, which we believe reinforces our
name recognition in the market place.
In the advanced technology vehicle market in the United States, we compete with
large manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have
more significant financial resources, established market positions, longstanding
relationships with customers and dealers, and who have more significant name
recognition, technical, marketing, sales, manufacturing, distribution and other
resources than we do. Each of these companies is currently working to develop,
market and sell advanced technology vehicles in the United States market. The
resources available to our competitors to develop new products and introduce
them into the market place exceed the resources currently available to 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 portable energy line. This intense competitive environment
may require us to make changes in our products, pricing, licensing, services,
distribution or marketing to develop, maintain and extend our current technology
and market position.
EMPLOYEES
As of March 30, 2007, the Company had a total of 50 employees. We have
employment agreements with the following: Mr. Schneider (Chief Executive Officer
and Director), Mr. Starr (Chairman of the Board ), and Ms. Cude (Corporate
Secretary and Director) that provide for their continued service to the Company
until October 2013. We believe our employee relations are generally good. Our
employees are not represented by a collective bargaining unit.
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY ON A QUARTERLY OR
ANNUAL BASIS IS UNCERTAIN, WHICH COULD HAVE A HARMFUL EFFECT ON OUR BUSINESS AND
THE VALUE OF ZAP'S COMMON STOCK.
Since we began operation in 1994, we have generated a profit only for the three
month period ended September 30, 2006 and not in any other fiscal quarters or
any fiscal year. We incurred net losses of $11.9 million, $23.5 million, and
$27.8 million for the years ended December 31, 2006, 2005 and 2004,
respectively. We can give no assurance that we will be able to operate
profitably in the future.
In each of the 13 years since we began operations, we have not generated enough
revenue to exceed our expenditures. Since our inception, we have financed our
operations primarily through private and public offerings of our equity
securities. Our planned expenditures are based primarily on our internal
estimates of our future sales and ability to raise additional financing. If
revenues or additional financing do not meet our expectations in any given
period of time, we will have to cut our planned expenditures which could have an
adverse impact on our business or force us to cease operations. Our cash on hand
was $2.2 million on December 31, 2006. Failure to achieve profitable operations
may require us to seek additional financing when none is available or is only
available on unfavorable terms.
WE MAY FACE LIQUIDITY CHALLENGES AND NEED ADDITIONAL FINANCING IN THE FUTURE.
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We currently expect to be able to fund our working capital requirements from our
existing cash and cash flows from operations through at least December 31, 2007.
However, we could experience unforeseen circumstances, such as an economic
downturn, unforeseen difficulties in manufacturing/ distribution, or other
factors that could increase our use of available cash and require us to seek
additional financing. We may find it necessary to obtain equity or debt
financing due to the factors listed above or in order to support our expansion,
develop new or enhanced products, respond to competitive pressures, or respond
to unanticipated requirements.
We may seek to raise additional funds through private or public sales of
securities, strategic relationships , bank debt, or otherwise. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders will be reduced, stockholders may experience
additional dilution or any equity securities we sell may have rights,
preferences or privileges senior to those of the holders of our common stock. We
may expect that obtaining additional financing on acceptable terms, we may be
unable to pay our debts as they become due, develop our products, take advantage
of future opportunities or respond to competitive pressures or unanticipated
requirements, which could have a material effect on our business, financial
condition and future operating results.
We have substantial indebtedness and we are highly leveraged. As of March 30,
2007, we have total indebtedness of approximately $4.6 million. Our substantial
indebtedness may limit our strategic operating flexibility and our capacity to
meet competitive pressures and withstand adverse economic conditions. In
addition, our notes contain restrictive covenants which, among other things,
limit our ability to borrow additional funds, repay the notes, before maturity
or grant security interests on our assets.
Our substantial indebtedness could have significant adverse consequences,
including:
o increasing our vulnerability to general adverse economic and industry
conditions,
o limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, research and development and
other general corporate requirements;
o limiting our flexibility in planning for, or reacting to, changes in
our business and the industry; and
o placing us at a disadvantage compared to our competitors with less
debt and competitors that have better access to capital resources.
WE FACE INTENSE COMPETITION WHICH COULD CAUSE US TO LOSE MARKET SHARE.
In the advanced technology vehicle market in the United States, we compete with
large manufacturers, including Honda, Toyota, and Daimler-Chrysler, who have
more significant financial resources, established market positions,
long-standing relationships with customers and dealers, and who have more
significant name recognition, technical, marketing, sales, manufacturing,
distribution, financial and other resources than we do. Each of these companies
is currently working to develop, market, and sell advanced technology vehicles
in the United States market. The resources available to our competitors to
develop new products and introduce them into the marketplace exceed the
resources currently available to us. We also face competition from smaller
companies with respect to our consumer products, such as our electric bicycle
and scooter. We expect to face competition from the makers of consumer batteries
and small electronics with respect to the ZAP Portable Energy line. This intense
competitive environment may require us to make changes in our products, pricing,
licensing, services, distribution, or marketing to develop, maintain, and extend
our current technology and market position.
CHANGES IN THE MARKET FOR ELECTRIC VEHICLES COULD CAUSE OUR PRODUCTS TO BECOME
OBSOLETE OR LOSE POPULARITY.
The electric vehicle industry is in its infancy and has experienced substantial
change in the last few years. To-date, demand for and interest in electric
vehicles has been sporadic. As a result, growth in the electric vehicle industry
depends on many factors, including:
o continued development of product technology;
o the environmental consciousness of customers;
o the ability of electric vehicles to successfully compete with
vehicles powered by internal combustion engines;
o widespread electricity shortages and the resultant increase in
electricity prices, especially in our primary market, California,
which could derail our past and present efforts to promote electric
vehicles as a practical solution to vehicles which require gasoline;
and
o whether future regulation and legislation requiring increased use of
nonpolluting vehicles is enacted.
13
We cannot assure you that growth in the electric vehicle industry will continue.
Our business may suffer if the electric vehicle industry does not grow or grows
more slowly than it has in recent years or if we are unable to maintain the pace
of industry demands.
WE MAY BE UNABLE TO KEEP UP WITH CHANGES IN ELECTRIC VEHICLE TECHNOLOGY AND, AS
A RESULT, MAY SUFFER A DECLINE IN OUR COMPETITIVE POSITION.
Our current products are designed for use with, and are dependent upon, existing
electric vehicle technology. As technologies change, we plan to upgrade or adapt
our products in order to continue to provide products with the latest
technology. However, our products may become obsolete or our research and
development efforts may not be sufficient to adapt to changes in or create
necessary technology. As a result, our potential inability to adapt and develop
the necessary technology may harm our competitive position.
THE FAILURE OF CERTAIN KEY MANUFACTURING AND SUPPLIERS TO PROVIDE US WITH
XEBRA(TM) ELECTRIC CARS ABD COMPONENTS COULD HAVE A SEVERE AND NEGATIVE IMPACT
UPON OUR BUSINESS.
The Company purchases all of its Xebra electric vehicles from one Chinese
manufacturer and we rely on a small group of suppliers to provide us with
components for our products, some of whom are located outside of the United
States. If the manufacturer or these suppliers become unwilling or unable to
provide the Xebra vehicles and components, there are a limited number of
alternative manufacturers or suppliers who could provide them. Changes in
business conditions, wars, governmental changes, and other factors beyond our
control or which we do not presently anticipate could affect our ability to
receive the Xebra vehicles and components from our manufaturer and suppliers.
Further, it could be difficult to find replacement components if our current
suppliers fail to provide the parts needed for these products. A failure by our
major suppliers to provide the Xebra vehicles and these components could
severely restrict our ability to manufacture our products and prevent us from
fulfilling customer orders in a timely fashion.
As described elsewhere, we have entered into a contract with a Brazilian
automobile manufacturer, OBVIO, for the delivery of 50,000 flex-fuel vehicles in
two different models. We may not be able to obtain the vehicles that we expect
to obtain from OBVIO because OBVIO is a new developer and manufacturer of
automobiles in Brazil and there are many risks associated with its design and
manufacturing of cars for us, including, but not limited to, risks associated
with the constructing its factory, hiring personnel, acquiring equipment,
assembling a network of suppliers and developing the vehicle assembly process.
If we cannot get the vehicles from OBVIO that we expect to, our business will be
adversely affected.
LITIGATION RISKS.
ZAP v. Daimler Chrysler AG, et al., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, ZAP filed a complaint against
Daimler Chrysler Corporation and others in the Los Angeles Superior Court. The
complaint includes claims for intentional and negligent interference with
prospective economic relations, trade libel, defamation, breach of contract -
agreement to negotiate in good faith, breach of implied covenant of good faith
and fair dealing, and unfair competition. The complaint alleges that Daimler
Chrysler has engaged in a series of anti-competitive tactics aimed at defaming
ZAP and disrupting its third-party business relationships. As a result of the
allegations, the complaint requests damages in excess of $500 million and such
other relief as the court deems just and proper. Daimler Chrysler has
successfully filed a motion to quash that compliant for lack of personal
jurisdiction, and the court's ruling on that matter is in the process of being
appealed. Two of the other defendants in the action, G&K Automotive Conversion,
Inc. and The Defiance LLC, have filed a cross-complaint against ZAP in the Los
Angeles Superior Court for, among other things, violations of Section 43(a) of
the Lanham Act, statutory and common law unfair competition, and intentional and
negligent interference with prospective economic advantage. ZAP has responded to
the cross-complaint and denied engaging in any wrongful actions.
PRODUCT LIABILITY OR OTHER CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
The risk of product liability claims, product recalls, and associated adverse
publicity is inherent in the manufacturing, marketing, and sale of electrical
vehicles. Although we have product liability insurance for our consumer products
for risks of up to an aggregate of $5,000,000, that insurance may be inadequate
to cover all potential product claims. We also carry liability insurance on our
automobile products. Any product recall or lawsuit seeking significant monetary
damages either in excess of our coverage, or outside of our coverage, may have a
material adverse effect on our business and financial condition. We may not be
able to secure additional product liability insurance coverage on acceptable
terms or at reasonable costs when needed. A successful product liability claim
against us could require us to pay a substantial monetary award. Moreover, a
product recall could generate substantial negative publicity about our products
and business and inhibit or prevent commercialization of other future product
candidates. We cannot assure you that such claims and/or recalls will not be
made in the future.
WE MUST DEVOTE SUBSTANTIAL RESOURCES TO IMPLEMENTING A PRODUCT DISTRIBUTION
NETWORK.
Our dealers are often hesitant to provide their own financing to contribute to
our product distribution network. As a result, we anticipate that we may have
to, provide financing or other consignment sale arrangements for dealers who
would like to participate as our regional distribution centers.
14
The further expansion of our product distribution network will require a
significant capital investment and will require extensive amounts of time from
our management. A capital investment such as this presents many risks, foremost
among them being that we may not realize a significant return on our investment
if the network is not profitable. Our inability to collect receivables from our
dealers could cause us to suffer losses. Lastly, the amount of time that our
management will need to devote to this project may divert them from performing
other functions necessary to assure the success of our business.
FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD ADVERSELY AFFECT OUR BUSINESS.
We plan to increase sales and expand our operations substantially during the
next several years through internally-generated growth and the acquisition of
businesses and products.
To manage our growth, we believe we must continue to implement and improve our
operational, manufacturing, and research and development departments. We may not
have adequately evaluated the costs and risks associated with this expansion,
and our systems, procedures, and controls may not be adequate to support our
operations. In addition, our management may not be able to achieve the rapid
execution necessary to successfully offer our products and services and
implement our business plan on a profitable basis. The success of our future
operating activities will also depend upon our ability to expand our support
system to meet the demands of our growing business. Any failure by our
management to effectively anticipate, implement, and manage changes required to
sustain our growth would have a material adverse effect on our business,
financial condition, and results of operations. We cannot assure you that we
will be able to successfully operate acquired businesses, become profitable in
the future, or effectively manage any other change. An inability to successfully
operate recently acquired businesses and manage existing business would harm our
operations.
THE LOSS OF CERTAIN KEY PERSONNEL COULD SIGNIFICANTLY HARM OUR BUSINESS.
As of March 30, 2007, the Company had a total of 50 employees. This is an
increase of 19 employees, from 31 at March 30, 2006. The Company's performance
is substantially dependent upon the services of its executive officers and other
key employees, as well as on its ability to recruit, retain, and motivate other
officers and key employees. Competition for qualified personnel is intense and
there are a limited number of people with knowledge of and experience in the
advanced technology vehicle industry. The loss of services of any of our
officers or key employees, or our inability to hire and retain a sufficient
number of qualified employees, will harm our business. Specifically, the loss of
Mr. Schneider, our Chief Executive Officer or Mr. Starr, our Chairman of the
Board, whose specialized knowledge of the electric vehicle industry is essential
to our business, would be detrimental. We have employment agreements with Mr.
Schneider and Mr. Starr that provide for their continued service to the Company
until October 1, 2013.
REGULATORY REQUIREMENTS MAY HAVE A NEGATIVE IMPACT UPON OUR BUSINESS.
While our products are subject to substantial regulation under federal, state,
and local laws, we believe that the products we have sold are materially in
compliance with all applicable laws. However, to the extent the laws change, or
if we introduce new products in the future, some or all of our products may not
comply with applicable federal, state, or local laws. Further, certain federal,
state, and local laws and industrial standards currently regulate electrical and
electronics equipment. Although standards for electric vehicles are not yet
generally available or accepted as industry standards, our products may become
subject to federal, state, and local regulation in the future. Compliance with
this regulation could be burdensome, time consuming, and expensive.
Our automobile products are subject to environmental and safety compliance with
various federal and state regulations, including regulations promulgated by the
EPA, NHTSA, and Air Resource Board of the State of California, and compliance
certification is required for each new model year. The cost of these compliance
activities and the delays and risks associated with obtaining approval can be
substantial. Although the Company had marketed its Smart Car product in the
United States, the car must be certified by the California Air Resources Board
before it can be sold in California, New York, and three other states. In
addition, the two models of our OBVIO products will need to satisfy all
regulatory requirements before they can be sold in the United States. The risks,
delays, and expenses incurred in connection with such compliance could be
substantial.
MANUFACTURING OVERSEAS MAY CAUSE PROBLEMS FOR US.
We have been shifting our manufacturing overseas, including contracting with
OBVIO, a Brazilian company, for the manufacture of 50,000 vehicles over three
years. All of our Xebra electric vehicles are manufactured in China. There are
many risks associated with international business. These risks include, but are
not limited to, language barriers, fluctuations in currency exchange rates,
political and economic instability, regulatory compliance difficulties, problems
enforcing agreements, and greater exposure of our intellectual property to
markets where a high probability of unlawful appropriation may occur. A failure
to successfully mitigate any of these potential risks could damage our business.
WE MAY NOT BE ABLE TO PROTECT OUR INTERNET ADDRESS.
We currently hold the internet address, http://www.zapworld.com, a portal
through which we sell our products. We may not be able to prevent third parties
from acquiring internet addresses that are confusingly similar to our address,
which could adversely affect our business. Governmental agencies and their
designees generally regulate the acquisition and maintenance of internet
15
addresses. However, the regulation of internet addresses in the United States
and in foreign countries is subject to change. As a result, we may not be able
to acquire or maintain relevant internet addresses in all countries where we
conduct business.
OUR SUCCESS IS HEAVILY DEPENDENT ON PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS.
We rely on a combination of patent, copyright, trademark, and trade secret
protections to protect our proprietary technology. Our success will, in part,
depend on our ability to obtain trademarks and patents. We hold several patents
registered with the United States Patent and Trademark Office. These
registrations include both design patents and utility patents. In addition, we
have recently submitted provisional patents which may or may not be afforded the
limited protection associated with provisional patents. We have also registered
numerous trademarks with the United States Patent and Trademark Office, and have
several pending at this time. We cannot assure you that the trademarks and
patents issued to us will not be challenged, invalidated, or circumvented, or
that the rights granted under those registrations will provide competitive
advantages to us.
We also rely on trade secrets and new technologies to maintain our competitive
position. Although we have entered into confidentiality agreements with our
employees and consultants, we cannot be certain that others will not gain access
to these trade secrets. Others may independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
our trade secrets.
WE MAY BE EXPOSED TO LIABILITY FOR INFRINGING INTELLECTUAL PROPERTY RIGHTS OF
OTHER COMPANIES.
Our success will, in part, depend on our ability to operate without infringing
on the proprietary rights of others. Although we have conducted searches and are
not aware of any patents and trademarks which our products or their use might
infringe, we cannot be certain that infringement has not or will not occur. We
could incur substantial costs, in addition to the great amount of time lost, in
defending any patent or trademark infringement suits or in asserting any patent
or trademark rights, in a suit with another party.
RISK OF UNREGISTERED SECURITIES OFFERING.
In the past, we have had numerous sales of our securities which were not
registered under federal or state securities laws. We have strived to comply
with all applicable Federal and state securities laws in connection with our
issuances of unregistered securities. However, to the extent we have not
complied, there may be liability for the purchase price of the securities sold
together with interest and the potential of regulatory sanctions.
OUR STOCK PRICE AND TRADING VOLUME MAY BE VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR OUR STOCKHOLDERS.
The equity trading markets may experience periods of volatility, which could
result in highly variable and unpredictable pricing of equity securities. The
market price of our common stock could change in ways that may or may not be
related to our business, our industry or our operating performance and financial
condition. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. We have experienced significant
volatility in the price of our stock over the past few years. See Item 5. Market
For Common Equity and Related Shareholder Matters. For example, on December 31,
2004, our stock had a high of $3.35 and on December 31, 2005, it had a low of
$0.25. If the market price of our common stock declines significantly, you may
be unable to resell your common stock at or about its purchase price. We cannot
assure you that the market price of our common stock will not fluctuate or
decline significantly in the future. In addition, the stock markets in general
can experience considerable price and volume fluctuations.
A SUBSTANTIAL NUMBER OF SHARES WE HAVE ISSUED IN EXEMPT TRANSACTIONS ARE, OR ARE
BEING MADE, AVAILABLE FOR SALE ON THE OPEN MARKET, AND THE RESALE OF THESE
SECURITIES MIGHT ADVERSELY AFFECT OUR STOCK PRICE.
We have on file with the SEC effective registration statements for a substantial
number of shares for resale. The selling stockholders under our effective
registration statements will be permitted to sell their registered shares in the
open market from time to time without advance notice to us or to the market and
without limitations on volume.
The sale of a substantial number of shares of our common stock under our
registration statements, or the anticipation of such sales, could make it more
difficult for us to sell equity or equity-related securities in the future at a
time and at a price that we might otherwise wish to effect sales.
WE HAVE NOT PAID CASH DIVIDENDS ON OUR COMMON STOCK AND DO NOT ANTICIPATE PAYING
ANY CASH DIVIDENDS ON OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have not achieved profitable operations and if we do realize a profit in the
future, we anticipate that we will retain all future earnings and other cash
resources for the future operation and development of our business. Accordingly,
we do not intend to declare or pay any cash dividends on our common stock in the
foreseeable future. Payment of any future dividends will be at the direction of
our board of directors after taking into account many factors, including our
operating results, financial conditions, current and anticipated cash needs and
plans for expansion.
16
ITEM 2. DESCRIPTION OF PROPERTY.
The chart below contains a summary of our principal facilities
Location Use Square Feet Rent
--------------------------- ------------------- ----------- -----------
501 Fourth Street, SR Corporate Headquarters 20,000 $ - (1)
44720 Main Street,Mendocino Retail Outlet 5,507 $ - (2)
2 West Third Street Main Warehouse 22,000 $ 9,000
806 Donahue Street Vehicle Storage 21,954 $ 8,800
3362 &3405 Fulton Road, SR Office, Automobile Lot 21,780 $ 7,000
(1) Under the terms of the Mortgage, dated March 7, 2003, between the
Company and Atocha Land LLC concerning the Fourth Street location,
monthly payments of principal and interest amortizing the underlying $2
million debt have commenced on April 7, 2005, with the interest at the
prime rate plus 2%. The underlying debt may be converted to ZAP's common
shares at Atocha's option. See also below.
(2) In the second quarter of 2005, ZAP issued 445,442 common shares in
exchange for the purchase of real estate. ZAP recorded the common shares
at the appraised value of the real estate. Under the terms of the
purchase, ZAP is obligated to issue additional common shares for no
additional consideration if after 1 year the market price of ZAP's
common shares is less than the market price at their date of issuance.
The Company has evaluated the potential liability and has accordingly
provided an estimate in the financial statements at December 31, 2006.
The Company purchased the Fourth Street building in March 2003 to use as our
principal executive offices. The building was built originally in 1906 and is in
downtown Santa Rosa. Over the years it was updated and remodeled by previous
owners and the Company. The Company has renovated the building during its
ownership with new carpets, paint and remodeled to include a new showroom and
conference room. The building and contents are adequately insured in the opinion
of management. The Company occupies more than 90 percent of the building. The
property tax rate is set at 1 percent per year of the assessed value (currently
set at the 2004 appraised value of $2.9 million). The building is being
depreciated over a 30 year useful life. The Company has a $2 million convertible
note due in March 2025, with annual interest at 7.5%. The Company began making
payments in April 2005 of $15,166 per month. The note is payable with equal
principal and interest payments over the next 240 months. The note-holder has
the option to convert some or all of the unpaid principal and accrued interest
to shares of ZAP's common stock at $2.15 per share or an agreed upon conversion
price (as defined). The seller also received common stock and warrants in
connection with the transaction. The Company purchased the Mendocino California
property in May 2005 which is currently being used as a retail outlet. The net
book value of our real estate holdings at December 31, 2006 was approximately $4
million.
The rest of our facilities are leased. The properties located at 3362 and 3405
Fulton Road are rented on a month-by-month basis from ZAP's Chief Executive
Officer. The Company plans to continue to rent properties based on the Company's
needs. The Company believes these properties are adequate for the Company's
foreseeable needs.
It is management's opinion that our insurance policies cover all insurance
requirements of the landlords. We own the basic tools, machinery and equipment
necessary for the conduct of our repairs, our minimal research and development,
and vehicle prototyping activities. We believe that the above facilities are
generally adequate for present operations. At present, the manufacturing for the
Company is being contracted out as well as certain research and developments
projects such as the Lotus Arrangement mentioned earlier.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, we may become involved in various legal
proceedings. Except as stated below, we know of no pending or threatened legal
proceeding to which we are or will be a party which, if successful, might result
in a material adverse change in our business, properties or financial condition.
However, as with most businesses, we are occasionally parties to lawsuits
incidental to our business, none of which are anticipated to have a material
adverse impact on our financial position, results of operations, liquidity or
cash flows. The Company estimates the amount of potential exposure it may have
with respect to litigation claims and assessments.
ZAP V. DAIMLER CHRYSLER AG, ET AL., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, ZAP filed a complaint against
Daimler Chrysler Corporation and others in the Los Angeles Superior Court. The
complaint includes claims for intentional and negligent interference with
prospective economic relations, trade libel, defamation, breach of contract -
agreement to negotiate in good faith, breach of implied covenant of good faith
and fair dealing, and unfair competition. The complaint alleges that Daimler
Chrysler has engaged in a series of anti-competitive tactics aimed at defaming
ZAP and disrupting its third-party business relationships. As a result of the
allegations, the complaint requests damages in excess of $500 million and such
other relief as the court deems just and
17
proper. Daimler Chrysler has successfully filed a motion to quash that compliant
for lack of personal jurisdiction, and the court's ruling on that matter is in
the process of being appealed. Two of the other defendants in the action, G&K
Automotive Conversion, Inc. and The Defiance LLC, have filed a cross-complaint
against ZAP in the Los Angeles Superior Court for, among other things,
violations of Section 43(a) of the Lanham Act, statutory and common law unfair
competition, and intentional and negligent interference with prospective
economic advantage. ZAP has responded to the cross-complaint and denied engaging
in any wrongful actions.
JAMES A. ARNOLD, ET AL. V. STEVEN SCHNEIDER, ET AL., Superior Court of
California, County of Sacramento, Case No. 02AS02062, filed April 5, 2002,
dismissed October 9, 2003, dismissal set aside and referred to Case Management
Program March 4, 2004. Plaintiffs seek damages of $71,000 in compensatory
damages, $50 per month since April 5, 2002, other charges, interest, and further
relief in the court's discretion for breach of contract, promissory estoppel,
and fraud. Plaintiffs also seek $750,000 in punitive damages for fraud. The
Company has cross-claimed against Plaintiffs seeking compensatory damages,
attorneys' fees and equitable relief for breach of oral contract, common count
for goods sold and delivered, conversion, liability of surety, violation of
statute, and violation of the Unfair Practices Act. On February 17, 2005, the
court referred the matter to non-binding arbitration pursuant to California Code
of Civil Procedure section 1141.1. The non-binding arbitration hearing was held
on July 27, 2005. The arbitrator award, issued on August 5, 2005, awarded
Plaintiffs damages in the amount of $68,290, plus prejudgment interest at the
rate of 7%. This amount was awarded against both the Company and Mr. Schneider.
Given an admission in the plaintiff's case management conference statement and
the decision of the court to refer the matter to non-binding arbitration, the
Company believes that the amount in controversy should be less than $50,000,
though the complaint asks for more than $71,000 in damages. Trial in Sacramento
County Superior Court began on Tuesday, May 2, 2006, at 8:30 a.m., in Department
47. At the trial, the parties agreed to settle this matter upon the following
terms: (1) the plaintiff agreed to dismiss the causes of action it had alleged
against Mr. Schneider; and (2) RAP Group agreed to (a) pay the plaintiff $20,000
on or before May 31, 2006; (b) pay the plaintiff an additional $20,000 on or
before January 5, 2007; (c) provide the plaintiff with whatever ownership
documentation (such as titles) it can find in its possession, custody, or
control regarding the 43 cars identified by the plaintiff during discovery as
being the subject of this litigation; (d) allow the court to enter an order
directing that plaintiff may dispose of the vehicles that are the subject of the
litigation; and (e) allow the court to enter judgment against it in the amount
of $50,000, minus whatever monies have already been paid by RAP Group to the
plaintiff, if RAP Group does not timely make either of the payments identified
above. Both the plaintiff and RAP Group agreed to execute general mutual
releases of all claims arising out of the subject matter of the litigation
(pursuant to section 1542 of the Civil Code) and to dismiss with prejudice the
complaint and the cross-complaint after performance of the settlement agreement.
The plaintiff and RAP Group further agreed that the stipulated settlement will
be governed by section 664.6 of the Code of Civil Procedure. RAP Group made the
first payment to the plaintiff for $20,000, but did not pay the second payment
of $20,000 that was due by January 5, 2007. Plaintiff has therefore moved the
court to enter a default judgment against RAP Group for $30,000 pursuant to the
terms of the Settlement Agreement. A hearing on that motion for default judgment
is scheduled for April 4, 2007 in Sacramento Superior Court.
LEANDRA DOMINGUEZ V. RAP GROUP, INC. DBA THE REPO OUTLET ET. AL., Superior Court
of California, County of Sonoma, Case No. SCV-235641, complaint filed October
14, 2004, first amended complaint filed December 15, 2004. Plaintiff has sued
The Repo Outlet and Credit West Corporation for negligent misrepresentation, for
a violation of the Business and Professions Code Section 17200, for breach of
the implied warranty of merchantability under the Magnusson-Moss Act, and for
violation of the federal Truth in Lending Act. On January 13, 2005, the RAP
Group, Inc. agreed to defend and indemnify Credit West Corporation. At a hearing
before the Sonoma County Superior Court on February 23, 2005, the court granted
The Repo Outlet's motion to compel arbitration, and on March 8, 2005, the court
stayed the court proceeding pending arbitration. The RAP Group, Inc. filed a
demand for arbitration with the American Arbitration Association (the
"Association") on April 7, 2005, but the parties later stipulated that the
arbitration would proceed before JAMS. The Repo Outlet made a Code of Civil
Procedure 998 offer to settle and have Dominguez dismiss the matter with
prejudice for the sum of $1,001. Because Dominguez failed to timely respond to
The Repo Outlet's Section 998 offer, that offer expired on March 2, 2006. The
Repo Outlet made another settlement offer of $1,857 to settle this matter as to
both defendants on January 8, 2007, but this offer was rejected as plaintiff's
counsel seeks to recover all of his attorneys' fees. Although the case was sent
to arbitration before JAMS, and set for arbitration in February 2007, on January
9, 2007, The Repo Outlet informed the arbitrator and plaintiff's counsel that it
would be ceasing operations and its counsel would be withdrawing as attorneys of
record. At a status conference on February 8, 2007, the court was informed that
counsel for RAP Group had moved to withdraw for non-payment of fees. The hearing
on that motion is set for April 18, 2007. Since that time, Credit West has
substituted its own counsel of record, and so RAP Group is no longer tendering a
defense to Credit West. The next case management conference is scheduled for
April 25, 2007.
VOLTAGE VEHICLES V. AMERICAN ELECTRIC POWER COMPANY, ET AL., Superior Court of
California, County of Sonoma, Case No. SCV 236 830. On June 1, 2005, Voltage
Vehicles filed suit against American Electric Power Company, CSW Energy
Services, Inc., Central and Southwest Corporation, Total EV, Freightquote, LLC,
and Central Freight Lines, Inc. A First Amended Complaint was filed August 29,
2005, against the same defendants, asserting causes of action for breach of a
written contract of sale against certain defendants, as well as breach of a
written contract as a third party beneficiary against all
18
defendants. Voltage Vehicles' First Amended Complaint seeks compensatory damages
in the amount of $744,735, prejudgment interest, attorneys' fees, and costs of
suit. Defendants CSW Energy Services, Inc. and Central Freight Lines filed
demurrers, both of which the court overruled. This matter settled in December,
2006 with payment by defendants CSW Energy Services and American Electric Power
Company to Voltage Vehicles of $15,000. All parties agreed to bear their own
costs and attorneys fees. All defendants were thereafter dismissed with
prejudice on December 27, 2006.
MARIETA CRUZ HANSELL V. ROBERT WARREN JOHNSON, JR., ZAP, ET. AL., Superior Court
of California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell filed
suit against Robert Johnson (a former employee of ZAP), ZAP and other defendants
for personal injury, property damage and permanent disability based on an
alleged automobile collision between the plaintiff and defendant Johnson. The
Company and Mr. Johnson have both filed answers and case management statements
containing a general denial of all of the plaintiff's claim, and the Company has
agreed to defend Mr. Johnson in this matter. The parties are in the process of
propounding and responding to discovery. The plaintiff is claiming permanent
disability, and she has submitted a Statement of Damages in the amount of
$108,727.34, plus unspecified amounts of future general damages, future wage
loss, diminution of earning capacity damages, and incidental, consequential and
special damages. The plaintiff has not yet made any demand for settlement. The
Company intends to vigorously defend both itself and Mr. Johnson against these
claims. This matter is now being handled by alternative counsel for ZAP.
According to information received from alternative counsel, the parties have
agreed to settle this matter with a payment by the Company and Mr. Johnson to
the plaintiff of a total of $70,000. The lawsuit was settled on February 15,
2007 and was dismissed with prejudice.
FIRST CLASS AUTO SALES, INC. D/B/A FIRST CLASS IMPORTS V. VOLTAGE VEHICLES AND
ZAP, American Arbitration Association Case No. 74 133 00081 06 NOCA. First Class
Imports is a vehicle dealer that executed a licensing and distributorship
agreement with Voltage Vehicles, a subsidiary of the Company, in May, 2004. On
January 14, 2006, First Class Imports and its principal, Leon Atkind, filed an
arbitration demand with the American Arbitration Association. Therein they
alleged that Voltage Vehicles breached the licensing agreement by not delivering
new SMART-branded vehicles to First Class Imports and demanded return of the
$100,000 licensing fees paid to Voltage Vehicles under the agreement, plus
interest. In a separate cause of action, Mr. Atkind alleged Voltage Vehicles
breached a second contract by failing to timely deliver a stock certificate in
exchange for a Mercedes vehicle that he sold to Voltage Vehicles. Regarding this
second claim, Mr. Atkind contended that the late delivery of the certificate
caused the shares to be restricted for an extra month during which the Company's
stock price declined, and he seeks as damages the difference in the value of the
stock on the two subject dates multiplied by 59,999, the number of shares he
received. Concerning both causes of action, First Class Imports and Mr. Atkind
alleged that the Company should be held liable as Voltage Vehicles' alleged
alter ego. Voltage Vehicles filed a counterclaim against both First Class
Imports and Mr. Atkind. The first cause of action therein alleges breach of
contract against First Class Imports for its refusal to accept SMART-branded
vehicles offered to it pursuant to the parties' licensing agreement. Voltage
Vehicles seeks as damages the lost revenue it otherwise would have gained
through First Class Imports' purchase of SMART-branded vehicles, as well as
damages based on the depreciation of a SMART-branded vehicle it loaned to First
Class Imports. The second cause of action alleges breach of contract against Mr.
Atkind based on his failure to deliver title to the Mercedes identified above.
On this claim, Voltage Vehicles seeks as damages the depreciation of the
Mercedes during the time in which it has been unable to sell the vehicle. After
selection of an arbitrator, the arbitration was continued several times as the
parties discussed settlement. Eventually the parties decided to allow the
arbitrator to mediate the dispute, and a mediation was held on January 22, 2007.
During the mediation the parties agreed in principle to resolve the dispute via:
(1) Voltage Vehicles' retention of the $100,000 licensing fee; (2) termination
of the licensing contract effecting a territorial buyback by Voltage Vehicles of
all rights that were granted to First Class Imports in that contract; (3) the
Company's provision to Leon Atkind of 47,500 shares of restricted Company stock;
and (4) the Company's provision to First Class Imports of two SMART-branded
motor vehicles (a 2003 and a 2005 model, each with less than 500 miles on their
odometers). Counsel for the Company and Voltage Vehicles have sent a draft
settlement agreement to counsel for First Class Imports and Mr. Atkind, who has
yet to provide comments in response thereto. Meanwhile, Sonoma County Superior
Court has scheduled the next case management conference for April 19, 2007.
ZAP V. NORM ALVIS, ET AL., Superior Court of California, County of Sonoma, Case
No. SCV-238419, complaint filed March 27, 2006. Mr. Alvis was engaged by the
Company and Rotoblock Corporation ("Rotoblock") as a consultant to perform
public relations work on behalf of the Company and Rotoblock. As consideration
for Mr. Alvis' consent to the contract with the Company, the Company provided
Mr. Alvis with use of a motor home worth approximately $306,000. The Company
then sued Mr. Alvis, claiming he failed to perform his obligations under the
contract and refused to return the consideration he received therefor (i.e. the
motor home). The Company is seeking either the return of the motor home or
$500,000 in damages. Mr. Alvis initially did not respond to the complaint, which
prompted the Company to take his default on May 9, 2006. The court then entered
a default judgment on May 16, 2006, on which date the Company obtained a writ of
possession allowing it to reclaim possession of the disputed motor home. On June
18, 2006, Mr. Alvis moved the court to set aside the default and default
judgment and to vacate its order authorizing issuance of the writ of possession.
The court agreed to set aside the default judgments, but it left intact the writ
of possession. The court also required Mr. Alvis to pay the Company $1,000 as
compensation for forcing the Company to initially take his default. Mr. Alvis
has paid the Company the required $1,000. Mr. Alvis then filed (1) an answer
denying the Company's allegations, and (2) a cross-claim against the Company,
Steve Schneider in his individual capacity, and Rotoblock, alleging two counts
of breach of contract, one common count of work, labor, and
19
services received, and one count of fraud. All of Mr. Alvis' claims relate to
the two contracts he executed with the Company and Rotoblock. Mr. Alvis claims
he provided services to the Company and Rotoblock pursuant to these contracts
but received no consideration in exchange therefor. For the fraud claim,
defendant claims the Company and Schneider executed the contracts with no intent
to perform. Mr. Alvis has prayed for damages of $2,000,000, interest according
to proof, punitive damages, and an order directing the Company to perfect title
to the motor home. Mr. Alvis then moved the court to quash the writ of
possession. On November 2, 2006, the court denied this motion, although it did
require the Company to post a $300,000 bond to enforce the writ. The Company has
not yet posted that bond, and consequently Mr. Alvis has threatened to move to
revoke the writ. The Company, Rotoblock and Schneider then demurred to the
cross-complaint, and Alvis responded by filing an amended cross-complaint. The
first amended cross-complaint again seeks breach of contract and common count
damages against the Company and Rotoblock, as well as fraud damages against the
Company and Schneider. The Company and Schneider answered the first amended
cross-complaint with general denials; Rotoblock responded by filing a second
demurrer in which it has alleged it was an improperly named party. The hearing
on Rotoblock's demurrer was heard on March 21, 2007, at which time the demurrer
was denied. Rotoblock intends to file an answer to the amended cross-compliant
with general denials. Counsel has given notice of the claims against Schneider
to the Company's D&O insurer, which has acknowledged receipt of the notice.
Discovery is on-going, and the next case management conference is scheduled for
April 9, 2007.
DEPARTMENT OF MOTOR VEHICLES V. RAP GROUP, INC., ET AL. This is an
administrative proceeding brought by the Department of Motor Vehicles (the
"DMV") which is seeking license revocation of the following licenses related to
the RAP Group's operations: (1) vehicle verifier license for RAP Group employee
Jeff Schneider; (2) sales license for Jeff Schneider; and (3) dealer's license
for RAP Group, doing business as Bug Motors and Voltage Vehicles. Settlement
with the DMV was reached in late 2006, resulting in the voluntary surrender of
RAP Group's dealer license.
ROBERT CHAUVIN; MARY CHAUVIN; RAJUN CAJUN, INC. DBA ZAP OF CARSON CITY, DBA ZAP
OF RENO, DBA ZAP OF SPARKS ("ROBERT CHAUVIN, ET AL.") V. VOLTAGE VEHICLES; ZAP;
ZAP POWER SYSTEMS INC.; ZAPWORLDCOM; ELLIOT WINFIELD; STEVEN SCHNEIDER; PHILLIP
TERRAZZI; MAX SCHEDER-BRESCHIN; RENAY CUDIE; [SIC] AND DOES I-XX, Second
Judicial District Court State of Nevada, County of Washoe, Case No. CV06 02767.
On November 17, 2006, Robert Chauvin, et al. filed a complaint alleging breach
of contract, breach of the covenant of good faith and fair dealing, breach of
warranties, fraud/misrepresentation, negligent misrepresentation, quantum merit
or unjust enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks ("Rajun Cajun") and
Voltage Vehicles. The complaint seeks general damages in an amount in excess of
$10,000, special damages in an amount in excess of $10,000, punitive damages in
an amount in excess of $10,000, attorneys' fees and cost of suit, for judgment
in an amount equal to treble actual damages, and recession in the amounts of
$397,900 and $120,000. Defendants Voltage Vehicles and ZAP filed a Motion to
Dismiss on January 19, 2007. Chauvin, et al. filed an opposition to that motion
on February 16, 2007, and Voltage Vehicles and ZAP filed a reply on March 5,
2007. The matter has now been submitted to the court, and the parties are
awaiting a ruling on that motion. It is anticipated that the Motion to Dismiss
will be granted as the License Agreement entered into between Rajun Cajun and
Voltage Vehicles contains a forum selection clause designating Sonoma County,
State of California as the appropriate forum. On February 16, 2007, Robert
Chauvin, et al. filed Notices of Intent to Take Default against the individual
defendants, with the exception of Renay Cude, and two of the named corporate
defendants. In response, on February 22, 2007, named defendants ZAP Power
Systems, Inc., ZAPWORLDCOM, Elliot Winfield, Steven Schneider, Phillip Terrazzi,
Max Scheder-Breschin, and Renay Cude filed a Motion to Quash Service of Process
or Alternatively for Dismissal as the individual defendants were never properly
served, and because the two corporate defendants no longer exist. Chauvin, et
al. filed an opposition to that motion on March 8, 2007, and the defendants will
be filing a reply thereto on March 19, 2007, after which the matter will be
submitted to the court for a ruling. On March 5, 2007, Chauvin, et al. filed a
Motion for Publication of Summons for each of the five named individual
defendants in the underlying matter filed in Nevada. On February 9, 2007 Voltage
Vehicles filed a Complaint against Rajun Cajun in the Superior Court of
California, County of Sonoma for Declaratory Relief, which asks the Court to
declare that the License Agreement does not grant Rajun Cajun an exclusive
dealership in northern Nevada to distribute Voltage Vehicle products and that
Voltage Vehicles has performed its obligations under the License Agreement.
(Voltage Vehicles v. Rajun Cajun, et al., Case No. SCV 240179) Rajun Cajun has
yet to file an Answer to this Complaint.
ZAP V. INTERNATIONAL MONETARY GROUP,(PATRICK J HARRINGTON PRESIDENT AND CEO)
INC., A DELAWARE CORPORATION; MICHAEL C. SHER DBA THE LAW OFFICES OF MICHAEL C.
SHER, Case No. SCV 240277, complaint filed March 1, 2007 in Sonoma County
Superior Court. ZAP sued International Monetary Group ("IMG") whose President
and CEO is Patrick D. Harrington and Michael Sher for declaratory relief,
rescission, and breach of contract. ZAP had entered into an agreement with IMG,
a merchant banking company, to procure financing, and ZAP alleges that IMG,
contrary to the parties' agreement, is seeking to enforce a $500,000 promissory
note. ZAP also alleges that IMG and Sher have taken $12,500 and 10,000 shares of
ZAP common stock that they held in trust for ZAP without authorization. ZAP also
alleges that IMG and Sher continue to hold 1,291,176 shares of ZAP stock that
was supposed to have been used as collateral for a $1 million loan to be
procured by IMG and Sher that never materialized. After being served with the
complaint, counsel for IMG and Sher initiated settlement discussions and, in
consideration, were given until May 7, 2007 to respond to the complaint.
Management has recorded an estimated liability for any potential exposure
related to these transactions which is included in the accompanying consolidated
balance sheet. In addition, management believes that the ultimate resolution of
this claim will not have a material adverse effect on our consolidated financial
position or on results of operations.
20
ZAP V. THOMAS C. GRAVER AND AUTO AMERICA GROUP, INC., to be filed in the
Northern District of California in March 2007 with claims under the Federal
Anti-Cybersquatting Act and for trademark infringement. Graver is the President
and Chief Executive Officer of Auto America Group, Inc. ("AAG"). AAG and Graver
signed an independent contractor agreement with ZAP on October 21, 2005 to
provide certain services to ZAP, but that agreement terminated on October 18,
2006. At no time did ZAP enter into an agreement with AAG or Graver giving
either of them permission to use ZAP's federally-registered trademark
"zapworld.com." Following discussions regarding a business dispute between
Graver, AAG and one of ZAP's business partners, a Brazilian company called
Obvio, Graver registered the domain name www.zapworld.us on January 4, 2007.
Although there is very little content on the website www.zapworld.us, the home
page does refer extensively to Obvio and has two references to ZAP. One of those
references is to "ZAP Agreement Correspondence" with an apparent link that is
not functional. The other ZAP reference is to an article referring to ZAP in a
negative light. As Graver has failed to respond to ZAP's cease and desist
letters, ZAP anticipates filing suit later this month against Graver and AAG to
have the domain name "zapworld.us" transferred to ZAP and for attorneys' fees
and damages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A special meeting of shareholders was held on October 17, 2006 to approve the
issuance and sale of up to 20,000,000 shares of common stock and up to 6,000,000
securities exercisable or convertible into shares of common stock at
below-market prices to private investors. It is estimated that the issuance and
sale of these securities may potentially raise between $10 and $15 million in
the financing transaction. At present, the Company needs additional capital to
continue expanding its current operations. Due to the lack of a quorum of the
shareholders at the special meeting on October 17, 2006 the meeting was
adjourned and rescheduled for October 31, 2006 where the proper quorum existed
and the proposal was approved by 88% of the shareholders. A total of 18,345,530
votes were cast; 16,087,369 for, 1,622,865 against, and 635,296 abstained.
Subsequent to December 31, 2006 and as March 30, 2007 the Company has issued
$2.7 million of Convertible notes and sold $.9 million of common stock and
warrants to qualified investors. Any further equity transactions will depend on
the overall stock market price acceptance.
Investment proceeds will be used primarily: (i) to purchase Xebra(TM) vehicles,
both sedan and utility trucks from ZAP's Chinese partner to fulfill the
increasing demand for 100% electric vehicles in the United States, and (ii) to
continue building our dealer network and expanding ZAP's market initiatives. ZAP
will also use the proceeds to purchase consumer product inventory for the
continued roll-out of new products, to add qualified sales and professional
staff to execute on ZAP's business plan, and to expand ZAP's efforts in the
research and development of advanced technology vehicles, such as the
ethanol-driven OBVIO! Automobiles and other fuel efficient vehicles.
21
PART II
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ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL
BUSINESS PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
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 stock symbol of "ZAPZ." On June 20, 2005, ZAP received approval to
list its common stock on the Archipelago Exchange (ArcaEx). This exchange was a
facility of the Pacific Exchange (PCXE) and is the nation's first totally open,
all-electronic stock exchange. The Company changed its stock ticker symbol used
on the ArcaEx from "ZAPZ" to "ZP" on July 7, 2005. On March 7, 2006, the ArcaEx
merged with the New York Stock Exchange (the "NYSE") creating the NYSE Arca
electronic trading platform.
On October 31, 2006, ZAP received written notice that its common stock would be
suspended from trading on the NYSE Arca effective at the market opening on
November 8, 2006. This action was due to ZAP's inability to satisfy the
continued listing standards. On November 8, 2006, ZAP's common stock was
approved for quotation on the OTC Bulletin Board under the symbol "ZAAP."
BID PRICE
---------------------
PERIOD HIGH LOW
------------------- ------ ------
FISCAL YEAR 2006:
DECEMBER 31, 2006 $ 1.18 $ 0.79
SEPTEMBER 30, 2006 1.74 0.69
JUNE 30, 2006 2.59 1.12
MARCH 31, 2006 1.81 0.28
FISCAL YEAR 2005:
DECEMBER 31, 2005 $ 1.07 $ 0.26
SEPTEMBER 30, 2005 1.40 0.96
JUNE 30, 2005 3.03 0.93
MARCH 31, 2005 3.56 2.35
HOLDERS
We have approximately 3,630 record holders of our common stock as of March 21,
2007, according to a shareholders' list provided by our transfer agent as of
that date. The number of registered shareholders does not include any estimate
by us of the number of beneficial owners of common shares held in street name.
The transfer agent and registrar for our common stock is Continental Trust &
Transfer Company.
DIVIDENDS
We have never declared nor paid any cash dividends on our common stock, and we
do not anticipate that we will pay any cash dividends on our common stock in the
foreseeable future. Any future determination to declaration and payment of cash
dividends will be at the discretion of our board of directors, and will be
dependent upon our financial condition, results of operations, capital
requirements and other factors as our board of directors may deem relevant at
that time. On November 9, 2006, ZAP's Board of Directors approved a 10% stock
dividend to be issued, effective February 28, 2007, to all shareholders of
record as of February 15, 2007.
RECENT SALES OF UNREGISTERED SECURITIES
The following lists sales of unregistered securities during the last fiscal year
that were not previously included in a Quarterly Report on Form 10-QSB or a
Current Report on Form 8-K. We relied on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") for the issuance of these securities. Except as stated below,
no underwriting discounts or commissions were payable with respect to any of the
following transactions. The offer and sale of the following securities was
exempt from the registration requirements of the Securities Act under Rule 506
insofar as (1) except as stated below, each of the investors was accredited
within the meaning of Rule 501(a); (2) the transfer of the securities were
restricted by the company in accordance with Rule 502(d); (3) there were no more
than 35 non-accredited investors in any transaction within the meaning of Rule
506(b), after taking into consideration all prior investors under Section 4(2)
of the Securities Act within the twelve months preceding the transaction; and
(4) none of the offers and sales were effected through any general solicitation
or general advertising within the meaning of Rule 502(c).
22
On October 20, 2006, the Company issued 5,000 shares of common stock as payment
for sponsorship fees valued at $5,700. On October 20, 2006, the Company issued
2,500 shares of common stock as payment for sponsorship fees valued at $2,850.
On October 20, 2006, the Company issued 460,000 shares of common stock, one
warrant for the purchase of 33,000 shares at $1.50 per share, and five warrants
for the purchase of 320,000 shares at $1.20 for a direct investment in the
amount of $460,000 to a group of qualified investors. On November 9, 2006, the
Company issued 8,523 shares of common stock as payment for sponsorship fees
valued at $7,500. On November 9, 2006, the Company issued 85,000 shares of
common stock for consulting services valued at $74,800. On November 10, 2006,
the Company issued 600,000 shares of common stock for a direct investment in the
amount of $600,000 to a group of qualified investors. On December 5, 2006, the
Company issued three 8% convertible notes with par value totaling $1.5 million
and three warrants for the purchase of 450,000 shares at $1.10 per share in
connection with a direct investment.
On December 12, 2006, the Company issued 106,667 shares of common stock for
consulting services valued at $96,000
On December 12, 2006, the Company issued 68,896 shares of common stock to a
group of qualified investors to ensure an agreed upon price for the purchase of
property. On December 12, 2006, the Company issued 2,202 shares of common stock
for professional services valued at $1,916. On December 12, 2006, the Company
issued 14,045 shares of common stock for as payment for room rentals valued at
$12,500.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS ANNUAL 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:
o WHETHER THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOR
OUR PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH IT
MAY GROW;
o OUR ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENT
OUR GROWTH STRATEGIES,
o OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OUR
PRODUCTS;
o OUR ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY;
o OUR ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS;
o OUR ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGING
MARKET FOR ELECTRIC AND GAS-EFFICIENT VEHICLES;
o CHANGES IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND
o OTHER RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS
SECTIONS OF THIS REPORT, PARTICULARLY THE SECTION CAPTIONED "RISK
FACTORS."
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.
EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN
UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR
BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY
FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE
ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN
THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT
REQUIRED BY APPLICABLE LAW.
23
SUMMARY OF KEY ACCOMPLISHMENTS DURING 2006
Recent Developments
Some of the significant events for the Company that occurred during the year of
2006 and through the date of this report are as follows:
1. We contracted Lotus Engineering to develop a new electric car based on the
APX (Aluminum Performance Crossover) concept, which showcases Lotus
Engineering's Versatile Vehicle Architecture technology. The vehicle, the
ZAPX, will be a production-ready electric all-wheel drive crossover high
performance vehicle for ZAP in the USA market.
2. We introduced the new XEBRA a "City Car" available as a 4-door sedan or
2-passenger truck, good for city-speed driving up to 40 MPH and priced
about $10,000. ZAP recently introduced another way of improving range and
battery life with an optional rooftop solar panel. In 2007, the Company
received signed purchase orders for 12,300 electric cars from 20 dealers
for approximately $95 million at the recent National Automobile Dealers
Association (NADA) annual convention and exposition. This includes a signed
purchase order from one electric vehicle company for $79 million.
3. We announced the introduction of a new series of lithium battery packs
designed specifically to work with the iPod. Called iZAP, the battery
accessories for the iPod are part of a new line of ZAP Portable Energy
systems to power a wide range of mobile electronics. The iZAP's Portable
Energy(TM) chargers and power packs are designed to work in conjunction
with the iPod, including the iPod mini, iPod shuffle, iPod nano and the
iPod with video. The iZAP designed for the iPod shuffle can extend
listening time up to 60 hours. The new rechargeable power packs can power a
wide range of mobile electronics like cell phones, digital cameras, laptops
and more.
4. We invested in Obvio! Automotoveiculos S.A., based in Rio de Janeiro, to
develop two 'trybrid' high-performance microsports cars for markets across
the globe. Lotus Engineering, has been selected by OBVIO for the design of
'trybrid' engines that will run on gasoline, bio-ethanol or natural gas,
and other powertrain variants.
5. We began selling a new and improved line of electric scooters such as the
ZAPPY (R) 3 Pro and the ZAPPY(R) 3 EZ. In addition, the ZAP BUZZZ All
Terrain Vehicle and the ZAP MUD'E Trail Bike have also been introduced into
the consumer market place.
6. During the third quarter of 2006, we renegotiated our agreement with Smart
Automobile LLC for the Smart Car and were released from any liability by
Smart Auto (due to the unavailability of the Smart Car Americanized by ZAP
) and Daimler Chrysler's decision to import Smart Cars into the U.S. in
2008. We recognized other income of $7 million together with the write-off
of the license with Smart Auto of $2.3 million. We also decided that after
September 30, 2006 we will no longer continue to distribute Smart Cars
Americanized by ZAP due to the unavailability of Smart Cars Americanized by
ZAP and the conflict with Daimler Chrysler.
CRITICAL ACCOUNTING POLICIES JUDGMENTS AND ESTIMATES
This management's discussion and analysis of our financial condition and results
of operations is based upon our consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted accounting principles.
In preparing these financial statements, we are required to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including those related to doubtful
accounts, stock-based compensation, investments, goodwill and intangible assets
and income taxes as well as contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates using different
assumptions or conditions. We believe the following critical accounting policies
reflect the more significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition
The Company records revenues only upon the occurrence of all of the following
conditions:
24
-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; and
-The Company deems the collection of the amount invoiced probable.
The Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances.
The Company does not recognize sales taxes collected from customers as revenue.
Allowance for Doubtful Accounts
-------------------------------
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at December 31, 2006 and 2005. 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 Valuation
-------------------
We adjust the value of our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions and development of new products by our competitors. Inventories
consist primarily of vehicles gas and electric, parts and supplies, and finished
goods and are carried at the lower of cost (first-in, first-out method) or
market.
Deferred Tax Asset Realization
------------------------------
We record a full valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
Classification of Financial Instruments with Characteristics of both Liability
------------------------------------------------------------------------------
and Equity
----------
We account for financial instruments that we have issued and that have
characteristics of both liability and equity in accordance with SFAS No. 150,
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY. SFAS No. 150 specifies that mandatory redeemable
financial instruments are to be recorded as liabilities unless the redemption is
required to occur upon the liquidation or termination of the issuer. SFAS No.
150 also specifies that a financial instrument that embodies a conditional
obligation that an issuer may settle by issuing a variable number of its equity
shares is to be classified as a liability if, at inception, the value of the
obligation is based solely or predominantly on variations inversely related to
changes in the fair value of the issuer's equity shares. Should a financial
instrument not be classified as a liability under the provisions of SFAS No.
150, we further apply the criteria in Emerging Issues Task Force (EITF) Issue
No. 00-19, ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK, which enumerates additional
criteria to determine the appropriate classification as liability or equity. We
also evaluate the anti-dilution and/or beneficial conversion features that may
be included in our financial instruments in accordance with the provisions of
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which may classify the feature as an embedded derivative and require that the
financial instrument be bifurcated and the feature accounted for separately. We
evaluate each financial instrument on its own merits at inception or other
prescribed measurement or valuation dates and may engage the services of
valuation experts and other professionals to assist us in our detemination of
the appropriate classification.
25
Accounting for Stock-Based Compensation
---------------------------------------
Effective January 1, 2006, we adopted the fair value recognition provisions of
SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS 123(R)"), using the
modified-prospective transition method. Under the fair value recognition
provisions of SFAS 123(R), share-based compensation cost is estimated at the
grant date based on the fair value of the award and is recognized as expense,
net of estimated pre-vesting forfeitures, ratably over the vesting period of the
award.
In addition, the adoption of SFAS 123R requires additional accounting related to
the income tax effects and disclosure regarding the cash flow effects resulting
from share-based payment arrangements. In January 2005, the SEC issued Staff
Accounting Bulletin ("SAB") No. 107, which provides supplemental implementation
guidance for SFAS 123R. We selected the Black-Scholes option-pricing model as
the most appropriate fair-value method for our awards. Calculating share-based
compensation expense requires the input of highly subjective assumptions,
including the expected term of the share-based awards, stock price volatility,
and pre-vesting forfeitures. The assumptions used in calculating the fair value
of stock-based awards represent our best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result,
if factors change and we use different assumptions, our share-based compensation
expense could be materially different in the future. In addition, we are
required to estimate the expected pre-vesting forfeiture rate and only recognize
expense for those shares expected to vest. If our actual forfeiture rate is
materially different from our estimate, our share-based compensation expense
could be significantly different from what we have recorded in the current
period. The total amount of stock-based compensation expense recognized during
the year ended December 31, 2006 was $4.1 million, all of which has been
recorded in general and administrative expenses. At December 31, 2006, total
unrecognized estimated compensation expense related to non-vested stock options
granted prior to that date was $2,112,270, which is expected to be recognized
through December 2009.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
"TRANSITION ELECTION RELATED TO ACCOUNTING FOR TAX EFFECTS OF SHARE-BASED
PAYMENT AWARDS " (FSP 123(R)-3). We adopted the alternative transition method
provided in the FASB Staff Position for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R in the fourth quarter of fiscal
2006. The alternative transition method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool (APIC pool) related
to the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123R. The adoption did not have a material impact on our
results of operations and financial condition.
Prior to January 1, 2006, we accounted for share-based payments to our employees
and non-employee members of our board of directors under the recognition and
measurement provisions of Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related guidance, as permitted by
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"), and amended
by SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION-TRANSITION AND
DISCLOSURE ("SFAS 148") . We did not recognize any significant share-based
employee compensation costs in our statements of operations prior to January 1,
2006, as options granted to employees and non-employee members of the board of
directors generally had an exercise price equal to the fair value of the
underlying common stock on the date of grant. As required by SFAS 148, prior to
the adoption of SFAS 123(R), we provided pro forma disclosure of net income
(loss) applicable to common shareholders as if the fair-value-based method
defined in SFAS No. 123 had been applied. In the pro forma information for
periods prior to 2006, we accounted for pre-vesting forfeitures as they
occurred. Our operating results for prior periods have not been restated.
Further details related to our Stock Plans and our adoption of SFAS 123R are
provided in Note 1 - Organization and significant accounting policies and Note
13 Stockholders' Equity (Deficit) to our consolidated financial statements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005
NET SALES for the year- ended December 31, 2006, were $10.8 million compared to
$3.6 million for the year 2005 . The increase of $7.2 million or 200% was due to
sales of Advanced Technology Vehicles of $8.3 million for the year-ended 2006
versus $432,000 for the year-ended 2005. Sales of the Smart Car Americanized by
ZAP accounted for $7.4 million and shipments of the Xebra(TM) Electric vehicles
were $737,000. The Company has shipped 342 Smart Cars Americanized by ZAP and
approximately 100 Xebra vehicles through December 31, 2006. Due to supply
problems with Daimler Chrysler's decision to import Smart Cars in 2008 and
interference with ZAP's marketing efforts by Daimler Chrysler AG, et al, in
September 2006 the Company discontinued the distribution of the Smart Car
Americanized by ZAP. Sales for electric consumer products were $824,000 compared
to $624,000 an increase of $200,000 due to the introduction of new electric
scooters and All Terrain Vehicles in 2006. Sales for the retail vehicle lot were
$1.6 million versus $2.5 million in 2005. The decrease was due to less consumer
demand for pre-owned gas vehicles and the transition of the retail lot to
include electric vehicles beginning in September 2006.
26
GROSS PROFIT was $525,000 for the year ended December 31, 2006 compared to
$341,000 for the year ended December 31, 2005. The overall increase of $184,000
was primarily due to the sales of advanced technology vehicles which resulted in
gross profit of $530,000 in 2006 compared with $9,000 in 2005. Sales of electric
consumer products in 2006 resulted in a gross loss of $445,000 versus a profit
of $17,000 in 2005. In 2006 the Company provided a reserve for some older
consumer products that are slow moving and older models of the product lines.
The retail vehicle lot had an increase in gross profit of $440,000 in 2006
versus $303,000 in 2005. The increase was due to product mix with higher margins
on certain vehicle models.
SALES AND MARKETING EXPENSES for the year ended 2006 were $1,319,000 as compared
to $909,000 in 2005. The increase of $410,000 or 45% in 2006. The higher expense
was primarily due to $215,000 for the higher sales salaries, more personnel,
higher commissions due to higher sales volume, $175,000 for shows and marketing
promotion for attendance at more trade shows and for advertising campaigns for
the Xebra(TM) electric vehicles and new consumer products.
GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December 31, 2006 were
$15.5 million as compared to $18.3 million in 2005. The decrease of $2.9 million
or 16% was primarily due to: consulting expenses for the year ended December 31,
2006 being less by approximately $10.4 million and legal and professional fees
were less by $1.4 million. In the prior year ended 2005,the company incurred a
number of one time expenses for legal fees, such as for the Damlier Chrysler
lawsuit preparation and various expenses to consultants to identify future
funding sources for the Company. Many of these expenses did not result in the
use of the Company's cash but was provided for by the issuance of warrants,
common stock or stock options. Also in 2005, the Company had recorded favorable
adjustments to employee compensation warrants and options. The total of non-cash
General and Administrative Expenses was $10.5 million for the year ended
December 31, 2005. In the year ended December 31, 2006 the decreases in some
expense categories was offset by increases in the following: the expensing of
stock options and warrants in accordance with FAS 123R resulted in $3.7 million
of expense, the Company also experienced higher expenses for shareholder
relations, travel, employee salaries and benefits, higher rents for more
warehouse space and higher expenses in many of the other operating expense
categories.
RESEARCH AND DEVELOPMENT expense for the year ended December 31, 2006 was
$715,000 as compared to $156,000 in 2005. The increase of $559,000 was due to
payments to Obvio! Automotoveiculos S.A., based in Rio de Janeiro, to develop
two 'trybrid' high-performance microsports cars for markets across the globe.
Lotus Engineering, has been selected by OBVIO for the design of 'trybrid'
engines that will run on gasoline, bio-ethanol or natural gas, and other
powertrain variants. We also invested in a project with Lotus Engineering to
develop a new electric car based on the APX (Aluminum Performance Crossover)
concept, which showcases Lotus Engineering's Versatile Vehicle Architecture
technology. The vehicle, the ZAPX, will be a production-ready electric all-wheel
drive crossover high performance vehicle for ZAP in the USA market.
IMPAIRMENT LOSS ON THE SMART AUTOMOBILE LICENSE resulted from the cancellation
of the Smart Auto license and distribution agreement during the third quarter of
2006. The expense of $2.2 million represents the write-off of the net book value
of the Smart Automobile license, advances for inventory and related equipment.
GAIN ON SETTLEMENT OF SMART AUTO LIABILITY the Company realized a gain of $7.1
million resulting from the discharge of the liability from Smart Auto during the
third quarter of 2006. The agreement with Smart Auto was previously cancelled in
the second quarter of 2006 with a residual liability of $7.1 million at June 30,
2006. The discharge of the liability was largely due to Smart Auto's inability
to supply Smart Cars for ZAP to convert to Smart Cars Americanized by ZAP.
INTEREST EXPENSE, net increased from $17,000 in the year ended December 31, 2005
to $241,000 in 2006. The net increase in interest expense was due to noncash
interest expense related to the discount on our Senior Convertible notes.
OTHER INCOME increased from $2.0 million in 2005 to $7.5 million in 2006. The
increase is primarily due to the gain on the discharge of the Smart Auto
liability of $7 million in 2006. In 2005, other income was primarily derived
from the gain on the Fusion warrant liability of $1.5 million.
GAIN (LOSS) ON REVALUATION OF WARRANT LIABILITY decreased from a gain of $2.2
million for the year ended 2005 to a loss of $158,000 in 2006. The decrease was
due to a one-time 2005 transaction which accounted for $1.5 million of the
difference. It represented the difference between the fair market value of the
warrant liability at December 31, 2004 and the fair market value on February 22,
2005, the date when the warrant liability was settled and transferred to equity.
The balance for the year ended December 31, 2006 resulted from favorable changes
in the value of warrant and put option liabilities.
NET LOSS was $11.9 million for the year ended December 31, 2006 as compared to a
loss of $23.5 million for December 31, 2005. The decrease in net losses was due
to the gain on the discharge of the Smart Auto liability of $7.1 million during
the period. However, the gain was offset by the write-off of the Smart License
agreement with related equipment , a decrease in the impairment losses on the
Smart License and the expensing of stock options and warrants in accordance with
FAS 123R.
27
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash from operations of $4.9 and $4.6 million during the years
ended December 31, 2006 and 2005, respectively.
Cash used in operations in 2006 was the result of the net loss incurred for the
year of $11.9 million, offset by non-cash expenses of $5.1 million. In 2006,
non-cash expenses included $4.7 million related to stock-based compensation for
consulting and other services, $4.1 million related to stock-based employee
compensation, $2.4 million related to the Smart Auto licence and equipment
impairment offset by a $7.1 million gain resulting from the settlement of the
Smart Auto liabilty. In 2005 the non-cash expenses included the following: the
impairment write-down of the Smart Auto license of $5.7 million, charges of
$15.9 million for stock based compensation for consulting and employee
compensation, a gain on revaluation of warrant liability of $2.2 million and a
$1 million allowance established for the past due Smart Automotive LLC note
receivable.
The net change in operating assets and liabilities resulted in a cash increase
of $2.0 million. The change was primarily due to a decrease in inventory.
Investing activities used cash of $42,000 and $798,000 during the year ended
December 31, 2006 and 2005, respectively. In 2005, the Company's investing
activities used cash for the acquisition of property and equipment and to
acquire a distribution license.
Financing activities provided cash of $5.5 million and $1.6 million during the
year ended December 31, 2006 and 2005, respectively.
At December 31, 2006 the Company had cash of $2.2 million as compared to $1.5
million at December 31, 2005. The Company's working capital deficit at December
31, 2006 was $71,000 compared to working capital of $543,000 at December 31,
2005. We do not have a bank operating line of credit, and there can be no
assurance that any required or desired financing will be available through bank
borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If
future financing requirements are satisfied through the issuance of equity
securities, investors may experience significant dilution in the net book value
per share of common stock and there is no guarantee that a market will exist for
the sale of the Company's shares.
In September of 2006, the Company signed a Settlement Agreement with Phi-Nest
requiring that the common stock being held as collateral be transferred to an
independent third party (Michael C. Sher dba the Law Offices of Michael C.
Sher), to hold the securities in a depository account. At the same time, the
Company entered into an agreement with International Monetary Group ("IMG")
whose President and CEO is Patrick D. Harrington, a merchant banking company to
procure financing for the Company. Michael C. Sher was also acting as IMG's
in-house attorney. In return, Phi-Nest received 150,000 shares of the collateral
stock for consulting services and forgiveness of a note receivable for $56,000
owed by a principle of Phi-Nest and cousin of Steven Schneider, ZAP CEO. As a
result, the Company recognized $236,000 in non-cash charges in the accompanying
consolidated statement of income.
In January 2005, the Company advanced $1,000,000 to Smart Automobile LLC and
Thomas Heidemann (President of Smart Auto LLC) in exchange for a note
receivable. The note bears interest at 5% per annum, payable in 24 equal monthly
installments beginning January 7, 2006. The loan was secured by an interest in
certain Smart Cars owned by Smart Auto LLC. The note was in default as of
January 7, 2006 since the Company has not received the required payments and is
uncertain if any payments will be received in the future and has therefore
established a reserve a $1 million in the event efforts to collect the note are
unsuccessful.
In September 2005, the Company signed a $425 million revolving financing
facility with Surge Capital II, LLC that, subject to certain conditions, can be
used by ZAP to import Smart Cars Americanized by ZAP and other advanced
transportation vehicles for ZAP dealers. The financing agreement had a term of
one year, but may be extended upon agreement by both parties. The financing is
based on orders ZAP receives from dealers who must be approved in advance by
Surge Capital II, LLC and is secured by a first lien on substantially all of
ZAP's assets. In September of 2006, the financing facility expired with neither
party wishing to continue the agreement. No amounts were outstanding and due
under the agreement and all liens placed on behalf of Surge Capital II, LLC have
been cancelled.
28
A special meeting of shareholders was held on October 17, 2006 to approve the
issuance and sale of up to 20,000,000 shares of common stock and up to 6,000,000
securities exercisable or convertible into shares of common stock at
below-market prices to private investors. It is estimated that the issuance and
sale of these securities may potentially raise between $10 and $15 million in
the financing transaction. At present, the Company needs additional capital to
continue expanding its current operations. Due to the lack of a quorum of the
shareholders at the special meeting on October 17, 2006 the meeting was
adjourned and rescheduled for October 31, 2006 where the proper quorum existed
and the proposal was approved by 88% of the shareholders. As of March 30, 2007
the Company has issued $2.7 million of Convertible notes and sold $900,000 of
common stock and warrants to a qualified investor. Any further equity
transactions will depend on the overall stock market price acceptance.
Investment proceeds will be used primarily: (i) to purchase Xebra(TM) vehicles,
both sedan and utility trucks from ZAP's Chinese partner to fulfill the
increasing demand for 100% electric vehicles in the United States, and (ii) to
continue building our dealer network and expanding ZAP's market initiatives. ZAP
will also use the proceeds to purchase consumer product inventory for the
continued roll-out of new products, to add qualified sales and professional
staff to execute on ZAP's business plan, and to expand ZAP's efforts in the
research and development of advanced technology vehicles, such as the
ethanol-driven OBVIO! Automobiles and other fuel efficient vehicles.
8% Senior Convertible Notes
On December 5, 2006, when the market price of the Company's common stock was
$0.89 per share, the Company concluded a private placement to three
institutional investors of $1,500,000 of 8% Senior Convertible Notes due
December 5, 2008 (the "Notes"). The Notes are convertible at $1.00 per share
(the "Conversion Price") into 1,500,000 shares of the Company's common stock,
subject to anti-dilution adjustments should the Company issue common stock or
common stock equivalents for a price less than the Conversion Price, on or prior
to the later of 1) the earlier of (x) the date a Registration Statement is
declared effective by the SEC and (y) the two year anniversary of the issue date
and 2) the six month anniversary of the issue date. The Company also issued to
the Investors common stock purchase warrants (the "Warrants"), each immediately
exercisable and expiring on December 5, 2011. The Warrants are exercisable to
purchase 450,000 shares of the Company's common stock at $1.10 per share. The
Warrants provide for anti-dilution and other adjustments of the issuable shares
and the exercise prices thereof should the Company issue common stock or common
stock equivalents for a price less than the exercise price of the Warrants, on
or prior to the later of 1) the earlier of (x) the date a Registration Statement
is declared effective by the SEC and (y) the two year anniversary of the issue
date and 2) the six month anniversary of the issue date. The anti-dilution
provided by the Warrants calls for the exercise price of the Warrants to adjust
to 110% of the price of any dilutive issuances, on a per share basis. After
December 31, 2007 and if the daily volume weighted average price of its common
stock is equal to or greater than the Forced Conversion Price (as defined) for
20 trading days occurring during any period of thirty consecutive trading days,
the Company has the right to require the conversion of any unconverted Notes
into shares of common stock. After December 31, 2007, and if the daily volume
weighted average price of its common stock is equal to or greater than the $2.20
for 20 trading days occurring during any period of thirty consecutive trading
days, the Company has the right to require the exercise of any unexercised
Warrants into shares of common stock.
The Notes provide for quarterly interest to be paid in cash, or subject to
certain conditions, by issuing shares of common stock. If the Company is
eligible and elects to pay quarterly interest in stock, the price per share used
to calculate the number of shares due for interest will be calculated by
reducing the market price of the shares by 5% (as defined).
The Company will use the proceeds from the issuance of the Notes for general
working capital purposes and to increase the capacity of its product
distribution network.
Under terms of a registration rights agreement, the Company is obligated to file
a registration statement within 90 days of the closing date for the resale of
the shares of common stock underlying the Notes, the Warrants and any other
shares issuable pursuant to the terms of the Notes or the Warrants and to cause
the registration statement to become effective within 180 days of the closing
date. The Company is also required to maintain the effectiveness of the
registration statement until all shares have been sold or may be sold without a
registration statement.
In the event the registration statement is not filed within 90 days after the
closing or does not become effective within 180 days of the closing, or once
declared effective ceases to remain effective during the period that the
securities covered by the agreement are not sold, the Company will be required
to pay, in cash, an amount for such failure, equal to 1% of the aggregate
principal amount for each thirty day period in which the registration statement
is not filed, effective, or maintained effective. There is no cap on the amount
of damages potentially payable by the Company should the registration statement
not be filed, declared effective, or maintained effective. At March 30, 2007,
the Company has not filed a registration statement pursuant to the registration
rights agreement.
If the Company issues additional common stock or common stock equivalents for a
price less than the Conversion Price, on or prior to the later of 1) the earlier
of (x) the date a Registration Statement is declared effective by the SEC and
(y) the two year anniversary of the issue date and 2) the six month anniversary
of the issue date of the Notes, the Investors will have the right, but
29
not the obligation, to participate in such issuance, upon the same terms as
those offered, so that each Investor's percentage ownership of the Company
remains the same.
The Company paid fees of $25,000 related to the Notes. These cash fees have been
recorded as Deferred Offering Costs and are being amortized over the life of the
Notes.
As a result of the anti-dilution provisions, the Notes are not considered
conventional convertible debt under the provisions of Emerging Issues Task Force
(EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock. The Company further
determined that the conversion feature is subject to the provisions of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities and is an
embedded derivative which should be bifurcated and accounted for separately.
Accordingly, the fair value of the derivative was accounted for at inception as
a discount to the face value of the Notes and a corresponding liability, and
will be marked to market at each balance sheet date with the change in the fair
value of the derivative being recorded as interest expense. At December 5, 2006,
the date the Notes were issued, the Company valued the derivative at
approximately $1,325,000 using a binomial pricing model to estimate future stock
prices, assuming historical stock price volatility of 125.77%, a risk-free
interest rate of 4.52%, an expected dividend rate of 0.00%, and a 100%
probability of completing additional rounds of equity financing during the
two-year term of the derivative. As a result of changes in the market price of
the Company's stock between December 4, 2006 and December 31, 2006, the decrease
in the remaining life of the derivative, and changes in other assumptions, the
Company's valuation of the derivative decreased to approximately $1,189,000,
with the change in valuation being recorded as a credit to other income. The
value of the derivative at December 31, 2006 was again determined using a
binomial pricing model to estimate future stock prices, assuming historical
stock price volatility of 124.82%, a risk-free interest rate of 4.82%, an
expected dividend rate of 0.00%, and a 100% probability of completing additional
rounds of equity financing during the remaining term of the derivative.
Due to the Company's obligation to file, and achieve and maintain effectiveness
of the registration statement, the Company has classified the Warrants as a
liability. This liability will be marked to market at each balance sheet date
with the change in the fair value of the Warrants being recorded as interest
expense. The Company valued the Warrants at December 5, 2006 at $0.844 per share
using a binomial pricing model with the following assumptions: risk free
interest rate of 4.39%; expected dividend rate of 0.00%; volatility of 142.17%;
and expected term of 5 years. The fair value of the Warrants at December 5, 2006
was approximately $380,000, which the Company recorded as an additional discount
to the Notes with a corresponding credit to a Warrant liability. The
anti-dilution provision contained in the Warrants reduces the exercise price but
does not increase the number of shares issuable to the warrant holders. The
Warrant liability was adjusted to its fair value of $300,000 at December 31,
2006 and the decrease in the Warrant liability was recorded as a credit to other
income. The Company valued the Warrants at December 31, 2006 at $0.667 per share
using a binomial pricing model with the following assumptions: risk free
interest rate of 4.70%; expected dividend rate of 0.00%; volatility of 141.13%;
and expected term of 4.93 years.
The aggregate amount of the discount to the Notes related to the note derivative
and Warrant liabilities at December 5, 2006 was approximately $1,705,000. As
this discount exceeds the face value of the Notes by $205,000, the Company
expensed this excess discount to the Notes to interest expense. The Company is
amortizing the remaining $1,500,000 discount to interest expense using the
effective interest method prescribed by APB Opinion No. 21, Interest on
Receivable and Payables, over the life of the Notes. The effective interest rate
on these notes is approximately 279% based on the stated interest rate, the
amount of amortized discount, and the term of the notes.
The Company will be required to make monthly principal payments, beginning on
June 1, 2007, in twelve equal installments; however, the Company will not be
obligated to issue its stock in payment of such principal at a price below the
lower of $0.75 or the adjusted conversion price in effect. The investors may,
however, choose to receive the Company's stock at (but not below) the lower of
$0.75 or the adjusted conversion price in effect. If the Company chooses to pay
principal with common stock, it will be based on the lower of a 10% discount to
the lowest daily Volume Weighted Average Price for any trading day among the
immediately preceding ten consecutive trading days and the conversion price in
effect on such Principal Payment Date.
Scheduled annual maturities for this long term debt for years ending after
December 31, 2006 are as follows: $875,000 - 2007 and $625,000 - 2008.
In March of 2003, the Company purchased a three-story 20,000 square foot office
building in downtown Santa Rosa for $2.9 million in convertible debt, stock and
warrants. The building is the corporate headquarters of the Company. Terms of
the transaction included a convertible promissory note for $2 million payable
over 22 years with interest only for the first two years. No payments of
interest are due until after two years. At that time, the payee has the option
to convert some or all of the unpaid principal and accrued interest to shares of
ZAP's common stock at an agreed upon conversion price. The seller also received
a certain amount of common stock and warrants in connection with the
transaction.
In order to finance our working capital requirements, we require additional
financing, but there can be no assurances that we will obtain this capital or
that it will be obtained on terms favorable to us. There can be no assurance
that any required or desired financing will be available through bank
borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If
future
30
financing requirements are satisfied through the issuance of equity securities,
investors may experience significant dilution in the net book value per share of
common stock and there is no guarantee that a market will exist for the sale of
the Company's shares.
In addition to the above working capital needs, our other capital needs are to
fund our growth strategy, which includes increasing our shopping mall presence,
improving and increasing distribution channels, establishing Company owned and
franchised ZAP stores, expanding our electric vehicle dealerships, introducing
new products, improving existing product lines, and developing a strong
corporate infrastructure.
SUBSEQUENT EVENTS
In January 2007, the Company received $900,000 through the sale of 700,000
shares of common stock and 2 million warrants to qualified investors.
On January 26, 2007,the Board of Directors extended by five years through July
1,2012, the expiration date of a certain number of the Company's warrants,
Series B through K. These warrants were issued for executive incentives and by
the plan of reorganization. The exercise prices of the warrants were also
revised from prices ranging from $1.00 to $8.00 to prices ranging from $1.00 to
$1.20.
On February 20, 2007, ZAP (the "Company") entered in to a Purchase and Amendment
Agreement (the "Amendment"), amending the Securities Purchase Agreement entered
into by the Company on December 5, 2006 (the "Original Agreement" and as amended
by the Amendment, the "Agreement"), with several institutional and accredited
investors (the "Purchasers") pursuant to which the Company sold to the
Purchasers an additional $1.2 million aggregate principal amount of 8% senior
convertible notes due February 2009 (the "Notes") and warrants to purchase
360,000 shares of the common stock of the Company (the "Warrants"), in a private
placement. The Transaction closed on February 22, 2007. Gross proceeds from the
sale to the Company were $1.2 million, of which $15,000 was paid to one of the
Purchasers for expenses incurred in connection with the Transaction.
The Notes bear interest at 8% per year, payable quarterly, and are convertible
into shares of the Company's common stock at an original conversion price of
$1.00 per share.
The Warrants entitle each Purchaser to purchase a number of shares of common
stock equal to thirty percent of the number of shares of common stock that would
be issuable upon conversion of the Note purchased by such Purchaser in the
Transaction. The Warrants have an initial exercise price of $1.32.
On March 31, 2007 the Board of Directors extended the employment agreements for
Mr. Schneider, Mr. Starr and Ms. Cude to October 1, 2013.
On March 26, 2007, ZAP appointed Mr. Amos Kazzaz as its Chief Operating Officer.
Prior to joining ZAP, Mr. Kazzaz served as Vice President of Cost Management at
United Airlines, Inc. where he oversaw United Airline's operations, process
improvement, and cost management. From 2003 to 2006, Mr. Kazzaz served as United
Airline's Vice President of Financial Planning and Analysis during which time he
accounted for United Airline's planning and analysis function and capital
budget. From 2002 to 2004, Mr. Kazzaz served as United Airline's Vice President
of the Business Transformation Office, the company's first enterprise project
management office, during which time he was responsible for identifying areas of
revenue and cost improvements; concurrently, Mr. Kazzaz served as the Chief
Operating Officer at Avolar, a subsidiary of United Airlines. He currently sits
on the Boards of Directors of Alliant Credit Union, SkyTech Solutions in India,
and Integres. Mr. Kazzaz holds a bachelors degree in International Affairs from
the University of Colorado and a Masters in Business Administration from the
University of Denver.
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 are sourced from stable,
cost-competitive industries. As such, we do not foresee any material
inflationary trends for our raw materials and finished goods sources.
31
GOODWILL
Goodwill consists of the excess consideration paid over net assets acquired.
Impairment of goodwill is evaluated whenever a triggering event is encountered.
The impaired value is determined by reference to cash flows anticipated from
estimated proceeds from selling the related technology and/or sales of products
directly linked to the technology and assets that gave rise to the goodwill.
USE OF ESTIMATES
The preparation of financial statements in conformity with U. S. generally
accepted accounting principles generally accepted in the United States of
America requires management of the Company to make estimates and assumptions
affecting the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as revenues and expenses during the reporting period. The amounts estimated
could differ from actual results.
ITEM 7. FINANCIAL STATEMENTS.
32
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Shareholders of ZAP
We have audited the accompanying consolidated balance sheet of ZAP as of
December 31, 2006, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
include consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects, the consolidated financial position of ZAP at December 31,
2006, and the consolidated results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for share based compensation when it adopted
SFAS No. 123(revised 2004),"Share-Based Payments" in accounting for its employee
stock-based compensation, applying the modified prospective method effective
January 1, 2006.
/s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP
-------------------------------------------
San Francisco, California
March 30, 2007
33
ZAP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2006
(In thousands, except share data)
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,160
Accounts receivable, net of allowance of $179 224
Inventories 2,347
Prepaid non-cash professional fees 715
Other prepaid expenses and other current assets 449
----------
Total current assets
5,895
Property and equipment, net 4,466
Other assets:
Patents and trademarks, net 91
Goodwill 175
Prepaid non-cash professional fees, less current portion 146
Deferred offering costs 25
Deposits and other 18
----------
$ 10,816
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term note $ 104
Accounts payable 250
Accrued liabilities 2,703
Deferred revenue 1,190
Put option liability 230
Note derivative liability 1,189
Warrant liability 300
----------
Total current liabilities 5,966
Secured convertible note, less current portion 1,833
8% Senior convertible notes, net of discount of $1,498 2
Other long-term debt 5
----------
Total Liabilities 7,806
----------
Commitments and contingencies
Shareholders' equity:
Preferred stock; 50 million shares authorized; no par value;
no shares issued and outstanding --
Common stock; 100 million shares authorized; no par value;
38,414,259 shares issued and outstanding 91,227
Common Stock issued as loan collateral (1,549)
Accumulated deficit (86,668)
----------
Total shareholders' equity 3,010
----------
$ 10,816
==========
See accompanying notes to consolidated financial statements.
34
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands; except per share data)
Year ended December 31
-----------------------
2006 2005
---------- ----------
Net sales $ 10,830 $ 3,602
Cost of goods sold (exclusive of amortization
of smart license) 10,305 3,261
---------- ----------
Gross profit 525 341
---------- ----------
Operating expenses:
Sales and marketing 1,319 909
General and administrative (non-cash of $8,749
in 2006 and $10,505 in 2005, respectively) 15,452 18,352
Research and development 715 156
Loss on disposal of equipment -- 36
Loss on joint venture investment -- 372
Impairment loss on Smart Automobile license,
fixed assets and goodwill 2,448 6,022
---------- ----------
Total operating expenses 19,934 25,847
---------- ----------
Loss from operations (19,409) (25,506)
---------- ----------
Other income (expense):
Gain on settlement of Smart Auto liability 7,051 --
Gain on revaluation of put-option, warrant and
note derivative liabilities 581 1,883
Interest expense, net (non-cash of $207 and $10
in 2005, respectively) (241) (17)
Other income, net 107 143
---------- ----------
7,498 2,009
---------- ----------
Loss before income taxes (11,911) (23,497)
Provision for income taxes (4) (4)
---------- ----------
Net loss $ (11,915) $ (23,501)
========== ==========
Net loss per share:
Basic and diluted $ (0.31) $ (0.68)
Weighted average number of common shares outstanding:
Basic and diluted 39,021 34,687
See accompanying notes to consolidated financial statements.
35
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands)
Common Notes
Convertible stock Receivable
preferred stock Common stock issued from
------------------- ------------------- Accumulated as loan Share-
Shares Amount Shares Amount Deficit collateral holders Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2004 7.50 $ 7,500 29,524 $ 63,616 $(51,252) $ (3,529) $ (70) $ 16,265
Issuance of common stock for:
Real property and other assets 514 1,211 1,211
Inventory 224 235 235
Consulting and other services 879 1,405 1,405
Employee compensation 38 83 83
Cash 630 1,250 1,250
Repurchased shares from Fusion Capital (200) (500) (500)
Exercise of warrants and options 886 978 978
Investment in joint venture 90 248 248
Fair value of warrants issued for
consulting and other services 9,290 9,290
Reclassification of warrant liability 6,711 6,711
Put option liability (638) (638)
Employee warrants - variable accounting
adjustment (5,438) (5,438)
Proceeds from notes receivable 14 14
Net loss -- -- -- -- (23,501) -- -- (23,501)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2005 7.50 7,500 32,585 78,451 (74,753) (3,529) (56) 7,613
Issuance of common stock for:
Inventory and other assets 5 3 3
Consulting and other services 1,786 1,585 780 56 2,421
Employee compensation 435 388 388
Cash 1,129 876 1,200 2,076
Exercise of warrants and options 2,174 2,061 2,061
Settlement of Smart Auto liability (7.50) (7,500) 300 405 (7,095)
Fair value of warrants and options issued
for:
Consulting and other services 2,278 2,278
Employee compensation 3,662 3,662
Settlement of Smart Auto liability 950 950
Reclassification of warrant liability 568 568
Net loss -- -- -- -- (11,915) -- -- (11,915)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2006 -- $ -- 38,414 $ 91,227 $(86,668) $ (1,549) $ -- $ 3,010
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
36
ZAP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Year ended December 31
------------------------
2006 2005
---------- ----------
Operating activities:
Net loss $ (11,915) $ (23,501)
Items not requiring the current use of cash:
Gain on settlement on Smart Auto liability (7,051) --
Depreciation and amortization 1,434 1,426
Loss on disposal of fixed assets -- 36
Impairment write down of Smart Auto license and
equipment 2,191 5,721
Impairment of goodwill -- 301
Impairment of fixed assets 257 --
Loss on investment in joint venture -- 372
Gain(Loss)on revaluation of warrant and
note derivative liabilities 158 (2,215)
Gain(Loss)on revaluation of put option liability (739) 331
Allowance for doubtful accounts (154) (215)
Stock-based compensation for consulting and other
services 4,699 15,860
Stock-based employee compensation 4,050 (5,355)
Non-cash interest expense attributable to
discount on convertible debt 207 10
Changes in other items affecting operations:
Accounts receivable 115 224
Inventories (609) 573
Advance on Smart car inventory 1,378 188
Prepaid expenses (267) 42
Other assets 260 --
Accounts payable 61 39
Accrued liabilities 921 1,464
Deferred revenue 140 75
---------- ----------
Cash used for operating activities (4,864) (4,624)
---------- ----------
Investing activities:
Acquisition of property and equipment (77) (406)
Proceeds from sale of equipment 35 --
Acquisition of distribution license -- (268)
Investment in joint venture -- (124)
---------- ----------
Cash used for investing activities (42) (798)
---------- ----------
Financing activities:
Issuance of common stock 2,076 1,250
Exercise of warrants and options 2,061 978
Proceeds from convertible debt, net of
issuance costs 1,475 --
Payments on long-term debt (93) (127)
Payments on note receivable from shareholder -- 14
Repurchase of common stock -- (500)
---------- ----------
Cash provided by financing activities 5,519 1,615
---------- ----------
Increase (decrease) in cash and cash equivalents 613 (3,807)
Cash and cash equivalents at beginning of year 1,547 5,354
---------- ----------
Cash and cash equivalents at end of year $ 2,160 $ 1,547
========== ==========
See accompanying notes to consolidated financial statements.
37
ZAP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ZAP ("The Company" or "ZAP"), was incorporated in California in September 1994.
ZAP markets many forms of advanced transportation, including alternative energy
and fuel efficient automobiles, motorcycles, bicycles, scooters, personal
watercraft, hovercraft, neighborhood electric vehicles, commercial vehicles and
more. Additionally, the Company produces an electric scooter, known as the
ZAPPY(R), using parts manufactured by various contractors. The Company's
business strategy has been to develop, acquire and commercialize electric
vehicles and electric vehicle power systems, which have fundamental practical
and environmental advantages over available internal combustion modes of
transportation that can be produced commercially on an economically competitive
basis. The Company intends to further expand its technological expertise through
an aggressive plan of acquisitions of companies with exciting new products in
the advanced transportation industry and strategic alliances with certain
manufacturers, distributors and sales organizations. The Company's business goal
is to become the largest and most complete distribution portal for advanced
transportation (fuel efficient) and electric vehicles. In 2006, the Company
continued to accelerate its market positioning in the electric vehicle industry.
The Company is now focused on creating a distribution channel for its vehicles,
with special emphasis on entrepreneurs in the power-sport and independent auto
industry.
A summary of significant accounting policies is as follows:
Basis of presentation
---------------------
The accompanying consolidated financial statements have been prepared assuming
we will continue as a going concern. The Company has incurred net losses of
$11.9 million and $23.5 million in 2006 and 2005, respectively. The accumulated
deficit at December 31, 2006 was $86.9 million. As described more completely in
Note 18, Subsequent Events, during 2007, the Company raised $1.2 million from
the issuance of Senior Convertible notes and sale of common stock to a qualified
investor. Management believes this will provide the additional funds needed to
sustain operations at expected levels, at least through December 31, 2007. The
Company's future liquidity and capital requirements will depend on numerous
factors, including successful development, marketing and sale of advanced
technology vehicles, protection of intellectual property rights, costs of
developing its new products, including the necessary intellectual property
rights, obtaining regulatory approvals for its new products, market acceptance
of all its products, existence of competing products in its current and
anticipated markets, and its ability to raise additional capital in a timely
manner. Management expects to be able to raise additional capital; however, the
Company may not be able to obtain additional financing on acceptable terms, or
at all. If adequate funds are not available or not available on acceptable terms
as needed, we may be unable to pay our debts as they become due, develop our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements.
Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of ZAP,
RAP Group ("RAP"), Voltage Vehicles ("VV"), ZAP Rentals and ZAP Stores for the
years ended December 31, 2006 and 2005. On October 1, 2006 RAP surrendered its
Dealer Vehicle License and began doing business under the existing Dealer
Vehicle License of Voltage Vehicles. All subsidiaries are 100% owned by ZAP. All
significant inter-company transactions and balances have been eliminated.
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;
38
-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; and
-The Company deems the collection of the amount invoiced probable.
The Company provides no price protection. Product sales are net of promotional
discounts, rebates and return allowances. The Company does not recognize sales
taxes collected from customers as revenue.
Deferred Revenue
----------------
Voltage Vehicles sells licenses to auto dealerships under the ZAP name. The term
of the license agreements range from four to five years and among other things,
call for the licensee to purchase a minimum number of vehicles from ZAP each
year. As of December 31, 2006, the Company has collected a total of $1,230,000
related to these agreements and has classified them as current deferred revenue.
The Company's policy is to begin recognizing revenue when they begin delivering
a substantial number of vehicles to these dealerships on a regular basis. During
the first quarter of 2006, the Company began recognizing revenue on various
license agreements on a straight-line basis over the term of the agreements. The
Company has recognized $48,000 of revenue for the year ended December 31, 2006
resulting in an ending balance in deferred revenue of $1,190,000.
Allowance for doubtful accounts
-------------------------------
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
records an allowance for doubtful accounts receivable for credit losses at the
end of each period based on an analysis of individual aged accounts receivable
balances. As a result of this analysis, the Company believes that its allowance
for doubtful accounts is adequate at December 31, 2006. If the financial
condition of the Company's customers should deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents. The Company maintains
the majority of its cash balances with one financial institution. At times the
balances may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risk on cash and cash equivalents.
Inventories
-----------
Inventories consist primarily of vehicles(gas and electric), parts and supplies,
and Finished Goods and are carried at the lower of cost (first-in, first-out
method) or market.
Property and equipment
----------------------
Property and equipment consists of land, building and improvements, machinery
and equipment, office furniture and equipment, vehicles, and leasehold
improvements. Property and equipment is stated at cost and is depreciated or
amortized using straight-line and accelerated methods over the asset's estimated
useful life. Costs of maintenance and repairs are charged to expense as
incurred; significant renewals and betterments are capitalized. Estimated useful
lives are as follows:
Machinery and equipment 5 years
Computer equipment and software 3-5 years
Office furniture and equipment 5 years
Vehicles 5 years
Leasehold improvements 10 years or life of lease,
whichever is shorter
Building and improvements 30 years
39
Patents and trademarks
----------------------
Patents and trademarks consist of costs expended to perfect certain patents and
trademarks acquired and are amortized over ten years. For each of the years
ended December 31, 2006 and 2005, amortization expense was approximately $33,000
and $40,000, respectively.
Long-lived assets
-----------------
Long-lived assets are comprised of property and equipment and intangible assets.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. An estimate of undiscounted future cash flows produced by the
asset, or by the appropriate grouping of assets, is compared to the carrying
value to determine whether impairment exists. If an asset is determined to be
impaired, the loss is measured based on quoted market prices in active markets,
if available. If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including a discounted value of
estimated future cash flow and fundamental analysis. The Company reports an
asset to be disposed of at the lower of its carrying value or its estimated net
realizable value.
Goodwill
--------
Goodwill results from the Company's acquisition of Voltage Vehicles "VV" in
2002.The Company tests for goodwill impairment annually in December, absent
earlier indicators of impairment. The valuation of goodwill is based on the
Company's discounted projected cash flows of VV. The valuation of goodwill
related to VV indicated that the fair value of goodwill at December 31, 2006 was
greater than its carrying value of $175,000.
Investment in Chinese Joint Venture
-----------------------------------
During 2005, the Company invested approximately $372,000 for an 80% interest in
a Chinese Joint Venture for the purpose of manufacturing products. The
investment consisted of issuing 90,000 shares of common stock valued at $248,000
and $124,000 in cash. However, the joint venture has not begun any manufacturing
activity and the Company does not have a date that any profits will be generated
by the joint venture and has accordingly established a reserve for the full
amount of the investment during the fourth quarter of 2005.
Investment in Obvio
-------------------
We invested in Obvio! Automotoveiculos S.A., based in Rio de Janeiro, to develop
two 'trybrid' high performance microsports cars. We recorded research and
development expenses of $275,000 and $269,000 during the years ended December
31, 2006 and 2005, respectively, related to this agreement.
Advertising
-----------
The cost of advertising is expensed as incurred. Advertising and marketing
expenses amounted to $320,000 and $356,000 in the years ended December 31, 2006
and 2005, respectively.
Warranty
--------
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.
The Company also provides a 36 month or 36,000 mile warranty on the Smart Car
Americanized by ZAP and 6 month warranties for the Xebra(TM) vehicles. At
December 31, 2006, the Company has recorded a warranty liability for $279,000
for estimated warranty obligations (repair costs) for Smart Cars Americanized by
ZAP and Xebra vehicles, which is included in accrued liabilities in the
accompanying consolidated balance sheet.
Shipping and handling costs
---------------------------
Shipping and handling costs have been included in cost of goods sold.
Research and development
------------------------
Research and product development costs are expensed as incurred.
Income taxes
------------
The Company accounts for income taxes using an asset and liability method for
financial accounting and reporting purposes. Deferred income tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities, operating loss and tax credit
carry-forwards and are measured using the currently enacted tax rates and laws.
The Company has made no provision for income taxes except for the minimum state
tax due in any period presented in the accompanying consolidated financial
statements because it incurred operating losses in each of these periods.
The Company analyzes its deferred tax assets with regard to potential
realization. The Company has established a valuation allowance on its deferred
tax assets to the extent that management has determined that it is more likely
than not that some portion or all of the deferred tax asset will not be realized
based upon the uncertainty of their realization. The Company has considered
estimated future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the amount of the valuation allowance.
40
Use of estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions affecting the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, as well as revenues and expenses during the reporting
period. The amounts estimated could differ from actual results.
Risks and uncertainties (major supplier)
----------------------------------------
The Company currently relies on one manufacturer, Shandong Jindalu Vehicle Co.,
LTD of China ("Shandong") to supply 100% of Xebra(TM) Electric Vehicles. If
Shandong is unable to supply electric vehicles and the Company is unable to
obtain alternative sources of supply for these products and services, the
Company might not be able to fill existing backorders and/or to sell more
Xebra(TM) Electric Vehicles.
Fair value of financial instruments
-----------------------------------
The Company measures its financial assets and liabilities in accordance with
U.S. generally accepted accounting principles. The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties. For certain of the Company's financial
instruments, including cash equivalents, accounts receivable, accounts payable
and accrued liabilities, the carrying amount approximates fair value because of
the short maturities. The fair value of debt is not determinable due to the
terms of the debt and the lack of a comparable market for such debt.
Comprehensive Loss
------------------
The Company has no components of other comprehensive loss other than its net
loss, and, accordingly, its comprehensive loss is equivalent to its net loss for
the periods presented.
Stock-based compensation
------------------------
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, using the modified-prospective transition method. Under
the fair value recognition provisions of SFAS 123R, share-based compensation
cost is estimated at the grant date based on the fair value of the award and is
recognized as expense, net of estimated pre-vesting forfeitures, ratably over
the vesting period of the award. In addition, the adoption of SFAS 123R requires
additional accounting related to the income tax effects and disclosure regarding
the cash flow effects resulting from share-based payment arrangements. In
January 2005, the SEC issued SAB No. 107, which provides supplemental
implementation guidance for SFAS 123R. Calculating share-based compensation
expense requires the input of highly subjective assumptions, including the
expected term of the share-based awards, stock price volatility, dividend yield,
risk free interest rates, and pre-vesting forfeitures. The assumptions used in
calculating the fair value of stock-based awards represent the Company's best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if factors change and the
Company uses different assumptions, its share-based compensation expense could
be materially different in the future. In addition, the Company is required to
estimate the expected pre-vesting forfeiture rate and only recognize expense for
those shares expected to vest. If the Company's actual forfeiture rate is
materially different from its estimate, the Company's share-based compensation
expense could be significantly different from what the Company has recorded in
the current period. The total amount of stock-based compensation expense
recognized during the year ended December 31, 2006 totaled $4,050,000, all of
which has been recorded in general and administrative expenses. As of December
31, 2006, the total unrecognized stock-based compensation balance for unvested
options was $2,112,270, which is expected to be recognized through December
2009.
On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
"Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards " (FSP 123(R)-3). The Company adopted the alternative transition
method provided in the FASB Staff Position for calculating the tax effects of
stock-based compensation pursuant to SFAS 123R in the fourth quarter of fiscal
2006. The alternative transition method includes simplified methods to establish
41
the beginning balance of the additional paid-in capital pool (APIC pool) related
to the tax effects of employee stock-based compensation, and to determine the
subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS 123R. The adoption did not have a material impact on the
Company's results of operations and financial condition.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model based on the assumptions noted in the
following table. The expected term of options represents the period that the
Company's stock-based awards are expected to be outstanding based on the
simplified method provided in SAB 107. The risk-free interest rate for periods
related to the expected life of the options is based on the U.S. Treasury yield
curve in effect at the time of grant. The expected volatility is based on
historical volatilities of the Company's stock. The expected dividend yield is
zero, as the Company does not anticipate paying cash dividends in the near
future. During the year ended December 31, 2006, the Company used a forfeiture
rate of 3% based on an analysis of historical data as it reasonably approximates
the currently anticipated rate of forfeiture for granted and outstanding options
that have not vested. The following assumptions were used to determine
stock-based compensation during the year ended December 31, 2006:
Twelve months
ended
December 31,
2006
--------------
Expected term (in years) 6.0
Volatility 134.0 - 154.4%
Risk-free interest rate 4.63 - 5.21%
Dividend yield 0.00%
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues
Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are
Issued to Other than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services.
Prior to January 1, 2006, the Company accounted for share-based payments to its
employees and non-employee members of its Board of Directors under the
recognition and measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related guidance, as
permitted by SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123"), and
amended by SFAS 148, Accounting for Stock-Based Compensation-Transition and
Disclosure ("SFAS 148"). The Company did not recognize any significant
share-based employee compensation costs in its statements of operations prior to
January 1, 2006, as options granted to employees and non-employee members of the
board of directors generally had an exercise price equal to the fair value of
the underlying common stock on the date of grant. As required by SFAS 148, prior
to the adoption of SFAS 123R, the Company provided pro forma disclosure of net
loss applicable to common stockholders as if the fair-value-based method defined
in SFAS 123 had been applied to employee stock options and purchase rights. In
the pro forma information for periods prior to 2006, the Company accounted for
pre-vesting forfeitures as they occurred. The Company's operating results for
prior periods have not been restated. The following table illustrates the effect
on net loss per share applicable to common shareholders as if the Company had
applied the fair value recognition provisions of SFAS 123 to share-based
compensation for the year ended December 31, 2005 (in thousands, except per
share amounts):
2005
----------
Net loss attributable to common
shareholders, as reported $ (23,501)
Add: Stock-based employee compensation expense
and variable accounting adjustments to modified
warrants included in reported net loss, net of
related tax effects (5,438)
Less: Stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects, and variable
accounting adjustment related to modified warrants (1,609)
----------
Pro forma net loss attributable to common
shareholders $ (30,548)
==========
Net loss per share attributable to common shareholders:
As reported $ (0.68)
==========
Pro forma $ (0.88)
==========
42
The vesting of all unvested employee stock options will be accelerated upon the
occurrence of a change of control of the company.
Upon adoption of SFAS 123(R), we continued estimating the value of stock option
awards on the date of grant using the Black-Scholes option pricing model
(Black-Scholes Model). The determination of the fair value of share-based
payment awards on the date of grant using an option pricing model is affected by
our stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, our
expected stock price volatility over the term of the awards, actual and
projected employee stock option exercise behaviors, risk-free interest rate and
expected dividends.
Estimates of share-based compensation expenses are significant to our financial
statements, but these expenses are based on option valuation models and will
never result in the payment of cash by us. For this reason, and because we do
not view share-based compensation as related to our operational performance, we
exclude estimated share-based compensation expense when evaluating the business
performance of our operations.
The guidance in SFAS 123(R) and SAB 107 is relatively new, and best practices
are not well established. The application of these principles may be subject to
further interpretation and refinement over time. There are significant
differences among valuation models, and there is a possibility that we will
adopt different valuation models in the future. This may result in a lack of
consistency in future periods and materially affect the fair value estimate of
share-based payments. It may also result in a lack of comparability with other
companies that use different models, methods and assumptions.
Theoretical valuation models and market-based methods are evolving and may
result in lower or higher fair value estimates for share-based compensation. The
timing, readiness, adoption, general acceptance, reliability and testing of
these methods is uncertain. Sophisticated mathematical models may require
voluminous historical information, modeling expertise, financial analyses,
correlation analyses, integrated software and databases, consulting fees,
customization and testing for adequacy of internal controls. Market-based
methods are emerging that, if employed by us, may dilute our earnings per share
and involve significant transaction fees and ongoing administrative expenses.
The uncertainties and costs of these extensive valuation efforts may outweigh
the benefits to investors.
Net loss per share
------------------
On November 9, 2006, ZAP's Board of Directors approved a 10% stock dividend to
be issued effective February 28, 2007, to all shareholders of record as of
February 15, 2007. As a result of the stock dividend, approximately 3.9 million
shares were issued to shareholders. The number of shares and loss per share
amounts included in these financial statements has been adjusted for all periods
presented to reflect the stock dividend.
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the year. The
computation of diluted loss per common share is similar to the computation of
basic net loss per share except that the denominator is increased for the
assumed conversion of convertible securities and the exercise of options and
warrants to the extent they are dilutive using the treasury stock method. The
weighted average shares used in computing basic and diluted net loss per share
were the same for the two years ended December 31, 2006 and 2005. Options,
warrants and convertible debt for 64,770,809 shares and 59,432,000 shares were
excluded from the computation of loss per share at December 31, 2006 and 2005,
respectively, as their effect is anti-dilutive. Common shares issued as
collateral for a loan that has not been finalized totaling 1.292 million and
2.941 million shares have been excluded from the weighted average number of
shares outstanding for 2006 and 2005, respectively.
43
Recent accounting pronouncements
--------------------------------
In June 2006, the EITF reached a consensus on Issue No. 06-3, How Taxes
Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement" ("EITF 06-3"). The scope of EITF 06-3
includes sales, use, value added and some excise taxes that are assessed by a
governmental authority on specific revenue-producing transactions between a
seller and customer. EITF 06-3 states that a company should disclose its
accounting policy (i.e., gross or net presentation) regarding the presentation
of taxes within its scope, and if significant, these disclosures should be
applied retrospectively to the financial statements for all periods presented.
EITF 06-3 is effective for interim and annual reporting periods beginning after
December 15, 2006. The adoption of EITF 06-3 is not expected to have a material
effect on the Company's financial position, results of operations or cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes ("FIN No.48"), which prescribes a recognition
threshold and measurement process for recording in the financial statements
uncertain tax positions taken or expected to be taken in a tax return.
Additionally, FIN No. 48 provides guidance on the derecognition, classification,
accounting in interim periods and disclosure requirements for uncertain tax
positions. The accounting provisions of FIN No. 48 will be effective for fiscal
years beginning after December 15, 2006. The Company is in the process of
determining the effect, if any, that the adoption of FIN No. 48 will have on its
financial statements.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 provides guidance on how prior year misstatements should
be taken into consideration when quantifying misstatements in current year
financial statements for purposes of determining whether the current year's
financial statements are materially misstated. SAB No. 108 is effective for
fiscal years ending on or after November 15, 2006. The adoption of SAB No. 108
did not have a material impact on the Company's financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring the fair value of assets and
liabilities. This framework is intended to provide increased consistency in how
fair value determinations are made under various existing accounting standards
which permit, or in some cases require, estimates of fair market value. SFAS No.
157 is effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. Earlier application is encouraged, provided
that the reporting entity has not yet issued financial statements for that
fiscal year, including any financial statements for an interim period within
that fiscal year. The Company is currently in the process of evaluating the
impact of SFAS No. 157 on its financial position and results of operations.
On December 21, 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
Accounting for Registration Payment Arrangements. This FSP addresses how to
account for registration payment arrangements and clarifies that a financial
instrument subject to a registration payment arrangement should be accounted for
in accordance with other generally accepted accounting principles ("GAAP")
without regard to the contingent obligation to transfer consideration pursuant
to the registration payment arrangement. This accounting pronouncement further
clarifies that a liability for registration statement obligations should be
recorded in accordance with SFAS No. 5, Accounting for Contingencies, when the
payments become probable and can be reasonably estimated. This FSP is effective
for companies with fiscal years ending on or after December 15, 2006. The
Company is currently assessing the impact that this FSP may have in its
financial statements.
NOTE 2 - SMART AUTOMOBILE LICENSE
On April 19, 2004, ZAP entered into an Exclusive Purchase, License and Supply
Agreement with Smart-Automobile LLC ("SA"), a California limited liability
company, to distribute and manufacture Smart Cars. Smart is the brand name for a
3-cyclinder gas turbo engine car manufactured by Daimler Chrysler AG, which can
achieve estimated fuel economy of 40 miles per gallon. SA is not affiliated with
Daimler Chrysler, but is a direct importer.
Under the agreement ZAP was SA's exclusive distributor and licensee of the right
to manufacture and distribute Smart cars in the United States and the
non-exclusive distributor and licensee outside of the United States for a period
of ten years. Subject to the terms of the agreement, ZAP will pay SA a license
and distribution fee of $10,000,000: a $1 million payment in cash was made upon
execution of the agreement, $1 million will be payable in cash ratably
commencing with the delivery of the first 1,000 Smart Cars, and $8 million was
paid in ZAP preferred stock.
44
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 vehicles
delivered to ZAP in the years 2004, 2005 and 2006 which are fully EPA compliant
to sell in the United States as new cars, the holder shall convert 500 shares of
preferred stock SA to $500,000 of common stock, and allow the holder to receive
505,000 warrants with an exercise price of $2.50 per share exercisable through
July 7, 2009, or when all the preferred have been converted. During 2004, ZAP
allowed SA to convert 500 preferred shares to $500,000 of common stock prior to
delivering any EPA compliant Smart Cars.
The Company recorded the cost of the Smart Automobile license at $10.6 million,
based on: 1) the $10 million the Company paid to SA as consideration for a
Purchase, License and Supply Agreement dated April 19, 2004; and 2) the fair
value of five-year warrants issued under the Agreement for the purchase of
505,000 common shares at $2.50 per share and expiring in July 1, 2009. The
warrants were valued at $1.16 per share using the Black-Scholes option pricing
model with the following assumptions: expected dividend yield of 0.0%; risk free
interest rate of 3.08%; contractual life of 4.5 years; and volatility of
229.43%.
In the fourth quarter of 2005, the Company filed a lawsuit against Daimler
Chrysler Corporation ("Daimler Chrysler") and others alleging that Daimler
Chrysler has engaged in a series of anti-competitive tactics aimed at defaming
ZAP and disrupting its third party relationships including this arrangement.
Shortly thereafter, the Company commenced its annual impairment assessment. An
independent valuation of the Smart Automobile license as of December 31, 2005
estimated the fair value to be $3.1 million with a remaining life of two years
which was less than the $10.6 million recorded cost of the license. The carrying
cost of the license was $8.8 million prior to the impairment calculation and
accordingly, the Company recorded an impairment charge of $5.7 million for the
year ended December 31, 2005. The valuation of the license was based on the
Company's discounted projected cash flows from projected sales of Smart Cars
over the estimated life of the license agreement.
In June 2006, ZAP agreed in principle to amend its agreement with SA that was
originally signed in April 2004. As a result, SA returned to ZAP all of the
remaining preferred shares, or 7,500 preferred shares valued at $7.5 million, in
exchange for, among other things, 300,000 common shares valued at $405,000 and 1
million warrants with an exercise price of $1.75 per share, valued at $950,000
using the Black-Scholes option pricing model. In addition, ZAP's obligation to
pay accrued license fees of $906,000 at June 30, 2006 was canceled. As a result,
ZAP recorded a liability to SA of $7 million at June 30, 2006.
In September 2006, the Company further amended and renegotiated its agreement
with SA for the Smart Car, due to the unavailability of Smart Cars and
Daimler-Chrysler's announcement to begin selling Smart Cars in the U.S. in 2008.
This negotiation superseded all previous license and other distribution or asset
agreements between ZAP and SA. The renegotiated agreement released ZAP from any
remaining obligations to SA under its previous agreements and any liability to
SA and resulted in the reversal of the $7 million liability owed and the
corresponding recognition of $7 million in other income. The Company also
recognized an impairment loss on the remaining value of the license with SA of
approximately $2.2 million. Amortization expense of the license was $1,056,000
and $1,059,000 for the years ended December 31, 2006 and 2005. As of September
30, 2006, the Company no longer distributes Smart Cars.
NOTE 3 - INVENTORIES
Inventories at December 31, 2006 are summarized as follows (thousands):
Vehicles-conventional $ 209
Advanced technology vehicles 1,472
Parts and supplies 425
Finished goods 759
----------
2,865
Less - inventory reserve (518)
----------
$ 2,347
==========
45
Inventory reserve policy
The Company records inventory at the lower of cost or market and establishes
reserves for slow moving or excess inventory, product obsolescence and valuation
impairment. In determining the adequacy of its reserves, at each reporting
period the Company analyzes the following, among other things:
o Current inventory quantities on hand;
o Product acceptance in the marketplace;
o Customer demand;
o Historical sales;
o Forecasted sales;
o Product obsolescence; and
o Technological innovations.
Any modifications to the Company's estimates of its reserves are reflected in
cost of goods sold within the statement of operations during the period in which
such modifications are determined by management. Changes in the Company's
inventory reserve during the year ended December 31, 2006 are as follows (in
thousands):
Balance as of January 1, 2006 $ 180
Provision for slow moving inventory 338
Write-off of slow moving inventory --
----------
Balance as of December 31, 2006 $ 518
==========
46
Note 4 - NOTE RECEIVABLE SMART AUTOMOBILE LLC
In January 2005, the Company advanced $1 million to Smart Automobile, LLC and
Thomas Heidemann (President of Smart Automobile, LLC) in exchange for a note
receivable. The note is secured by an interest in certain equipment owned by
Smart Automobile, LLC, and bears interest at 5% per annum and is payable in 24
equal monthly installments beginning January 7, 2006. The note is in default as
of December 31, 2006 and to date the Company has not received any of the
required payments. At this time it is uncertain if any of the scheduled payments
will be received in the future, or if Smart Automobile has cash resources to
repay the loan. Accordingly, the Company has discontinued recording any interest
income and has established a reserve of $1 million. The Company has also named
Smart Automobile LLC as a party in its lawsuit against Daimler Chrysler AG (See
Note 15).
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2006 are summarized as follows
(thousands):
Land $ 1,078
Buildings and improvements 3,222
Machinery and equipment 218
Computer equipment and software 209
Office furniture and equipment 98
Leasehold improvements 9
Vehicles 523
----------
5,357
Less - accumulated depreciation and amortization 891
----------
$ 4,466
==========
The land and building and certain equipment, with a net book value of $2,800,000
at December 31, 2006, are pledged as security for certain indebtedness (see Note
7). Depreciation and amortization expense for the years ended December 31, 2006
and 2005 was approximately $345,000 and $327,000, respectively.
NOTE 6 - ACCRUED LIABILITIES
Accrued liabilities at December 31, 2006 consisted of the following (in
thousands):
Accrued professional fees $ 1,244
Accrued payables 286
Customer deposits 315
Warranty obligation 279
Other accrued expenses 579
----------
$ 2,703
==========
47
NOTE 7 - DEBT
CONVERTIBLE SECURED NOTE
The Company has a $2 million convertible note due in March 2025, with annual
interest at 2% through March of 2005, and thereafter at the prime rate (as
defined) plus 2%. Payments started on April 2005, at which time, the note is
payable with equal principal and interest payments over the next 240 months. The
note holder has the option to convert some or all of the unpaid principal and
accrued interest to shares of ZAP's common stock at $2.15 per share or an agreed
upon conversion price (as defined). The note was issued in exchange for the
purchase of the Company's new corporate headquarters and is secured by this
property. The note has a balance of $ 1,937,000 at December 31, 2006. Scheduled
annual maturities for this long-term debt for years ending after December 31,
2006 are as follows: $104,000 - 2007; $104,000 - 2008; $104,000 - 2009; $104,000
- 2010; $104,000 - 2011; and $1,422,000- thereafter.
8% SENIOR CONVERTIBLE NOTES
On December 5, 2006, when the market price of the Company's common stock was
$0.89 per share, the Company concluded a private placement to three
institutional investors of $1,500,000 of 8% Senior Convertible Notes due
December 5, 2008 (the "Notes"). The Notes are convertible at $1.00 per share
(the "Conversion Price") into 1,500,000 shares of the Company's common stock,
subject to anti-dilution adjustments should the Company issue common stock or
common stock equivalents for a price less than the Conversion Price, on or prior
to the later of 1) the earlier of (x) the date a Registration Statement is
declared effective by the SEC and (y) the two year anniversary of the issue date
and 2) the six month anniversary of the issue date. The Company also issued to
the Investors common stock purchase warrants (the "Warrants"), each immediately
exercisable and expiring on December 5, 2011. The Warrants are exercisable to
purchase 450,000 shares of the Company's common stock at $1.10 per share. The
Warrants provide for anti-dilution and other adjustments of the issuable shares
and the exercise prices thereof should the Company issue common stock or common
stock equivalents for a price less than the exercise price of the Warrants, on
or prior to the later of 1) the earlier of (x) the date a Registration Statement
is declared effective by the SEC and (y) the two year anniversary of the issue
date and 2) the six month anniversary of the issue date. The anti-dilution
provided by the Warrants calls for the exercise price of the Warrants to adjust
to 110% of the price of any dilutive issuances, on a per share basis. After
December 31, 2007 and if the daily volume weighted average price of its common
stock is equal to or greater than the Forced Conversion Price (as defined) for
20 trading days occurring during any period of thirty consecutive trading days,
the Company has the right to require the conversion of any unconverted Notes
into shares of common stock. After December 31, 2007, and if the daily volume
weighted average price of its common stock is equal to or greater than the $2.20
for 20 trading days occurring during any period of thirty consecutive trading
days, the Company has the right to require the exercise of any unexercised
Warrants into shares of common stock.
The Notes provide for quarterly interest to be paid in cash, or subject to
certain conditions, by issuing shares of common stock. If the Company is
eligible and elects to pay quarterly interest in stock, the price per share used
to calculate the number of shares due for interest will be calculated by
reducing the market price of the shares by 5% (as defined).
The Company will use the proceeds from the issuance of the Notes for general
working capital purposes and to increase the capacity of its product
distribution network.
Under terms of a registration rights agreement, the Company is obligated to file
a registration statement within 90 days of the closing date for the resale of
the shares of common stock underlying the Notes, the Warrants and any other
shares issuable pursuant to the terms of the Notes or the Warrants and to cause
the registration statement to become effective within 180 days of the closing
date. The Company is also required to maintain the effectiveness of the
registration statement until all shares have been sold or may be sold without a
registration statement.
In the event the registration statement is not filed within 90 days after the
closing or does not become effective within 180 days of the closing, or once
declared effective ceases to remain effective during the period that the
securities covered by the agreement are not sold, the Company will be required
to pay, in cash, an amount for such failure, equal to 1% of the aggregate
principal amount for each thirty day period in which the registration statement
is not filed, effective, or maintained effective. There is no cap on the amount
of damages potentially payable by the Company should the registration statement
not be filed, declared effective, or maintained effective. At March 30, 2007,
the Company has not filed a registration statement pursuant to the registration
rights agreement.
If the Company issues additional common stock or common stock equivalents for a
price less than the Conversion Price, on or prior to the later of 1) the earlier
of (x) the date a Registration Statement is declared effective by the SEC and
(y) the two
48
year anniversary of the issue date and 2) the six month anniversary of the issue
date of the Notes, the Investors will have the right, but not the obligation, to
participate in such issuance, upon the same terms as those offered, so that each
Investor's percentage ownership of the Company remains the same.
The Company paid fees of $25,000 related to the Notes. These cash fees have been
recorded as Deferred Offering Costs and are being amortized over the life of the
Notes.
As a result of the anti-dilution provisions, the Notes are not considered
conventional convertible debt under the provisions of Emerging Issues Task Force
(EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock. The Company further
determined that the conversion feature is subject to the provisions of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities and is an
embedded derivative which should be bifurcated and accounted for separately.
Accordingly, the fair value of the derivative was accounted for at inception as
a discount to the face value of the Notes and a corresponding liability, and
will be marked to market at each balance sheet date with the change in the fair
value of the derivative being recorded as interest expense. At December 5, 2006,
the date the Notes were issued, the Company valued the derivative at
approximately $1,325,000 using a binomial pricing model to estimate future stock
prices, assuming historical stock price volatility of 125.77%, a risk-free
interest rate of 4.52%, an expected dividend rate of 0.00%, and a 100%
probability of completing additional rounds of equity financing during the
two-year term of the derivative. As a result of changes in the market price of
the Company's stock between December 4, 2006 and December 31, 2006, the decrease
in the remaining life of the derivative, and changes in other assumptions, the
Company's valuation of the derivative decreased to approximately $1,189,000,
with the change in valuation being recorded as a credit to other income. The
value of the derivative at December 31, 2006 was again determined using a
binomial pricing model to estimate future stock prices, assuming historical
stock price volatility of 124.82%, a risk-free interest rate of 4.82%, an
expected dividend rate of 0.00%, and a 100% probability of completing additional
rounds of equity financing during the remaining term of the derivative.
Due to the Company's obligation to file, and achieve and maintain effectiveness
of the registration statement, the Company has classified the Warrants as a
liability. This liability will be marked to market at each balance sheet date
with the change in the fair value of the Warrants being recorded as interest
expense. The Company valued the Warrants at December 5, 2006 at $0.844 per share
using a binomial pricing model with the following assumptions: risk free
interest rate of 4.39%; expected dividend rate of 0.00%; volatility of 142.17%;
and expected term of 5 years. The fair value of the Warrants at December 5, 2006
was approximately $380,000, which the Company recorded as an additional discount
to the Notes with a corresponding credit to a Warrant liability. The
anti-dilution provision contained in the Warrants reduces the exercise price but
does not increase the number of shares issuable to the warrant holders. The
Warrant liability was adjusted to its fair value of $300,000 at December 31,
2006 and the decrease in the Warrant liability was recorded as a credit to other
income. The Company valued the Warrants at December 31, 2006 at $0.667 per share
using a binomial pricing model with the following assumptions: risk free
interest rate of 4.70%; expected dividend rate of 0.00%; volatility of 141.13%;
and expected term of 4.93 years.
The aggregate amount of the discount to the Notes related to the note derivative
and Warrant liabilities at December 5, 2006 was approximately $1,705,000. As
this discount exceeds the face value of the Notes by $205,000, the Company
expensed this excess discount to the Notes to interest expense. The Company is
amortizing the remaining $1,500,000 discount to interest expense using the
effective interest method prescribed by APB Opinion No. 21, Interest on
Receivable and Payables, over the life of the Notes. The effective interest rate
on these notes is approximately 279% based on the stated interest rate, the
amount of amortized discount, and the term of the notes.
The Company will be required to make monthly principal payments, beginning on
June 1, 2007, in twelve equal installments; however, the Company will not be
obligated to issue its stock in payment of such principal at a price below the
lower of $0.75 or the adjusted conversion price in effect. The investors may,
however, choose to receive the Company's stock at (but not below) the lower of
$0.75 or the adjusted conversion price in effect. If the Company chooses to pay
principal with common stock, it will be based on the lower of a 10% discount to
the lowest daily Volume Weighted Average Price for any trading day among the
immediately preceding ten consecutive trading days and the conversion price in
effect on such Principal Payment Date.
Scheduled annual maturities for this long term debt for years ending after
December 31, 2006 are as follows: $875,000 - 2007 and $625,000 - 2008.
49
NOTE 8 - REVOLVING FINANCING FACILITY
In September 2005, the Company signed a $425 million revolving financing
facility with Surge Capital II, LLC that, subject to certain conditions can be
used by ZAP to import Smart Cars Americanized by ZAP and other advanced
transportation vehicles for ZAP dealers. The financing agreement has a term of
one year, but may be extended upon agreement by both parties. The financing is
based on orders ZAP receives from dealers who must be approved in advance by
Surge Capital II, LLC and is secured by a first lien on substantially all of
ZAP's assets. In September of 2006 the financing facility expired with neither
party wishing to continue the agreement. No amounts were outstanding and due
under the agreement. All of the previous liens by Surge Capital II, LLC on the
assets of the Company have been cancelled.
NOTE 9 - INCOME TAXES
The provision for income taxes for all periods presented in the consolidated
statements of operations represents minimum California franchise taxes. Income
tax expense differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to pretax losses as a result of the following:
2006 2005
---------- ----------
Computed expected tax expense $ (4,057) $ (7,991)
Losses and credits for which no benefits
have been recognized 2,800 8,505
Stock grants and warrants not deductible
for income tax purposes 1,244 (510)
Other 17
---------- ----------
$ 4 $ 4
========== ==========
50
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 2006 is presented below:
2006
----------
Deferred tax assets:
Net operating loss carryovers $ 25,492
Other 1,737
----------
Total gross deferred tax assets 27,229
Valuation allowance (27,229)
----------
Net deferred tax assets $ 0
==========
The net change in the valuation allowance for the year ended December 2006 was
an increase of $3.8 million. Because there is uncertainty regarding the
Company's ability to realize its deferred tax assets, a 100% valuation allowance
has been established.
As of December 31, 2006, the Company had federal tax net operating loss
carryforwards of approximately $60.6 million, which will expire in the years
2012 through 2026. The Company also has federal research and development credit
carryforwards as of December 31, 2006 of approximately $130,000, which will
expire in the years 2012 through 2026. State tax net operating loss
carryforwards were approximately $53.1 million as of December 31, 2006. The
state net operating loss carryforwards will expire in the years 2012 through
2017.
The Company's ability to utilize its net operating loss and research and
development tax credit carryforwards may be limited in the future if it is
determined that the Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code. Federal and State tax laws impose
substantial restrictions on the utilization of net operating loss and credit
carryforwards in the event of an "ownership charge" for tax purposes as defined
in the Internal Revenue Code Section 382.
51
NOTE 10 - STOCK OPTIONS
During 2002 as part of the confirmed plan of reorganization, ZAP adopted an
Incentive Stock Option Plan ("2002 Plan"). During 2006, ZAP adopted a new
Incentive Stock Option Plan ("2006 Plan").
Options to purchase common stock are granted by the Board of Directors under
three Stock Option Plans, referred to as the 2006, 2002 and 1999 plans. Options
granted may be incentive stock options (as defined under Section 422 of the
Internal Revenue Code) or nonstatutory stock options. The numbers of shares
available for grant under the 2006, 2002 and 1999 Plans are 4,000,000,
10,000,000 and 1,500,000 respectively. Options are granted at no less than fair
market value on the date of grant. Options granted in 2006 and 2005 generally
become exercisable as they vest over a three year period, and expire ten years
after the date of grant.
Option activity under the 2006, 2002 and 1999 plans is as follows (thousands):
2006 Plan 2002 Plan 1999 Plan
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
-------- -------- -------- -------- -------- --------
Outstanding at January 1, 2005 -- -- 4,884 $ 1.02 159 $ 1.20
Granted -- -- 1,668 1.07 -- --
Exercised -- -- (10) 0.25 -- --
Canceled -- -- (280) 0.92 (4) 1.20
-------- -------- -------- -------- -------- --------
Outstanding at December 31, 2005 -- -- 6,262 1.04 155 1.20
Granted 1,367 $ 0.92 612 0.57 208 1.11
Exercised -- -- (619) 0.34 -- --
Canceled -- -- (400) 1.07 -- --
-------- -------- -------- -------- -------- --------
Outstanding at December 31, 2006 1,367 $ 0.92 5,855 $ 0.99 363 $ 1.15
======== ======== ======== ======== ======== ========
The weighted average fair value of options granted during the years ended
December 31, 2006 and 2005 was $0.57 and $1.06, respectively.
The following information applies to options outstanding at December 31, 2006:
(backup as exhibit 7)
2006 Plan 2002 Plan 1999 Plan
------------- ------------- -------------
Range of exercise prices $1.03 - $0.88 $2.80 - $0.25 $1.20 - $1.11
Weighted average remaining life (years) 8.92 7.03 7.67
Options exercisable 178,056 4,128,360 155,000
Weighted average exercise price $0.92 $0.99 $1.15
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
2006 2005
---------------- ----------------
Dividends None None
Expected volatility 134.00 - 154.43% 151.10 - 221.37%
Risk free interest rate 4.63 - 5.21% 3.71 - 4.65%
Expected life 0.50 - 6.5 years 1.25 - 9.9 years
At December 31, 2006, the Company has outstanding stock options for employees to
purchase 2,183,833 shares and for directors to purchase 5,464,289 shares, at
exercise prices ranging from $0.25 to $2.80.
52
NOTE 11 - COMMITMENTS
The Company presently rents its warehouse. The monthly rent is adjusted annually
to reflect the average percentage increase in the Consumer Price Index. The
Company leases the location of its car outlet and another warehouse from the
Company's CEO (see Note 14). Rent expenses were approximately $300,000 and
$484,000 in 2006 and 2005, respectively.
NOTE 12 - SHAREHOLDERS' EQUITY
While the Company was in the process of amending and restating its articles of
incorporation, the Secretary of State of California noted that the confirmed
plan of reorganization of June 20, 2002, did not authorize the Board to
designate its preferred shares, so the Board amended the articles through
shareholder vote to grant the Board this authority. The record date for this
vote was September 30, 2004. The Amended and Restated Articles of Incorporation
provide, among other things, for the authorization of the Company to issue
100,000,000 shares of Common Stock and 50,000,000 shares of Preferred Stock, as
well as for the elimination of all prior classes and series of preferred stock.
The Board of Directors was further authorized, subject to limitations prescribed
by law, to fix the designations, determinations, powers, preference and rights,
and the qualifications, limitations or restrictions thereof, of any wholly
un-issued series of Preferred Stock.
Stock Dividend
--------------
On November 9, 2006, ZAP's Board of Directors approved a 10% stock dividend to
be issued, effective February 28, 2007, to all shareholders of record as of
February 15, 2007.
Common stock
------------
2006 ISSUANCES
STOCK ISSUED FOR ASSETS
In 2006, the Company issued stock for inventory and assets and recorded the cost
at the intrinsic value of the stock or the fair value of the assets, whichever
is more reliably measurable. During 2006, 4,441 shares with value of $3,230 were
issued for purchase of inventory and certain assets. In 2005, under the terms of
the purchase of a building, the Company was obligated to issue additional shares
of common stock for no additional consideration if at the end of at least one
year the market price of ZAP's common shares was less than the market price of
the date of issuance. At December 31, 2006, the remaining put option liability
related to a land purchase was recorded at $230,105, to reflect the remaining
amount due to the seller.
53
STOCK ISSUED FOR SERVICES. In 2006, the Company issued shares of its common
stock for consulting and other services and employee compensation. The stock
grants were recorded at the intrinsic value of the stock on the date of grant.
During 2006, the Company issued grants for 2,436,000 shares, including 650,000
collateral shares, as consideration under agreements for consulting, legal and
other services. The Company also issued 435,000 shares for employee
compensation.
STOCK ISSUED FOR CASH. During 2006, the Company raised $2.076 million in cash
through the issuance of 2,129,000 shares of common stock, including 1,000,000
shares of collateral stock. In addition, the Company issued 2,173,870 shares for
$2,060,000 upon exercises of options and warrants.
2005 ISSUANCES
STOCK ISSUED FOR ASSETS. In 2005, the Company issued stock for inventory and
assets and recorded the cost at the intrinsic value of the stock or the fair
value of the assets, whichever is more reliably measurable. During 2005, 455,442
shares with value of $1.1 million were issued for purchase of real estate. ZAP
recorded the common shares at the appraised value of the real estate. Under the
terms of the purchase, ZAP is obligated to issue additional common shares for no
additional consideration if at the end of at least 1 year the market price of
ZAP's common shares is less than the market price at their date of issuance.
In the third quarter of 2005, ZAP calculated the fair value of the anti-dilution
obligation to issue additional shares ("put option liability") using a binomial
pricing model to estimate future stock prices, using the following assumptions:
historical stock price volatility of 139.6%, a risk free interest rate of 4.01%,
and an expected dividend rate of 0.00%. ZAP calculated the fair value of the put
option liability at the date of the common stock issuance at $600,593, and
reclassified the obligation from common stock to a liability in the third
quarter. Zap also entered into other equity transactions that contained the
potential obligation to issue additional shares. The put option liability
related to those transactions was originally valued at $37,066. The liabilities
were revalued and recorded at $969,000 at December 31, 2005, with the change of
$331,000 recorded as an expense in other income. These liabilities were
calculated using a binomial pricing model to estimate future stock prices, using
the following assumptions: historical stock price volatility of 109.2%, a risk
free interest rate of 4.38%, and an expected dividend rate of 0.00%. ZAP also
issued 59,000 shares to acquire other assets valued at $111,000 and 223,833
shares for automobile and other inventory.
STOCK ISSUED FOR SERVICES. In 2005, the Company issued shares of its common
stock for consulting and other services and employee compensation. The stock
grants were recorded at the intrinsic value of the stock on the date of grant.
During 2005, the Company issued grants for 321,351 shares as consideration under
agreements for consulting and related services, 134,592 shares were issued for
legal fees, 114,440 shares were issued for rent expense, 308,795 shares were
issued for other outside services and 38,795 shares were issued for employee
compensation.
STOCK ISSUED FOR CASH. During 2005, the Company raised $1.25 million in cash
through the issuance of 630,000 shares of common stock and three warrants to an
investor. Each of the three warrants is exercisable for five years and is
exercisable for 300,000 shares of common stock at initial exercise prices of
$2.50, $3.25 and $4.00 per share. In addition, the Company issued 885,510 shares
for $978,000 upon exercises of options and warrants.
STOCK ISSUED FOR INVESTMENT. During 2005, the company issued 90,000 shares for
an investment stake in a Chinese joint venture.
STOCK ISSUED AS COLLATERAL - In January 2003, the Company entered into a Loan
Agreement with Mercatus Partners LLP ("Mercatus") and issued 2, 941,176 common
shares to Mercatus as collateral for a $1 million loan that never funded. The
$3.529 million market value of these shares at the date of issuance was recorded
in common stock with an offsetting contra equity account. The shares were
reported as lost to the Company in December 2003 and in December 2004, the
shares were reissued to Mercatus who then assigned the shares and their
interests to Phi-Nest Fund, L.P. ("Phi-Nest") as collateral for the $1
54
million loan commitment. The Company amended the Loan Agreement allowing
Phi-Nest to purchase 500,000 shares for $1.16 per share. On March 30, 2006, the
Company received $500,000 in net proceeds from the sale of the 500,000 shares
and the collateralized shares were reduced to 2,441,176 shares. Phi-Nest did not
provide the $1 million loan. In September of 2006, the Company signed a
Settlement Agreement with Phi-Nest requiring that the common stock being held as
collateral be transferred to an independent third party (Michael C. Sher dba the
Law Offices of Michael C. Sher), to hold the securities in a depository account.
At the same time, the Company entered into an agreement with International
Monetary Group ("IMG") whose President and CEO is Patrick D. Harrington, a
merchant banking company to procure financing for the Company. Michael C. Sher
was also acting as IMG's in-house attorney. In return, Phi-Nest received 150,000
shares of the collateral stock for consulting services and forgiveness of a note
receivable for $56,000 owed by a cousin of Steven Schneider, ZAP CEO. As a
result, the Company recognized $236,000 in non-cash charges in the accompanying
consolidated statement of income. In September, the Board of Directors approved
the sale of 500,000 shares of the collateral stock to a qualified investor for
$500,000. In October 2006, the qualified investor transferred $500,000 directly
to IMG who in turn was to transfer the proceeds to the Company after the Company
authorized Michael C. Sher to release 500,000 shares of the collateral stock. In
October, IMG required the Company to sign a $500,000 note and represented that
they would not enforce the note based on other agreements with the Company and
in return IMG transferred $487,500 in net proceeds to ZAP for the 500,000 shares
of collateral stock previously issued to the qualified investor. Also in October
2006, the Company authorized the issuance of 250,000 shares of the collateral
stock to IMG and 250,000 shares of the collateral stock to Michael C. Sher for
consulting services and recognized $600,000 in non-cash consulting expense in
the accompanying consolidated statement of operations. At December 31, 2006,
there were 1,291,176 shares remaining in collateral stock held by Michael C.
Sher. In January 2007, IMG provided the Company with a notice of default on the
$500,000 alleged note obligation. In addition, Michael C. Sher has refused to
release the remaining 1,291,176 shares of collateral stock to the Company due to
a dispute over the alleged debt obligation with IMG. In February 2007, the
Company filed suit to have the collateral stock returned ( See Note 15) ZAP v.
International Monetary Group, Inc., a Delaware corporation; Michael C. Sher dba
the Law Offices of Michael C. Sher, Case No. SCV 240277) for a detailed
discussion. Management has recorded an estimated liability for any potential
exposure related to this transaction which is included in the accompanying
consolidated balance sheet. In addition, management believes that the ultimate
resolution of this claim will not have a material adverse effect on our
consolidated financial position or on results of operations.
FUSION CAPITAL STOCK PURCHASE AGREEMENT
On July 22, 2004, the Company entered into a $24.5 million stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital"). The stock
purchase agreement provided for the issuance of up to $24.5 million in common
stock over a 40 month period. The purchase prices would be based on market price
on the date of sale without any fixed discount. The agreement also provided for
the immediate issuance of 300,000 common shares as commitment and signing shares
at no cost, and the immediate issuance of five-year warrants for the purchase of
2.5 million shares of common stock at $2.50 to $5.50 per share.
The stock purchase agreement required the Company to file a registration
statement by August 20, 2004 for the resale of shares issued or issuable under
the stock purchase agreement, and to have the registration agreement declared
effective within 120 days. The stock purchase agreement provided for cash
liquidated damages if the Company failed to meet the registration deadlines. The
warrant agreement provided that Fusion Capital could use a cashless exercise
feature if an effective registration was not available.
In July 2004, the Company made an initial issuance under the agreement of
200,000 common shares at $2.50 per share. The Company also issued 300,000 common
shares as commitment and signing shares at no cost. The Company did not file the
required registration statement by August 20, 2004, Fusion Capital refused to
purchase any additional shares, and due to its dispute with Fusion Capital the
Company did not issue warrants until February 2005.
The Company and Fusion Capital terminated the stock purchase agreement on
February 22, 2005. Under the termination agreement, the Company repurchased the
200,000 common shares from Fusion Capital for the original issuance price of
$500,000; and Fusion Capital retained the 300,000 commitment and signing common
shares and the five year warrants for the purchase of 2.5 million shares at
$2.50 to $5.50 per share. The termination agreement amended the original
registration statement filing requirement to provide that the Company would use
its best efforts to obtain an effective registration statement by September 1,
2005, and that the warrant holders could use a cashless exercise feature if an
effective registration was not available.
The warrants under the stock purchase agreement and the termination agreement
are summarized as follows: two warrants for 500,000 shares each, with an
exercise price of $2.50 per share; one warrant for 500,000 shares with an
exercise price of $3.50 per share; one warrant for 500,000 shares with an
exercise price of $4.50 per share; and one warrant for 500,000 shares with an
exercise price of $5.50 per share. The $2.50 warrants expire on July 7, 2009.
All other warrants expire on July 20, 2009.
55
The warrants were valued at inception at prices ranging from $2.07 to $2.08
using the Black-Scholes option-pricing model with the following assumptions:
expected dividend yield of 0.0%; risk free interest rate of 3.68%; the
contractual life of 5.0 years; and volatility of 229.40%. The $5.185 million
fair value of the warrants at inception and the $612,000 market value of the
commitment and signing shares, based upon market prices of $1.70 to $2.10 per
share at issuance, were recorded as deferred offering costs and such costs would
have been charged against proceeds from stock issuances under the stock purchase
agreement. The Company wrote off the deferred offering costs in 2004 when Fusion
Capital refused to purchase any additional stock, and recorded a $5.8 million
charge to other expense. The Company revalued the warrant liability in February
2005 and recorded the market to market adjustment of $1.5 million in other
income. The remaining warrant liability was transferred to equity since the
Company was no longer required to file a registration statement for the warrant
shares.
The warrants were revalued at December 31, 2004 at prices ranging from $3.28 to
$3.30 per share, with the marked-to-market adjustment of $3.045 million recorded
in other expense. The fair value of the warrants at December 31, 2004 was
calculated using the Black-Scholes option pricing model with the following
assumptions: expected dividend of 0.0%; risk free interest rate of 3.47%; the
remaining contractual life of 4.5 years; and volatility of 223.26%.
Preferred stock
---------------
Prior to amending and restating its articles of incorporation on September 30,
2004, the Company was authorized to issue 50 million shares of preferred stock.
In December 2003, the Board of Directors established four classes of preferred
stock with 4 separate timelines. The four classes of preferred shares convert to
common shares as follows: Class B converts to 2000 shares, Class C converts to
1,500 shares, Class D converts to 1,000 shares and Class F converts to 500
shares. Four time-line definitions were also established. Each time line gives
the bearer the right to convert the preferred shares to common a certain number
of days after issuance as follows II after 30 days, III after 90 days, IV after
180 days and V after 1 year. Dividends are cumulative and accrue at 6% per year
and payable on June 30th of each year or on conversion date. Dividends are
payable in cash or in common stock at the Company's option. The Preferred Stock
holders have no voting rights. The liquidation value is its stated value plus
accrued and unpaid dividends thereon.
Series SA Preferred stock
-------------------------
The Company has designated 8,000 shares of preferred stock as Series SA
Preferred Stock ("SA" preferred stock). On October 25, 2004, the SA preferred
stock was issued to Smart Automobile, LLC in exchange for Class D convertible
preferred stock. These preferred shares had previously been issued to
Smart-Automobile, LLC in April 2004 in connection with an Exclusive Purchase,
License and Supply Agreement entered into between the Company and
Smart-Automobile, LLC. The SA preferred stock may be converted at the option of
the holder into common shares upon deliveries of Smart (R) automobiles to the
Company in 2004, 2005 and 2006. For every delivery of 1,000 vehicles that are
fully EPA compliant and salable as new cars in the United States, the preferred
shareholder may convert 500 SA preferred shares into $500,000 of common stock,
based on the market value (as defined) of stock at the conversion date. Not
withstanding the foregoing conversion requirements, the preferred shareholder
may immediately convert 500 preferred shares into $500,000 of common shares. In
October 2004, 500 SA preferred shares were converted into 423,729 common shares.
The preferred shares may not be converted after December 31, 2006. The Company
has the right to redeem all or a portion of the outstanding shares of SA
preferred stock after March 1, 2008 at a price of $.10 per share. The preferred
stock participates with the common shareholders as to any dividends payable on
common stock, based on the number of shares into which the SA preferred stock is
then convertible. The preferred stock also has liquidation preference, upon
liquidation, dissolution or winding up of the Company or disposition of
substantially all of the assets of the Company ("liquidation event"). The
liquidation preference is calculated as if each 100 shares of SA preferred stock
had been converted into 1 share of common stock immediately prior to the
liquidation event. The preferred shareholders are not entitled to vote on any
matters, unless otherwise required by law.
On June 19, 2006, Smart Automobile LLC returned to the Company all the remaining
shares of preferred stock with a carrying value of $7.5 million in exchange for
300,000 shares of common stock valued at approximately $400,000, one million
warrants with a strike price of $1.75 valued at approximately $950,000. See Note
2, Smart Auto License and Distribution Fee, for further discussion on this
transaction.
56
Warrants
The Company is authorized to issue 10 million shares each of Series B, C, D and
K Unrestricted Warrants. On November 8, 2004, the Board of Directors of ZAP
extended the expiration dates and exercise prices of the following Company
warrants:
1) Series B and B-2 Warrants expire on July 1, 2007 and have an exercise price
of $1.20.
2) Series C and C-2 Warrants expire on July 1, 2007 and have an exercise price
of $5.00.
3) Series D and D-2 Warrants expire on July 1, 2007 and have an exercise price
of $8.00.
4) Series K and K-2 Warrants expire on July 1, 2007 and have an exercise price
of $1.00.
The Board of Directors has also established the following restricted classes of
warrants: Series $1.10, Series $1.50, Series $1.75, Series $2.00, Series $2.50,
Series $3.05, Series $3.25, Series $3.50, Series $4.00, Series $4.05, Series
$4.50, Series $4.75, Series $5.00, and Series $5.50, with various expiration
periods.
The Board of Directors of ZAP has the right to (i) decrease the exercise price
of the warrants, (ii) increase the life of the warrants in which event the
exercise price may be increased, or (iii) make such other changes as the Board
of Directors of ZAP deems necessary and appropriate under the circumstances
provided the changes contemplated do not violate any statutory or common law.
Shares acquired through exercises of warrants for all Series other than Series
B, C, D and K are restricted as to sale. However, the warrants may be assigned,
sold, or transferred by the holder without restriction.
Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of
$0.01 per warrant upon thirty (30) days' written notice to the holders thereof;
provided, however, that if not all unexercised warrants in a particular series
are redeemed, then the redemption shall be pro-rated equally among the holders
of unexercised warrants in the series.
Total warrants outstanding at December 31, 2006 are summarized as follows (in
thousands):
Number of Exercise Expiration
Warrants Price Dates
-------- ----- -----
Series B-Unrestricted 4,200 1.20 7-1-07
Series B-2-Restricted 13,588 1.20 7-1-07
Series C-Unrestricted 6,898 5.00 7-1-07
Series C-2-Restricted 1,551 5.00 7-1-07
Series D-Unrestricted 7,438 8.00 7-1-07
Series D-2-Restricted 1,351 8.00 7-1-07
Series K-Unrestricted 4,040 1.00 7-1-07
Series K-2-Restricted 6,236 1.00 7-1-07
$1.10 Warrants Restricted 540 1.10 various
$1.50 Warrants Restricted 1,763 1.50 various
$1.75 Warrants Restricted 1,000 1.75 6-18-08
$2.00 Warrants Restricted 350 2.00 various
$2.50 Warrants Restricted 2,440 2.50 7-7-09
$3.05 Warrants Restricted 1,125 3.05 2-15-08
$3.25 Warrants Restricted 300 3.25 various
$3.50 Warrants Restricted 500 3.50 7-20-09
$4.00 Warrants Restricted 330 4.00 2-15-08
$4.05 Warrants Restricted 563 4.05 2-15-08
$4.50 Warrants Restricted 500 4.50 7-20-09
$4.75 Warrants Restricted 563 4.75 2-15-08
$5.00 Warrants Restricted 749 5.00 12-10-07
$5.50 Warrants Restricted 500 5.50 7-20-09
--------
56,525
========
See Note 18 - Subsequent events for additional information relating to the
outstanding warrants at December 31, 2006.
57
Replacement Warrants
--------------------
On July 1, 2004, the B and B-2 warrants and C and C-2 warrants expired, and
replacement warrants were issued. The Company issued replacement B and B-2
warrants to purchase 15,199,373 common shares at $1.26 per share, and
replacement C and C-2 warrants to purchase 8,988,743 common shares at $5.00 per
share. These replacement warrants are nonforfeitable and vested immediately, and
expire on January 1, 2005. The Company recorded compensation expense totaling
$2.5 million for replacement warrants held by current employees based on the
intrinsic value of the warrants. The Company also recorded prepaid professional
fees of $5.1 million for replacement warrants held by consultants currently
providing consulting services to the Company. The prepaid fees are being charged
to expense over the terms of the related consulting agreements. The consulting
expense was calculated using the Black-Scholes option-pricing model with the
following assumptions: expected dividend yield of 0.0%; risk free interest rate
of 1.64%; contractual life of 6 months; and volatility of 163.4%. For warrants
issued to investors and to consultants no longer providing consulting services
to the Company, there was no accounting consequence resulting from the
replacements.
Modified warrants
-----------------
On November 8, 2004, the Company repriced the B and B-2 warrants; and extended
the terms of the B and B-2 and the C and C-2 warrants. The exercise price of the
B and B-2 warrants was reduced from $1.26 per share to $1.20 per share, and the
expiration dates of the B and B-2 and the C and C-2 warrants were extended from
January 1, 2005 to July 1, 2007. On December 2, 2004, the C and C-2 warrants
were temporarily repriced from $5.00 per share to $3.25 per share for 30 days.
As result of the repricing of the B and B-2 and C and C-2 warrants, the warrants
held by current employees are accounted for using the variable method of
accounting under APB No. 25 and FIN 44. Accordingly, the intrinsic value of the
employee warrants at December 31, 2004 and 2005 was used to calculate
compensation expense for each year, and resulted in an additional compensation
charge of $2.9 million, or a total of $5.4 million for 2004, and a reduction of
compensation expense of $5.4 million for 2005. The fair value of warrants held
by consultants currently providing services to the Company was calculated at
November 8, 2004, and resulted in an adjustment of $2.2 million to prepaid
professional fees. The prepaid professional fees are being charged to expense
over the terms of the related consulting agreements. The fair value of the
consultant warrants at November 8, 2004 was determined using the Black-Scholes
option pricing model with the following assumptions: expected dividend yield of
0.0%; risk free interest rate of 3.08%; contractual life of 2.7 years; and
volatility of 228.9%. For warrants held by investors and by consultants no
longer providing services, there was no accounting consequence resulting from
the repricing and term modifications.
On November 8, 2004, the Company also extended terms of certain D and D-2
warrants and K and K-2 warrants, from July 1, 2005 to July 1, 2007. The Company
recorded compensation expense of $749,000 for warrants held by current employees
based on the intrinsic value of the warrants. The Company also recorded prepaid
professional fees of $470,000 for warrants held by consultants currently
providing consulting services to the Company. The prepaid professional fees are
being charged to expense over the terms of the related consulting agreements.
The consulting expense was calculated using the Black-Scholes option-pricing
model with the following assumptions: expected dividend yield of 0.0%; risk free
interest rate of 3.08%; contractual life of 2.7 years; and volatility of 228.9%.
For warrants issued to investors and to consultants no longer providing
consulting services, there was no accounting consequence resulting from the term
modifications.
Warrants issued in 2006
-----------------------
During 2006 the Company issued warrants in connection raising capital and
settlement of the Smart Auto liability. In addition, during 2006 the Company
issued warrants to purchase an aggregate of 4,191,272 shares of its common stock
under agreements with vendors, employees, and consultants to perform legal,
financial, business advisory and other services. The warrant grants to vendors
and consultants were non-forfeitable and fully vested at the date of issuance
and were valued using the Black-Scholes option pricing model with the following
range of assumptions:
Low High
----- ------
Exercise price per share $1.00 $ 2.00
Market price 0.32 2.08
Assumptions:
Expected dividend yield 0% 0%
Risk free rate of return 4.9% 2.02%
Contractual life 8 months 5 years
Volatility 134.2 143.6
Fair market value $.06 per share $1.21 per share
58
Pursuant to the requirements of FASB Statement No. 123 and EITF 96-18 and 00-18
related to accounting for stock-based compensation, the Company recognized
non-cash general and administrative expense in the amount of $2.3 million
attributable to the warrants issued to vendors and consultants at the date of
grant during 2006.
Warrants issued in 2005
-----------------------
During 2005, the Company issued warrants in connection raising capital and
license fees. In addition, during 2005, the Company issued warrants to purchase
an aggregate 9,365,694 shares of its common stock under agreements with vendors,
employees, and consultants to perform legal, financial, business advisory and
other services. The warrant grants to vendors and consultants were
non-forfeitable and fully vested at the date of issuance and were valued using
the Black-Scholes option pricing model with the following range of assumptions:
Low High
----- ------
Exercise price per share $1.00 $ 4.75
Market price .80 3.41
Assumptions:
Expected dividend yield 0% 0%
Risk free rate of return 2.87% 4.3%
Contractual life .5 year 6.92 years
Volatility 137% 211%
Fair market value 0.29 2.13
Pursuant to the requirements of FASB Statement No. 123 and EITF 96-18 and 00-18
related to accounting for stock-based compensation, the Company recognized
non-cash general and administrative expense in the amount of $13.6 million
attributable to the warrants issued to vendors and consultants at the date of
grant during 2005.
On September 20, 2005, ZAP issued non-forfeitable, fully vested 6.92 year
warrants to purchase 750,000 common shares at $1.50 per share. ZAP is required
to deliver registered shares upon the exercise of the warrants. The fair value
of the warrants of $890,000 was recorded as a warrant liability at September 30,
2005 pursuant to EITF 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock." The fair value
of $890,000, or $1.19 per share, was calculated at the date of issuance using
the Black-Scholes option pricing model using the following assumptions: risk
free interest rate of 3.90%; expected dividend rate of 0.00%; volatility of
211.5%; and expected term of 5.75 years. The warrants were revalued on December
31, 2005. The fair value of $194,000, or $0.26 per share, was calculated using
the Black-Scholes option pricing model using the following assumptions: risk
free interest rate of 4.26%; expected dividend rate of 0.00%; volatility of
230.3%; and expected term of 5.5 years. The difference of $696,000 was recorded
in other income.
NOTE 13 - RELATED PARTY
Rental agreements
-----------------
The Company leases office space, land and rents warehouse space from its CEO and
major shareholder. These properties are used to operate the car outlet and to
store inventory. Rental expense was approximately $96,500 and $196,000 for the
years ended September 31, 2006 and 2005, respectively.
Consulting services and other services
--------------------------------------
In November and December 2003, the Company entered into certain agreements with
two cousins of Steven M. Schneider, the CEO. One cousin received 25,000 B-2
Restricted warrants and 25 shares of preferred stock, which was later converted
into 50,000 shares of restricted common stock. The stock and warrants were
issued for website design services. The other cousin received 200,000 shares of
unrestricted common stock in January 2004. The shares were issued for consulting
services. In April 2004, the Company issued 2 million B-2 restricted warrants
and 1 million K-2 restricted warrants to Sunshine 511 Holdings for consulting
services. The managing partner of Sunshine 511 Holdings is the cousin of the CEO
of ZAP. In the fourth quarter of 2005 the Company expensed approximately $2.2
million, the carrying value of the prepaid services, since limited services had
been received and there were no assurances that future services would be
received. Also
59
in 2004, certain leasehold improvements in the amount of $65,000 made by the
Company on rental properties were abandoned in favor of the landlord, who is the
CEO of ZAP. In September of 2006, the Company canceled a shareholder note of
$56,000 due by the cousin of Steven Schneider in exchange for consulting
services.
Inventory Purchase
------------------
In December 2005, the Company purchased inventory from a related entity where
three of ZAP's officers and or Directors are also members of its Board of
Directors. The transaction resulted in a payable due to the related Company of
$204,000 at December 31, 2005 and September 30, 2006. During the second quarter
of 2006 the parties agreed that the payment will be offset against future
outside advertising services which will be provided to the related entity by the
Company.
Sales to a related entity
-------------------------
The Company also signed in the third quarter of 2006, a Distributor License
Agreement with a business entity that is wholly owned by the brother of
Maximilian Scheder- Bieschin, the former President of ZAP. The terms of the
agreement are the same as other distributor licenses signed with ZAP. The total
sales through December 31, 2006 were $21,000. In addition, Smart Concepts is
holding certain Xebra (TM) Vehicles on a consignment basis valued at $24,000.
NOTE 14 - LITIGATION
In the normal course of business, we may become involved in various legal
proceedings. Except as stated below, we know of no pending or threatened legal
proceeding to which we are or will be a party which, if successful, might result
in a material adverse change in our business, properties or financial condition.
However, as with most businesses, we are occasionally parties to lawsuits
incidental to our business, none of which are anticipated to have a material
adverse impact on our financial position, results of operations, liquidity or
cash flows. The Company estimates the amount of potential exposure it may have
with respect to litigation claims and assessments.
ZAP V. DAIMLER CHRYSLER AG, ET AL., Superior Court of California, County of Los
Angeles, Case No. BC342211. On October 28, 2005, ZAP filed a complaint against
Daimler Chrysler Corporation and others in the Los Angeles Superior Court. The
complaint includes claims for intentional and negligent interference with
prospective economic relations, trade libel, defamation, breach of contract -
agreement to negotiate in good faith, breach of implied covenant of good faith
and fair dealing, and unfair competition. The complaint alleges that Daimler
Chrysler has engaged in a series of anti-competitive tactics aimed at defaming
ZAP and disrupting its third-party business relationships. As a result of the
allegations, the complaint requests damages in excess of $500 million and such
other relief as the court deems just and
60
proper. Daimler Chrysler has successfully filed a motion to quash that compliant
for lack of personal jurisdiction, and the court's ruling on that matter is in
the process of being appealed. Two of the other defendants in the action, G&K
Automotive Conversion, Inc. and The Defiance LLC, have filed a cross-complaint
against ZAP in the Los Angeles Superior Court for, among other things,
violations of Section 43(a) of the Lanham Act, statutory and common law unfair
competition, and intentional and negligent interference with prospective
economic advantage. ZAP has responded to the cross-complaint and denied engaging
in any wrongful actions.
JAMES A. ARNOLD, ET AL. V. STEVEN SCHNEIDER, ET AL., Superior Court of
California, County of Sacramento, Case No. 02AS02062, filed April 5, 2002,
dismissed October 9, 2003, dismissal set aside and referred to Case Management
Program March 4, 2004. Plaintiffs seek damages of $71,000 in compensatory
damages, $50 per month since April 5, 2002, other charges, interest, and further
relief in the court's discretion for breach of contract, promissory estoppel,
and fraud. Plaintiffs also seek $750,000 in punitive damages for fraud. The
Company has cross-claimed against Plaintiffs seeking compensatory damages,
attorneys' fees and equitable relief for breach of oral contract, common count
for goods sold and delivered, conversion, liability of surety, violation of
statute, and violation of the Unfair Practices Act. On February 17, 2005, the
court referred the matter to non-binding arbitration pursuant to California Code
of Civil Procedure section 1141.1. The non-binding arbitration hearing was held
on July 27, 2005. The arbitrator award, issued on August 5, 2005, awarded
Plaintiffs damages in the amount of $68,290, plus prejudgment interest at the
rate of 7%. This amount was awarded against both the Company and Mr. Schneider.
Given an admission in the plaintiff's case management conference statement and
the decision of the court to refer the matter to non-binding arbitration, the
Company believes that the amount in controversy should be less than $50,000,
though the complaint asks for more than $71,000 in damages. Trial in Sacramento
County Superior Court began on Tuesday, May 2, 2006, at 8:30 a.m., in Department
47. At the trial, the parties agreed to settle this matter upon the following
terms: (1) the plaintiff agreed to dismiss the causes of action it had alleged
against Mr. Schneider; and (2) RAP Group agreed to (a) pay the plaintiff $20,000
on or before May 31, 2006; (b) pay the plaintiff an additional $20,000 on or
before January 5, 2007; (c) provide the plaintiff with whatever ownership
documentation (such as titles) it can find in its possession, custody, or
control regarding the 43 cars identified by the plaintiff during discovery as
being the subject of this litigation; (d) allow the court to enter an order
directing that plaintiff may dispose of the vehicles that are the subject of the
litigation; and (e) allow the court to enter judgment against it in the amount
of $50,000, minus whatever monies have already been paid by RAP Group to the
plaintiff, if RAP Group does not timely make either of the payments identified
above. Both the plaintiff and RAP Group agreed to execute general mutual
releases of all claims arising out of the subject matter of the litigation
(pursuant to section 1542 of the Civil Code) and to dismiss with prejudice the
complaint and the cross-complaint after performance of the settlement agreement.
The plaintiff and RAP Group further agreed that the stipulated settlement will
be governed by section 664.6 of the Code of Civil Procedure. RAP Group made the
first payment to the plaintiff for $20,000, but did not pay the second payment
of $20,000 that was due by January 5, 2007. Plaintiff has therefore moved the
court to enter a default judgment against RAP Group for $30,000 pursuant to the
terms of the Settlement Agreement. A hearing on that motion for default judgment
is scheduled for April 4, 2007 in Sacramento Superior Court.
LEANDRA DOMINGUEZ V. RAP GROUP, INC. DBA THE REPO OUTLET ET. AL., Superior Court
of California, County of Sonoma, Case No. SCV-235641, complaint filed October
14, 2004, first amended complaint filed December 15, 2004. Plaintiff has sued
The Repo Outlet and Credit West Corporation for negligent misrepresentation, for
a violation of the Business and Professions Code Section 17200, for breach of
the implied warranty of merchantability under the Magnusson-Moss Act, and for
violation of the federal Truth in Lending Act. On January 13, 2005, the RAP
Group, Inc. agreed to defend and indemnify Credit West Corporation. At a hearing
before the Sonoma County Superior Court on February 23, 2005, the court granted
The Repo Outlet's motion to compel arbitration, and on March 8, 2005, the court
stayed the court proceeding pending arbitration. The RAP Group, Inc. filed a
demand for arbitration with the American Arbitration Association (the
"Association") on April 7, 2005, but the parties later stipulated that the
arbitration would proceed before JAMS. The Repo Outlet made a Code of Civil
Procedure 998 offer to settle and have Dominguez dismiss the matter with
prejudice for the sum of $1,001. Because Dominguez failed to timely respond to
The Repo Outlet's Section 998 offer, that offer expired on March 2, 2006. The
Repo Outlet made another settlement offer of $1,857 to settle this matter as to
both defendants on January 8, 2007, but this offer was rejected as plaintiff's
counsel seeks to recover all of his attorneys' fees. Although the case was sent
to arbitration before JAMS, and set for arbitration in February 2007, on January
9, 2007, The Repo Outlet informed the arbitrator and plaintiff's counsel that it
would be ceasing operations and its counsel would be withdrawing as attorneys of
record. At a status conference on February 8, 2007, the court was informed that
counsel for RAP Group had moved to withdraw for non-payment of fees. The hearing
on that motion is set for April 18, 2007. Since that time, Credit West has
substituted its own counsel of record, and so RAP Group is no longer tendering a
defense to Credit West. The next case management conference is scheduled for
April 25, 2007.
VOLTAGE VEHICLES V. AMERICAN ELECTRIC POWER COMPANY, ET AL., Superior Court of
California, County of Sonoma, Case No. SCV 236 830. On June 1, 2005, Voltage
Vehicles filed suit against American Electric Power Company, CSW Energy
Services, Inc., Central and Southwest Corporation, Total EV, Freightquote, LLC,
and Central Freight Lines, Inc. A First Amended Complaint was filed August 29,
2005, against the same defendants, asserting causes of action for breach of a
written contract of sale against certain defendants, as well as breach of a
written contract as a third party beneficiary against all
61
defendants. Voltage Vehicles' First Amended Complaint seeks compensatory damages
in the amount of $744,735, prejudgment interest, attorneys' fees, and costs of
suit. Defendants CSW Energy Services, Inc. and Central Freight Lines filed
demurrers, both of which the court overruled. This matter settled in December,
2006 with payment by defendants CSW Energy Services and American Electric Power
Company to Voltage Vehicles of $15,000. All parties agreed to bear their own
costs and attorneys fees. All defendants were thereafter dismissed with
prejudice on December 27, 2006.
MARIETA CRUZ HANSELL V. ROBERT WARREN JOHNSON, JR., ZAP, ET. AL., Superior Court
of California, Case No. SCV-237645. On October 21, 2005, Marieta Hansell filed
suit against Robert Johnson (a former employee of ZAP), ZAP and other defendants
for personal injury, property damage and permanent disability based on an
alleged automobile collision between the plaintiff and defendant Johnson. The
Company and Mr. Johnson have both filed answers and case management statements
containing a general denial of all of the plaintiff's claim, and the Company has
agreed to defend Mr. Johnson in this matter. The parties are in the process of
propounding and responding to discovery. The plaintiff is claiming permanent
disability, and she has submitted a Statement of Damages in the amount of
$108,727.34, plus unspecified amounts of future general damages, future wage
loss, diminution of earning capacity damages, and incidental, consequential and
special damages. The plaintiff has not yet made any demand for settlement. The
Company intends to vigorously defend both itself and Mr. Johnson against these
claims. This matter is now being handled by alternative counsel for ZAP.
According to information received from alternative counsel, the parties have
agreed to settle this matter with a payment by the Company and Mr. Johnson to
the plaintiff of a total of $70,000. The lawsuit was settled on February 15,
2007 and was dismissed with prejudice.
FIRST CLASS AUTO SALES, INC. D/B/A FIRST CLASS IMPORTS V. VOLTAGE VEHICLES AND
ZAP, American Arbitration Association Case No. 74 133 00081 06 NOCA. First Class
Imports is a vehicle dealer that executed a licensing and distributorship
agreement with Voltage Vehicles, a subsidiary of the Company, in May, 2004. On
January 14, 2006, First Class Imports and its principal, Leon Atkind, filed an
arbitration demand with the American Arbitration Association. Therein they
alleged that Voltage Vehicles breached the licensing agreement by not delivering
new SMART-branded vehicles to First Class Imports and demanded return of the
$100,000 licensing fees paid to Voltage Vehicles under the agreement, plus
interest. In a separate cause of action, Mr. Atkind alleged Voltage Vehicles
breached a second contract by failing to timely deliver a stock certificate in
exchange for a Mercedes vehicle that he sold to Voltage Vehicles. Regarding this
second claim, Mr. Atkind contended that the late delivery of the certificate
caused the shares to be restricted for an extra month during which the Company's
stock price declined, and he seeks as damages the difference in the value of the
stock on the two subject dates multiplied by 59,999, the number of shares he
received. Concerning both causes of action, First Class Imports and Mr. Atkind
alleged that the Company should be held liable as Voltage Vehicles' alleged
alter ego. Voltage Vehicles filed a counterclaim against both First Class
Imports and Mr. Atkind. The first cause of action therein alleges breach of
contract against First Class Imports for its refusal to accept SMART-branded
vehicles offered to it pursuant to the parties' licensing agreement. Voltage
Vehicles seeks as damages the lost revenue it otherwise would have gained
through First Class Imports' purchase of SMART-branded vehicles, as well as
damages based on the depreciation of a SMART-branded vehicle it loaned to First
Class Imports. The second cause of action alleges breach of contract against Mr.
Atkind based on his failure to deliver title to the Mercedes identified above.
On this claim, Voltage Vehicles seeks as damages the depreciation of the
Mercedes during the time in which it has been unable to sell the vehicle. After
selection of an arbitrator, the arbitration was continued several times as the
parties discussed settlement. Eventually the parties decided to allow the
arbitrator to mediate the dispute, and a mediation was held on January 22, 2007.
During the mediation the parties agreed in principle to resolve the dispute via:
(1) Voltage Vehicles' retention of the $100,000 licensing fee; (2) termination
of the licensing contract effecting a territorial buyback by Voltage Vehicles of
all rights that were granted to First Class Imports in that contract; (3) the
Company's provision to Leon Atkind of 47,500 shares of restricted Company stock;
and (4) the Company's provision to First Class Imports of two SMART-branded
motor vehicles (a 2003 and a 2005 model, each with less than 500 miles on their
odometers). Counsel for the Company and Voltage Vehicles have sent a draft
settlement agreement to counsel for First Class Imports and Mr. Atkind, who has
yet to provide comments in response thereto. Meanwhile, Sonoma County Superior
Court has scheduled the next case management conference for April 19, 2007.
ZAP V. NORM ALVIS, ET AL., Superior Court of California, County of Sonoma, Case
No. SCV-238419, complaint filed March 27, 2006. Mr. Alvis was engaged by the
Company and Rotoblock Corporation ("Rotoblock") as a consultant to perform
public relations work on behalf of the Company and Rotoblock. As consideration
for Mr. Alvis' consent to the contract with the Company, the Company provided
Mr. Alvis with use of a motor home worth approximately $306,000. The Company
then sued Mr. Alvis, claiming he failed to perform his obligations under the
contract and refused to return the consideration he received therefor (i.e. the
motor home). The Company is seeking either the return of the motor home or
$500,000 in damages. Mr. Alvis initially did not respond to the complaint, which
prompted the Company to take his default on May 9, 2006. The court then entered
a default judgment on May 16, 2006, on which date the Company obtained a writ of
possession allowing it to reclaim possession of the disputed motor home. On June
18, 2006, Mr. Alvis moved the court to set aside the default and default
judgment and to vacate its order authorizing issuance of the writ of possession.
The court agreed to set aside the default judgments, but it left intact the writ
of possession. The court also required Mr. Alvis to pay the Company $1,000 as
compensation for forcing the Company to initially take his default. Mr. Alvis
has paid the Company the required $1,000. Mr. Alvis then filed (1) an answer
denying the Company's allegations, and (2) a cross-claim against the Company,
Steve Schneider in his individual capacity, and Rotoblock, alleging two counts
of breach of contract, one common count of work, labor, and
62
services received, and one count of fraud. All of Mr. Alvis' claims relate to
the two contracts he executed with the Company and Rotoblock. Mr. Alvis claims
he provided services to the Company and Rotoblock pursuant to these contracts
but received no consideration in exchange therefor. For the fraud claim,
defendant claims the Company and Schneider executed the contracts with no intent
to perform. Mr. Alvis has prayed for damages of $2,000,000, interest according
to proof, punitive damages, and an order directing the Company to perfect title
to the motor home. Mr. Alvis then moved the court to quash the writ of
possession. On November 2, 2006, the court denied this motion, although it did
require the Company to post a $300,000 bond to enforce the writ. The Company has
not yet posted that bond, and consequently Mr. Alvis has threatened to move to
revoke the writ. The Company, Rotoblock and Schneider then demurred to the
cross-complaint, and Alvis responded by filing an amended cross-complaint. The
first amended cross-complaint again seeks breach of contract and common count
damages against the Company and Rotoblock, as well as fraud damages against the
Company and Schneider. The Company and Schneider answered the first amended
cross-complaint with general denials; Rotoblock responded by filing a second
demurrer in which it has alleged it was an improperly named party. The hearing
on Rotoblock's demurrer was heard on March 21, 2007, at which time the demurrer
was denied. Rotoblock intends to file an answer to the amended cross-compliant
with general denials. Counsel has given notice of the claims against Schneider
to the Company's D&O insurer, which has acknowledged receipt of the notice.
Discovery is on-going, and the next case management conference is scheduled for
April 9, 2007.
DEPARTMENT OF MOTOR VEHICLES V. RAP GROUP, INC., ET AL. This is an
administrative proceeding brought by the Department of Motor Vehicles (the
"DMV") which is seeking license revocation of the following licenses related to
the RAP Group's operations: (1) vehicle verifier license for RAP Group employee
Jeff Schneider; (2) sales license for Jeff Schneider; and (3) dealer's license
for RAP Group, doing business as Bug Motors and Voltage Vehicles. Settlement
with the DMV was reached in late 2006, resulting in the voluntary surrender of
RAP Group's dealer license.
ROBERT CHAUVIN; MARY CHAUVIN; RAJUN CAJUN, INC. DBA ZAP OF CARSON CITY, DBA ZAP
OF RENO, DBA ZAP OF SPARKS ("ROBERT CHAUVIN, ET AL.") V. VOLTAGE VEHICLES; ZAP;
ZAP POWER SYSTEMS INC.; ZAPWORLDCOM; ELLIOT WINFIELD; STEVEN SCHNEIDER; PHILLIP
TERRAZZI; MAX SCHEDER-BRESCHIN; RENAY CUDIE; [SIC] AND DOES I-XX, Second
Judicial District Court State of Nevada, County of Washoe, Case No. CV06 02767.
On November 17, 2006, Robert Chauvin, et al. filed a complaint alleging breach
of contract, breach of the covenant of good faith and fair dealing, breach of
warranties, fraud/misrepresentation, negligent misrepresentation, quantum merit
or unjust enrichment, civil conspiracy, violation of Security [sic] and Exchange
Act/federal securities law, and deceptive trade practices, pursuant to a License
Agreement (for a distribution license) entered into between Rajun Cajun, Inc.
dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks ("Rajun Cajun") and
Voltage Vehicles. The complaint seeks general damages in an amount in excess of
$10,000, special damages in an amount in excess of $10,000, punitive damages in
an amount in excess of $10,000, attorneys' fees and cost of suit, for judgment
in an amount equal to treble actual damages, and recession in the amounts of
$397,900 and $120,000. Defendants Voltage Vehicles and ZAP filed a Motion to
Dismiss on January 19, 2007. Chauvin, et al. filed an opposition to that motion
on February 16, 2007, and Voltage Vehicles and ZAP filed a reply on March 5,
2007. The matter has now been submitted to the court, and the parties are
awaiting a ruling on that motion. It is anticipated that the Motion to Dismiss
will be granted as the License Agreement entered into between Rajun Cajun and
Voltage Vehicles contains a forum selection clause designating Sonoma County,
State of California as the appropriate forum. On February 16, 2007, Robert
Chauvin, et al. filed Notices of Intent to Take Default against the individual
defendants, with the exception of Renay Cude, and two of the named corporate
defendants. In response, on February 22, 2007, named defendants ZAP Power
Systems, Inc., ZAPWORLDCOM, Elliot Winfield, Steven Schneider, Phillip Terrazzi,
Max Scheder-Breschin, and Renay Cude filed a Motion to Quash Service of Process
or Alternatively for Dismissal as the individual defendants were never properly
served, and because the two corporate defendants no longer exist. Chauvin, et
al. filed an opposition to that motion on March 8, 2007, and the defendants will
be filing a reply thereto on March 19, 2007, after which the matter will be
submitted to the court for a ruling. On March 5, 2007, Chauvin, et al. filed a
Motion for Publication of Summons for each of the five named individual
defendants in the underlying matter filed in Nevada. On February 9, 2007 Voltage
Vehicles filed a Complaint against Rajun Cajun in the Superior Court of
California, County of Sonoma for Declaratory Relief, which asks the Court to
declare that the License Agreement does not grant Rajun Cajun an exclusive
dealership in northern Nevada to distribute Voltage Vehicle products and that
Voltage Vehicles has performed its obligations under the License Agreement.
(Voltage Vehicles v. Rajun Cajun, et al., Case No. SCV 240179) Rajun Cajun has
yet to file an Answer to this Complaint.
ZAP V. INTERNATIONAL MONETARY GROUP,(PATRICK J HARRINGTON PRESIDENT AND CEO)
INC., A DELAWARE CORPORATION; MICHAEL C. SHER DBA THE LAW OFFICES OF MICHAEL C.
SHER, Case No. SCV 240277, complaint filed March 1, 2007 in Sonoma County
Superior Court. ZAP sued International Monetary Group ("IMG") whose President
and CEO is Patrick D. Harrington and Michael Sher for declaratory relief,
rescission, and breach of contract. ZAP had entered into an agreement with IMG,
a merchant banking company, to procure financing, and ZAP alleges that IMG,
contrary to the parties' agreement, is seeking to enforce a $500,000 promissory
note. ZAP also alleges that IMG and Sher have taken $12,500 and 10,000 shares of
ZAP common stock that they held in trust for ZAP without authorization. ZAP also
alleges that IMG and Sher continue to hold 1,291,176 shares of ZAP stock that
was supposed to have been used as collateral for a $1 million loan to be
procured by IMG and Sher that never materialized. After being served with the
complaint, counsel for IMG and Sher initiated settlement discussions and, in
consideration, were given until May 7, 2007 to respond to the complaint.
Management has recorded an estimated liability for any potential exposure
related to these transactions which is included in the accompanying consolidated
balance sheet. In addition, management believes that the ultimate resolution of
this claim will not have a material adverse effect on our consolidated financial
position or on results of operations.
63
ZAP V. THOMAS C. GRAVER AND AUTO AMERICA GROUP, INC., to be filed in the
Northern District of California in March 2007 with claims under the Federal
Anti-Cybersquatting Act and for trademark infringement. Graver is the President
and Chief Executive Officer of Auto America Group, Inc. ("AAG"). AAG and Graver
signed an independent contractor agreement with ZAP on October 21, 2005 to
provide certain services to ZAP, but that agreement terminated on October 18,
2006. At no time did ZAP enter into an agreement with AAG or Graver giving
either of them permission to use ZAP's federally-registered trademark
"zapworld.com." Following discussions regarding a business dispute between
Graver, AAG and one of ZAP's business partners, a Brazilian company called
Obvio, Graver registered the domain name www.zapworld.us on January 4, 2007.
Although there is very little content on the website www.zapworld.us, the home
page does refer extensively to Obvio and has two references to ZAP. One of those
references is to "ZAP Agreement Correspondence" with an apparent link that is
not functional. The other ZAP reference is to an article referring to ZAP in a
negative light. As Graver has failed to respond to ZAP's cease and desist
letters, ZAP anticipates filing suit later this month against Graver and AAG to
have the domain name "zapworld.us" transferred to ZAP and for attorneys' fees
and damages.
64
NOTE 15 - SEGMENT REPORTING
In accordance with the provisions of SFAS No. 131, the Company has identified
three reportable segments consisting of sales and marketing of electric consumer
products, operation of a retail car outlet, sales of advanced technology
vehicles for the Xebra(TM) electric vehicles and Smart Cars Americanized by ZAP.
These segments are strategic business units that offer different services. They
are managed separately because each business requires different resources and
strategies. The Company's chief operating decision making group, which is
comprised of the Chief Executive Officer and the senior executives of each of
the Company's segments, regularly evaluates financial information about these
segments in deciding how to allocate resources and in assessing performance. The
performance of each segment is measured based on its profit or loss from
operations before income taxes. Segment results are summarized as follows (in
thousands):
Electric Advanced
Consumer Car Technology
products outlet Vehicles Total
-------- -------- -------- --------
Year ended December 31, 2006:
Net sales $ 843 $ 1,618 $ 8,369 $ 10,830
Gross profit(loss) (445) 440 530 525
Depreciation, amortization
and impairment 3,844 25 17 3,886
Net loss (11,755) (17) (143) (11,915)
Total assets 8,304 430 2,082 10,816
Year ended December 31, 2005:
Net sales $ 624 $ 2,524 $ 432 $ 3,602
Gross profit 18 303 9 341
Depreciation, amortization
and impairment 7,392 44 175 7,660
Net loss (22,106) (744) (459) (23,501)
Total assets 11,769 771 2,137 14,677
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
A summary of non-cash investing and financing information is as follows (in
thousands):
Year ended December 31
----------------------
2006 2005
-------- --------
Cash paid during the year for:
Income taxes $ 4 $ 4
Interest 72 59
Common stock and warrant issuances for:
Inventory 235
Investment in joint venture 248
Settlement of warrant liability 568 6,711
Prepaid professional fees 861 830
Property and equipment 3 1,211
65
NOTE 17 - SUBSEQUENT EVENTS
In January 2007, the Company received $900,000 through the sale of 700,000
shares of common stock and 2 million warrants to qualified investors.
On January 26, 2007,the Board of Directors extended by five years through July
1,2012, the expiration date of certain of the Company's warrants, Series B
through K. These warrants were issued for executive incentives and by the plan
of reorganization. The exercise prices of the warrants were also revised from
prices ranging from $1.00 to $8.00 to prices ranging from $1.00 to $1.20.
On February 20, 2007, ZAP (the "Company") entered in to a Purchase and Amendment
Agreement (the "Amendment"), amending the Securities Purchase Agreement entered
into by the Company on December 5, 2006 (the "Original Agreement" and as amended
by the Amendment, the "Agreement"), with several institutional and accredited
investors (the "Purchasers") pursuant to which the Company sold to the
Purchasers additional $1.2 million aggregate principal amount of 8% senior
convertible notes due February 2009 (the "Notes") and warrants to purchase
360,000 shares of the common stock of the Company (the "Warrants"), in a private
placement. The Transaction closed on February 22, 2007. Gross proceeds from the
sale to the Company were $1.2 million, of which $15,000 was paid to one of the
Purchasers for expenses incurred in connection with the Transaction.
The Notes bear interest at 8% per year, payable quarterly, and are convertible
into shares of the Company's common stock at an original conversion price of
$1.00 per share.
The Warrants entitle each Purchaser to purchase a number of shares of common
stock equal to thirty percent of the number of shares of common stock that would
be issuable upon conversion of the Note purchased by such Purchaser in the
Transaction. The Warrants have an initial exercise price of $1.32.
On March 31, 2007, the Board of Directors extended the employment agreements for
Mr. Schneider, Mr. Starr and Ms. Cude to October 1, 2013.
66
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 8A. CONTROLS AND PROCEDURES.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to our management, including the individuals who serves as our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Our disclosure controls and procedures were
designed to provide reasonable assurance that the controls and procedures would
meet their objectives.
As required by Rules 13a-15(e) and 15d-15(e) under the Exchange Act, we carried
out an evaluation, under the supervision and with the participation of our
management, including the individual who serves as both our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. In the course of conducting the audit of our financial
statements for the year ended December 31, 2006, our registered independent
public accounting firm, Odenberg, Ullakko, Muranishi & Co. LLP ("OUM"), noted
several deficiences in both the design and operation of internal controls over
financial reporting, when considered in the aggregate , they believe constitutes
a material weakness over financial reporting at December 31, 2006. We have been
and continue to be engaged in efforts to improve our internal controls and
procedures and we expect that these efforts will, over time, positively address
the weakness noted by our independent auditors. We intend to engage an outside
firm to assist us in analyzing and improving our system of internal controls.
67
OUM also determined that we were unable to properly account for several very
complex financing transactions such as Convertible debt with derivatives with
our own in house resources. Our auditors also advised us that we do not have a
sufficient organization to facilitate an efficient financial statement close and
reporting process and permit the preparation of our financial statements in
accordance with U.S. Generally Accepted Accounting Principles (GAAP). For
example, there were a significant number of post-closing adjustments to our
financial statements during the course of the 2006 audit, including the areas of
stock issued for services, warrant valuation, and convertible debt. At least one
of which was individually material and dealt with convertible debt accounting.
We have a very small accounting staff of three people with limited resources and
lack certain required skills to handle some of these complex transactions that
were not usual to the Company's normal business and we needed help. We engaged
outside accounting financial consultants for their expertise and help in
calculating and presenting the required proper financial disclosure for the
recording of the convertible debt transaction and valuation of certain financial
dervatives transactions. We were however, closely involved with their
calculations and agreed with their findings. These transactions did result in
material adjustments that needed to be made to our pre-audited financial
statements. Our auditors have advised us that they consider this a deficiency
that was also a material weakness in the operation of entity-level controls.
Our auditors have additionally advised us if we are not successful in retaining
experienced personnel in our accounting and finance organization and establish
formal control processes in order to sufficiently address the matters referenced
above, there is more than a remote likelihood that our quarterly or annual
financial statements could be materially misstated, which could require a
restatement. We have been and continue to be engaged in efforts to improve our
internal controls and procedures and we expect that these efforts will, over
time, positively address the weakness noted by our independent auditors. We
intend to engage an outside firm to assist us in analyzing and improving our
system of internal controls.
(b) Changes in Internal Control Over Financial Reporting. There were no changes
our internal control over financial reporting that occurred during the year
ended December 31, 2006 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION.
The Company was not required to disclose information on Form 8-K that it did not
report on a Form 8-K during the fourth quarter of the year covered by this Form
10-KSB.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The Company's directors and executive officers and their ages as of March 21,
2007 are as follows:
Name Age Position
------------------------ --- ------------------------------------
Steven M. Schneider 46 Chief Executive Officer and Director
Gary Starr 51 Chairman of the Board of Directors
William Hartman 59 Chief Financial Officer
Renay Cude 30 Secretary and Director
Amos Kazzaz 55 Chief Operating Officer
Peter H. Scholl 60 Director
Raymond F. Byrne 59 Director
Steven M. Schneider. Mr. Schneider has been director and Chief Executive Officer
of ZAP since October 26, 2002. Schneider has a 30-year career in the automotive
industry and a long-time interest in fun, fuel-efficient cars. He has served as
ZAP's CEO since 2002, when the company acquired Auto Distributors, Inc. and
Voltage Vehicles, businesses he founded which specialized in the distribution of
electric and alternative fuel vehicles including automobiles, motorcycles and
bicycles. Schneider also founded the RAP Group, an automotive liquidator and
reseller, which ZAP also acquired. He serves on the board of directors of Apollo
Energy Systems, a developer of fuel cells and advanced batteries. He also serves
as a director of Rotoblock Corporation, a public company focused on the
continued development of the oscillating piston engine. He is an active member
with various industry groups, including the Electric Drive Transportation
Association in Washington, DC. , and is a member of the Bay Area Alliance of
CEOs. He lectures frequently on industry topics at universities and other
organizations.
68
Gary Starr. Mr. Starr co-founded ZAP in 1994, has been a director since the
Company's inception and served as Chief Executive Officer from 2000 to 2002. He
became chairman of the Board of Directors in October 2002. Mr. Starr founded US
Electricar's electric vehicle operation in 1983. Mr. Starr has several
publications: "Electric Cars: Your Guide to Clean Motoring, "The Shocking Truth
of Electric Cars," and "The True Cost of Oil." In addition, he has appeared on
more than 300 radio and television shows including Larry King Live, The Today
Show, Inside Edition, CNN Headline News, Prime Time Live, the CBS Evening News
and the McNeil Lehrer News Hour as an authority in the field of electric
vehicles. Mr. Starr has a Bachelor of Science Degree from the University of
California, Davis in Environmental Consulting and Advocacy. He is a frequent
lecturer on electric cars and has developed several industry inventions.
William Hartman. Mr. Hartman was appointed Chief Financial Officer in March
2001. He was engaged with the Company as a financial consultant starting in
January 2001. Prior to his engagement at ZAP, Mr. Hartman provided financial and
accounting consulting services to various Internet start up companies in the San
Francisco Bay Area from 1999 to 2001. Mr. Hartman is a Certified Public
Accountant in the State of California with a Masters in Accounting Degree from
the State University of New York. He also had previous public accounting
experience as an audit manager with Price Waterhouse Coopers in San Francisco.
Mr. Amos Kazzaz. Mr. Kazzaz was appointed Chief Operating Officer on March 26,
2007. Prior to joining ZAP, Mr. Kazzaz served as Vice President of Cost
Management at United Airlines, Inc. where he oversaw United Airline's
operations, process improvement, and cost management. From 2003 to 2006, Mr.
Kazzaz served as United Airline's Vice President of Financial Planning and
Analysis during which time he accounted for United Airline's planning and
analysis function and capital budget. From 2002 to 2004, Mr. Kazzaz served as
United Airline's Vice President of the Business Transformation Office, the
company's first enterprise project management office, during which time he was
responsible for identifying areas of revenue and cost improvements;
concurrently, Mr. Kazzaz served as the Chief Operating Officer at Avolar, a
subsidiary of United Airlines. He currently sits on the Boards of Directors of
Alliant Credit Union, SkyTech Solutions in India, and Integres. Mr. Kazzaz holds
a bachelors degree in International Affairs from the University of Colorado and
a Masters in Business Administration from the University of Denver.
Renay Cude. Ms. Cude was appointed Corporate Secretary in August 2002, and has
been a director of the Company since October 26, 2002. Ms. Cude is the President
of our subsidiary, Voltage Vehicles, where she works closely with corporate
counsel in obtaining all the required licensing in the 50 states for the proper
distribution of advanced technology vehicles. Ms. Cude is also the President of
ZAP Manufacturing and ZAP Rentals. Prior to joining ZAP, from 1997 to 2002, Ms.
Cude worked as a legal secretary for various law firms. Ms. Cude has over five
years experience working in the bankruptcy field where she helped companies
through the reorganization process. Ms. Cude also currently serves as Secretary
and a director of Rotoblock Corporation, a public company focused on the
continued development of the oscillating piston engine. Ms. Cude holds an
Associates Degree in General Education from Santa Rosa Junior College.
Raymond F. Byrne. Mr. Byrne is currently the President of North Coast Bank, a
division of American River Bank. Prior to that he was SeniorVice President and
Senior Lender of North Coast Bank from 2001 to 2003. From 2000 to 2001 he was
Vice President and Manager of Bank of the West.
Peter H. Scholl. Mr. Scholl is currently an independent engineering consultant.
From 2003 to 2005, Mr. Scholl served as President of Rotoblock Inc. in Canada
and Rotoblock Corporation, a Nevada corporation, in the development of
Oscillating Piston Engine technology. He served as President of Unimont Inc., a
real estate development firm, in Penticton, Canada from 2001 to 2003. From 1996
to 2000, Mr. Scholl worked on the development of water purification systems in
Arizona. Mr. Scholl has a Bachelor's of Science degree in Mechanical Engineering
from the Institute of Technology in Biel, Switzerland.
Family Relationships
There are no family relationships among any of our officers or directors.
Board of Directors
Corporate Governance Principles and Board Matters
ZAP is committed to having sound corporate governance principles and practices.
ZAP's primary corporate governance documents, including our Code of Ethics and
Committee Charters, are available to the public on our website at
http://www.zapworld.com. The following is a discussion of our current governance
principles and practices.
69
Board Meetings
During 2006, our Board met or conferred by telephone 26 times. During 2006, all
directors attended at least 75% of the aggregate of (i) the total number of
meetings of the Board during 2006 and (ii) the total number of meetings held by
all committees of the Board on which such director served in 2006. The Company
does not have a policy with regard to attendance of directors at annual
meetings, but encourages attendance of all meetings.
Committees of the Board
Audit Committee
The Board's Audit Committee is comprised of Raymond Byrne, Peter Scholl, and
Gary Starr. During 2006, the Audit Committee met 4 times. All current members of
the Audit Committee are financially literate and are able to read and understand
fundamental financial statements, including a balance sheet, income statement
and cash flow statement. The Board has determined that Mr. Byrne qualifies as an
audit committee financial expert as defined within Item 401 of Regulation S-B.
The Board has determined that Mr. Byrne qualifies as an audit committee
financial expert by means of being President of a bank.
The Audit Committee assists the Board of Directors in its oversight of the
quality and integrity of the accounting, auditing, and reporting practices of
the Company. The Audit Committee's role includes overseeing the work of the
Company's internal accounting and financial reporting and internal auditing
processes and discussing with management the Company's processes to manage
business and financial risk, and for compliance with significant applicable
legal, ethical, and regulatory requirements. The Audit Committee is responsible
for the appointment, compensation, retention, and oversight of the independent
auditor engaged to prepare or issue audit reports on the financial statements
and internal control over financial reporting of the Company. The Audit
Committee relies on the expertise and knowledge of management and the
independent auditor in carrying out its oversight responsibilities. The
Committee's specific responsibilities are delineated in the Audit Committee
Charter. The Audit Committee Charter is available on the ZAP website at
http://www.zapworld.com.
Compensation Committee
The Board's Compensation Committee is comprised of Gary Starr and Peter Scholl.
During 2006, the Compensation Committee met 3 times. A copy of the Compensation
Committee Charter is available on the ZAP website at http://www.zapworld.com.
The Compensation Committee, among other things, advises the Board on all matters
pertaining to compensation programs and policies, approves the compensation
payable to each of the officers of the Company, reviews proposed compensation of
executives as provided in the Company's executive compensation plan and
administers the Company's stock option plans.
Corporate Governance and Nominating Committee
The Board's Corporate Governance and Nominating Committee (the "Governance
Committee") is comprised of Peter Scholl and Raymond Byrne. During 2006, the
Governance Committee met 3 times. The Governance Committee has adopted a
charter, which has been ratified and approved by the Board. A copy of the
committee's charter is available on the ZAP website at http://www.zapworld.com.
The Governance Committee, among other things, identifies, evaluates and
recommends individuals qualified to be directors of the Company. Members of the
Board of Directors should have the highest professional and personal ethics and
values. They should have broad experience at the policy-making level in
business, government, education, technology or public interest. They should be
able to provide insights and practical wisdom based on their experience and
expertise. They should be committed to enhancing shareholder value and should
have sufficient time to effectively carry out their duties. Their service on
other Boards of public companies should be limited to a reasonable number.
The Governance Committee annually reviews the appropriate skills and
characteristics required of Board members in the context of the current
composition of the Board, the operating requirements of the Company and the
long-term interests of the shareholders. In conducting this assessment, the
committee considers diversity, age, skills, and such other factors as it deems
appropriate given the current needs of the Board and the Company, to maintain a
balance of knowledge, experience and capability.
70
Code of Ethics
The Board has adopted a Code of Ethics to provide guidance on maintaining the
Company's commitment to being honest and ethical in its business endeavors. The
Code of Ethics covers a wide range of business practices, procedures and basic
principles regarding corporate and personal conduct and applies to all
directors, executives, officers and employees. A copy of the Code of Ethics is
available by written request submitted to the Corporate Secretary at ZAP, 501
Fourth Street, Santa Rosa, CA 95401. The Company intends to satisfy any
disclosure requirements regarding amendments to, or waivers from, any provision
of the Code of Ethics by disclosing on the Company's website, by press release
and/or on a current report on Form 8-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons beneficially owning more than 10% of the
outstanding common stock of the Company to file reports of beneficial ownership
and changes in beneficial ownership with the Securities and Exchange Commission
("SEC"). Officers, directors, and greater than 10% beneficial owners of common
stock are required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file. The Company believes that during the fiscal year
ended December 31, 2006, all officers and directors timely filed the initial
statement of beneficial ownership of securities on Form 3. The Company also
believes that during the fiscal year ended December 31, 2006, all officers and
directors timely reported certain transactions on Form 4s.
ITEM 10. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following executive compensation disclosure reflects all compensation
awarded to, earned by or paid to the executive officers below for the fiscal
year ended December 31, 2006. The following table summarizes all compensation
for fiscal year 2006 received by our Chief Executive Officer, and the Company's
two most highly compensated executive officers who earned more than $100,000 in
fiscal year 2006.
SUMMARY COMPENSATION TABLE
Non- Non-
Equity qualified
Incentive Deferred All
Plan Compen- Other
Stock Option Compen- sation Compen-
Awards Awards sation Earnings sation
Name and principal position Year Salary ($) Bonus ($) ($) (1) ($)(1) ($) ($) ($) Total ($)
--------------------------- ---- ---------- --------- ------- ------ --- --- --- ---------
Steven Schneider, CEO 2006 120,000 - 17,800 419,756 - - - 557,556
Gary Starr, Chairman 2006 120,000 - 17,800 419,756 - - - 557,556
Renay Cude, Secretary 2006 78,000 - 17,800 419,756 - - - 512,556
(1) Stock awards are based on the stock price on the date of issue. Options/warrant awards were calculated using the following
assumptions: dividend of 0, rate of 5.12% for warrants and 4.91% for options, expected life of 5 months for warrants and 6.75
years for options, strike price of $1.00 for warrants and $0.91 for options, stock price of $0.91 and volatility of 149.75%.
All option and warrant issuances were fully vested at time of issue.
71
Employment Agreements
We currently have employment agreements with three of our Named Executive
Officers as described below.
Steve Schneider, Chief Executive Officer
We entered into an employment agreement with Steve Schneider on October 1, 2003.
The agreement provides that Mr. Schneider will serve as our Chief Executive
Officer through October 1, 2008 and receive a salary, benefits and options equal
to the highest paid employee of ZAP, but in no event less than $75,000 per year.
Mr. Schneider's current salary is set at $120,000. In addition, the agreement
provides that should ZAP become profitable, Mr. Schneider's salary will
automatically be increased by 10% for every $100,000 in profits calculated on a
quarterly basis. Mr. Schneider annually receives a grant of stock options or
warrants equal to 1% of the outstanding common stock of ZAP at an exercise price
equal to 110% of the market price on the date of grant. Mr. Schneider also
receives all other benefits as are afforded to our employees and a Company car,
or a car allowance of $5,000 per year in lieu of a Company car. In the event ZAP
terminates his employment without cause, Mr. Schneider is entitled to his full
salary for the remainder of the term of the agreement. Should ZAP elect to
terminate Mr. Schneider's employment in the case of a merger or reclassify Mr.
Schneider without cause prior to the expiration of the employment agreement, the
Company must retain Mr. Schneider as an employee or consultant for a period of
five years for an aggregate salary of $500,000, payable bi-monthly, or make a
lump sum payment of $300,000. The agreement automatically renews for successive
five year periods unless terminated by either party upon proper notice. On March
30, 2007, The Board of Directors of ZAP did approve the extension of the
employment agreement with Mr. Schneider through October 1, 2013.
Gary Starr, Chairman of the Board
We entered into an employment agreement with Gary Starr on October 1, 2003. The
agreement provides that Mr. Starr will serve as Chairman of the Board of
Directors of ZAP through October 1, 2008 and receive a salary, benefits and
options equal to the highest paid employee of ZAP, but in no event less than
$75,000 per year. Mr. Starr's current salary is set at $120,000. In addition,
the agreement provides that should ZAP become profitable, Mr. Starr's salary
will automatically be increased by 10% for every $100,000 in profits, calculated
on a quarterly basis. Mr. Starr annually receives a grant of stock options or
warrants equal to 1% of the outstanding common stock of ZAP at an exercise price
equal to 110% of the market price on the date of grant. Mr. Starr also receives
all other benefits as are afforded to our employees and a Company car, or a car
allowance of $5,000 per year in lieu of a Company car. In the event ZAP
terminates his employment without cause, Mr. Starr is entitled to his full
salary for the remainder of the term of the agreement. Should ZAP elect to
terminate Mr. Starr's employment in the case of a merger or reclassify Mr. Starr
without cause prior to the expiration of the employment agreement, the Company
must retain Mr. Starr as an employee or consultant for a period of five years
for an aggregate salary of $500,000, payable bi-monthly, or make a lump sum
payment of $300,000. The agreement automatically renews for successive five year
periods unless terminated by either party upon proper notice. On March 30, 2007,
On March 30, 2007,The Board of Directors of ZAP did approve the extension of the
employment agreement with Mr. Starr through October 1, 2013.
Renay Cude, Corporate Secretary
We entered into an employment agreement with Renay Cude on October 1, 2003. The
agreement provides that Ms. Cude will serve as Corporate Secretary of ZAP
through October 1, 2008 and receive a salary, benefits and options equal to the
highest paid non corporate officer-employee of ZAP, but in no event less than
$36,000 per year. Ms. Cude's current salary is set at $78,000. In addition, the
agreement provides that should ZAP become profitable, Ms. Cude's salary will
automatically be increased by 10% for every $100,000 in profits, calculated on a
quarterly basis. Ms. Cude annually receives a grant of stock options or warrants
equal to 1% of the outstanding common stock of ZAP at an exercise price equal to
110% of the market price on the date of grant. Ms. Cude also receives all other
benefits as are afforded to our employees and a Company car, or a car allowance
of $5,000 per year in lieu of a Company car. In the event ZAP terminates her
employment without cause, Ms. Cude is entitled to her full salary for the
remainder of the term of the agreement. Should ZAP elect to terminate Ms. Cude's
employment in the case of a merger or reclassify Ms. Cude without cause prior to
the expiration of the employment agreement, the Company must retain Ms. Cude as
an employee or consultant for a period of five years for an aggregate salary of
$250,000, payable bi-monthly, or make a lump sum payment of $150,000. The
agreement automatically renews for successive five year periods unless
terminated by either party upon proper notice. On March 30, 2007,The Board of
Directors of ZAP did approve the extension of the employment agreement with Ms.
Cude through October 1, 2013.
73
The following table sets forth certain information concerning stock option
awards granted to our named executive officers.
-------------------------------------------------------------------------------------- --------------------------------------------
OPTION AWARDS STOCK AWARDS
Equity
incentive Equity
plan incentive
awards: plan
number awards:
Number of Market or
Equity of unearned payout
Incentive shares shares, value of
Number of Plan Awards: or units Market units or unearned
Number of securities Number of of stock value of other shares,
securities underlying Securities that shares or rights units or
underlying unexercised underlying have units of that have other rights
unexercised options (#) unexercised Option Option not stock that not that have
options (#) Unexercis unearned exercise expiration vested have not vested not vested
Name Exercisable -able options (#) price ($) date (#) vested ($) (#) ($)
Steve Schneider (1) 1,690,786 - - 1.00 7/1/12
Steve Schneider (2) 200,000 - - 0.25 7/5/12
Steve Schneider (2) 486,111 13,889 - 1.26 6/23/14
Steve Schneider (2) 428,877 85,775 - 1.32 11/16/14
Steve Schneider (2) 211,265 105,633 - 0.93 6/7/15
Steve Schneider (1) 355,424 - - 0.91 8/11/16
Gary Starr (1) 1,470,671 - - 1.00 7/1/12
Gary Starr (2) 116,667 - - 1.20 12/19/11
Gary Starr (2) 150,000 - - 0.25 7/5/12
Gary Starr (2) 486,111 13,889 - 1.26 6/23/14
Gary Starr (2) 428,877 85,775 - 1.32 11/16/14
Gary Starr (2) 211,265 105,633 - 0.93 6/7/15
Gary Starr (1) 355,424 - - 0.91 8/11/16
Renay Cude (1) 1,525,786 - - 1.00 7/1/12
Renay Cude (1) 161,700 - - 0.50 12/2/13
Renay Cude (2) 48,611 1,389 - 1.26 6/23/14
Renay Cude (2) 428,877 85,775 - 1.32 11/16/14
Renay Cude (2) 211,265 105,633 - 0.93 6/7/15
Renay Cude (1) 355,424 - - 0.91 8/11/16
William Hartman (1) 687,500 - - 1.00 7/1/12
William Hartman (3) 41,667 8,333 - 1.32 11/16/14
William Hartman (3) 25,000 - - 1.20 12/19/11
William Hartman (3) 72,917 2,083 - 1.26 6/23/14
William Hartman (1) 100,000 - - 1.03 9/18/16
(1) The award represents warrants which are exercisable at the time of
issuance.
(2) The award vests equally over 36 months from date of grant. The option has a
ten year life. Issued per the employment agreements
(3) The award vests equally over 36 months from date of grant. The option has a
ten year life.
74
DIRECTOR COMPENSATION
The following director compensation disclosure reflects all compensation awarded
to, earned by or paid to the directors below for the fiscal year ended December
31, 2006.
Change in
Pension
Fees Value and
Earned Non-Equity Nonqualified
or Paid Stock Option Incentive Plan Deferred All Other
in Cash Awards Awards Compensation Compensation Compensation
Name ($) ($) ($) ($) Earnings ($) ($) Total ($)
Raymond F. Byrne (1) 3,000 20,800 23,800
Peter H. Scholl (1) 3,000 20,800 23,800
(1) Both independent directors received a stock award with value of $17,800 for
their service on the Board and $3,000 for attending Board meetings.
Compensation of Directors
Starting in April 2006, all directors received $500 and a grant of $500 of
common stock for attendance at each Board meeting and each committee meeting.
Directors are also reimbursed for out-of-pocket travel and other expenses
incurred in attending Board and/or committee meetings. Prior to April 2006, we
did not provide our directors with cash or other forms of compensation, although
we did reimburse their out-of-pocket expenses. Each Director also received
20,000 shares of common stock in December 2006 as an additional compensation
incentive .
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information, as of March 21, 2007, with
respect to the holdings of (1) each person who is the beneficial owner of more
than five percent of our common stock, (2) each of our directors, (3) the CEO
and each Named Executive Officer, and (4) all of our directors and executive
officers as a group.
Beneficial ownership of the common stock is determined in accordance with the
rules of the Securities and Exchange Commission and includes any shares of
common stock over which a person exercises sole or shared voting or investment
powers, or of which a person has a right to acquire ownership at any time within
60 days of March 21, 2007. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in this table have sole
voting and investment power with respect to all shares of common stock held by
them. Applicable percentage ownership in the following table is based on
43,973,721 shares of common stock outstanding as of March 21, 2007, plus, for
each individual, any securities that individual has the right to acquire within
60 days of March 21, 2007.
Unless otherwise indicated below, the address of each of the principal
shareholders is c/o ZAP, 501 Fourth Street, Santa Rosa, California 95401.
75
Name and Address Shares Beneficially Owned Percentage of Class
------------------------------------------------ ------------------------- -------------------
Beneficial Owners of More than 5%:
Sunshine 511 Holdings (1) 3,300,000 6.98%
101 N. Clematis Street, Suite 511
West Palm Beach, Florida 33401
Daka Development Ltd. (2) 2,799,136 6.01%
8/F Leroy Plaza, Unit C
15 Cheung Shun Street
Chung Sha Wan Kin, Hong Kong
Fusion Capital Fund II, LLC (3) 2,750,000 5.89%
222 Merchandise Mart Plaza, Suite 9-112
Chicago, IL 60654
Jeffrey G. Banks (4) 6,828,373 13.94%
c/o The Banks Group, LLC
PO Box 10287
Oakland, CA 94610
Current Directors, Nominees and Named
Executive Officers:
Steven Schneider (5) 17,138,611 29.56%
Gary Starr (6) 8,396,775 16.36%
William Hartman (7) 1,050,042 2.34%
Renay Cude (8) 2,935,152 6.27%
Peter Scholl (9) 625,218 1.40%
Raymond Byrne 25,218 *
All Directors and Executive Officers as a group (6 persons) 30,171,015 43.24%
----------------------------------------------------------------------------------------------------
---------------
* Less than 1%.
(1) Represents 3,300,000 warrants to purchase common stock. The managing
partner is Andrew Schneider, a cousin of ZAP's CEO. The address for
Sunshine 511 Holdings is 101 N. Clematis Street, Suite 511, West Palm
Beach, FL 33401.
(2) Includes 2,587,262 warrants to purchase common stock. The managing
partner is Raymond Chow. The address for Daka Development is Unit C 8/F
Leroy Plaza, 15 Cheung Shun Street, Chung Sha Wan Kin, Hong Kong.
76
(3) Represents 2,750,000 warrants to purchase common stock. Pursuant to the
terms of the warrant, Fusion Capital is not entitled to exercise the
warrants to the extent such exercise would cause the aggregate number
of shares of common stock beneficially owned by Fusion Capital to
exceed 9.9% of the outstanding shares of the common stock following
such exercise. Steve Martin is the managing partner. The address for
Fusion Capital is 222 Merchandise Mart Plaza, Suite 9-112, Chicago, IL
60654.
(4) Includes 5,005,000 warrants to purchase common stock.
(5) Includes 12,159,266 shares of common stock issuable upon the exercise
of various warrants and 1,849,845 shares of stock issuable upon the
exercise of stock options.
(6) Includes 5,441,160 shares of common stock issuable upon the exercise of
various warrants and 1,923,179 shares of stock issuable upon the
exercise of stock options.
(7) Includes 709,500 shares of common stock issuable upon the exercise of
various warrants and 263,542 shares of stock issuable upon the exercise
of stock options.
(8) Includes 1,525,786 shares of common stock issuable upon the exercise of
various warrants and 1,326,465 shares of stock issuable upon the
exercise of stock options.
(9) Includes 600,000 shares of common stock issuable upon the exercise of
various warrants.
Equity Compensation Plan Information
We have adopted stock incentive plans to provide incentives to attract and
retain officers, directors, key employees and consultants. We currently have
reserved a total of 15,500,000 shares of our common stock for granting awards,
including 1,500,000 shares under our 1999 Incentive Stock Option Plan,
10,000,000 shares under our 2002 Incentive Stock Option Plan, and 4,000,000
shares under our 2006 Incentive Stock Option Plan. All plans were approved by
our shareholders. As of December 31, 2006, 643,870 shares of common stock had
been issued pursuant to options exercised out of the 2002 plan.
The following table sets forth a description of our equity compensation plans as
of December 31, 2006:
Number of securities
remaining available for
Number of Securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of outstanding exercise price of plans, (excluding
options and other outstanding options and securities reflected in
Plan Category rights other rights column (a))
------------------------------------- --------------------------- --------------------------- ----------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 11,775,524 $1.08 1,103,859
Equity compensation plans not
approved by security holders 11,309,358 $1.65 232,873
Total 23,084,882 $1.36 1,336,732
----------------------------------------------------------------------------------------------------- -----------------------------
77
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
(8) RELATED PARTY TRANSACTIONS
Rental agreements
The Company rents office space, land and warehouse space from its CEO and major
shareholder. These properties are used to operate the car outlet and to store
inventory. Rental expense was approximately $96,500 and $196,000 for the years
ended December 31, 2006 and 2005, respectively.
Consulting services and other services
In November and December 2003, the Company entered into certain agreements with
two cousins of Steven M. Schneider, the CEO. One cousin received 25,000 B-2
Restricted warrants and 25 shares of preferred stock, which was later converted
into 50,000 shares of restricted common stock. The stock and warrants were
issued for website design services. The other cousin received 200,000 shares of
unrestricted common stock in January 2004. The shares were issued for consulting
services. In April 2004, the Company issued 2 million B-2 restricted warrants
and 1 million K-2 restricted warrants to Sunshine 511 Holdings for consulting
services. The managing partner of Sunshine 511 Holdings is the cousin of the CEO
of ZAP. In the fourth quarter of 2005 the Company expensed approximately $2.2
million, the carrying value of the prepaid services, since limited services had
been received and there were no assurances that future services would be
received. Also in 2004, certain leasehold improvements in the amount of $65,000
made by the Company on rental properties were abandoned in favor of the
landlord, who is the CEO of ZAP. In September of 2006, the Company canceled a
shareholder note of $56,000 due by the cousin of Steven Schneider in exchange
for consulting services.
Inventory Purchase
In December 2005, the Company purchased inventory from a related entity where
two of ZAP's officers and or Directors are also members of its Board of
Directors. The transaction resulted in a payable due to the related Company of
$204,000 at December 31, 2006 and 2005. During the second quarter of 2006 the
parties agreed that the payment will be offset against future outside
advertising services which will be provided to the related entity by the
Company.
Sales to a related entity
The Company also signed in the third quarter of 2006, a Distributor License
Agreement with a business entity that is wholly owned by the brother of
Maximilian Scheder- Bieschin, the former President of ZAP. The terms of the
agreement are the same as other distributor licenses signed with ZAP. The total
sales through December 31, 2006 were $21,000. In addition, Smart Concepts is
holding certain Xebra (TM) Vehicles on a consignment basis valued at $24,000.
DIRECTOR INDEPENDENCE
The following directors are independent directors as that term is defined under
NASDAQ Rule 4200(a)(15):
Raymond F. Byrne
Peter H. Scholl
78
ITEM 13. EXHIBITS.
EXHIBITS.
2.1 Approved Second Amended Plan of Reorganization, dated as June 20, 2002.
(5)
3.1 Amended and Restated Articles of Incorporation. (4)
3.2 Certificate of Determination of Series SA Convertible Preferred Stock.
(14)
4.1 Form of common share purchase warrant of the Company held by Fusion
Capital Fund II, L.P. (6)
4.2 Form of Series B common stock purchase warrant of the Company. (14)
4.3 Form of Series K common stock purchase warrant of the Company. (14)
10.1 Settlement Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the
Shareholders dated June 27, 2001. (3)
10.3 2004 Consultant Stock Plan. (7)
10.4 Convertible Promissory Note, dated April 26, 2004, issued to Banks
Living Trust. (1)
10.5 Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC
and ZAP. (3)
10.6 Promissory Note $2,000,000 - Atocha Land LLC and ZAP. (3)
10.7 Warrant Agreement dated April 26, 2004, issued to Banks Living Trust.
(1)
10.8 Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II,
LLC. (6)
10.9 Registration Rights Agreement between ZAP and Fusion Capital Fund II,
LLC. (6)
10.10 Form of Common Stock Purchase Warrant between ZAP and Fusion Capital
Fund II, LLC (6)
10.11 Agreement for Consulting Services with Evan Rapoport dated January 8,
2004. (1)
10.12 Asset Purchase Agreement dated April 12, 2004 with Jeffrey Banks for
purchase of various autos (1)
10.13 Agreement for Private Placement Investment received dated April 14,
2004 with Phi-Nest Fund LLP (1)
10.14 Consulting Agreement dated April 21, 2004 with Elexis International(1)
10.15 Consulting Agreement dated April 21, 2004 with Sunshine 511 Holdings
(1)
10.16 Definitive Stock Agreement dated October 25, 2004 with
Smart-Automobile, LLC (2)
10.17 Master Distribution Agreement between Apollo Energy Systems, Inc. and
Voltage Vehicles Corporation, a subsidiary of ZAP. (8)
10.18 ZAP Floor Line and Dealer Development Agreement with Clean Air Motors,
LLC for a $45 Million Floor Plan Line of Credit for Qualified ZAP
Dealers (9)
79
10.19 Exclusive Purchase, License and Supply Agreement between Smart
Automobile, LLC and ZAP. (10)
10.20 Amendment dated November 15, 2004 to previous consulting agreement with
Sunshine Holdings 511 (14)
10.21 Secured Promissory Note Payable dated December 30, 2004 with Phi-Nest
Fund, LLP. (14)
10.22 ZAP assignment of 2.9 million shares of Restricted Common Stock to
Phi-Nest Fund, LLP as collateral on note payable (14)
10.23 Promissory note receivable dated January 6, 2005 for $1 million loan
due from Smart Automobile, LLC and Thomas Heidemann (President Smart
Automobile, LLC) (14)
10.24 Security Agreement dated January 6, 2005 from Smart Automobile, LLC and
Thomas Heidemann (President Smart Automobile ,LLC) to secure loan
above. (14)
10.25 Common Stock Purchase Agreement between ZAP and Platinum Partners Value
Arbitrage Fund LP (14)
10.26 Form of Common Stock Purchase Warrant between ZAP and Platinum Partners
Value Arbitrage Fund LP (14)
10.27 Common Stock Purchase Agreement between ZAP and Lazarus Investment
Partners LLP (14)
10.28 Form of Common Stock Purchase Warrant between ZAP and Lazarus
Investment Partners LLP (14)
10.29 Termination of Common Stock Purchase Agreement between ZAP and Fusion
Capital Fund II, LLC (11)
10.30 Financing Agreement between ZAP and Surge Capital II, LLC (12)
10.31 Exclusive Purchase, License, and Supply Agreement between ZAP and
Obvio! Automotoveiculos S.P.E. Ltda (13)
10.36 Agreement dated July 14, 2006 between ZAP, Thomas Heidemann and Smart
Automobile (15)
10.37 Amendment Agreement Dated August 30, 2006 between ZAP and Smart
Automobile LLC (16)
10.38 Exclusive Distribution Agreement dated May 1, 2005, as supplemented by
a letter dated June 9, 2006 (17)
10.39 ZAP Guarantee (18)
10.40 Shandong Jindalu Vehicle Co., Ltd. Guarantee (19)
10.41 Joint Venture Negotiations dated September 21, 2006 (20)
10.42 Security Purchase Agreement between ZAP and Certain Institutional
Investors (21)
10.43 Purchase and Amendment Agreement between ZAP and Certain Institutional
Investors (22)
21.1 List of subsidiaries. (3)
23.1 Consent of Independent Registered Public Accounting Firm (Odenberg,
Ullakko, Muranishi & Co. LLP). (14)
80
31.1 Certification of Principal Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (14)
31.2 Certification of Principal Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (14)
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (14)
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (14)
(1) Previously Filed as an exhibit to the Registrants's Form 8-K for the
quarter ended March 31, 2004 and incorporated by reference.
(2) Previously filed as an exhibit to the Registrant's Form 8-K of November
6, 2004 and incorporated by reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2003 and incorporated by
reference.
(4) Previously filed with Pre-effective Amendment Number 3 to Form SB-2
registration statement filed with the Securities and Exchange Commission
on October 3, 2001.
(5) Previously filed as an exhibit to the Registrant's Form 8-K of October
20, 2002 and incorporated by reference.
(6) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated July 22, 2004 and incorporated by reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (File No. 333-117560) on July 22, 2004.
(8) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on October 6, 2004
and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10QSB for the period ended June 30, 2004 and incorporated herein by
reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on April 21, 2004
and incorporated herein by reference.
(11) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on February 25, 2005
and incorporated herein by reference.
(12) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on September 16,
2005 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on September 21,
2005 and incorporated herein by reference.
(14) Previously filed as an exhibit to the Registrant's Yearly Report on Form
10KSB for the period ended December 31, 2004 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on July 20, 2006 and
incorporated herein by reference.
(16) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on September 6, 2006
and incorporated herein by reference.
(17) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on November 6, 2006
and incorporated herein by reference.
(18) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the
81
Securities and Exchange Commission on November 6, 2006 and incorporated
herein by reference.
(19) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on November 6, 2006
and incorporated herein by reference.
(20) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on November 6, 2006
and incorporated herein by reference.
(21) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on December 11, 2006
and incorporated herein by reference.
(22) Previously filed as an exhibit to the Registrant's Current Report on Form
8K filed with the Securities and Exchange Commission on February 26, 2007
and incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUTANT FEES AND SERVICES.
Audit and Non-Audit Fees
The following table presents fees for professional audit services
rendered by Odenberg, Ullakko, Muranishi & Co. LLP for the audit of the
Company's annual financial statements for the years ended December 31, 2006 and
December 31, 2005, and fees billed for other services rendered by Odenberg,
Ullakko, Muranishi & Co. LLP during those periods.
2006 2005
------------ ------------
Audit fees:(1) $ 237,000 $ 230,000
Audit-related fees: (2) 10,000 --
Tax fees:(3) -- --
All other fees:(4) -- --
------------ ------------
Total $ 247,000 $ 230,000
============ ============
(1) Audit fees include fees invoiced for the audit of the Company's annual
financial statements and the quarterly reviews of these statements, as
well as fees for consultation regarding accounting issues and their
impact on or presentation in the Company's financial statements.
(2) This category includes fees billed for assurance and related services
that are reasonably related to the performance of the audits or reviews
of the financial statements and are not reported under "Audit Fees," and
generally consist of fees for due diligence in connection with
acquisitions, accounting consultation and audits of employee benefit
plans.
(3) This category includes fees billed for professional services rendered by
the independent auditors for tax compliance, tax planning and tax
advice. (4) The Company generally does not engage Odenberg, Ullakko,
Muranishi & Co. LLP for "other" services.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Public Accounting Firm
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are
required to periodically report to the Audit Committee regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.
82
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZAP
By: /s/ Steven M. Schneider
-----------------------------
Steven M. Schneider
Chief Executive Officer
(principal executive officer)
Date: March 30, 2007
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name Position Date
---- -------- ----
By: /S/ STEVEN M. SCHNEIDER Director and Chief March 30, 2007
----------------------- Executive Officer
Steven M. Schneider (principal executive officer)
By: /S/ GARY STARR Chairman of the Board March 30, 2007
----------------------- of Directors
Gary Starr
By: /S/ WILLIAM HARTMAN Chief Financial Officer March 30, 2007
----------------------- (principal financial and
William Hartman accounting officer)
By: /S/ RENAY CUDE Director and Secretary March 30, 2007
-----------------------
Renay Cude
By: /S/ Raymond Byrne Director March 30, 2007
-----------------------
Raymond Byrne
By: /S/ Peter Scholl Director March 30, 2007
-----------------------
Peter Scholl
83