-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C0V4S04kS7Lkx3FaWIYrpDXSvK4URV9oTz6OXlSZjhBD4ERn980a+D1cDc2x6oSC mJkm9SS+HU6iU/6BiD+OsA== 0001072613-04-000703.txt : 20040330 0001072613-04-000703.hdr.sgml : 20040330 20040330145200 ACCESSION NUMBER: 0001072613-04-000703 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZAP CENTRAL INDEX KEY: 0001024628 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 943210624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-30300 FILM NUMBER: 04700236 BUSINESS ADDRESS: STREET 1: 501 FOURTH STREET CITY: SANTA ROSA STATE: CA ZIP: 95401 BUSINESS PHONE: 7075258658 MAIL ADDRESS: STREET 1: 501 FOURTH STREET CITY: SANTA ROSA STATE: CA ZIP: 95401 FORMER COMPANY: FORMER CONFORMED NAME: ZAPWORLD COM DATE OF NAME CHANGE: 19990715 FORMER COMPANY: FORMER CONFORMED NAME: ZAP POWER SYSTEMS INC DATE OF NAME CHANGE: 19970319 10KSB 1 form10ksb_12581.txt FORM 10-KSB (DECEMBER 31, 2003) ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB (Mark One) [X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended DECEMBER 31, 2003 [_] Transition Report under to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ___________ Commission File Number 0-303000 ZAP ---------------------------------------------- (Name of small business issuer in its charter) CALIFORNIA 94-3210624 - ------------------------------- ---------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 501 FOURTH STREET SANTA ROSA, CALIFORNIA 95401 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (707) 525-8658 ------------------------------------------------ (Issuer's Telephone Number, Including Area Code) Securities registered under section 12(b) of the Exchange Act: NONE Securities registered under section 12(g) of the Exchange Act: COMMON STOCK ---------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $5,828,000 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within the past 60 days. (SEE definition of affiliate in Rule 12b-2 of the Exchange Act.) Based on the average bid and ask price as of March 26, 2004, $10,956,520. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 16,231,882 shares of common stock as of March 26, 2004. DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1933 (the "Securities Act"). The listed documents should be clearly described for identification purposes. NONE. Transitional Small Business Disclosure Format (check one): Yes [_] No [X] ================================================================================ TABLE OF CONTENTS PART I Page Number ----------- Item 1. Description of Business 1 Item 2. Description of Property 4 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Securities 5 Item 6. Management's Discussion and Analysis or Plan of Operation 7 Item 7. Index to Financial Statements 11 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 12 Item 8A. Controls and Procedures 12 PART III Item 9. Directors and Executive Officers of the Registrant 12 Item 10. Executive Compensation 14 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 14 Item 12. Certain Relationships and Related Transactions 16 PART IV Item 13. Exhibits and Reports on Form 8-K 16 Item 14. Principal Accountant Fees and Services 18 SIGNATURES 19 PART I ITEM 1. DESCRIPTION OF BUSINESS. THE INFORMATION ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S INDUSTRY, MANAGEMENT'S BELIEFS AND CERTAIN ASSUMPTIONS MADE BY MANAGEMENT. On June 20, 2002, the U.S. Bankruptcy Court confirmed ZAP's Second Amended Plan of Reorganization (the "Plan"), which allowed the Company to emerge from Chapter 11 proceedings. A. BUSINESS DEVELOPMENT ZAP (the "Company" or "ZAP") was incorporated under the laws of the State of California, on September 23, 1994, as "ZAP Power Systems." The name of the Company was changed to "ZAPWORLD.COM" on May 16, 1999 in order to increase our visibility in the world of electronic commerce. We subsequently changed our name to ZAP on June 18, 2001 in order to reflect our growth and entry into larger, more traditional markets. The Company has grown from a single product line to a full line of electric vehicle and advanced transportation products. Most of the Company's domestic manufacturing has been transferred to lower-cost overseas contract manufacturers. The Company's business strategy has been to develop, acquire and commercialize advanced transportation including electric vehicles and electric vehicle power systems, and low emission vehicles, which have fundamental, practical and environmental advantages over available internal combustion modes of transportation that can be produced commercially on an economically competitive basis. In 2003, the Company continued to enhance and broaden its electric vehicle product line. The Company intends to further expand its technological expertise through an aggressive plan of acquisitions of companies with exciting new products in the advanced transportation industry and strategic alliances with certain manufacturers, distributors and sales organizations. B. BUSINESS OF ISSUER The Company's business goal is to become the largest and most complete distribution portal for advanced transportation and electric vehicles. In 2003, the Company continued to accelerate its market positioning in the electric vehicle industry. The Company is now focused on creating a distribution channel for its vehicles, with special emphasis on entrepreneurs in the power-sport and independent auto industry. According to various sources, the Company has developed perhaps the strongest brand names in the electric vehicle industry. PRODUCT SUMMARY- ZAP markets many forms of advanced transportation, including electric automobiles, motorcycles, bicycles, scooters, personal watercraft, neighborhood electric vehicles, commercial vehicles and more. Additionally, the Company produces the electric scooter, known as the ZAPPY(R), which is manufactured by the Company, using parts manufactured by various subcontractors. ELECTRIC VEHICLE RENTAL PROGRAM- ZAP established ZAP Rental Outlet in 2002 to rent neighborhood electric vehicles in tourist locations. ZAP plans to solicit the participation of rental agencies and other locations for the program. Neighborhood electric cars are a new category of 25 MPH automobiles designed for short trips in urban areas, planned communities, commercial zones or tourist districts. The smaller, low-speed electric cars are a new alternative in places concerned with air and noise pollution, high fuel prices, traffic congestion or parking shortages. In September 2003 the Company acquired a fleet of approximately 100 electric cars, which are being rented to the public at two locations on the main Casino strip in Las Vegas. The purchase was completed in exchange for stock and warrants. ELECTRIC VEHICLE DEALERSHIP PROGRAM - The Company began establishing Electric Vehicle Dealerships in various locations in the United States in the fourth quarter of 2003. The new car dealer pays the Company a fee and in return may apply with the respective state to become a licensed new car electric vehicle dealership. The Company also receives a commitment from the new car dealer to purchase a minimum number of electric automobiles annually. 1 ACQUISITION OF NEW BUSINESSES-The Company completed its acquisition of Voltage Vehicles ("VV") and RAP Group on July 1, 2002. Voltage Vehicles is a Sonoma County-based Nevada Corporation with exclusive distribution contracts for advanced transportation in the independent auto dealer network, including rights to one of the only full-performance electric cars certified under federal safety standards. The RAP Group ("RAP") owns an auto dealership focused on the independent automotive and advanced technology vehicle markets. A Voltage Vehicle authorized dealer, RAP showcases an array of advanced transportation at its dealership in Fulton, California. Voltage Vehicles, which began business in February 2001, is a relatively new enterprise. As noted in ZAP's Amended and Confirmed Plan of Reorganization (see Financial Statement Note 3), the mergers are expected to enhance ZAP's financial base by providing access to the two companies' services and relationships. The move is expected to advance ZAP's goal of becoming a leading full-service brand in the electric and alternate fuel transportation industry. Since the acquisition, ZAP plans to step-up its role in building a national distribution network to support its contract manufacturing for its growing line of products. The merger enabled ZAP to immediately cut overhead and other costs, and increase revenues. ZAP purchased VV and RAP through the issuance of 500,000 and 4,000,000 (post-split) shares of common stock, respectively, to the equity shareholders of VV and RAP. VV and RAP are wholly owned subsidiaries of ZAP. The equity shareholders will also receive one Warrant in Series B, C, D and K to purchase common stock in the Reorganized ZAP for each common share issued to Voltage Vehicles and RAP Group, Inc. In connection with the acquisition of RAP and VV the Company recorded goodwill or the excess of the purchase price over the net assets acquired of approximately $800,000. The goodwill recorded is primarily for RAP and Voltage Vehicles and is based upon an independent appraisal of the fair value of the tangible and intangible assets acquired in order to record and allocate the purchase price in accordance with Financial Accounting Standards Board 141, "Business Combinations." ENVIRONMENTAL INITIATIVES AND LEGISLATION Federal legislation was enacted to promote the use of alternative fuel vehicles, including electric vehicles. Qualified electric vehicles are entitled to a 10% federal tax credit. Several states have also adopted legislation that sets mandates for the introduction of electric vehicles. However, there is strong political opposition to this mandate. Foreign countries have also initiated either mandates or incentives for electric vehicles or are planning such programs in the future. As ZAP commercializes new transportation technology, it has been required to expend Company resources in educating legislators of the benefits of these vehicles. In November 2002, President Bush signed legislation which transfers regulation of electric bikes from the National Highway Traffic Safety Administration to the Consumer Product Safety Commission. This effectively changes the regulatory standards from motor vehicles to consumer standards such as bicycles. Although many government agencies are concerned about rising global air pollution, it is expected that the Company will need to continue to expend considerable resources in the future in the governmental process, and there cannot be assurance that the current favorable governmental climate for these zero emission vehicles will remain in the future. RESEARCH AND PRODUCT DEVELOPMENT The Company has primarily become a marketer and distributor of products and is only involved in the manufacturing of the ZAPPY Scooters. Thus, we do not require large expenditures for internal research and development costs. In order to maintain our competitive advantage the Company searches globally for the latest technological advances in electric transportation and then determines the feasibility of including the new item into our product. CURRENT PRODUCT LINE The Company's existing product line, which includes new and planned introductions, is as follows: ZAPCAR (TM) - This electric vehicle is made in China and is the first of its kind to utilize an advanced drivetrain powered by an asynchronous AC motor system delivering up to four times the horsepower of other models in its class. The Company signed an exclusive agreement to import this nearly completed vehicle into the United States. ZAP LIGHT UTILITY VEHICLE (LUV) - This vehicle is a new kind of automobile called a Neighborhood Electric Vehicle (NEV). A new category of automobile was created for the many car trips people take for inter-city transportation, planned communities, commercial zones and tourist areas. The LUV sports a European design that comes from Italy. The vehicle has speeds up to 25 mph, has room for two and plugs into any normal household electric outlet. The LUV was selected as a finalist for Tech-TV's Best of the Consumer Electronic Show held in Las Vegas in January 2003. 2 ZAPPY(R)- This electric scooter is a stand-up, portable, lightweight scooter featuring a 12-volt battery with a built-in charger and a collapsible frame. Its patented design includes a unique folding mechanism and proprietary circuitry, which increases the efficiency and range of the vehicle. In the fourth quarter last year, we introduced a new 2002 ZAPPY(R) Scooter which offered significant upgrades over the previous design, from performance and construction to look. ZAPPY TURBO(TM) - The new ZAPPY TURBO is an improved version of the Company's ZAPPY folding electric scooter. The ZAPPY TURBO's new electric propulsion system offers improved acceleration and hill climbing, and has a "hi-performance" mode that allows the scooter to reach speeds of 19.5 MPH. We started shipping this item in March of 2002. ZAP(R) SEASCOOTER(TM) - The ZAP SeaScooter (TM) is a revolutionary affordable underwater propulsion device designed to pull swimmers and snorkelers through the water. It can run at speeds up to 2 mph at a depth of 60 feet and has built in buoyancy regulation for maximum comfort. ZAPLIGHT - This product is a perpetual flashlight that has no need for batteries or bulbs. With just 30 seconds of shaking the Faraday flashlight can generate enough power for up to five minutes of light. POWERBIKE(R) - The Powerbike is primarily a mountain bike with a new and improved electric motor attached. It was designed to appeal to the low cost mass merchant. OTHER ELECTRIC VEHICLES - Commercial road and highway. Under various distribution agreements, the Company has the rights to a wide spectrum of personal and industrial electric vehicles. MICROPROCESSOR DRIVE CONTROLLERS - The Company is working to develop a series of low cost proprietary motor controller microprocessors for all of its electric vehicles, which is believed to increase efficiency and lower costs of operation. SOURCES AND AVAILABILITY OF RAW MATERIALS Materials, parts, supplies and services used in the Company's business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on the Company's operations. LICENSES, PATENTS AND TRADEMARKS The Company has a number of patents and trademarks covering its electric vehicles. The Company was issued its first United States Patent on February 13, 1996 on its electric motor power system for bicycles, tricycles, and scooters (Patent #5,491,390). On September 30, 1997, the Company was issued its second United States Patent on its electric motor system (Patent #5,671,821). On December 15, 1998, the Company was issued a United States Patent for its ZAPPY scooter (Patent #5,848,660). On November 14, 2000, The Company was issued a design patent on its ZAPPY(R) scooter (Des. #433,718). The Company also holds several other patents in the electric vehicle industry. The Company also acquired two patents as the result of the emPower acquisition in December 1999. One patent was for the powered roller skates (Patent #6,059,062) and another for the powered skateboard (Patent #6,050,357). The Company acquired all of the assets of Electric Vehicles Systems Inc., including the PowerSki(R), trademark (Registration #2,224,640) and two U.S. Patents, (Patent #5,735,361) and (Patent #5,913,373). The Company also has a patent for the Powered Scooter (Patent #115,434). With the purchase of Aquatic Propulsion Technology Inc. on July 1, 2000, the Company acquired the following six patents: submersible marine vessel issued June 13, 1995 (Patent #5,423,278), personal submersible marine vehicle issued June 3, 1997 (Patent #5,634,423), submersible marine vessel issued on April 19, 1994 (Patent #5,303,666), scuba scooter issued on May 31, 1994 (Patent Des. 347,418), scuba scooter issued June 6, 1995 (Patent Des. 359,022) and submersible marine vehicle issued February 19, 2002 (Patent #US D453,726 S). The Company also has several copyright registrations for various advertisements that it uses to promote its products. 3 ZAP also holds several trademarks: the trademark ZAP(R)was assigned to the Company on September 23, 1994, (Reg. No. 1,794,866); the ELECTRICRUIZER(R)mark was registered on April 2, 1999 (Reg. No. 2,248,753); the ZAPPY(R)mark was registered on March 21, 2000 (Reg. No. 2,330,894); the POWERBIKE(R)mark was registered on June 1, 1999 under trademark ZAPWORLD.COM(R) which was registered on July 25, 2000 (Reg. No. 2,371,240); the trademark ZAP Electric Vehicle Outlet(R)was registered on March 28, 2000 (Reg. No. 2,335,090) and the mark Zero Air Pollution(R)was registered on February 28, 2000 (Reg. No. 2,320,346). BACKLOG The Company has a $140,400 backlog of orders and purchase contracts in hand for various products and electric vehicles as of March 26, 2004. The Company expects to fill its backlog within the current fiscal year. COMPETITIVE CONDITIONS The competition to develop and market electric vehicles has increased during the last year and is expected to continue to increase. There are also other manufacturers, both large and small, of personal electric vehicles. The principal competitive advantages of the Company are its ownership of fundamental technology, its trade name and its potential ability to be a low cost manufacturer through domestic and international connections, and its distribution network. In order to reduce costs the Company's production activities have been transferred to lower cost off shore outside contract manufacturers. This move also enables the Company to concentrate on its marketing and sales efforts. The Company also currently benefits from its high name recognition in the electric vehicle industry coupled with a rapidly developing business on its Internet website ZAPWORLD.COM. The Company offers one of the broadest lines of personal electric vehicles currently available. According to published reports, the Company believes it currently holds a leading electric vehicle market position in the United States. EMPLOYEES As of March 26, 2004, the Company had a total of 42 employees. This is an increase of 5 employees from 2003. The Company's performance is substantially dependent upon the services of its executive officers and other key employees, as well as on its ability to recruit, retain and motivate other officers and key employees. Competition for qualified personnel is intense and there are a limited number of people with knowledge of and experience in the electric vehicle industry. The loss of services of any of its officers or key employees, or its inability to hire and retain a sufficient number of qualified employees, will harm the Company's business. ITEM 2. DESCRIPTION OF PROPERTY The chart below contains a summary of our principal facilities.
Location Use Square Feet - -------- --- ----------- 501 Fourth Street, Santa Rosa Calif Corporate Office 20,000 6784 Sebastopol Avenue, Sebastopol Calif Distribution Center 9,800 3362 Fulton Road, Santa Rosa Calif Office, Auto Lot 10,000 2955 Las Vegas Blvd, Las Vegas NV Electric Rental Car Location 3,000 3771 S Las Vegas Blvd, Las Vegas NV Electric Rental Car Location 2,500 1815 E. Sahara Ave, Las Vegas NV Electric Car Location 5,050
The Company purchased the Fourth Street building in March of 2003 through the issuance of common stock, warrants and a $2 million note payable. The rest of the facilities are leased. All facilities are in good condition. It is management's opinion that the Company's insurance policies cover all insurance requirements of the landlords. The Company owns the basic tools, machinery and equipment necessary for the conduct of its repairs, research and development, and vehicle prototyping activities. Management believes that the above facilities are generally adequate for present operations. 4 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including employment-related and trade related claims. On May 20, 2003, the RAP Group, Inc., a wholly owned subsidiary of ZAP was named as a defendant in a lawsuit filed in the Superior Court of California by Fireside Thrift Co. The suit alleges breach of contract and misrepresentation with respect to the Dealer Agreement. The plaintiff is seeking damages in the amount of $546,108 plus interest. The pending action is in the preliminary stage. The Company intends to mount a vigorous defense in this action. Management believes that the ultimate resolution of these claims will not have a material adverse effect on our financial position or on results of operations. The RAP Group is currently on probation with the California Department of Motor Vehicles for a period of two years ending June 12, 2004. The probationary action was primarily due to the RAP Group's untimely transfers of pink slips for sales of vehicles and lack of compliance with Motor Vehicle Pollution Control guidelines on certain automobile sales. As part of ZAP's original business plan, management is considering converting, depending upon the sales volume, the dealership into a wholesale distributor for its electric cars. There is an action pending against ZAP in the United States Bankruptcy Court for the Northern District of California, Santa Rosa Division, entitled Esquire Trade and Finance, Ltd., and Celeste Trust Reg. v. ZAP, Adversary Proceeding Number 03-1187. This is an action brought by the Plaintiffs against ZAP for declaratory relief in which they ask the court to issue a declaratory judgment that ZAP's purported redemption of the Plaintiff's Class A Warrants in February of 2003 is ineffective. Management believes that the ultimate resolution of this claim will not have a material adverse effect on our financial position or on results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year-ended December 31, 2003. Part II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF SECURITIES On July 1, 2002, our common stock began trading on the National Association of Securities Dealers, Inc. Electronic Bulletin Board (the "OTC Bulletin Board") under the new stock symbol of ZAPZ. According to the OTC Bulletin Board, the symbol change is to indicate that ZAP is no longer in Chapter 11 Reorganization, and that the stock has undergone a reverse split effective July 1, 2002. ZAP's common stock of 6,693,643 shares was converted to 2,231,214 shares of common stock in the Reorganized ZAP, which was then reversed split on a 2:1 basis. The final result of the conversion and the reverse split equates to 6:1 or in other words for every six shares a common stock held on June 20, 2002 (ZAP's Plan of Reorganization Date) the individual received one share of common stock in the Reorganized ZAP. The resulting shares of common stock after the split were 1,115,607. All shares and per share data have been restated to reflect the stock splits. The Common Shareholders' also received one Warrant in Series B, C and D to purchase common stock in the Reorganized ZAP for each common share issued to the claimant. During the year ended December 31, 2003, the Company issued approximately 7.1 million shares of restricted and unrestricted common stock for the following reasons: 2.9 million shares as collateral for a loan that did not fund (the prospective lender notified the Company in December 2003 that the shares have been lost, however they have not been cancelled as of yet); 1.5 million shares of unrestricted and restricted stock in exchange for shareholder notes; 678,000 shares for the purchase of automobiles and other inventory items; 947,000 shares for consulting, advertising and other outside services; 581,000 shares for the purchase of the corporate headquarters building; 370,000 shares in exchange for cash and shareholder warrants; 65,000 shares to extinguish debt; 29,000 shares for the exercise of employee stock options and bonuses and 30,000 shares as payment of interest on a short-term note. During the year ended December 31, 2003, the Company issued the following warrants: o Approximately 1.4 million of Series B-2 Restricted Warrants at $1.07, which expire on June 30, 2004. The warrants were issued for the following reasons: 505,000 warrants for consulting services; 315,000 5 warrants issued in exchange for cash; 300,000 warrants for the purchase of the corporate headquarters building; 100,000 warrants for the purchase of electric automobiles and 64,000 warrants for building improvements. o Approximately 50,000 Series C-2 Restricted Warrants, which are priced at $4.00 and expire on July 1, 2004. The warrants were issued to purchase inventory items. o Approximately 50,000 Series D-2 Restricted Warrants, which are priced at $8.00 and expire on July 1, 2005. The warrants were issued to purchase inventory items. o 300,000 Series K-2 Restricted Warrants, which are priced at $1.00 and expire on July 1, 2005. The warrants were issued to the CEO and the Chairman. o Approximately 200,000 of $1.50 Warrants, which are priced at $1.50 and expire on August 26, 2004. The warrants were issued to purchase electric automobiles. As of March 26, 2004, there were 16,231,882 shares of common stock outstanding held by 3,390 shareholders (not including those held in street names). The table below sets forth the range of high and low bid quotes of our common stock as reported by the OTC Bulletin Board. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, markdowns or commissions and may not necessarily represent actual transactions.
2004 2003 2002 High Low High Low High Low (through 3/26/2004) ----- ----- ----- ----- ----- ----- First Quarter....... $0.90 $0.60 $2.59 $1.16 $0.33 $0.09(1) Second Quarter...... - - 1.90 1.15 0.21 0.01 Third Quarter....... - - 1.75 1.20 1.98 (2) 0.30(2) Fourth Quarter...... - - 1.35 0.47 1.80 1.09
(1) During this quarter, the stock was briefly halted from trading on NASDAQ as the result of ZAP's filing for Chapter 11 Reorganization protection (2) Reflects a 6:1 reverse stock split on July 1, 2002. Dividend Policy The Company has not declared or paid any cash dividends on its common stock and presently intends to retain its future earnings, if any, to fund the development of its business and, therefore, does not anticipate paying any cash dividends in the future. RECENT SALES OF UNREGISTERED SECURITIES. Since its inception in 1994, the Company has issued or sold unregistered securities in the amounts, at the times, for the consideration and pursuant to the exemptions from registration provided by the Securities Act of 1933, as amended (the "Act"), as follows: During the month of January, 2003 on various dates a total of 3,069,054 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of assets of ZAP Latin America - 30,000 shares; cancellation of a subsidiary's debt - 65,000 shares; outside services - 5,000 shares; and collateral for a working capital loan - 2,941,176 shares. The loan did not fund and the shareholder reported to the Company in December 2003 that the shares have been lost. However, as of March 26, 2004 the transfer agent has not cancelled the shares. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 27,878 shares of common stock for the conversion of Shareholder warrants. In addition, the Company issued the total of approximately 140,000 Series B-2 Restricted Warrants at $1.07 for the following reasons: 50,000 warrants for consulting; 50,000 for the purchase of inventory; 25,000 for building improvements and 15,000 to a shareholder. The Company also issued 49,692 of Restricted C-2 Warrants at $4.00 for inventory purchases and 49,692 of Restricted D-2 Warrants at $8.00 for inventory purchases. 6 During the month of February, 2003 on various dates a total of 445,984 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of inventory and automobiles - 65,405 shares and outside services, consulting and advertising - 57,137 shares. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 300,000 shares of unrestricted stock in return for a note receivable from a shareholder and 23,442 shares of stock for the conversion of Shareholder warrants. In addition, the Company issued a total of approximately 75,000 Series B-2 Restricted Warrants at $1.07 for the following reasons: 25,000 warrants for consulting and 50,000 for the purchase of automobiles. During the month of March, 2003 on various dates a total of 956,836 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of corporate headquarters building - 581,395 shares; purchase of inventory and automobiles - 264,309 shares and outside services and consulting - 432 shares. Pursuant to ZAP's Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 110,700 shares of restricted stock in return for a note receivable from a shareholder. In addition, the Company issued a total of approximately 355,000 Series B-2 Restricted Warrants at $1.07 for the following reasons: 300,000 warrants for the purchase of the corporate headquarters building, 30,000 for consulting and 25,000 for building improvements. During the month of April, 2003 on various dates a total of 673,620 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of inventory and automobiles - 98,720 shares; outside services, consulting and advertising - 133,500 shares; and issuance of 41,400 shares for cash. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 400,000 shares of restricted stock in return for a note receivable from a shareholder. During the month of May, 2003 on various dates a total of 73,818 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: exercise of an employee stock option - 25,000 shares; outside services, consulting and rent - 23,718 shares and issuance of 25,100 shares for cash. During the month of June, 2003 on various dates a total of 265,828 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of inventory and automobiles - 19,227 shares; outside services, consulting and advertising - 11,800 shares and payment of interest for short-term note payable - 30,000 shares. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 200,000 shares of unrestricted stock in return for a note receivable from a shareholder, conversion of shareholder warrants to stock - 4,000 shares and forgiveness of unsecured creditors debt for stock - 801 shares. In addition, the Company issued approximately 5,000 Series B-2 Restricted Warrants at $1.07 for consulting services. During the month of July, 2003 on various dates a total of 197,752 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of inventory and automobiles - 52,676 shares; outside services, consulting and advertising - 143,076 shares and payment for employee bonuses - 2,000 shares. In addition, the Company issued approximately 300,000 Series B-2 Restricted Warrants at $1.07 in exchange for cash. During the month of August, 2003 on various dates a total of 916,110 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of inventory and automobiles (electric car fleet in Las Vegas) - 226,418 shares; outside services, consulting and advertising - 59,692 shares and issuance of 230,000 shares in exchange for cash. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 400,000 shares of unrestricted stock in return for a shareholder's notes. During the month of September, 2003 on various dates a total of 244,119 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: purchase of inventory and automobiles - 36,666 shares; outside services, consulting and advertising - 149,978 shares; payment for employee bonuses - 1,500 shares and payment of rent - 55,975 shares. In addition, the Company issued a total of approximately 24,000 Series B-2 Restricted Warrants at $1.07 for the following reasons: 10,000 warrants for consulting and 14,000 for building improvements. The Company also issued 196,000 warrants at $1.50 for the purchase of electric automobiles (electric automobile fleet-Las Vegas). 7 During the month of October, 2003 on various dates a total of 161,568 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: outside services, consulting and advertising - 89,991 shares; payments of rents - 50,000 shares; and payment of employee bonus - - 650 shares. Pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 20,927 shares of stock for the conversion of Shareholder warrants. In addition, the Company issued a total of approximately 150,000 Series B-2 Restricted Warrants at $1.07 for consulting services. During the month of November, 2003 on various dates a total of 192,404 shares of stock were issued. Pursuant to an exemption under Section 4 (2) of the Act, the Company issued the following: outside services, consulting and advertising - 24,237 shares and payment for inventory and automobiles - 66,667 shares. Pursuant to ZAP's Confirmed Plan of Reorganization of June 20, 2002 and Section 1145 of the Bankruptcy Code, the Company issued 1,500 shares of stock for the conversion of Shareholder warrants and 100,000 shares of unrestricted stock for a note receivable from a shareholder. In addition, the Company issued 100,000 Series B-2 Restricted Warrants to a cousin of the CEO for consulting services. See Note 13 of the financial statements. During the month of December, 2003 on various dates pursuant to ZAP's Amended and Confirmed Plan of Reorganization of June 20, 2002 the Company issued 312 shares of the Company's preferred stock that is convertible into 338,650 common stock shares, up to 30 days after issuance. No shares of common stock were issued in December 2003. In addition, the Company issued approximately 235,000 Series B-2 Restricted Warrants at $1.07 for the following reasons: 210,000 warrants for consulting and 25,000 for web design services. The Company also issued 300,000 of Restricted K-2 Warrants at $1.00. Both the CEO and Chairman were each issued 150,000 of these warrants. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE MADE PURSUANT TO THE SAFE HARBOR PROVIDED IN SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, CONTINUED ACCEPTANCE OF THE COMPANY'S PRODUCTS, INCREASED LEVELS OF COMPETITION FOR THE PRODUCTS AND TECHNOLOGICAL CHANGES, THE COMPANY'S DEPENDENCE UPON THIRD PARTY SUPPLIERS, INTELLECTUAL PROPERTY RIGHTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. Management's discussion and analysis of results of operations and financial condition are based on our financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our company, ZAP, was incorporated in California in 1994 under the name "ZAP Power Systems." We distribute electric vehicles, including electric automobiles, electric scooters, electric bicycle power kits, electric bicycles, electric motorcycles, and electric water scooters, and other personal electric and non-electric transportation vehicles. The Company sells its electric vehicles to retail customers, international distributors, law enforcement agencies, electric utility companies, bicycle dealerships, motorsport dealers, its dealers and mail order catalogs. Products are also available for purchase on the Company's Internet site, which is ZAPWORLD.COM. The Company sells to mail order catalogs and selected customers on various credit terms. Many of the smaller dealerships are sold on a cash-on - -delivery basis. The Internet and retail sales are primarily paid for with a credit card or personal check before shipment of the product. The Company's overall goal is to dominate the personal electric vehicle industry market. The Company's primary growth strategy is to increase net sales by augmenting its marketing and sales force, by increasing distribution channels through mass retail organizations and wholesale distributors both domestically and overseas. We also intend to expand our electric vehicle dealerships throughout the United States. Through the acquisition of RAP Group, Inc., the Company has a proof of concept and showcase successful retailer of electric vehicles. Strategic alliances with leaders in the industry are also of equal importance, and these alliances will be broadened throughout the coming year. 7 The Company intends to function as a sales and marketing organization with any manufacturing of its products done by overseas contract manufacturers. Product improvements, new product introductions, and the expansion of the ZAP electric outlet network will continue to enlarge ZAP's presence in the electric vehicle industry. SUMMARY OF KEY ACCOMPLISHMENTS DURING 2003 The Company completed the following transactions, acquisitions and strategic alliances during the period of this report: The Company purchased a three-story 20,000 square foot office building in downtown Santa Rosa, California for $2.9 million in convertible debt, stock and warrants. The new facility became the corporate headquarters of ZAP. A $650,000 Financing agreement with Daka Development was signed by the Company for inventory purchases; the terms were 50% Common stock and 50% in cash. Daka had previously provided the Company with $500,000 of inventory financing last year, which was also converted to equity. The Company acquired a fleet of approximately 100 electric cars which are being rented to the public at two locations on the main Casino strip in Las Vegas. The purchase was completed in exchange for stock and warrants. An exclusive agreement was signed by the Company to import nearly completed electric automobiles from China. The new ZAPCAR (TM) is the first vehicle of its kind to utilize an advanced drivetrain powered by an asynchronous AC motor system delivering up to four times the horsepower of other models in its class. A subsidiary of ZAP, Voltage Vehicles, signed an agreement with a European-based group of companies involved in the design and manufacturing of electric automobiles. The group started production on several different types of light electric utility vehicles for urban transportation and commercial use, including a 25 MPH neighborhood electric car that is now available. The ZAP LIGHT UTILITY VEHICLE (LUV)(TM) is a new kind of automobile called a Neighborhood Electric Vehicle (NEV). This new category of automobile was created for the many car trips people take for inter-city transportation, planned communities, commercial zones and tourist areas. The vehicle has speeds up to 25 mph, has room for two and plugs into any normal household electric outlet. The LUV was selected as a finalist for Tech-TV's best of the Consumer Electronic Show held in Las Vegas in January 2003. ZAP is working to launch a ZAP "L.U.V.-Line" of electric automobiles, which includes freeway-capable vehicles as well as vans, pickups and tractors. In the later part of the year, Voltage Vehicles, a subsidiary of ZAP, began establishing electric vehicle dealerships with independent parties in various geographic parts of the United States. The Company intends to expand this network throughout the United States in the future. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Note: The results for 2003 include an entire year's activity for the RAP Group Inc. and Voltage Vehicles while 2002 only includes activity for the newly acquired companies of RAP Group Inc., and Voltage Vehicles as of July 1, 2002. Since Voltage Vehicles is still in the development stage the majority of the results of the combined ZAP are affected by RAP. NET SALES increased by $1.4 million from $4.4 million in 2002 to $5.8 million over the year ended December 31, 2003. The increase was primarily due to the inclusion of twelve months of net sales for the RAP Group in 2003 while only six months were recorded in 2002 (see above). Included in the 2003 net sales of $5.8 million were $3.7 million for RAP and $2.1 million for ZAP. The net sales for ZAP increased by $300,000 from $1.8 million in 2002 to $2.1 million in 2003. The primary reason for the increase was to increased shipments of SeaScooters. GROSS PROFIT dollars increased by $1.1 million from $254,000 in 2002 to $1.3 million for the year-ended 2003. 8 Approximately $270,000 of the increase was primarily due to the inclusion of twelve months of gross profit for the RAP Group in 2003 while only six months were recorded in 2002 (see above). Included in the 2003 gross profit of $1.3 million was $906,000 for RAP and $389,000 for ZAP. Gross profit in 2003 increased over 2002 for both RAP and ZAP individually. The primary reason for RAP's increase was sales of higher margin automobiles. ZAP's increase was due to product mix with more shipments of higher margin SeaScooters in 2003. SELLING expenses in 2003 were $1.0 million compared to $541,000 in 2002. RAP's expenses were $222,000 in 2003. ZAP's expenses were $731,000 in 2003 versus $349,000 in 2002. ZAP had an increase of $382,000 or 110% from 2002 to 2003. As a percentage of sales, selling expenses increased from 12% of sales to 17%. The increase was due to higher salaries, as the sales department was reorganized with new employees hired in 2003. Also advertising and marketing expenses were higher, as the result of more print media being used to promote the products. GENERAL AND ADMINISTRATIVE expenses for 2003 were $4.7 million as compared to $2.3 million in 2002. RAP's portion of the expenses were $1.4 million in 2003. For ZAP, the expenses increased $1.0 million from $2.0 million in 2002 to $3.0 million in 2003. As a percentage of sales, general and administrative expenses increased from 52% to 81%. The major items that contributed to the increase were higher consulting services to promote the Company's stock and higher salaries and benefits, where 2003 represents a full year for the new hires of 2002. In addition, the Company also had an increase in legal and professional fees during 2003. RESEARCH AND DEVELOPMENT expenses decreased from $30,000 in 2002 to no major expenses in 2003. Since ZAP has transitioned from a manufacturing to a sales marketing organization, R&D expenses have decreased. IMPAIRMENT OF INTANGIBLES was $375,000 in 2003 versus $50,000 in 2002. The increase was due to a writedown of RAP's goodwill. INTEREST EXPENSE, net increased from $12,000 in 2002 to $108,000 in 2003. The primary reason for the increase was interest accrued on the note payable of $2 million to purchase the Company's corporate headquarters in March of 2003. Allowance for notes receivable to shareholders is due to the doubtful collection of notes receivable from two investors. The Company has engaged an attorney to collect on the notes since the makers have not met the required payment terms or collateral requirements. REORGANIZATION EXPENSES decreased in 2003 since the Company completed its reorganization in June of 2002. RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company used cash from operations of $625,000 and $307,000 during the years ended December 31, 2003 and 2002, respectively. Cash used in operations in 2002 was the result of the net loss incurred for the year of $2.8 million, offset by net non-cash income of $492,000 and the net change in operating assets and liabilities resulting in a cash increase of $1.8 million. The increase in cash was due to a decrease in accounts receivable of $903,000 and a decrease in inventory of $875,000. Investing activities used cash of $29,000 during the year ended 2003. Investing activities used cash for the purchase of fixed assets. In the year ended December 31, 2002, investing activities used cash of $204,000, which was also for the purchase of fixed assets. Financing activities provided cash of $855,000 for the year ended December 31, 2003 and used cash of $19,000 during the year ended December 31, 2002. At December 31, 2003 the Company had cash of $ 551,000 as compared to $350,000 at December 31, 2002. The Company's working capital at December 31, 2003 was $687,000 compared to $1,554,000 at December 31, 2002. The decrease in working capital is primarily due to funding of ongoing corporate operations. 9 The Company has recorded notes receivable from shareholders of $864,170, less a reserve of $697,200 resulting in a net due of $166,970 at December 31, 2003. The notes were given to the Company by three shareholders in exchange for restricted and unrestricted common stock. Reserves were established for two of the shareholders, and one has not met the agreed upon payment terms and the other shareholder has not assigned collateral as required by the notes. The Company has hired an attorney to pursue collection from the shareholders. In March of 2003, the Company purchased a three-story 20,000 square foot office building in downtown Santa Rosa for $2.9 million in convertible debt, stock and warrants. The building is the corporate headquarters of the Company. Terms of the transaction included a convertible promissory note for $2 million payable over 22 years with interest only for the first two years. No payments of interest are due until after two years. At that time, the payee has the option to convert some or all of the unpaid principal and accrued interest to shares of ZAP's common stock at an agreed upon conversion price. The seller also received a certain amount of common stock and warrants in connection with the transaction. In order to finance our working capital requirements, we are currently seeking both debt and equity investments with several investors, but there can be no assurances that we will obtain this capital or that it will be obtained on terms favorable to us. We do not have a bank line of credit and there can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock and there is no guarantee that a market will exist for the sale of the Company's shares. In addition to the above working capital needs, our other capital needs are to fund our growth strategy, which includes increasing our shopping mall presence, improving and increasing distribution channels, establishing company owned and franchised ZAP stores, expanding our electric vehicle dealerships, introducing new products, improving existing product lines, and developing a strong corporate infrastructure. SEASONALITY AND QUARTERLY RESULTS Our business is subject to seasonal influences. Sales volumes in our industry typically slow down during the winter months, November to March, in the U.S. As we are marketing worldwide, we are not impacted 100% by U.S. seasonality. INFLATION Our raw materials and finished products are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our raw materials and finished goods sources. GOODWILL Goodwill consists of the excess consideration paid over net assets acquired. Impairment of goodwill is evaluated whenever a triggering event is encountered. The impaired value is determined by reference to cash flows anticipated from estimated proceeds from selling the related technology and/or sales of products directly linked to the technology and assets that gave rise to the goodwill. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results. 10 Risks Related to Our Business Other risks include, but are not limited to, the following: We face intense competition, which could cause us to lose market share. Changes in the market for electric vehicles could cause our products to become obsolete or lose popularity. We cannot assure you that growth in the electric vehicle industry will continue and our business may suffer if growth in the electric vehicle industry ceases or if we are unable to maintain the pace of industry demands. We may be unable to keep up with changes in electric vehicle technology and, as a result, may suffer a decline in our competitive position. The failure of certain key suppliers to provide us with components could have a severe and negative impact upon our business. Product liability or other claims could have a material adverse effect on our business. We may not be able to protect our Internet address. Our success is heavily dependent on protecting our intellectual property rights. ITEM 7. FINANCIAL STATEMENTS. CONTENTS Page ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. F-1 FINANCIAL STATEMENTS Consolidated Balance Sheet.......................................... F-2 Consolidated Statements of Operations............................... F-3 Consolidated Statement of Shareholders' Equity...................... F-4 Consolidated Statement of Cash Flows................................ F-5 Notes to Consolidated Financial Statements.......................... F-6 11 To the Board of Directors and Shareholders of ZAP REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- We have audited the accompanying consolidated balance sheet of ZAP and its subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements audited by us present fairly, in all material respects, the financial position of ZAP and its subsidiaries at December 31, 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company has suffered recurring operating losses and negative cash flows from operations, and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Odenberg, Ullakko, Muranishi & Co. LLP San Francisco, California March 26, 2004 F-1 ZAP AND SUBSIDIARIES -------------------- CONSOLIDATED BALANCE SHEET -------------------------- DECEMBER 31, 2003 ----------------- (In thousands, except share data) ASSETS ------ Current assets: Cash and cash equivalents $ 551 Accounts receivable, net of allowance of $698 315 Inventories 1,428 Prepaid expenses and other current assets 458 ------------ Total current assets 2,752 Property and equipment, net 3,631 Other assets: Patents and trademarks, net 187 Goodwill 476 Deposits and other 108 ------------ $ 7,154 ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt $ 88 Accounts payable 538 Accrued liabilities 1,149 Deferred revenue 290 ------------ Total current liabilities 2,065 ------------ Long-term debt, less current portion 2,055 ------------ Total Liabilities 4,120 ------------ Commitments and contingencies Shareholders' equity: Preferred stock; 50 million shares authorized; no par value; 312 shares issued and outstanding 165 Common stock; 100 million shares authorized; no par value; 13,228,206 shares issued and outstanding 26,455 Notes receivable from shareholders, net (167) Accumulated deficit (23,419) ------------ Total shareholders' equity 3,034 ------------ $ 7,154 ============ See accompanying notes to consolidated financial statements. F-2 ZAP AND SUBSIDIARIES -------------------- CONSOLIDATED STATEMENT OF OPERATIONS ------------------------------------ (In thousands; except per share data) Year ended December 31 ------------------------- 2003 2002 ---------- ---------- Net sales $ 5,828 $ 4,413 Cost of goods sold 4,497 4,159 ---------- ---------- Gross profit 1,331 254 ---------- ---------- Operating expenses: Sales and marketing (non-cash of $213 and $0 in 2003 and 2002, respectively) 998 541 General and administrative (non-cash of $1,425 and $182 in 2003 and 2002, respectively) 4,678 2,302 Research and development 1 30 Impairment write-off 375 50 ---------- ---------- Total operating expenses 6,052 2,923 ---------- ---------- Loss from operations (4,721) (2,669) ---------- ---------- Other income (expense): Interest expense (non-cash of $18 and $0 in 2003 and 2002, respectively) (108) (12) Other income 14 39 Allowance for notes receivable to shareholders (697) -- ---------- ---------- (791) 27 Loss before reorganization fees, extraordinary gain and income taxes (5,512) (2,642) Reorganization fees 28 170 ---------- ---------- Loss before extraordinary gain and income taxes (5,540) (2,812) Provision for income taxes 2 2 ---------- ---------- Loss before extraordinary gain (5,542) (2,814) Extraordinary gain -- 3,964 ---------- ---------- Net income (loss) $ (5,542) $ 1,150 ========== ========== Loss per share before extraordinary gain: Basic and Diluted $ (0.49) $ (0.69) Earnings (loss) per share: Basic $ (0.49) $ 0.28 Diluted $ (0.49) $ 0.17 Weighted average number of common shares outstanding: Basic 11,246 4,051 Diluted 11,246 6,945 See accompanying notes to consolidated financial statements. F-3 ZAP AND SUBSIDIARIES -------------------- CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ---------------------------------------------- (In thousands)
Convertible preferred stock Common stock Receivable --------------------- ---------------------- from Accumulated Shares Amount Shares Amount Shareholders Deficit Total ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2001 2 $ 1,133 1,103 $ 18,101 $ -- $ (19,001) $ 233 Issuance of common stock: Employee stock purchase plan 12 14 14 Reverse accrued dividends 267 (26) 241 Repurchase of Ridgewood stock (104) (1,500) (1,500) Preferred stock conversion (2) (1,133) 630 1,133 -- Ridgewood stock note conversion 995 199 199 Rap and Voltage Vehicles acquisition 4,500 1,580 1,580 Stock issued for Daka note 1,176 500 500 Conversion of unsecured creditor's debt to stock 295 236 236 Stock issued for professional services and equipment 351 325 325 Exercise of with warrants 32 34 34 Net income -- -- -- -- -- 1,150 1,150 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2002 -- -- 8,990 20,889 -- (17,877) 3,012 Issuance of common stock: Purchase building and improvements 581 993 993 Acquisition of rental car fleet 327 490 490 For inventory, equipment and services 1,678 1,811 1,811 Stock issued for cash 594 671 671 Exercise of warrants and options 101 114 114 For notes receivable 892 864 (167) 697 Debt converted to common stock 65 78 78 Fair value of warrants issued for services 545 545 Issuance of preferred stock: -- For cash 0.10 50 50 For equipment 0.01 6 6 For services 0.20 109 109 Net loss -- -- -- -- -- (5,542) (5,542) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2003 0.31 $ 165 13,228 $ 26,455 $ (167) $ (23,419) $ 3,034 ========== ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 ZAP AND SUBSIDIARIES -------------------- CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (In thousands) Year ended December 31 -------------------------- 2003 2002 ---------- ---------- Operating activities: Net income (loss) $ (5,542) $ 1,150 Items not requiring the current use of cash: Depreciation and amortization 370 260 Loss on disposal of fixed asset 85 -- Impairment of intangibles 375 50 Extraordinary gain on debt forgiveness -- (3,964) Allowance for notes receivable 697 -- Stock and warrants issued for goods and services 1,454 182 Amortization of note discount 89 -- Changes in other items affecting operations: Accounts receivable 89 903 Inventories 788 875 Prepaid expenses (1) 36 Other assets (87) 83 Accounts payable 40 238 Accrued liabilities 728 (120) Deferred revenue 290 -- ---------- ---------- Cash used for operating activities (625) (307) ---------- ---------- Investing activities: Acquisition of property and equipment (29) (204) ---------- ---------- Cash used for investing activities (29) (204) ---------- ---------- Financing activities: Issuance of common stock 671 -- Issuance of common stock under employee purchase plan 8 14 Exercise of warrants and options 106 34 Proceeds from debt 228 -- Payments on long-term debt (158) (29) ---------- ---------- Cash provided by financing activities 855 19 ---------- ---------- Increase (decrease) in cash and cash equivalents 201 (492) Cash and cash equivalents at beginning of year 350 842 ---------- ---------- Cash and cash equivalents at end of year $ 551 $ 350 ========== ========== See accompanying notes to consolidated financial statements. F-5 ZAP AND SUBSIDIARIES -------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ NOTE 1 - ORGANIZATION AND OPERATIONS: ZAP (the "Company" or "ZAP"), was incorporated in California in September, 1994. ZAP markets many forms of advanced transportation, including electric automobiles, motorcycles, bicycles, scooters, personal watercraft, neighborhood electric vehicles, commercial vehicles and more. Additionally, the Company produces an electric scooter, known as the ZAPPY(R), using parts manufactured by various contractors. The Company has also established a rental program to rent neighborhood electric cars, primarily through agencies. The Company's business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, which have fundamental practical and environmental advantages over available internal combustion modes of transportation that can be produced commercially on an economically competitive basis. In 2003, the Company continued to enhance and broaden its electric vehicle product line. On March 1, 2002 the Company filed a voluntary petition for reorganization under Chapter 11 of the U. S. Bankruptcy Code with the U.S. Bankruptcy Court. On June 20, 2002, the Company emerged from Chapter 11 proceedings (see Note 3). Basis of presentation - --------------------- For the year ended December 31, 2003, the Company incurred a loss from operations of $5.5 million and cash used in operating activities was $625,000. In 2002, the Company also incurred substantial operating losses and negative cash flows from operations. Based upon the Company's operating budget and cash flow projections, the Company expects to continue to experience negative cash flows from operations through 2004. The recurring losses and expected continued negative cash flows from operations raise substantial doubt about the Company's ability to continue as a going concern. Management believes the Company will be able to raise sufficient working capital to fund its operating plan at least through 2004. During the period from January 1, 2004 to March 26, 2004, the Company has raised $460,000 through the sale of preferred stock. The Company has received a funding proposal letter. The proposal calls for the investor to make a $2 million dollar equity investment and provide an $8 million convertible revolving line of credit to purchase vehicles. The Company has not closed on the proposal as of yet and is also considering other alternatives. There can be no assurance that the foregoing proposed financing, or other necessary financing, will be available, or if it is available, that it would be available on acceptable terms. A summary of significant accounting policies is as follows: Principles of consolidation - --------------------------- The accompanying consolidated financial statements include the accounts of ZAP, RAP Group, Voltage Vehicles, ZAP Rentals and ZAP Stores for the years ended December 31, 2003 and 2002. All subsidiaries are 100% owned by ZAP. All significant intercompany transactions and balances have been eliminated. F-6 Revenue recognition - ------------------- The Company records revenues only upon the occurrence of all of the following conditions: o The Company has received a binding purchase order or similar commitment from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale). o The purchase price has been fixed, based on the terms of the purchase order. o The Company has delivered the product from its distribution center to a common carrier acceptable to the purchaser. The Company's customary shipping terms are FOB shipping point. o The Company deems the collection of the amount invoiced probable. The Company provides no price protection. Product sales are net of promotional discounts, rebates and return allowances. Extraordinary gain on forgiveness of debt - ----------------------------------------- Under ZAP's confirmed plan of reorganization, a $3 million note payable was converted to common stock (see Note 3). This transaction resulted in the Company recognizing an extraordinary gain of approximately $2.9 million. The remainder of the extraordinary gain of $1.1 million was due to the cancellation of indebtedness to unsecured creditors. Also, in accordance with ZAP's confirmed plan of reorganization, certain unsecured creditors have elected to receive common stock rather than cash for their claims. The confirmed plan of reorganization also provides for a twelve-month period following June 20, 2002 for the unsecured creditors to still elect to receive equity. Those unsecured creditors that elected to receive cash will share in a fund of $300,000 which is payable over three years, with each creditor receiving their pro-rata share (see Note 7). Deferred revenue - ---------------- During 2003, one of the Company's subsidiaries, Voltage Vehicles, began licensing auto dealerships under the ZAP name. The license agreements call for the licensee to purchase a minimum number of electric vehicles from ZAP each year. The Company collected $290,000 related to these agreements, which is classified as deferred revenue until such time as the Company begins delivering electric vehicles to these dealerships. Allowance for doubtful accounts - ------------------------------- The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company records an allowance for doubtful accounts receivable for credit losses at the end of each period based on an analysis of individual aged accounts receivable balances. As a result of this analysis, the Company believes that its allowance for doubtful accounts is adequate at December 31, 2003 and 2002. If the F-7 financial condition of the Company's customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Cash and cash equivalents - ------------------------- The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The Company maintains the majority of its cash balances with a major financial institution. At times the balances may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Inventories - ----------- Inventories consist primarily of vehicles, raw materials, and finished goods, which are carried at the lower of cost (first-in, first-out method) or market. Property and equipment - ---------------------- Property and equipment is stated at cost and is depreciated or amortized using straight-line and accelerated methods over the asset's estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows: Machinery and equipment 3-7 years Computer equipment and software 3-5 years Office furniture and equipment 3-7 years Vehicles 5 years Leasehold improvements 15 years or life of lease, whichever is shorter Building 30 years Patents and trademarks - ---------------------- Patents and trademarks consist of costs expended to perfect certain patents and trademarks acquired and are amortized over ten years. Amortization expense for the years ended December 31, 2003 and 2002 was approximately $67,000 and $38,000, respectively. Goodwill - -------- Goodwill results primarily from the Company's acquisition of the RAP Group Inc., and Voltage Vehicles in 2002 (See Note 2). F-8 The Company tests for goodwill impairment annually in December, absent earlier indicators of impairment. The valuation of goodwill is based on the Company's discounted projected cash flows of the RAP Group Inc., Voltage Vehicles and EMC. The valuation of goodwill related to RAP and EMC indicated that the fair value of goodwill at December 31, 2003 was less than its carrying value. Accordingly, the Company recorded a goodwill impairment charge of approximately $375,000 and $50,000 in 2003 and 2002 respectively. Goodwill consists of the following (in thousands): December 31, 2003 ---- RAP $200 Voltage Vehicles 276 ---- $476 ==== Advertising - ----------- The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to $552,000 and $162,000 in the years ended December 31, 2003 and 2002, respectively. Warranty - -------- The Company provides for estimated future warranty costs upon product shipment. The specific terms and conditions of those warranties vary depending upon the product sold and range from 30 to 90 days. The estimated cost of warranties has not been significant to date. Changes in the Company's warranty liability, which is included as a component of "Accrued expenses" on the Balance Sheet, during the year ended December 31, 2003 are as follows (in thousands): Balance as of December 31, 2002 $ 32 Provision for warranty liability for sales during the year 10 Settlements made during the year (16) ----- Balance as of December 31, 2003 $ 26 ===== Shipping and handling costs - --------------------------- Shipping and handling costs have been included in cost of goods sold. Research and development - ------------------------ Research and product development costs are expensed as incurred. F-9 Income taxes - ------------ The Company accounts for income taxes using an asset and liability method for financial accounting and reporting purposes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and operating loss and tax credit carryforwards and are measured using the currently enacted tax rates and laws. Use of estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results. Fair value of financial instruments - ----------------------------------- For the Company's financial assets and short-term liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturities. The fair value of debt is not determinable due to the terms of the debt and the lack of a comparable market for such debt. Stock-based compensation - ------------------------ Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, establishes a fair-value method of accounting for stock options and similar equity instruments. The fair-value method requires that compensation cost be measured on the value of the award at the grant date, and recognized over the service period. SFAS No. 123 as amended allows companies to either account for stock-based compensation to employees under the provisions of SFAS No. 123 as amended or under the provisions of Accounting Principles Board (APB) Opinion No. 25 and its related interpretations. The Company accounts for its stock-based compensation to employees in accordance with the provisions of APB Opinion No. 25. The Company has recorded deferred compensation for the difference, if any, between the exercise price and the deemed fair market value of the common stock for financial reporting purposes of stock options granted to employees. The compensation expense related to such grants is amortized over the vesting period of the related stock options on a straight-line basis. F-10 The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123, as amended, and Emerging Issues Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. 2003 2002 ============ ============ Net income (loss) attributable to common stockholders, as reported $ (5,542) $ 1,150 Less: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (368) (304) ------------ ------------ Pro forma net income (loss) attributable to common stockholders $ (5,910) $ 846 ============ ============ Net (loss) per share attributable to common stockholders: As reported $ (0.49) $ 0.28 ============ ============ Pro forma (0.53) 0.17 ============ ============ Net income (loss) per share attributable to common stockholders - ---------------------------------------------------------------- Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the year. The computation of diluted earnings per common share is similar to the computation of basic net loss per share attributable to common stockholders, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of options and warrants to the extend they are dilutive using the treasury stock method. The weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders were the same for the two years ended December 31, 2003 and 2002. Options and warrants for 1,650,000 shares and 33,209,000 shares convertible preferred stock of 339,000 and convertible debt of 930,000 were excluded from the computation of loss per share at December 31, 2003 and 2002, respectively, as their effect is anti-dilutive. Reclassifications - ----------------- Certain previously reported amounts in the financial statements have been reclassified to conform to the current year presentation. Recent accounting pronouncements - -------------------------------- In December 2003, the Financial Accounting Standard Board issued SFAS No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. This Statement amends Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. However, the Statement does not change the recognition and measurement requirements of those Statements. This Statement retains the disclosure requirements contained in SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which it replaces and requires additional disclosure. Additional new disclosure includes actual mix of plan assets by category, a description of investment strategies and policies used, a narrative description of the basis for determining the overall expected long-term rate of return on asset assumption and aggregate expected contributions. The Company does not expect that the adoption of SFAS 132 will have a material affect on its financial statements. F-11 In May 2003, the FASB has issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. This statement is effective for interim periods beginning after June 15, 2003. The Company does not expect that the adoption of SFAS 150 will have a material effect on its financial positions. In April 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and is not expected to have a material impact on the Company's financial statements. In January 2003, the FASB issued FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. FIN 46 provides guidance on how to apply the controlling financial interest criteria in ARB 51 to variable interest entities ("VIE"). Given the complexity of FIN 46 and implementation issues after its original issuance, particularly with respect to its scope and application of the consolidation model, the FASB staff issued several FASB staff positions throughout 2003 to clarify the Board's intent on certain of the interpretation's provisions. In December 2003, the Board issued FIN 46R to address certain technical corrections and clarify the implementation issues that had arisen. In general, a VIE is subject to consolidation if it has (1) an insufficient amount of equity for the entity to carry on its principal operations without additional subordinated financial support provided by any parties, (2) a group of equity owners that are unable to make decisions about the entity's activities or (3) equity that does not absorb the entity's losses or receive the entity's benefits. Variable interest entities are to be evaluated for consolidation based on all contractual, ownership or other interests that expose their holders to the risks and rewards of the entity. These interests may include equity investments, loans, leases, derivatives, guarantees, service and management contracts and other instruments whose values change with changes in the VIE. Any of these interests may require its holder to consolidate the entity. The holder of a variable interest that receives the majority of the potential variability in gains or losses of the VIE is the VIE's primary beneficiary and is required to consolidate the VIE. FIN 46R became effective immediately for entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has determined that the adoption of the provisions of FIN 46 will not have an impact upon its financial condition or results of operations. F-12 NOTE 2 - ACQUISITION OF NEW BUSINESSES Acquisition of auto dealerships - ------------------------------- The Company completed an acquisition of Voltage Vehicles ("VV") and RAP Group, Inc. ("RAP") on July 1, 2002. VV and RAP became wholly owned subsidiaries of the Company through a purchase from the equity shareholders of Voltage Vehicles and RAP Group, Inc. all of the shares of VV and RAP in exchange for 4,500,000 (post-split) shares of the Company, as follows: 500,000 shares of the Company to the equity shareholders of VV and 4,000,000 shares to the shareholders of RAP. The equity shareholders of VV and RAP also received, for each common share of the Company issued to them, four warrants (one in Series B, Series C, Series D, and Series K) to purchase common stock in Reorganized ZAP. In connection with its acquisition of RAP and VV, the Company recorded goodwill or the excess of the purchase price over the net assets acquired of approximately $525,000 and $276,000 for RAP and VV, respectively. The Company obtained an independent appraisal of the fair value of the tangible and intangible assets acquired in order to record and allocate the purchase price in accordance with Financial Accounting Standards Board 141, "Business Combinations." The purchase price was allocated as follows (thousands): Voltages RAP Group, Inc. Vehicles --------------- -------- Accounts receivable $ 630 $ 5 Inventory 442 129 Property and equipment 24 -- Goodwill 525 276 Liabilities assumed (221) (235) ------ ------ $1,400 $ 175 ====== ====== VV is a Sonoma County-based Nevada Corporation with exclusive distribution contracts for advanced transportation in the independent auto dealer network, including rights to one of the only full-performance electric cars certified under federal safety standards. RAP owns an auto dealership focused on the independent automotive and advanced technology vehicle markets. As a Voltage Vehicles authorized dealer, RAP showcases an array of advanced transportation at its dealership in Fulton, California. The results of operations of RAP and Voltage Vehicles are included in the accompanying financial statements from the date of acquisition, July 1, 2002. The following summarized unaudited pro forma financial information assumes the acquisition occurred on January 1 of 2002: F-13 Year ended December 31 ----------- 2002 ----------- Net sales $ 8,397 Loss before extraordinary gain (2,627) Loss per share before extraordinary gain (0.65) The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. Neighborhood electric vehicle rental program - -------------------------------------------- ZAP established ZAP Rentals in 2002 to rent neighborhood electric vehicles throughout California. In September 2003, ZAP purchased 98 rental cars for 326,644 shares of ZAP common stock valued at $1.50 per share (See Note 5 and 12). Neighborhood electric cars are a new category of 25 MPH automobiles designed for short trips in urban areas, planned communities, commercial zones or tourist districts. The smaller, low-speed electric cars are a new alternative in places concerned with air and noise pollution, high fuel prices, traffic congestion or parking shortages. NOTE 3 - PLAN OF REORGANIZATION On March 1, 2002 the Company filed a voluntary petition for reorganization under Chapter 11 of the U. S. Bankruptcy Code with the U.S. Bankruptcy Court. The first impact of the Chapter 11 filing was to stay certain legal proceedings that had been instituted against the Company. Management also believed that the Chapter 11 filing would allow the Company to reorganize and rethink its direction, and to seek debtor-in-possession financing. On June 20, 2002, the Bankruptcy Court entered an order confirming a second amended plan of reorganization (the "confirmed plan of reorganization"). The primary objectives of the confirmed plan of reorganization are to: (a) alter the Company's equity and debt structures to permit the Company to emerge from the reorganization proceedings with a viable capital structure; (b) maximize the value of the ultimate recoveries to all creditor groups on a fair and equitable basis; and (c) settle, compromise, or otherwise dispose of certain claims and interests on terms that the Company believed to be fair and reasonable and in the best interests of their respective estates, creditors, and stakeholders. The confirmed plan of reorganization provides for, among other things: o The cancellation of certain indebtedness in exchange for cash, common stock, no par value, in Reorganized ZAP, and/or warrants to purchase shares of common stock. The warrants were issued to each claimant during 2002; o Payment of $50,000 to a claimant of secured pre-petition debt. $50,000 is the estimated value of the collateral, plus 5% interest on a declining balance, payable monthly over three years, commencing August 20, 2002; F-14 o Conversion of 2,250 shares of ZAP preferred stock, originally valued at $1,000 per share, into 630,000 shares of common stock in Reorganized ZAP after all reverse stock splits. The preferred shareholders also received 2.5 million Series A warrants, to vest in accordance with a schedule outlined in the Plan and one warrant in Series B, C and D to purchase common stock in the Reorganized ZAP for each common share issued to the claimant; o Conversion of 6,693,643 shares of ZAP at June 20, 2002 into 1,115,607 shares of common stock in the Reorganized ZAP, after all reverse stock splits. The common shareholders also received one warrant in Series B, C and D to purchase common stock in the Reorganized ZAP for each common share issued to the claimant; o The assumption and assignment, or rejection of executory contracts or unexpired leases to which the Company was a party; o Authorization to issue 100 million shares of common stock and 50 million shares of preferred stock. o Authorization to issue 10 million common shares each for the following warrants: Series A, B, C, D and K for a total of 50 million warrants, with the expiration dates for the warrants ranging from 12 to 36 months; O The creation of an Incentive Stock Option Plan for employees within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended, with an option by the Incentive Stock Option Plan to purchase 10 million shares of ZAP common stock at an exercise price equal to the closing price on the date of issue (see Note 9); o Authorization to execute a $500,000 convertible debenture for the purchase of inventory from a new supplier in exchange for a note with interest at 6% per annum; or shares of common stock at $0.50 per share or 15% of the outstanding shares of the Reorganized ZAP, whichever amount is greater. The supplier was also given warrants in Series B, C and D for each common share owned (The entire debt was converted to common stock during 2002; see Note 12). o Authorization to complete the acquisition of VV and RAP effective July 1, 2002 (see Note 1). NOTE 4 - INVENTORIES Inventories at December 31, 2003 are summarized as follows (thousands): Vehicles $ 733 Raw material 338 Finished goods 734 ------------ 1,805 Less - inventory reserve 377 ------------ $ 1,428 ============ F-15 Inventory reserve policy - ------------------------ The Company records inventory at the lower of cost or market and establishes reserves for slow moving or excess inventory, product obsolescence and valuation impairment. In determining the adequacy of its reserves, at each reporting period the Company analyzes the following, among other things: o Current inventory quantities on hand; o Product acceptance in the marketplace; o Customer demand; o Historical sales; o Forecasted sales; o Product obsolescence; and o Technological innovations. Any modifications to the Company's estimates of its reserves are reflected in cost of goods sold within the Statement of Operations during the period in which such modifications are determined by management. Changes in the Company's inventory reserve during the year ended December 31, 2003 is as follows (in thousands): Balance as of December 31, 2002 $ 589 Provision for slow moving inventory 141 Write-off of slow moving inventory (353) ------- Balance as of December 31, 2003 $ 377 ======= F-16 NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 2003 are summarized as follows (thousands): Land $ 260 Building and improvements 2,668 Machinery and equipment 494 Computer equipment and software 319 Office furniture and equipment 178 Leasehold improvements 89 Vehicles available for rent 475 Other vehicles 148 ------------ 4,631 Less - accumulated depreciation and amortization 1,000 ------------ $ 3,631 ============ The land and building and certain equipment, with a net book value of $2,857,000 at December 31, 2003, are pledged as security for certain indebtedness (see Note 7). Depreciation and amortization expense for the years ended December 31, 2003 and 2002 was approximately $289,000 and $222,000, respectively. NOTE 6 - ACCRUED LIABILITIES Accrued liabilities at December 31, 2003 consisted of the following (in thousands): Professional and legal fees $ 697 Advances 100 Customer deposits 76 Sales and use tax 37 Warranty 26 Payroll 23 Other 190 ------------ $ 1,149 ============ F-17 NOTE 7 - LONG-TERM DEBT The Company has a $2 million in convertible note due in 22 years, with annual interest at 2% for the first two years, and thereafter at the prime rate (as defined) plus 2%. No payments are due until after two years, at which time, the note is payable with equal principal and interest payments over the next 240 months. The noteholder has the option to convert some or all of the unpaid principal and accrued interest to shares of ZAP's common stock at $2.15 per share or an agreed upon conversion price (as defined). The Company recorded a discount to the face value of the note of approximately $150,000 and is amortizating the discount over the term of the note using the interest method. The note discount was recorded to reflect value of the below market interest during the first two years and the value of the warrants (warrants to purchase 250,000 shares of common stock at $1.07 per share) issued to the seller. The warrants were valued at the date of issuance at $.65 per share using the Black Scholes option-pricing model with the following assumptions: expected dividends yield 0%, risk-free interest rate of 2%, the contractual life of 1.25 years and volatity of 160%. The note was issued in exchange for the purchase of the Company's new corporate headquarters and is secured by this property. The note has a net balance of $1,939,000 at December 31, 2003 ($2 million note, less the discount of $91,000 plus accrued interest of $30,000). The Company's debt also consisted of approximately $147,000 in notes payable to unsecured creditors as a result of the confirmed plan of reorganization (see Note 3). These notes bear interest at 5% per annum and have an annual distribution on June 1 of approximately 1/3 the original balance plus accrued interest. The current portion of these notes is approximately $60,000. Long-term debt also consists of a several note payable secured by equipment totaling $55,000. These notes bear interest ranging from 5% to 18% per annum and have monthly payments of approximately $3,200 with maturities from July 2005 to November 2006. Scheduled annual maturities for long-term debt for years ending after December 31, 2003 are as follows: $77,000 - 2004; $153,000 - 2005; $67,000 - 2006; $60,000 - 2007; $64,000 - 2008 and $1,812,000 - thereafter. NOTE 8 - INCOME TAXES The provision for income tax for 2003 and 2002 represents minimum California franchise tax. The Company made no provision for income taxes on the extraordinary gain resulting from the extinguishment of debt in 2002 (see Notes 1 and 3), due to the relevant tax regulations governing the treatment of debt extinguishment income in Chapter 11 bankruptcy proceedings. A reconciliation of the provision for income tax expense with the expected income tax is computed by applying the federal statutory income tax rate follows: F-18 Year ended December 31 ------------------------- 2003 2002 ---------- ---------- Expected federal statutory rate (34.00%) (34.00%) State, net of federal benefit (5.84%) (5.84%) Other, net (.50%) (.30%) Net operating loss carryforward 40.33% 40.13% ---------- ---------- Effective tax rate (0.01%) (0.01%) ========== ========== Significant components of the Company's deferred tax assets at December 31, 2003 consist of the following (thousands): Deferred tax assets: Net operating loss carryforwards $ 5,219 Inventory capitalization 275 Depreciation and amortization 9 Other accruals and allowances 278 Tax credits 44 ---------- Total deferred tax asset 5,825 Valuation allowance (5,825) ---------- Net deferred tax asset $ -- ========== The Company has available for carryforward approximately $14.5 million and $4.9 million of federal and state net operating losses, respectively, expiring through 2017 for federal purposes and 2008 for state purposes. The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose restrictions on the utilization of net operating losses in the event of an "ownership change" as defined by Section 382 of the Internal Revenue Code. There has been no determination whether an ownership change, as defined, has taken place, or the extent of any limitation on the use of the net operating loss carryforwards. Because of the uncertainty regarding the Company's ability to realize its deferred tax assets, a 100% valuation allowance has been established. The valuation allowance for the year ended December 31, 2003 increased $1,994,000 and decreased $1,435,000 for the year ended December 31, 2002. NOTE 9 - EMPLOYEE STOCK OPTIONS During 2002 as part of the confirmed plan of reorganization, ZAP created a new Incentive Stock Option Plan ("2002 Plan"). Options to purchase common stock are granted by the Board of Directors under two Stock Option Plans, referred to as the 2002 and 1999 plans. Options granted may be incentive stock options (as defined under Section 422 of the Internal Revenue Code) or nonstatutory stock options. The numbers of shares available for grant under the 2002 and 1999 Plans are 10,000,000 and 1,500,000 respectively. Options are granted at no less than fair market value on the date of grant. Options granted in 2003 and 2002 generally become exercisable as they vest over a three year period, and expire ten years after the date of grant. F-19 Option activity under the 2002 and 1999 plans is as follows (thousands):
2002 Plan 1999 Plan -------------------- -------------------- Weighted Weighted Average Average Number of Exercise Number of Exercise Shares Price Shares Price --------- -------- --------- -------- Outstanding at January 1, 2002 -- -- 282 1.20 Granted 1,908 $ 0.32 -- -- Exercised -- -- -- -- Canceled (117) 1.20 --------- -------- --------- -------- Outstanding at December 31, 2002 1,908 $ 0.32 165 1.20 Granted 462 0.76 Exercised (25) 0.30 Canceled (855) 0.67 (4) 1.20 --------- --------- Outstanding at December 31, 2003 1,490 $ 0.38 161 $ 1.20 ========= =========
The weighted average fair value of options granted during the years ended December 31, 2003 and 2002 was $0.50 and $0.32, respectively. The following information applies to options outstanding at December 31, 2003: 2002 Plan 1999 Plan ------------- ------------- Range of exercise prices $0.30 - $1.20 $1.20 Weighted average remaining life (years) 3.6 4 Options exercisable 656,000 182,500 Weighted average exercise price $0.38 $1.20 The fair value of each option and warrant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: F-20 2003 2002 -------- -------- Dividends None None Expected volatility 160% 200% Risk free interest rate 2.75% 4.0% Expected life 5 years 5 years At December 31, 2003, the Company has outstanding stock options for employees to purchase 1,270,000 shares, for directors to purchase 541,000 shares, at exercise prices ranging from $0.30 to $1.20. NOTE 10 - MAJOR CUSTOMERS During 2003 and 2002, no single customer accounted for more than 10% of the Company's net sales, nor receivables. NOTE 11 - COMMITMENTS The Company presently rents its warehouse under an operating lease that expires in 2005. The monthly rent is adjusted annually to reflect the average percentage increase in the Consumer Price Index. The Company leases the location of its car outlet and another warehouse from the Company's CEO (see Note 13). Rent expenses under all leases were approximately $241,186 and $145,000 in 2003 and 2002, respectively. Future minimum lease payments due under the leases are as follows (thousands): Year ending December 31 2004 $ 138 2005 107 2006 40 ---------- Total $ 285 ========== NOTE 12 - EQUITY Common stock - ------------ On July 1, 2002, ZAP's stock began trading on the Over-the-Counter (OTC) Bulletin Board under the new stock symbol of ZAPZ. According to the OTC Bulletin Board, the symbol change is to indicate that ZAP is no longer in Chapter 11 Reorganization, and that the stock has undergone a reverse split effective July 1, 2002. ZAP's 6,693,643 shares of common stock outstanding were converted on a 3:1 basis to 2,231,214 shares of common stock in the Reorganized ZAP, which was then reverse split on a 2:1 basis into 1,115,607 total shares outstanding. The final result of the conversion and the reverse split equates to a ratio of 6:1. Thus, for every six shares a common shareholder held on June 20, 2002 (date of court confirmation of plan of reorganization) the individual received one share of common stock in the Reorganized ZAP. All shares and per share data have been restated to reflect the stock splits. The common shareholders also received, for each common share issued to the claimant, one warrant in Series B, C and D to purchase common stock in the Reorganized ZAP. During 2002, the Company issued 4.5 million shares for the acquisition of RAP and Voltage Vehicles (see Note 2), and approximately 1.2 million shares of common stock for a conversion by Daka of a note payable into equity (see Note 3). During 2002, ZAP also issued approximately 351,000 shares of common stock to satisfy professional fees and the acquisition of equipment, and approximately 295,000 shares to satisfy $133,000 in unsecured debt holders' claims and other payables. In addition, the Company issued approximately 44,000 shares in exchange for $48,000 in cash as a result of the exercise of warrants and stock options. During 2003, the Company issued approximately 4.3 million shares of common stock. Approximately 581,000 of these shares (including debt and warrants) were issued to purchase the new corporate headquarters (See Note 7) at $1.30 per share and 327,000 shares (including warrants) were issued to acquire an electric car rental fleet at $1.50 per share. The Company obtained an independent appraisal of the value of the land and building and car rental fleet. The appraised values were used to record these asset purchases. During 2003, the Company also issued approximately 678,000 shares for inventory, 162,000 shares for building improvements and other equipment, and 617,000 shares for rent, advertising, interest expense, professional services, consulting services, stock promotion and other services. The price per share for these transactions ranged from $0.50 to $1.50. The stock issuances were recorded as noncash operating interest and assets based on the intrinsic value of the stock on the date granted. The Company also issued approximately 1.5 million shares for cash and notes receivable during 2003. The Company issued approximately 600,000 unrestricted shares in exchange for $100,000 cash and note receivable of $492,000 and approximately 300,000 unrestricted shares in exchange for $95,000 in cash and note receivable of $205,000. All of these notes are due and payable and have been fully reserved at December 31, 2003. The Company also issued 111,000 restricted shares for an $111,000 note receivable with interest at 7% and payable in May 2004. The Company also issued 400,000 shares for $100,000 note receivable which was repaid during 2003 with $50,000 in cash and $50,000 in equipment and inventory. The Company also issued 76,000 shares for a $56,000 note receivable to a related party. This note bears interest at 3% and is payable in November 2005. During 2003, the Company also issued approximately 269,000 shares for $426,000 in cash and 101,000 shares for $114,000 from the exercise of warrants and stock options. The Company also issued 65,000 shares to settle debt of approximately $78,000. In 2003, the Company issued approximately 2.9 million shares of restricted common stock to be pledged as collateral for a long-term loan that has not funded. The prospective lender has instructed the Company to cancel the shares, and accordingly, the shares have not been reflected as issued or outstanding in the financial statements. Preferred stock - --------------- Under the confirmed plan of reorganization the Company was authorized to issue 50 million shares of preferred stock. In December 2003, the Board of Directors established four classes of preferred stock with 4 separate timelines. The four classes of preferred shares convert to common shares as follows Class B converts to 2000 shares, Class C converts to 1,500 shares, Class D converts to 1,000 shares and Class F converts to 500 shares. Four time-line definitions were also established. Each time line gives the bearer the right to convert the preferred shares to common a certain number of days after issuance as follows II after 30 days, III after 90 days, IV after 180 days and V after 1 year. Each share of preferred stock also has a warrant attached to each share converted into common stock at the price on the date that the preferred share is issued. Dividends are cumulative and accrue at 6% per year and payable on June 30th of each year or on conversion date. Dividends are payable in cash or in common stock at the Company's option. The Preferred Stock holders have no voting rights. The liquidation value is its stated value plus accrued and unpaid dividends thereon. F-21 Warrants - -------- During 2002, the Company issued warrants for the acquisition of RAP and Voltage Vehicles (See Note 2), to settle debt obligations (See Note 3) and for equipment and services. During 2003, the Company issued warrants in connection with the acquisition of its new corporate headquarters and rental car fleet, and the issuance of preferred and common stock for cash. In addition, during 2003, the Company issued warrants to purchase an aggregate 639,000 shares of its common stock under agreements with vendors and consultants to perform legal, financial, business advisory and other services. The warrant grants to vendors and consultants were non-forfeitable and fully vested at the date of issuance and were valued using the Black-Scholes option pricing model with the following range of assumptions: Low High ------ ------ Exercise price per share $ 1.00 $ 1.50 Market price .50 2.40 Assumptions: Expected dividend yield 0% 0% Risk free rate of return 1.0% 2.75% Contractual life 1 year 3 years Volatility 100% 200% Fair market value 0.30 1.90 Pursuant to the requirements of FASB Statement No. 123 and EITF 96-18 and 00-18 related to accounting for stock-based compensating, the Company recognized non-cash operating expense in the amounts of $545,000 attributable to the warrants issued to vendors and consultants at the date of grant in 2003. Total warrants outstanding at December 31, 2003 are summarized as follows (in thousands): Number of Warrants -------- Series A-Unrestricted 396 Series A-2-Restricted 915 Series B-Unrestricted 6,688 Series B-2- Restricted 2,906 Series C-Unrestricted 7,403 Series C-2- Restricted 1,451 Series D-Unrestricted 7,403 Series D-2- Restricted 1,351 Series K-Unrestricted 4,200 Series K-2-Restricted 300 $1.50 Warrants Restricted 196 -------- 33,209 ======== The Company is authorized to issue 10 million shares each of Series A, B, C, D and K Unrestricted Warrants. Series A warrants give the holder the right, for a period of 1,095 days from the issuance, to purchase ZAP's common stock at an exercise price of $1.05 for the life of the warrant. Series B warrants give the holder the right to purchase one share of ZAP common stock at an exercise price of $1.07 and expires on June 30, 2004, Series C warrants give the holder the right to purchase one share of ZAP common stock for a period of 730 days from the date of issuance, at an exercise price of $4.00 for the first 547 days, $4.50 for the next 90 days, and $5.00 for the remaining life of the warrant. Series D warrants give the holder the right to purchase one share of ZAP common stock for a period of 1,095 days, from the date of issuance, at an exercise price of $8.00 for the first 730 days, $9.00 for the next 190 days, and $10.00 for the remaining life of the warrant. Series K warrants give the holder the right to purchase one share of ZAP common stock for a period of 1,095 days from the date of issuance, at an exercise price of $1.00 for the life of the warrant. The Board of Directors of ZAP shall have the right to (i) decrease the exercise price of the warrants, (ii) increase the life of the warrants in which event the exercise price may be increased, or (iii) make such other changes as the Board of Directors of ZAP deems necessary and appropriate under the circumstances provided the changes contemplated do not violate any statutory or common law. F-22 During 2003, the Board of Directors established the following restricted classes of warrants: Series A-2, B-2, C-2, D-2, K-2 and $1.50 Warrants Restricted. These warrants give the holder the right to purchase one share of ZAP common stock for the following prices and have the respective expiration dates: Series A-2 at $1.05 expires on July 1, 2005, Series B-2 at $1.07 expires on June 30, 2004, Series C-2 at $4.00 expires on July 1, 2004, Series D-2 at $8.00 expires on July 1, 2005, Series K-2 at $1.00 expires on July 1, 2005 and $1.50 Warrants at $1.50 expires on August 26, 2004. Warrants for all Series may be assigned, sold, or transferred by the holder without restriction. The stock received from the exercise of a warrant for any Series will be without restriction and as a free trading stock exempt from the Securities Act of 1993 pursuant to Section 1145 of the Bankruptcy Code. Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days' written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series. The Series A warrants may be redeemed by ZAP for $0.01 per warrant only if the post-confirmation, post-reverse split trading price of the ZAP stock is 200% or more than the strike price of the affected warrant, (i) at the time written notice is issued, and (ii) for at least 30 consecutive calendar days prior to that time. Otherwise, the Series A warrants may be redeemed upon thirty days' written notice for $0.75 per warrant. If not all unexercised warrants in Series A are redeemed, then the redemption shall be pro rated equally among the holders of unexercised warrants in Series A. The Board may not change the terms of the Series A warrants without the consent of the holders of Series A warrants. In February 2003, the Company redeemed 2.5 million outstanding Series A warrants that were issued to the preferred shareholders in accordance with ZAP's confirmed plan of reorganization. However, the warrant holders are currently disputing the redemption (See Note 14). NOTE 13 - RELATED PARTY Rental agreements - ----------------- The Company leases land, office and warehouse space from our CEO and major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense under these leases was approximately $95,000 and $49,000 for the years ended December 31, 2003 and 2002, respectively. Consulting services and fund raising agreements - ----------------------------------------------- In November and December 2003, the Company entered into certain agreements with two relatives of our CEO. In December 2003 the first relative received 25,000 B-2 Restricted warrants and 25 shares of Class B preferred stock, which was later converted into 50,000 shares of restricted common stock. The stock and warrants were issued for website design services to be performed over the next year. The second relative received 100,000 shares of unrestricted common stock in November of 2003 and an additional 100,000 shares of unrestricted stock in January 2004. The 100,000 shares issued in November were for a media production valued at $17,000 and for a note receivable from shareholder of approximately $57,000, which is due in November 2005. The 100,000 shares issued in January of 2004 were an advance on fees for fund raising activities (See Note 17). The second relative received the 100,000 Series B-2 Restricted Warrants in November 2003 for consulting services. F-23 NOTE 14 - LITIGATION From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business, including employment-related and trade related claims. On May 20, 2003 the RAP Group, Inc, a wholly owned subsidiary of ZAP was named as a defendant in a lawsuit filed in the Superior Court of California by Fireside Thrift Co. The suit alleges breach of contract and misrepresentation with respect to the Dealer Agreement. The plaintiff is seeking damages in the amount of $ 546,108 plus interest. The pending action is in the preliminary stage. The Company intends to mount a vigorous defense in this action. Management believes that the ultimate resolution of these claims will not have a material adverse effect on our financial position or on results of operations. The Company, during the first quarter of 2002, became aware that the California Department of Motor Vehicles (DMV)-Investigations Division is conducting an inquiry into the activities of certain employees of the RAP Group. If any adverse findings did result, the Auto Dealer's License for the RAP Group could be jeopardized, since RAP is currently on probation by the California Department of Motor Vehicles for a period of two years ending June 12, 2004. The probationary action was primarily due to the RAP Group's untimely transfers of pink slips for sales of vehicles and lack of compliance with Motor Vehicle Pollution Control guidelines on certain automobile sales. As part of ZAP's original business plan, management is considering converting, depending upon the sales volume, the dealership into a wholesale distributor for its electric cars. The RAP Group has had no additional inquiries from the DMV since last year. There is an action pending against ZAP in the United States Bankruptcy Court for the Northern District of California, Santa Rosa Division, entitled Esquire Trade and Finance, Ltd., and Celeste Trust Reg. v. ZAP, Adversary Proceeding Number 03-1187. This is an action brought by the Plaintiffs against ZAP for declaratory relief in which they ask the court to issue a declaratory judgment that ZAP's purported redemption of the Plaintiff's Class A Warrants in February of 2003 is ineffectual. The Plaintiffs also ask that the court order ZAP to issue written certificates for each share of stock and each Warrant to be given to the Plaintiffs pursuant to ZAP's confirmed Chapter 11 Plan of Reorganization. Management believes that the ultimate resolution of this claim will not have a material adverse effect on our financial position or on results of operations. NOTE 15 - SEGMENT REPORTING In accordance with the provisions of SFAS No. 131, the Company has identified four reportable segments consisting of sales and marketing of electric products, operation of a retail car outlet, sales and marketing of electric car dealerships and electric car rental outlets. These segments are strategic business units that offer different services. They are managed separately because each business requires different resources and strategies. The Company's chief operating decision making group, which is comprised of the Chief Executive Officer and the senior executives of each of the Company's segments, regularly evaluates financial information about these segments in deciding how to allocate resources and in assessing performance. The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows (in thousands): F-24
Electric Car Rental products Car outlet dealerships outlets Total ---------- ---------- ---------- ---------- ---------- Year ended December 31,2003: Net sales $ 1,954 $ 3,777 $ -- $ 97 $ 5,828 Gross profit 388 906 (56) 93 1,331 Depreciation, amortization and impairment 281 50 6 33 370 Net income (loss) (4,267) (1,025) (142) (108) (5,542) Total assets 4,607 1,343 560 644 7,154 Year ended December 31,2002: Net sales 1,811 2,602 -- -- 4,413 Gross profit 140 114 -- -- 254 Depreciation, amortization and impairment 295 15 -- -- 310 Net income (loss) 1,498 (348) -- -- 1,150 Total assets $ 2,342 $ 1,765 $ -- $ -- $ 4,107
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION A summary of non-cash investing and financing information is as follows: Year ended December 31 ---------------------- 2003 2002 -------- -------- Cash paid during the year for: Income taxes $ 2 $ 2 Interest 1 1 Non-cash investing and financing activities: The Company entered into numerous common and preferred stock transactions which resulted in the following non-cash entries: Inventory 617 -- Prepaids 303 -- Property and equipment 3,516 133 Debt (1,808) -- Notes receivable 1,109 -- Common stock (3,731) (133) Preferred Stock (6) -- Issuance of common stock and assets and liabilities recognized upon acquisition of RAP and Voltage Vehicles: Common stock 1,575 Accounts receivable 685 Inventory 571 Property and equipment, net 24 Goodwill 801 Accounts payable and accrued liabilities (506) F-25 NOTE 17 - SUBSEQUENT EVENTS The Company has engaged various outside consultants in early 2004 to assist in fund raising activities. Efforts from January through March 26, 2004 have resulted in cash investments to the Company of $460,000. The Company has received a funding proposal letter. The proposal calls for the investor to make a $2 million dollar equity investment and provide an $8 million convertible revolving line of credit to purchase vehicles. The Company has not closed on the proposal as of yet and is also considering other alternatives. During March 2004, the Company has agreed to purchase vehicles of another electric transportation company for the sum of $250,000, to be paid entirely with preferred stock (500 Class B shares) and 100,000 Class B warrants, which may be used to purchase common stock. F-26 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There were no changes or disagreements with our Accountants during the last two years. During 2002 our principal independent accountant was dismissed with a new firm appointed. This change in accountants was approved by our audit committee and board of directors. ITEM 8A. CONTROLS AND PROCEDURES. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was undertaken in consultation with our accounting personnel. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth the names, ages, and positions of our directors and officers. MANAGEMENT Directors and Management - ------------------------ Name Age Position - ---- --- -------- Steven M. Schneider 43 Director, Chief Executive Officer Gary Starr 48 Director, Chairman of the Board William R. Hartman 56 Chief Financial Officer Renay Cude 27 Corporate Secretary Louis Auletta 53 Director The directors named above will serve until the next annual meeting of our shareholders or until their successors are duly elected and have qualified. Directors will be elected for one-year terms at the annual shareholders meeting. Officers will hold their positions at the pleasure of the board of directors, absent any employment agreement, of which none currently exists. There is no arrangement or understanding between any of our directors or officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue to elect the current board of directors. There are also no arrangements, agreements or understandings between non-management shareholders that may directly or indirectly participate in or influence the management of our affairs. There is no family relationship among any of our directors and executive officers. BIOGRAPHICAL INFORMATION STEVEN M. SCHNEIDER - CHIEF EXECUTIVE OFFICER AND DIRECTOR was the founder of Voltage Vehicles, a full-service fuel vehicle distributor specializing in the full spectrum of electric vehicles (EV) and full-performance alternative fuel vehicles (AFV) including automobiles, motorcycles, bicycles, scooters, hovercraft, neighborhood electric vehicles (NEV), commercial vehicles and accessories. He also founded Auto Distributors, Inc., which is the promotion and distribution arm of Voltage Vehicles dealership. He is also on the Advisory Board of Directors to Apollo Energy Systems. Apollo is in the business of 12 developing and manufacturing fuel cell technology and propulsion systems. He is also active in legislative issues regarding alternative fuel vehicles. Mr. Schneider recently lobbied at the nation's capital on behalf of the Clear Act (S.760/H.R. 1864: "Clean Efficient Automobiles Resulting From Advanced Car Technologies"). He also supported Representative Sherwood Boehlert (R-NY) efforts to introduce new legislation called the "Alternative Fueled Acceleration Act of 2001" along with actively supporting numerous other related state and federal initiatives. He is an active member on the electrical low speed vehicle subcommittee in Washington D.C., where his ideas have spawned new innovative markets for low speed vehicles. Mr. Schneider's automotive career spans more than 17 years experience in varying roles including that of owner, partner, sales representative, business manager, creditor, and adjustor. His successes also include the formation of two Northern California automobile sales companies, as well as stints in the financial, real estate, and electronics industries. He has also received extensive education and training in sales and marketing, banking, insurance, and automotive training. During 2003, Mr. Schneider was recognized as a spokesman for the electric vehicle industry appearing on multiple national news shows. GARY STARR - CHAIRMAN OF THE BOARD was previously the Chief Executive Officer of ZAP and has been a director since its inception in 1994. He has been building, designing, and driving electric cars for more than 25 years. In addition to overseeing the marketing of more than 85,000 electric vehicles, Mr. Starr has invented several solar electric products and conservation devices. Mr. Starr founded U.S. Electricar's electric vehicle operation in 1983. In 1993, Mr. Starr earned a Private Industry Council Recognition Award for creating job opportunities in the EV industry and was named as one of the ten most influential electric car authorities by Automotive News. He has also received recognition awards for his contributions toward clean air from the American Lung Association of San Francisco, CALSTART and U.S. Senator Barbara Boxer. Mr. Starr has several publications: Electric Cars: Your Guide to Clean Motoring, The Shocking Truth of Electric Cars, and The True Cost of Oil. In addition, he has appeared on more than 300 radio and television talk and news shows (including Larry King Live, The Today Show, Inside Edition, CNN Headline News, Prime Time Live, and the CBS Evening News and the McNeil Lehrer News Hour) as a recognized authority in the field of electric vehicles. Mr. Starr has a Bachelor of Science Degree from the University of California, Davis in Environmental Consulting and Advocacy. WILLIAM R. HARTMAN - CHIEF FINANCIAL OFFICER was appointed Chief Financial Officer in March 2001. He had been engaged as a financial consultant at our Company since January 2001. He has over 15 years of CFO or Controller experience in various industries. While in a previous position as Division Controller for Sega of America he obtained extensive experience in the consumer products manufacturing and distribution business. Prior to his engagement at ZAP, Mr. Hartman had been providing financial and accounting consulting services to various Internet start-ups in the SF Bay area. Mr. Hartman is a Certified Public Accountant in the State of California with a Masters in Accounting Degree from the State University of New York. He also had previous public accounting experience as an audit manager with Price Waterhouse Coopers in San Francisco. RENAY CUDE- CORPORATE SECRETARY and Director was appointed Corporate Secretary in August 2002. Prior to joining our company, Ms. Cude was working as a legal secretary for a law firm. Ms. Cude has over five years experience working in the bankruptcy field with helping companies through the reorganization process. Ms. Cude holds an Associates Degree in Business Administration from Sonoma State University. LOUIS AULETTA - DIRECTOR has been involved in various entrepreneurial business ventures for the past 35 years. Currently, he is engaged in real estate development. An avid environmentalist all his life, he has also served as the executive director of the Earth Options Institute. Mr. Auletta holds a Bachelors degree in Business from Wagner College, New York. No individual on our Board of Directors possesses all of the attributes of an audit committee financial expert and no one on our Board of Directors is deemed to be an audit committee financial expert. In forming our Board of Directors, we sought out individuals who would be able to guide our operations based on their business experience, both past and present, or their education. Our business model is not complex and our accounting issues are straightforward. Responsibility for our operations is centralized within management, which is comprised of four people. We rely on the assistance of others, such as our accountant, to help us with the preparation of our financial information. We recognize that having a person who possesses all of the attributes of an audit committee financial expert would be a valuable addition to our Board of Directors, however, we are not, at this time, able to compensate such a person therefore, we may find it difficult to attract such a candidate. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act requires our directors, executive officers and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership of our common stock with the Securities and Exchange Commission. Directors, executive officers and persons who own more than 10% of our common stock are required by Securities and Exchange Commission regulations to furnish to us copies of all Section 16(a) forms they file. 13 To our knowledge, based solely upon review of the copies of such reports received or written representations from the reporting persons, we believe that during our 2003 fiscal year our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements, except that Mr. Schneider and Mr. Starr filed Form 3 and 5 late. CODE OF ETHICS We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Such code of ethics will be provided to any person without charge, upon request, a copy of such code of ethics by sending such request to us at our principal office. ITEM 10. EXECUTIVE COMPENSATION. The following tables set forth information concerning the compensation we paid for services rendered during our fiscal years ended December 31, 2003, 2002 and 2001, by the Named Executive Officers. The Named Executive Officers are our company's Chief Executive Officer, regardless of compensation level, for the salary and bonus for the fiscal years ended December 31, 2003, 2002 and 2001. Steven M. Schneider was elected the Chief Executive Officer on October 26, 2002, with Gary Starr appointed Chairman of the Board on the same date. SUMMARY COMPENSATION TABLE
Annual Compensation Long -Term Compensation Awards Payouts ------------------------- ---------- ------------ Other Restricted Stock Annual Stock Underlying All Other Salary Bonus Compensation Award Options LTIP Compen- /SARs Payouts sation Name and Principal Position Year ($) ($) ($) ($) (#) ($) ($) - --------------------------- ---- ------ ----- ------------ ------------ ------------ ---------- ------------ Steven M. Schneider 2003 74,100 150,000(1) Chief Executive Officer 2002 31,300 200,000 3,000 Effective 10/26/02 Gary Starr Chairman of the Board 2003 74,100 150,000(1) Former Chief Executive 2002 61,600 200,000 officer 2001 66,700 116,667
(1) The restricted warrant awards in represents K-2 Restricted Warrants, each one of which may be exchanged for one share of ZAP common stock at an exercise price of $1.00. The warrants expire on July 01, 2005.] We have employment agreements with three of our officers that expire October 1, 2008. These employees are Steve Schneider, CEO, Gary Starr, Chairman and Renay Cude, Corporate Secretary who is also a director. OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS) No Options/SAR Grants were made to the executive officers during the fiscal year ended December 31, 2003. COMPENSATION OF DIRECTORS Our directors do not receive any cash compensation for their service on our Board of Directors, but they may be reimbursed for certain expenses in connection with their attendance at board meetings. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table presents information with respect to beneficial ownership of our common stock as of March 26, 2004 by: o Each person or entity who beneficially owns more than 5% of common stock; 14 o Each of our directors; o Each of our Named Executive Officers; and o All Executive Officers and directors as a group. Unless otherwise indicated, the address for each person or entity named below is c/o ZAP, 501 Fourth Street, Santa Rosa, California 95401. The table includes all shares of common stock issuable upon the exercise of options and other rights beneficially owned by the indicated shareholders on that date. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and except for community property laws where applicable, the persons named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The applicable percentage of ownership is based on 50,232,696 shares of common stock outstanding on a fully diluted basis as of March 26, 2004. The number of shares of common stock outstanding on a fully diluted basis includes 33,128,176 shares of common stock issuable upon the exercise of certain warrants, and 934,553 shares of common stock issuable upon the exercise of certain options. SHARES BENEFICIALLY OWNED NAME OF BENEFICIAL OWNER NUMBER PERCENT Steven M. Schneider (1) 13,027,806 25.9 Gary Starr (2) 5,447,847 10.9 Ridgewood ZAP LLC (3) 3,361,057 6.9 Ridgewood Power 947 Linwood Avenue Ridgewood NJ Mercatus & Partners (4) 2,941,176 5.9 188 Green Lane Northwood Middlesex United Kingdom All Executive Officers and directors 18,575,582 37.0 as a group (4 persons) (1) Includes 10,000,000 shares of common stock issuable upon the exercise of various warrants and 127,810 shares of stock upon the exercise of stock options. (2) Includes 4,152,535 shares of common stock issuable upon the exercise of various warrants and 244,467 shares of stock upon the exercise of stock options. (3) Includes 2,983,500 shares of common stock issuable upon the exercise of certain warrants. (4) Stock was provided as collateral for a working capital loan, which did not fund. In December 2003, the shareholder reported to the Company that the stock certificates were lost which has been reported to the transfer agent. The stock certificates have not been cancelled as of March 26, 2004. On June 21, 2002, our Board of Directors adopted and our shareholders approved the 2002 Incentive Stock Plan (the "Equity Incentive Plan"). The Equity Incentive Plan has a term of 10 years and is administered by our Board of Directors. Pursuant to the Equity Incentive Plan, the Board of Directors may grant to eligible persons, which include employees, officers, directors, consultants and agents, awards of options (which may be qualified or non-qualified) or common stock. 10,000,000 shares of our common stock were originally set aside for grants made under the Equity Incentive Plan. As of December 31, 2003, we had issued options to employees to purchase a total of 934,553 shares of our common stock. The options will expire 10 years from the date of grant, The price for each share of common stock purchased pursuant to 15 the options varies. The exercise price per share for the options granted is the fair market value of our common stock on the date of grant. The following table sets forth, as of December 31, 2003, the number of securities to be issued upon exercise of outstanding options, the weighted average exercise price of the outstanding options and the number of securities remaining available for future issuance under the Equity Incentive Plan. EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------- ---------------------------- ---------------------------- ------------------------- Number of securities to be Weighted average exercise Number of securities issued upon exercise of price of outstanding remaining available for outstanding options, options warrants and rights future issuance under the warrants and rights equity compensation plan (excluding securities reflected in column (a) Plan Category (a) (b) (c) - ------------------------------- ---------------------------- ---------------------------- ------------------------- - ------------------------------- ---------------------------- ---------------------------- ------------------------- Shareholder Approved 934,553 $0.52 9,065,447 (1) - ------------------------------- ---------------------------- ---------------------------- ------------------------- - ------------------------------- ---------------------------- ---------------------------- ------------------------- Not Approved by Shareholders 0 N/A N/A - ------------------------------- ---------------------------- ---------------------------- ------------------------- - ------------------------------- ---------------------------- ---------------------------- -------------------------
(1) Pursuant to the terms of the Equity Incentive Plan, awards may be granted for options (both incentive stock options and non-qualified stock options) and for restricted stock and stock bonuses. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Rental Agreements - ----------------- The Company leases office space, land and also warehouse space from Steven M. Schneider, our CEO and major shareholder (See Financial Statements Note 13). These properties are used to operate the car outlet and to store inventory. Rental expense under these leases was approximately $95,000 and $49,000 for the years ended December 31, 2003 and 2002, respectively. Consulting Services and Fund Raising Agreements - ----------------------------------------------- In November and December 2003, the Company entered into certain agreements with Kevin and Andrew Schneider, each cousins of Steven M. Schneider, the CEO. Kevin Schneider received 25,000 B-2 Restricted warrants and 25 shares of preferred stock, which was later converted into 50,000 shares of restricted common stock. The stock and warrants were issued for website design services to be performed over the next year. Andrew Schneider received 100,000 shares of unrestricted common stock in November of 2003 and an additional 100,000 shares of unrestricted common stock in January 2004. The 100,000 shares issued in November were for a media production valued at $17,000 and for a note receivable from shareholder of approximately $57,000, which is due in November 2005. The 100,000 shares issued in January of 2004 were advance fees for fund raising activities (See Financial Statements Note: 17 - Subsequent Events). Andrew Schneider also received 100,000 Series B-2 Restricted Warrants in November 2003 for consulting services. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBITS. Exhibit Description No. 3.1 Articles of Incorporation of ZAP Power Systems, endorsed and filed on September 23, 1994. (1) 3.2 Certificate of Amendment to Articles of Incorporation of ZAP Power Systems, endorsed and filed on November 8, 1996. (2) 3.3 Certificate of Amendment of Articles of Incorporation of ZAP Power Systems, endorsed and filed on June 2, 1999. (3) 3.4 Certificate of Amendment of Articles of Incorporation of ZAPWORLD.COM, endorsed and filed June 28, 2000. (1) 16 3.5 Certificate of Amendment of Articles of Incorporation of ZAPWORLD.COM, endorsed and filed February 26,2001. (5) 3.6 Amended Bylaws of ZAPWORLD.COM dated June 24, 2000. (3) 3.7 Certificate of Determination of Rights and Preferences of the Series B Convertible Preferred Stock, Endorsed and filed June 26, 2001(5) 3.8 Amended and Restated Certificate of Determination of the rights, Preferences, Privileges of the Series B Convertible Preferred Stock, filed on October 2, 2001. (5) 3.9 Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC and ZAP.* 3.10 Promissory Note $2,000,000 - ATOCHA Land LLC and ZAP.* 10.1 Settlement Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the Shareholders dated June 27, 2001 (5) 10.2 ZAP's Approved Second Amended Plan of Reorganization of June 20, 2002 (6) 21 Subsidiaries of the small business issuer* 14 Code of Business Conduct and Ethics* 23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP* 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)* 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)* 32.1 Certification of Chief Executive Officer pursuant to Section 1350* 32.2 Certification of Chief Financial Officer pursuant to Section 1350* * Filed herewith. (1) Filed and endorsed on September 23, 1994. Included as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31,2000. (2) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1996. (3) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1999. (4) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2000. (5) Previously filed with Pre-effective Amendment Number 3 to Form SB-2 registration statement filed with the Securities and Exchange Commission on October 3, 2001. (6) Previously filed as an exhibit to the Registrant's Form 8-K of October 20, 2002. REPORTS ON FORM 8-K. We did not file any reports on Form 8-K during the last quarter of the period covered by this report. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The following table sets forth fees billed to us by our auditors during the fiscal years ended December 31, 2003 and December 31, 2002 for: (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services by our auditor that are reasonably related to the performance of the audit or review of our financial statements and that are not reported as Audit Fees, (iii) services rendered in connection with tax compliance, tax advice and tax planning, and (iv) all other fees for services rendered. 17 December 31, 2003 December 31, 2002 (i) Audit Fees $ 71,500 $ 65,000 (ii) Audit Related Fees $ ________ $ _______ (iii) Tax Fees $ ________ $ _______ (iv) All Other Fees $ ________ $ _______ 18 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZAP By /s/ STEVEN M. SCHNEIDER ----------------------- Steven M. Schneider, Chief Executive Officer Date March 26, 2004 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ STEVEN M. SCHNEIDER Chief Executive Officer March 26, 2004 - ------------------------ Steven M. Schneider /s/ WILLIAM R. HARTMAN Chief Financial Officer March 26, 2004 - ------------------------ William R. Hartman /s/ GARY STARR Director and Chairman of the Board March 26, 2004 - ------------------------ Gary Starr /s/ LOUIS AULETTA Director March 26, 2004 - ------------------------ Louis Auletta /s/ RENAY CUDE Secretary and Director March 26, 2004 - ------------------------ Renay Cude 19 EX-3.9 3 exh3-9_12581.txt PURCHASE AND SALE AGREEMENT EXHIBIT 3.9 ----------- PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is entered into effective March 07 2003, by and between ATOCHA LAND LLC, a Virginia limited liability company ("Seller"), and ZAP, a California corporation ("Buyer"). 1. Purchase. Seller shall sell and Buyer shall purchase that certain real property located at 501 4th Street/300 "B" Street, Santa Rosa, California, legally described in Exhibit A attached hereto and hereby made a part hereof, and consisting of a two-story building containing approximately 19,962 square feet of floor area, together with all easements, rights and appurtenances thereto (the "Subject Property"), all in accordance with the terms and conditions hereinafter set forth. Buyer has had ample opportunity to inspect the Subject Property and review all reports regarding the condition of the Subject Property and hereby agrees to purchase and take possession of the Subject Property in its current "AS-IS" condition, with all faults and without any warranty, express implied. 2. Purchase Price. The purchase price (the "Purchase Price") for the Subject Property shall consist of a convertible promissory note made by Buyer in favor of Seller in the principal amount of Two Million Dollars ($2,000,000) (the "Note") in the form of Exhibit B, attached hereto and hereby made a part hereof; (b) the delivery by Buyer to Seller of 576,037 shares of the common stock of Buyer (the "Shares"); and (c) by delivery by Buyer to Seller of a Class B Warrant to Purchase 250,000 shares of Common Stock of Buyer (the "Warrant") in the form of Exhibit C, attached hereto and made a part hereof. The obligations of Buyer under the Note shall be secured by a Deed of Trust and Assignment of Rents with Buyer as Trustor, Chicago Title Company as Trustee, and Seller as Beneficiary, respecting the Subject Property (the "Deed of Trust"). 3. Lease Termination. (a) Seller and Buyer agree that upon the Closing (as defined below), that certain Commercial Lease and Deposit Receipt between Seller, as landlord, and Buyer, as tenant, dated November 12, 2002 as to Seller and November 25, 2002 as to Buyer (the "Original Lease") pertaining to a portion of the Subject Property shall be terminated and shall be of no further force or effect and Seller and Buyer shall be released of all obligations under the Original Lease that have not accrued as of the date of the Closing. (b) With respect to Buyer's rent obligation under the Original Lease as of the Closing, within fifteen (15) days following the Closing, Buyer shall calculate its gross sales from the Subject Property (as provided in the Original Lease) from the day following the last day for which Buyer has paid such rent through the date of the Closing, and shall pay Seller the amount of percentage rent Buyer owes under the Original Lease based on such calculation. (c) Within fifteen (15) days following the Closing, Seller shall determine the amount of all unpaid sums, if any, owed by Buyer under the Original Lease as of the date of the Closing and, after applying any remaining portion of the deposit made by Buyer under the Original Lease (the "Deposit"), shall either refund Buyer the remaining balance of the Deposit, if any, or bill Buyer for the amount of any such unpaid sums owing after applying the Deposit. Buyer shall pay Seller the amount of any such billing within fifteen (15) days after receipt thereof. 4. Conditions Precedent. (a) Notwithstanding anything to the contrary in this Agreement, Buyer shall not be obligated to purchase the Subject Property unless, at or prior to closing of the transactions contemplated hereby (the "Closing"), each of the following conditions ("Buyer's Conditions") has been met or has been waived by Buyer in writing. Seller shall cooperate with Buyer, and agrees to execute any documents that may be necessary or convenient, in the performance of Buyer's Conditions: (i) Title to the Subject Property shall be good and marketable and shall be free and clear of all liens, encumbrances, easements, assessments, restrictions, tenancies (whether recorded or unrecorded) and other exceptions to title, except those exceptions number 1 through 6 in Schedule B of that certain Preliminary Title Report dated December 30, 2002 and prepared by Chicago Title Company under its Order No. 223181 (the "Permitted Exceptions"). Seller shall, within fifteen (15) days after the date of this Agreement, give Buyer complete copies of all unrecorded leases or occupancy agreements, if any, affecting the Subject Property or any portion thereof as of the date of this Agreement (the "Existing Leases"). Between the date of this Agreement and the earlier of the date of the Closing or the termination of this Agreement, Seller shall not (A) sign any new lease or occupancy agreement affecting the Subject Property or any portion thereof, or (B) amend any Existing Lease, or (C) execute any easement, covenant or restriction affecting the Subject Property or any portion thereof. Seller agrees there shall be no monetary liens or encumbrances affecting the Subject Property as of the date of the Closing except the liens included in the Permitted Exceptions. (ii) The Escrow Holder (as defined below) shall be prepared to obtain from Chicago Title Company or other title insurance company designated by Buyer, upon the Closing, a CLTA Owner's Policy of Title Insurance in the full amount of the Purchase Price, insuring that marketable fee simple title to the Subject Property is vested in Buyer or Buyer's designee and a CLTA Lender's Policy of Title Insurance in the full amount of the Purchase Price. Buyer and Seller shall share equally the cost of such title policies. (iii) All of Seller's representations and warranties under this Agreement shall continue to be true and correct as of the date of the Closing. (b) Notwithstanding anything to the contrary in this Agreement, Seller shall not be obligated to sell the Subject Property unless at or prior to the Closing each of the following conditions ("Seller's Conditions") has been met or has been waived by Seller in writing. Buyer shall cooperate with Seller, and agrees to execute any documents that may be necessary or convenient, in the performance of Seller's Conditions: (i) All of Buyer's representations and warranties shall continue to be true and correct as of the date of the Closing. -2- (ii) Buyer shall have delivered to Seller a certificate executed by Buyer's Secretary, in the form of Exhibit D (the "Secretary's Certificate"), attached hereto and made a part hereof, certifying (among other things): (A) the accuracy of the copies of the Articles of Incorporation and Bylaws attached to the Secretary's Certificate, each as amended to date, and (B) the resolutions of the Board of Directors of Buyer, attached to the certificate authorizing the execution and delivery of this Agreement, the Note, the Warrant, and the Deed of Trust and the sale and issuance to Seller of the Shares. (iii) Buyer shall have delivered to Seller the affidavit referred to in Section 7 of this Agreement. (iv) Buyer shall have delivered to Seller an executed UCC-1 financing statement enabling Seller to perfect its security interest in the fixtures at the Subject Property 5. Escrow Holder. Prior to the Closing, the parties shall open an escrow (the "Escrow") with Chicago Title Company (the "Escrow Holder"). Seller shall deposit into the Escrow a duly executed deed (the "Deed") conveying the Subject Property to Buyer, together with instructions to deliver and record the Deed when the Escrow Holder is in a position to pay the Purchase Price to Seller and when Seller notifies the Escrow Holders that all of Seller's conditions have been met or waived in writing. After all of Buyer's Conditions have been met or waived in writing and Buyer has been so advised, Buyer shall deposit the certificate for the Shares (the "Stock Certificate"), the Note, and the Deed of Trust, into the Escrow with instructions to deliver the Note, and the Stock Certificate, to Seller upon recordation of the Deed and the Deed of Trust, and the issuance of the title insurance policy or binder required by Section 4(a)(ii). 6. Closing. The Closing shall be the date on which the Deed is recorded which shall be as soon as practicable after deposit of the Purchase Price into the Escrow. Possession passes to Buyer on the Closing. 7. Section 1445 Affidavit. Prior to the Closing, Seller shall deliver to Buyer an affidavit in compliance with Section 1445 of the Internal Revenue Code providing Seller's United States taxpayer identification number and business address and stating whether or not Seller is a "foreign person" as defined in the Internal Revenue Code and regulations applicable thereto (the "Code"). Seller agrees to cooperate with Buyer and to furnish Buyer with such tax forms and information as are reasonably required to insure Buyer's compliance with the Code. 8. Costs. Buyer shall pay the cost of recording the Deed. Any escrow fees shall be paid equally by both parties. Taxes, rentals and utilities shall be prorated as of the date of the Closing. Seller shall pay all other costs including, without limitation, all other recording fees, -3- state documentary stamps, transfer taxes, excise taxes, assessments for improvements completed prior to the date hereof, whether levied or not. 9. Commissions. Each party agrees that any commissions or fees owed to any broker, agent or finder to act in their behalf in connection with this transaction shall be paid outside the Escrow. Each party agrees to indemnify, defend and hold harmless the other party from all claims arising from any breach of this Section 9. 10. Seller's Representations and Warranties. (a) Seller represents and warrants that Seller has authority to enter into this Agreement and that Seller holds marketable fee simple title to the Subject Property. (b) Seller represents and warrants that, to Seller's knowledge, except as indicated in the Permitted Exceptions, the Subject Property is not subject to any existing, pending or future impact fees, bonds or assessments, and Seller does not know of any present or proposed public improvements which could give rise to the same. The representations and warranties set forth in this Section 10 shall constitute continuing representations and warranties and shall be deemed to be true and correct as of the date of the Closing. Seller agrees to indemnify, defend and hold harmless Buyer from and against any and all claims arising out of or in any way connected with Seller's breach of the representations and warranties set forth in this Section 10. 11. Representations and Warranties of Buyer. Except as set forth in Exhibit E attached hereto and hereby made a part hereof (the "Schedule of Exceptions"), Buyer hereby represents and warrants to Seller as follows: (a) Organization and Standing; Articles and Bylaws. Buyer is a corporation duly organized and existing under the laws of the State of California and is in good standing under such laws. Buyer has requisite corporate power and authority to own and operate its properties and assets, and to carry on its business as presently conducted and as proposed to be conducted. Buyer is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on Buyer's business as presently conducted and as currently proposed to be conducted. Buyer has made available to Seller copies of its Secretary's Certificate, which includes true, correct and complete copies of its Amended and Restated Articles of Incorporation ("Restated Articles") and Bylaws, each as presently in effect, and resolutions of the Board of Directors authorizing the execution, delivery, and performance of each of the Transaction Documents (as defined below). (b) Corporate Power. Buyer has all requisite corporate power to execute and deliver this Agreement, the Deed of Trust, the Warrant, and the Note and to issue the Shares to Seller and to carry out and perform its obligations under the terms of this Agreement and under each of the Transaction Documents. -4- (c) Subsidiaries. Buyer has no subsidiaries and does not own of record or beneficially any capital stock or equity interest or investment in any corporation, association or business entity. (d) Capitalization. Buyer's authorized capital stock consists of (i) 100,000,000 shares of common stock (the "Common Stock"), of which 12,033,000 shares are issued and outstanding, and (ii) no shares of preferred stock. All of the outstanding shares of Common Stock of Buyer are duly and validly issued, fully paid and non-assessable, and were not issued in violation of any preemptive or similar rights. The shares and the shares of Common Stock issuable upon exercise of the Warrant will be, when issued, duly and validly issued, fully paid and non-assessable, and not issued in violation of any preemptive or similar rights. All outstanding capital stock of Buyer, and all outstanding options, warrants, convertible notes, and other securities of Buyer, have been issued in full compliance with the applicable exemptions from the Securities Act of 1933, as amended (the "Act"), the registration and qualification requirements of all applicable securities laws of states of the United States and all other provisions of applicable securities laws of states of the United States, including, without limitation, anti-fraud provisions. Buyer has reserved 10,000,000 shares of Common Stock for issuance upon exercise of options granted under an Incentive Stock Option Plan adopted pursuant to Buyer's Second Amended Plan of Reorganization dated June 17, 2002. There are no other currently outstanding preemptive or conversion rights, options, warrants or agreements granted or issued by or binding upon Buyer for the purchase or acquisition of any shares of its capital stock. (e) Authorization. All corporate action on the part of Buyer, its directors and shareholders necessary for the authorization, execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated herein and therein, and for the authorization, issuance and delivery of the Shares has been taken. This Agreement, the Note, the Warrant, and the Deed of Trust (collectively the "Transaction Documents") constitute valid and binding obligations of Buyer, each enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency, and the relief of debtors and other laws of general application affecting enforcement of creditors' rights generally, including rules of law governing specific performance, injunctive relief or other equitable remedies. No shareholder of Buyer has any preemptive rights or rights of first refusal by reason of the issuance of the Shares. When issued, the Shares and the shares of Common Stock issued upon exercise of the Warrant, will be validly issued, fully paid and nonassessable issued in compliance with all applicable federal and state securities laws and will be free of any liens or encumbrances, and will be free of restrictions or transfer other than under state and/or federal securities laws. (f) SEC Documents. Buyer has filed all required reports, schedules, forms, statements and other documents with the Securities and Exchange Commission (the "SEC") since 1996 (the "SEC Documents"). As of their respective dates, the SEC Documents complied in all material respects with requirements of the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that -5- information contained in any SEC Document has been revised or superseded by a later filed SEC Document, none of the SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Buyer included in the SEC Documents shall: (i) comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto; (ii) have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") (except, in the case of unaudited statements as permitted by Form 10Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicted in the notes thereto); and (iii) fairly present the consolidated financial position of Buyer and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operation and cashflows (or changes in financial position prior to the approval of Financial Accounting Standards Boards Statement of Financial Accounting Standards No. 95) for the period then ending in accordance with GAAP (subject, in the case of the unaudited statements, to normal year end audit adjustments). Except as set forth in the filed SEC Documents, neither Buyer nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be set forth on a consolidated balance sheet of Buyer and its consolidated subsidiaries or in the notes thereto and which could reasonably be expected to have a material adverse effect on Buyer and its subsidiaries taken as a whole. (g) Absence of Certain Changes of Events. Except as disclosed in the SEC Documents since the date of the most recent audited financial statements included in the SEC Documents, there has not been (i) any declaration, setting aside or payment of any dividend or distribution (whether in cash, stock or property) with respect to any of Buyer's capital stock, (ii) any split, combination or reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, (iii) any damage, destruction or loss of property, whether or not covered by insurance, that has or could reasonably be expected to have a material adverse effect on Buyer and its subsidiaries taken as a whole, or (iv) any change in accounting methods, principles or practices by Buyer materially affecting its assets, liabilities, or business, except insofar as may have been required by a change in GAAP. (h) Litigation. There are no actions, suits, proceedings or investigations pending, or claims asserted (or, to Buyer's knowledge, any basis therefor or threat thereof), to which Buyer is a party or its property is subject, that might result in any material adverse change in the business or financial condition of Buyer or any of its properties or assets, or in any material impairment of the right or ability of Buyer to carry on its business as now conducted, or in any material liability on the part of Buyer, and none which questions the validity of this Agreement or any action taken or to be taken in connection herewith or therewith. (i) Consents. No consent, approval, qualification, order or authorization of, or filing with, any governmental authority is required in connection with Buyer's valid execution, delivery or performance of this Agreement or any other Transaction Document, or the offer, sale or issuance of the Shares by Buyer, or the consummation of any other transaction contemplated on the part of Buyer hereby or thereby except filings required pursuant to applicable federal and state securities laws and blue sky laws. -6- (j) Title to Properties; Liens and Encumbrances. Buyer has good and marketable title to its properties and assets and, with respect to the property and assets leased by Buyer, holds valid leasehold interests therein, in each case subject to no mortgage, pledge, lien, security interest, conditional sale agreement, encumbrance or charge, except (i) tax, materialmen's or like liens for obligations not yet due or payable or being contested in good faith by appropriate proceedings, or (ii) possible minor liens or encumbrances that do not materially detract from the value of the property subject thereto or materially impair the operations of Buyer and which have arisen in the ordinary course of business. (k) Proprietary Information and Other Rights. Buyer has title and ownership of all patents, patent applications, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes (collectively, "Proprietary Information") necessary for its business as now conducted and as presently proposed to be conducted without, to the best knowledge of Buyer, any conflict with or infringement of the rights of others. There are no outstanding options, licenses, or agreements of any kind relating to the foregoing, nor is Buyer bound by or a party to any options, licenses or agreements of any kind with respect to the Proprietary Information of any other person or entity. Buyer has not received any communications alleging that Buyer has violated or, by conducting its business as proposed, would violate any of the Proprietary Information of any other person or entity. To the best knowledge of Buyer none of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with the use of his or her best efforts to promote the interests of Buyer or that would conflict with Buyer's business as proposed to be conducted. Neither the execution nor delivery of this Agreement or the Ancillary Agreements, the carrying on of Buyer's business by the employees of Buyer, nor the conduct of Buyer's business as proposed will, to the best of Buyer's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. Buyer does not believe it is or will be necessary to utilize any inventions of any of their employees (or people they currently intend to hire) made prior to their employment by Buyer. (l) Compliance with Other Instruments. Buyer is not in any violation of any term of the Restated Articles or its Bylaws, any material term of any material agreement to which Buyer is a party, or any judgment, decree, order, statute, rule or regulation to which Buyer is subject, that would have a material adverse effect on the condition, financial or otherwise, or operations of Buyer. (m) Employees. To the best of Buyer's knowledge, no employee of Buyer is in violation of any term of any employment contract, patent disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by Buyer because of the nature of the business conducted or presently proposed to be conducted by Buyer. (n) Confidential Information and Invention Assignment Agreements. Each officer and employee of Buyer has executed a Confidential Information and Invention Assignment Agreement. -7- (o) Disclosure. None of this Agreement, the Transaction Documents or any other statements or certificates made or delivered in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 12. Indemnity. Seller agrees to indemnify Buyer against all claims, losses, damages and liabilities, including legal and other expenses reasonably incurred in investigating or defending against the same, arising out of any breach of any representation, warranty, or covenant made by Seller herein. Buyer agrees to indemnify Seller against all claims, losses, damages and liabilities, including legal and other expenses reasonably incurred in investigating or defending against the same, arising out of any breach of any representation, warranty, or covenant made by Buyer herein. 13. Governing Law. This Agreement shall be governed by the laws of the State of California, without reference to its principles of conflicts of law. 14. Successors. This Agreement shall be binding on the heirs, successors, assigns and personal representatives of the parties hereto. 15. Attorney's Fees. In the event either party initiates or defends any legal action or proceeding in any way connected with this Agreement, the prevailing party in any such action or proceeding (in addition to any other relief which may be granted, whether legal or equitable) shall be entitled to recover from the losing party in any such action or proceeding its reasonable costs and attorney's fees (including, without limitation, its reasonable costs and attorney's fees on any appeal). All such costs and attorney's fees shall be deemed to have accrued on commencement of any legal action or proceeding and shall be enforceable whether or not such legal action or proceeding is prosecuted to judgment. 16. Notices. (a) All notices given pursuant to this Agreement shall be in writing and shall be given by personal service, by United States mail or by United States express mail or other established express delivery service (such as Federal Express), postage or delivery charge prepaid, return receipt requested, addressed to the appropriate party at the address set forth below: Seller: 8548 Georgetown Pike McLean, Virginia 22102 Buyer: 117 Morris Street Sebastopol, California 95472 -8- The person and address to which notices are to be given may be changed at any time by any party upon written notice to the other party. All notices given pursuant to this Agreement shall be deemed given upon receipt. (b) For the purpose of this Agreement, the term "receipt" shall mean the earlier of any of the following: (i) the date of delivery of the notice or other document to the address specified pursuant to subsection (a) above as shown on the return receipt, (ii) the date of actual receipt of the notice or other document by the person or entity specified pursuant to subsection (a) above, or (iii) in the case of refusal to accept delivery or inability to deliver the notice or other document, the earlier of (A) the date of the attempted delivery or refusal to accept delivery, (B) the date of the postmark on the return receipt, or (C) the date of receipt of notice of refusal or notice of non-delivery by the sending party. 17. Captions and Headings. The captions and headings in this Agreement are for reference only and shall not be deemed to define or limit the scope or intent of any of the terms, covenants, conditions or agreements contained herein. 18. Entire Agreement. This Agreement and the other Transaction Documents contain the entire agreement between the parties hereto and supersede all prior agreements, oral or written, with respect to the subject matter hereof. The provisions of this Agreement shall be construed as a whole and not strictly for or against any party. 19. Construction. In construing the provisions of this Agreement and whenever the context so requires, the use of a gender shall include all other genders, the use of the singular shall include the plural, and the use of the plural shall include the singular. 20. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute a single instrument. Signature and acknowledgment pages may be detached from individual counterparts and attached to a single or multiple original(s) in order to form a single or multiple original(s) of this document. 21. Binding Agreement. This Agreement shall not be binding or enforceable until both parties have executed an original (or a counterpart original) of this Agreement and have delivered to the other party an original (or a counterpart original) of this Agreement, fully executed by the delivering party. -9- 22. Survival. All of the representations and warranties set forth in this Agreement shall constitute continuing representations and warranties, shall be deemed to be true and correct as of the date of the Closing, and shall (along with all indemnification, defense and hold harmless obligations related thereto) survive the Closing. 23. No Third Party Beneficiary Rights. This Agreement is not intended to create, nor shall it in any way be interpreted or construed to create, any third party beneficiary rights in any person not a party hereto. EXECUTED as of the date first set forth above. ATOCHA LAND LLC, ZAP, a Virginia limited liability company a California corporation By: /s/ Thomas J. [illegible] By: /s/Steven Schneider Name: Thomas J. [illegible] Name:Steven Schneider Title: [illegible] Title: CEO By: "Seller" Name: Title: "Buyer" -10- EX-3.10 4 exh3-10_12581.txt PROMISSORY NOTE - $2,000,000- ATOCHA AND ZAP EXHIBIT 3.10 ------------ PROMISSORY NOTE --------------- Santa Rosa, California $2,000,000. March 07, 2003 FOR VALUE RECEIVED, the undersigned ("Maker"), hereby promises and agrees to pay to the order of Atocha Land LLC, a Virginia limited liability company ("Payee"), in lawful money of the United States the principal sum of Two Million Dollars ($2,000,000.00), together with interest on the unpaid principal amount of this Note from time to time outstanding at the interest rates provided below. From the date of this Note until March 07, 2005 [THE SECOND ANNIVERSARY OF THE DATE OF THIS NOTE] the annual interest rate under this Note (the "Initial Interest Rate") shall be two percent (2%). After March 07, 2005 [THE SECOND ANNIVERSARY OF THE DATE OF THIS NOTE], the annual interest rate under this Note (the "Applicable Interest Rate") shall be equal to two percent (2%) in excess of the rate published from time to time in the Western edition of The Wall Street Journal as the "prime rate." Any change in such prime rate will cause a corresponding change in the Applicable Interest Rate, effective on the date of the publication of such prime rate. Principal and interest shall be payable in Two Hundred Forty (240) consecutive equal and fully amortizing payments of principal and interest, beginning on the first day of the calendar month immediately following the second anniversary of the date of this Note; provided, however, that Payee shall have the right, exercisable by written notice to Maker at any time on or prior to March 07, 2005 [THE SECOND ANNIVERSARY OF THE DATE OF THIS NOTE] (including after delivery to Payee of a Prepayment Notice (as defined below)), to convert some or all of the unpaid principal and accrued interest under this Note to shares of the common stock of Maker (the "Common Stock") at the Conversion Price (as defined below). The initial Conversion Price shall be $2.15 per share of Common Stock. All payments under this Note shall be paid to Payee at 8548 Georgetown Pike, McLean, Virginia 22102, or to such other place as may be designated in writing from time to time by Payee. Conversion of this Note in whole or in part may be effected by written notice from Payee to Maker. Maker shall, as soon as practicable after of receipt of such notice, but in no event later than seven (7) days thereafter, issue to Payee, a certificate or certificates for the shares of Common Stock to which Payee shall be entitled; provided, however, that Maker shall not be obligated to deliver such certificate or certificates to Payee until Payee has (i) surrendered this Note to Maker or its transfer agent or (ii) if this Note is lost, stolen, mutilated or destroyed, executed an affidavit of loss with respect to such Note with such terms as to indemnity as Maker may reasonably impose. No fractional shares shall be issued upon the conversion of this Note. If, after aggregation, the conversion would result in the issuance of any fractional share, Maker shall, in lieu of issuance of any fractional share, pay the Payee otherwise entitled to such fractional share a sum in cash equal to the product resulting from multiplying the then current Conversion Price by such fraction. Any person entitled to receive shares issuable upon such conversion shall be treated for all purposes as the record holder of such shares on the date such conversion option is exercised. In the case of any partial conversion of this Note, Payee shall surrender this Note for cancellation against execution and delivery to Payee of a new Note in substantially the form hereof in the amount of the unconverted principal amount. If shares of Common Stock are issued as a dividend or other distribution on the Common Stock, the Conversion Price in effect at the opening of business on the business day next succeeding the date fixed for the determination of the shareholders entitled to receive such dividend or other distribution shall be decreased to the Conversion Price determined by multiplying said Conversion Price so in effect by a fraction, the numerator of which shall be the number of shares of Common Stock issued and outstanding at the close of business on the date fixed for such determination and the denominator of which shall be the sum of said number of shares issued and outstanding at the close of business on the date fixed for such determination and the number of shares constituting such dividend or other distribution, such decrease becoming effective immediately after the opening of business on the business day next succeeding the date fixed for such determination. If the outstanding shares of Common Stock shall be subdivided into a greater number of shares or outstanding shares shall be combined into a smaller number of shares, the Conversion Price in effect at the opening of business on the business day next succeeding the day upon which such subdivision or combination becomes effective shall be decreased or increased, as the case may be, to the Conversion Price determined by multiplying said Conversion Price so in effect by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such subdivision or combination becomes effective and the denominator of which shall be the number of such shares outstanding at the opening of business on the business day next succeeding the day upon which such subdivision or combination becomes effective. Maker shall give Payee at least ten (10) days advance written notice before distributing to all or substantially all holders of Common Stock either (a) evidences of indebtedness or assets (excluding cash dividends or distributions) or (b) any other securities of Maker or any rights, warrants, options to subscribe for, purchase or otherwise acquire securities of Maker. Upon any adjustment or readjustment of the Conversion Price, then, and in each such case, Maker shall compute such adjustment or readjustment in accordance with the provisions hereof and prepare a certificate showing the adjusted or readjusted Conversion Price and a brief statement of the facts accounting for such adjustment or readjustment and shall mail such certificate, by first class mail, postage prepaid, to Payee. In case of any reclassification of the Common Stock other than a subdivision or combination of the outstanding Common Stock, or of any consolidation or merger to which Maker or any subsidiary of Maker is a party and for which approval of shareholders of Maker is required or of the sale or transfer of all or substantially all of the assets of Maker or of the voluntary or involuntary dissolution, liquidation or winding up of Maker, Maker shall cause to be mailed to Payee, at least twenty (20) days prior to the record date specified therein, a notice stating (a) the date of which any such record is to be taken, (b) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become effective, and (c) the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares for securities or other property 2 deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding up. This Note is secured by and is the same Note mentioned in that certain Deed of Trust with Assignment of Rents, with Maker as Trustor, Chicago Title Company as Trustee, and Payee as Beneficiary (the "Deed of Trust") of even date herewith respecting that certain real property commonly known as 501 4th Street/300 "B" Street, Santa Rosa, California executed in favor of Payee by Maker, and this Note is expressly made subject to and will be bound by the terms and conditions set forth in said Deed of Trust as if all of such terms and conditions were expressly set forth herein. The occurrence of any of the following shall constitute an Event of Default hereunder: (a) Maker fails to pay any installment or other sum due and payable under this Note within five (5) days after notice to Maker by Payee; (b) an Event of Default (as defined in the Deed of Trust) occurs; (c) Maker breaches any other promise or obligation in this Note or any other instrument now or hereafter securing the indebtedness evidenced by this Note; (d) Maker makes a general assignment for the benefit of its creditors, applies for or consents to the appointment of a receiver, trustee or liquidator of all of its assets, is adjudicated a bankrupt or insolvent, files a voluntary petition of bankruptcy or petition or answer seeking a composition, reorganization or arrangement with creditors, or admits (by answer, default or otherwise) the material allegations of any petition filed against it in any bankruptcy, reorganization, composition, insolvency or other proceedings (whether federal or state) relating to relief of debtors, or Maker suffers or permits to continue unstayed and in effect for ninety (90) consecutive days any judgment, decree or order entered by a court or governmental agency of competent jurisdiction, appointing a receiver, trustee or liquidator for substantially all of its assets; (e) any money judgment, writ or similar process shall be entered or filed against Maker or any of its subsidiaries or against any of its assets for more than One Hundred Thousand Dollars ($100,000) and shall not have been satisfied, vacated, bonded, appealed or stayed within a period of sixty (60) days; (f) there exists a default or an event that, with the giving of notice or the passage of time (or both), (i) would constitute a default, under any other indebtedness of Maker or any of its subsidiaries for borrowed money or (ii) would cause (or would permit any holder of such indebtedness or a trustee to cause) such indebtedness, or a portion thereof in an aggregate amount exceeding One Hundred Thousand Dollars $100,000 to become due prior to its stated maturity or prior to its regularly scheduled dates of payment, and such default or event shall not have been cured within a period of forty five (45) days; (g) the adoption by Maker of any plan of merger in which it is not the surviving entity and in which its shareholders prior to the merger do not own the majority of the outstanding stock on a fully diluted basis of the surviving entity, consolidation, liquidation or dissolution; the sale or other transfer by Maker of all or any material part of its property or assets except in the 3 usual and ordinary course of the operation of its business; or if Maker shall change the general character of its business or suspend any significant part of its business operations. If any such Event of Default occurs, the entire unpaid balance of principal and interest accrued thereon shall be immediately due and payable, and, in addition, the entire unpaid balance and all accrued but unpaid interest thereon shall automatically bear interest at the rate per annum equal to (instead of the Initial Interest Rate or the Applicable Interest Rate, as applicable) the lesser of (A) ten percent (10%) per annum or (B) the highest amount then permitted by law. All notices given pursuant to this Agreement shall be in writing and shall be given by personal service, by United States mail or by United States express mail or other established express delivery service (such as Federal Express), postage or delivery charge prepaid, return receipt requested, addressed to the appropriate party at the address stated in this Note or to such other address as a party may designate by written notice to the other. This Note may be prepaid, in whole or in part, at any time without premium or penalty, not less than forty-five (45) days after Maker gives notice of prepayment to the holder hereof (a "Prepayment Notice"). All prepayments shall be applied, when received, to the then accrued interest hereon and the balance shall be applied in reduction of the principal balance outstanding. All prepayments shall be applied to the installments due hereunder in the inverse order of their maturity. Time shall be of the essence in the payment of the interest and principal due under this Note. Failure of Payee to exercise any of Payee's rights and remedies shall not constitute a waiver of its right to exercise the same at that or any other time. All rights and remedies of Payee upon default hereunder shall be cumulative to the greatest extent permitted by law. Maker hereby waives presentment, demand, notice of dishonor, protest, notice of protest and further waives all exemptions to which it may now or hereafter be entitled under the laws of this or any other State or of the United States. This Note shall inure to the benefit of and be binding upon the successors and assigns of Maker and Payee; provided, however, that Maker may not assign this Note or assign or delegate any of its rights or obligations hereunder without Payee's prior written consent in each instance. Payee in its sole discretion may transfer this Note, and may sell or assign participations or other interests in all or any part of this Note, all without notice to or the consent of Maker. As used in this Note, "Payee" shall be deemed to include any such purchaser or assignee of this Note or of any participation or other interest herein. Maker and Payee intend and believe that each provision in this Note comports with all applicable local, state and federal laws and regulations, including SEC regulations, and judicial decisions. However, if any provision or provisions, or if any portion of any provision or provisions, of this Note is found by a court of law to be in violation of any applicable local, state or federal ordinance, statute, law, administrative or judicial decision, or public policy, and if the court should declare that portion, provision or provisions to be illegal, invalid, unlawful, void or unenforceable as written, then it is the intent of Maker and Payee that such portion, provision or provisions be given force to the fullest possible extent that they are legal, valid and enforceable, that the remainder of this Note shall be construed as if the illegal, invalid, unlawful, void or 4 unenforceable portion, provision or provisions were not contained herein, and that the rights, obligations and interest of Maker and Payee under the remainder of this Note shall continue in full force and effect. Notwithstanding any other provision of this Note or any other agreement between Maker and Payee, nothing herein shall require Maker to pay, or Payee to accept, interest in an amount which subjects the holder to any penalty or forfeiture under applicable law, and in no event shall the total of all charges payable hereunder (whether of interest or of such other charges which may or might be characterized as interest) exceed the maximum rate permitted to be charged under applicable law. If Payee receives any payment which is or would be in excess of that permitted to be charged under applicable law, the amount that would be excessive interest shall be applied to reduce the unpaid principal amount under this Note and not to pay interest, or, if such excessive interest exceeds the unpaid principal amount under this Note, such excess shall be refunded to Maker. This provision shall control every other provision of all agreements between Maker and Payee. This Note has been delivered in, and shall be governed by, and construed in accordance with, the laws of California without regard to its conflict of laws rules. Maker agrees to pay the following costs, expenses, and attorney fees paid or incurred by Payee, or adjudged by the court: (a) reasonable costs of collection and costs, expenses, and attorney fees paid or incurred in connection with the collection or enforcement of this Note, whether or not suit is filed; (b) reasonable costs, expenses, and attorney fees paid or incurred in connection with representing Payee in any bankruptcy, reorganization, receivership, or other proceeding affecting creditors' rights and involving a claim under this Note; (c) reasonable costs, expenses, and attorney fees incurred to protect the lien of the Deed of Trust; and (d) costs of suit and such sum as the court may award for attorney fees in any action to enforce payment of this Note or any part of it. IN WITNESS WHEREOF, Maker has executed and delivered this Note as of the day and year first above written. ZAP, a California corporation By: Steven Schneider ________________________ Title: CEO ________________________ By: __________________________________ Title: _________________________________ Address: 117 Morris Street, Sebastopol, California 95472 5 EX-14 5 exh14_12581.txt CODE OF BUSINESS CONDUCT AND ETHICS EXHIBIT 14 ---------- CODE OF BUSINESS CONDUCT AND ETHICS (AS APPROVED BY THE BOARD OF DIRECTORS) THIS CODE APPLIES TO EVERY DIRECTOR, OFFICER (INCLUDING THE CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER), AND EMPLOYEE OF ZAP (THE "COMPANY"). To further the Company's fundamental principles of honesty, loyalty, fairness and forthrightness, the Board of Directors of the Company (the "BOARD:") has established and adopted this Code of Business Conduct and Ethics (this "CODE"). This Code strives to deter wrongdoing and promote the following six objectives: o honest and ethical conduct; o avoidance of conflicts of interest; o full, fair, accurate, timely and transparent disclosure; o compliance with applicable government and self-regulatory organization laws, rules and regulations; o prompt internal reporting of Code violations; and o accountability for compliance with the Code. Below, we discuss situations that require application of our fundamental principles and promotion of our objectives. If you believe there is a conflict between this Code and a specific procedure, please consult the Company's Board of Directors for guidance. Each of our directors, officers and employees is expected to: o understand the requirements of your position, including Company expectations and governmental rules and regulations that apply to your position; o comply with this Code and all applicable laws, rules and regulations; o report any violation of this Code of which you become aware; and o be accountable for complying with this Code. TABLE OF CONTENTS ================================================================================ ETHICS ADMINISTRATOR..........................................................33 ACCOUNTING POLICIES...........................................................33 AMENDMENTS AND MODIFICATIONS OF THIS CODE.....................................33 ANTI-BOYCOTT AND U.S. SANCTIONS LAWS..........................................33 ANTITRUST AND FAIR COMPETITION LAWS...........................................33 BRIBERY.......................................................................35 COMPLIANCE WITH LAWS, RULES AND REGULATIONS...................................35 COMPUTER AND INFORMATION SYSTEMS..............................................35 CONFIDENTIAL INFORMATION BELONGING TO OTHERS..................................35 CONFIDENTIAL AND PROPRIETARY INFORMATION......................................36 CONFLICTS OF INTEREST.........................................................37 CORPORATE OPPORTUNITIES AND USE AND PROTECTION OF COMPANY ASSETS..............38 DISCIPLINE FOR NONCOMPLIANCE WITH THIS CODE...................................38 DISCLOSURE POLICIES AND CONTROLS..............................................38 ENVIRONMENT, HEALTH AND SAFETY................................................39 FILING OF GOVERNMENT REPORTS..................................................39 FOREIGN CORRUPT PRACTICES ACT.................................................39 INSIDER TRADING OR TIPPING....................................................39 INTELLECTUAL PROPERTY: PATENTS, COPYRIGHTS AND TRADEMARKS.....................40 INVESTOR RELATIONS AND PUBLIC AFFAIRS.........................................41 POLITICAL CONTRIBUTIONS.......................................................41 PROHIBITED SUBSTANCES.........................................................41 RECORD RETENTION..............................................................42 REPORTING VIOLATIONS OF THIS CODE.............................................42 WAIVERS.......................................................................42 CONCLUSION....................................................................42 ETHICS ADMINISTRATOR All matters concerning this Code shall be heard by the Board of Directors. ACCOUNTING POLICIES The Company will make and keep books, records and accounts, which in reasonable detail accurately and fairly present the Company's transactions. All directors, officers, employees and other persons are prohibited from directly or indirectly falsifying or causing to be false or misleading any financial or accounting book, record or account. You and others are expressly prohibited from directly or indirectly manipulating an audit, and from destroying or tampering with any record, document or tangible object with the intent to obstruct a pending or contemplated audit, review or federal investigation. The commission of, or participation in, one of these prohibited activities or other illegal conduct will subject you to federal penalties, as well as to punishment, up to and including termination of employment. No director, officer or employee of the Company may directly or indirectly make or cause to be made a materially false or misleading statement, or omit to state, or cause another person to omit to state, any material fact necessary to make statements made not misleading, in connection with the audit of financial statements by independent accountants, the preparation of any required reports whether by independent or internal accountants, or any other work which involves or relates to the filing of a document with the Securities and Exchange Commission ("SEC"). AMENDMENTS AND MODIFICATIONS OF THIS CODE There shall be no amendment or modification to this Code except upon approval by the Board of Directors. In case of any amendment or modification of this Code that applies to an officer or director of the Company, the amendment or modification shall be posted on the Company's website within two days of the board vote or shall be otherwise disclosed as required by applicable law or the rules of any stock exchange or market on which the Company's securities are listed for trading. Notice posted on the website shall remain there for a period of twelve months and shall be retained in the Company's files as required by law. ANTI-BOYCOTT AND U.S. SANCTIONS LAWS The Company must comply with anti-boycott laws of the United States, which prohibit it from participating in, and require us to report to the authorities any request to participate in, a boycott of a country or businesses within a country. If you receive such a request, report it to your immediate superior, our CEO, or to the chairman of the Board of Directors. We will also not engage in business with any government, entity, organization or individual where doing so is prohibited by applicable laws. ANTITRUST AND FAIR COMPETITION LAWS The purpose of antitrust laws of the United States and most other countries is to provide a level playing field to economic competitors and to promote fair competition. No director, officer or employee, under any circumstances or in any context, may enter into any understanding or agreement, whether express or implied, formal or informal, written or oral, with an actual or potential competitor, which would illegally limit or restrict in any way either party's actions, including the offers of either party to any third party. This prohibition includes any action relating to prices, costs, profits, products, services, terms or conditions of sale, market share or customer or supplier classification or selection. It is our policy to comply with all U.S. antitrust laws. This policy is not to be compromised or qualified by anyone acting for or on behalf of our Company. You must understand and comply with the antitrust laws as they may bear upon your activities and decisions. Anti-competitive behavior in violation of antitrust laws can result in criminal penalties, both for you and for the Company. Accordingly, any question regarding compliance with antitrust laws or your responsibilities under this policy should be directed to our CEO or the chairman of the Board of Directors, who may then direct you to our legal counsel. Any director, officer or employee found to have knowingly participated in violating the antitrust laws will be subject to disciplinary action, up to and including termination of employment. Below are some scenarios that are prohibited and scenarios that could be prohibited for antitrust reasons. These scenarios are not an exhaustive list of all prohibited and possibly prohibited antitrust conduct. Again, when in doubt about any situation, whether it is discussed below or not, you should consult with our CEO or the chairman of the Board of Directors, who may then direct you to our legal counsel. The following scenarios are prohibited for antitrust or anti-competition reasons: o proposals or agreements or understanding-express or implied, formal or informal, written or oral-with any competitor regarding any aspect of competition between the Company and the competitor for sales to third parties; o proposals or agreements or understanding with customers which restrict the price or other terms at which the customer may resell or lease any product to a third party; or o proposals or agreements or understanding with suppliers which restrict the price or other terms at which the Company may resell or lease any product or service to a third party. The following business arrangements could raise anti-competition or antitrust law issues. Before entering into them, you must consult with our CEO or the chairman of the Board of Directors, who may then direct you to our legal counsel: o exclusive arrangements for the purchase or sale of products or services; o bundling of goods and services; o technology licensing agreements that restrict the freedom of the licensee or licensor; or o agreements to add an employee of the Company to another entity's board of Directors. BRIBERY You are strictly forbidden from offering, promising or giving money, gifts, loans, rewards, favors or anything of value to any governmental official, employee, agent or other intermediary (either inside or outside the United States) which is prohibited by law. Those paying a bribe may subject the Company and themselves to civil and criminal penalties. When dealing with government customers or officials, no improper payments will be tolerated. If you receive any offer of money or gifts that is intended to influence a business decision, it should be reported to your supervisor, our CEO or the chairman of the Board of Directors immediately. The Company prohibits improper payments in all of its activities, whether these activities are with governments or in the private sector. COMPLIANCE WITH LAWS, RULES AND REGULATIONS The Company's goal and intention is to comply with the laws, rules and regulations by which we are governed. In fact, we strive to comply not only with requirements of the law but also with recognized compliance practices. All illegal activities or illegal conduct are prohibited whether or not they are specifically set forth in this Code. Where law does not govern a situation or where the law is unclear or conflicting, you should discuss the situation with your supervisor, our CEO or the chairman of the Board of Directors, who may then direct you to our legal counsel. Business should always be conducted in a fair and forthright manner. Directors, officers and employees are expected to act according to high ethical standards. COMPUTER AND INFORMATION SYSTEMS For business purposes, officers and employees are provided telephones and computer workstations and software, including network access to computing systems such as the Internet and e-mail, to improve personal productivity and to efficiently manage proprietary information in a secure and reliable manner. You must obtain the permission from your supervisor or our CEO to install any software on any Company computer or connect any personal laptop to the Company network. As with other equipment and assets of the Company, we are each responsible for the appropriate use of these assets. Except for limited personal use of the Company's telephones and computer/e-mail, such equipment may be used only for business purposes. Officers and employees should not expect a right to privacy of their e-mail or Internet use. All e-mails or Internet use on Company equipment is subject to monitoring by the Company. CONFIDENTIAL INFORMATION BELONGING TO OTHERS You must respect the confidentiality of information, including, but not limited to, trade secrets and other information given in confidence by others, including but not limited to partners, suppliers, contractors, competitors or customers, just as we protect our own confidential information. However, certain restrictions about the information of others may place an unfair burden on the Company's future business. For that reason, directors, officers and employees should coordinate with your supervisor or the CEO to ensure appropriate agreements are in place prior to receiving any confidential third-party information. In addition, any confidential information that you may possess from an outside source, such as a previous employer, must not, so long as such information remains confidential, be disclosed to or used by the Company. Unsolicited confidential information submitted to the Company should be refused, returned to the sender where possible and deleted, if received via the Internet. CONFIDENTIAL AND PROPRIETARY INFORMATION It is the Company's policy to ensure that all operations, activities and business affairs of the Company and our business associates are kept confidential to the greatest extent possible. Confidential information includes all non-public information that might be of use to competitors, or that might be harmful to the Company or its customers if disclosed. Confidential and proprietary information about the Company or its business associates belongs to the Company, must be treated with strictest confidence and is not to be disclosed or discussed with others. Unless otherwise agreed to in writing, confidential and proprietary information includes any and all methods, inventions, improvements or discoveries, whether or not patentable or copyrightable, and any other information of a similar nature disclosed to the directors, officers or employees of the Company or otherwise made known to the Company as a consequence of or through employment or association with the Company (including information originated by the director, officer or employee). This can include, but is not limited to, information regarding the Company's business, products, processes, and services. It also can include information relating to research, development, inventions, trade secrets, intellectual property of any type or description, data, business plans, marketing strategies, engineering, contract negotiations, contents of the Company intranet and business methods or practices. The following are examples of information that is not considered confidential: o information that is in the public domain to the extent it is readily available; o information that becomes generally known to the public other than by disclosure by the Company or a director, officer or employee; or o information you receive from a party that is under no legal obligation of confidentiality with the Company with respect to such information. We have exclusive property rights to all confidential and proprietary information regarding the Company or our business associates. The unauthorized disclosure of this information could destroy its value to the Company and give others an unfair advantage. You are responsible for safeguarding Company information and complying with established security controls and procedures. All documents, records, notebooks, notes, memoranda and similar repositories of information containing information of a secret, proprietary, confidential or generally undisclosed nature relating to the Company or our operations and activities made or compiled by the director, officer or employee or made available to you prior to or during the term of your association with the Company, including any copies thereof, unless otherwise agreed to in writing, belong to the Company and shall be held by you in trust solely for the benefit of the Company, and shall be delivered to the Company by you on the termination of your association with us or at any other time we request. CONFLICTS OF INTEREST Conflicts of interest can arise in virtually every area of our operations. A "conflict of interest" exists whenever an individual's private interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of the Company. We must strive to avoid conflicts of interest. We must each make decisions solely in the best interest of the Company. Any business, financial or other relationship with suppliers, customers or competitors that might impair or appear to impair the exercise of our judgment solely for the benefit of the Company is prohibited. Here are some examples of conflicts of interest: o FAMILY MEMBERS--Actions of family members may create a conflict of interest. For example, gifts to family members by a supplier of the Company are considered gifts to you and must be reported. Doing business for the Company with organizations where your family members are employed or that are partially or fully owned by your family members or close friends may create a conflict or the appearance of a conflict of interest. For purposes of this Code "family members" includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and adoptive relationships. o GIFTS, ENTERTAINMENT, LOANS, OR OTHER FAVORS--Directors, officers and employees shall not seek or accept personal gain, directly or indirectly, from anyone soliciting business from, or doing business with the Company, or from any person or entity in competition with us. Examples of such personal gains are gifts, non-business-related trips, gratuities, favors, loans, and guarantees of loans, excessive entertainment or rewards. However, you may accept gifts of a nominal value. Other than common business courtesies, directors, officers, employees and independent contractors must not offer or provide anything to any person or organization for the purpose of influencing the person or organization in their business relationship with us. Directors, officers and employees are expected to deal with advisors or suppliers who best serve the needs of the Company as to price, quality and service in making decisions concerning the use or purchase of materials, equipment, property or services. Directors, officers and employees who use the Company's advisors, suppliers or contractors in a personal capacity are expected to pay market value for materials and services provided. o OUTSIDE EMPLOYMENT--Officers and employees may not participate in outside employment, self-employment, or serve as officers, directors, partners or consultants for outside organizations, if such activity: o reduces work efficiency; o interferes with your ability to act conscientiously in our best interest; or o requires you to utilize our proprietary or confidential procedures, plans or techniques. You must inform your supervisor or the CEO of any outside employment, including the employer's name and expected work hours. You should report any actual or potential conflict of interest involving yourself or others of which you become aware to your supervisor or our CEO. Officers and directors should report any actual or potential conflict of interest involving yourself or others of which you become aware to the chairman of the Board of Directors. CORPORATE OPPORTUNITIES AND USE AND PROTECTION OF COMPANY ASSETS You are prohibited from: o taking for yourself, personally, opportunities that are discovered through the use of Company property, information or position; o using Company property, information or position for personal gain; or o competing with the Company. You have a duty to the Company to advance its legitimate interests when the opportunity to do so arises. You are personally responsible and accountable for the proper expenditure of Company funds, including money spent for travel expenses or for customer entertainment. You are also responsible for the proper use of property over which you have control, including both Company property and funds and property that customers or others have entrusted to your custody. Company assets must be used only for proper purposes. Company property should not be misused. Company property may not be sold, loaned or given away regardless of condition or value, without proper authorization. Each director, officer and employee should protect our assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company's profitability. Company assets should be used only for legitimate business purposes. DISCIPLINE FOR NONCOMPLIANCE WITH THIS CODE Disciplinary actions for violations of this Code can include oral or written reprimands, suspension or termination of employment or a potential civil lawsuit against you. The violation of laws, rules or regulations, which can subject the Company to fines and other penalties, may result in your criminal prosecution. DISCLOSURE POLICIES AND CONTROLS The continuing excellence of the Company's reputation depends upon our full and complete disclosure of important information about the Company that is used in the securities marketplace. Our financial and non-financial disclosures and filings with the SEC must be transparent, accurate and timely. Proper reporting of reliable, truthful and accurate information is a complex process involving cooperation between many departments and disciplines. We must all work together to insure that reliable, truthful and accurate information is disclosed to the public. The Company must disclose to the SEC, current security holders and the investing public information that is required, and any additional information that may be necessary to ensure the required disclosures are not misleading or inaccurate. The Company requires you to participate in the disclosure process, which is overseen by our CEO and principal accounting officer. The disclosure process is designed to record, process, summarize and report material information as required by all applicable laws, rules and regulations. Participation in the disclosure process is a requirement of a public company, and full cooperation and participation by our CEO, principal accounting officer and, upon request, other employees in the disclosure process is a requirement of this Code. Officers and employees must fully comply with their disclosure responsibilities in an accurate and timely manner or be subject to discipline of up to and including termination of employment. ENVIRONMENT, HEALTH AND SAFETY The Company is committed to managing and operating our assets in a manner that is protective of human health and safety and the environment. It is our policy to comply, in all material respects, with applicable health, safety and environmental laws and regulations. Each employee is also expected to comply with our policies, programs, standards and procedures. FILING OF GOVERNMENT REPORTS Any reports or information provided, on our behalf, to federal, state, local or foreign governments should be true, complete and accurate. Any omission, misstatement or lack of attention to detail could result in a violation of the reporting laws, rules and regulations. FOREIGN CORRUPT PRACTICES ACT The United States Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to foreign government officials or foreign political candidates in order to obtain, retain or direct business. Accordingly, corporate funds, property or anything of value may not be, directly or indirectly, offered or given by you or an agent acting on our behalf, to a foreign official, foreign political party or official thereof or any candidate for a foreign political office for the purpose of influencing any act or decision of such foreign person or inducing such person to use his influence or in order to assist in obtaining or retaining business for, or directing business to, any person. You are also prohibited from offering or paying anything of value to any foreign person if it is known or there is a reason to know that all or part of such payment will be used for the above-described prohibited actions. This provision includes situations when intermediaries, such as affiliates, or agents, are used to channel payoffs to foreign officials. INSIDER TRADING OR TIPPING Directors, officers and employees who are aware of material, non-public information from or about the Company (an "INSIDER"), are not permitted, directly or through family members or other persons or entities, to: o buy or sell securities (or derivatives relating to such securities) of the Company, or o pass on, tip or disclose material, nonpublic information to others outside the Company including family and friends. Such buying, selling or trading of securities may be punished by discipline of up to and including termination of employment; civil actions, resulting in penalties of up to three times the amount of profit gained or loss avoided by the inside trade or stock tip, or criminal actions, resulting in fines and jail time. Examples of information that may be considered material, non-public information in some circumstances are: o undisclosed annual, quarterly or monthly financial results, a change in earnings or earnings projections, or unexpected or unusual gains or losses in major operations; o undisclosed negotiations and agreements regarding mergers, concessions, joint ventures, acquisitions, divestitures, business combinations or tender offers; o undisclosed major management changes; o a substantial contract award or termination that has not been publicly disclosed; o a major lawsuit or claim that has not been publicly disclosed; o the gain or loss of a significant customer or supplier that has not been publicly disclosed; o an undisclosed filing of a bankruptcy petition by the Company; o information that is considered confidential; and o any other undisclosed information that could affect our stock price. The same policy also applies to securities issued by another company if you have acquired material, nonpublic information relating to such company in the course of your employment or affiliation with the Company. When material information has been publicly disclosed, each insider must continue to refrain from buying or selling the securities in question until the third business day after the information has been publicly released to allow the markets time to absorb the information. INTELLECTUAL PROPERTY: PATENTS, COPYRIGHTS AND TRADEMARKS Except as otherwise agreed to in writing between the Company and an officer or employee, all intellectual property you conceive or develop during the course of your employment shall be the sole property of the Company. The term intellectual property includes any invention, discovery, concept, idea, or writing whether protectable or not by any United States or foreign copyright, trademark, patent, or common law including, but not limited to designs, materials, compositions of matter, machines, manufactures, processes, improvements, data, computer software, writings, formula, techniques, know-how, methods, as well as improvements thereof or know-how related thereto concerning any past, present, or prospective activities of the Company. Officers and employees must promptly disclose in writing to the Company any intellectual property developed or conceived either solely or with others during the course of your employment and must render any and all aid and assistance, at our expense, to secure the appropriate patent, copyright, or trademark protection for such intellectual property. Copyright laws may protect items posted on a website. Unless a website grants permission to download the Internet content you generally only have the legal right to view the content. If you do not have permission to download and distribute specific website content you should contact your supervisor or our CEO, who may refer you to our legal counsel. If you are unclear as to the application of this Intellectual Property Policy or if questions arise, please consult with your supervisor or our CEO, who may refer you to our legal counsel. INVESTOR RELATIONS AND PUBLIC AFFAIRS It is very important that the information disseminated about the Company be both accurate and consistent. For this reason, all matters relating to the Company's internal and external communications are handled by our CEO (or, if retained for such purpose, a public relations consultant). Our CEO (or a public relations consultant retained by the Company) is solely responsible for public communications with shareholders, analysts and other interested members of the financial community. Our CEO (or a public relations consultant retained by the Company) is also solely responsible for our marketing and advertising activities and communication with employees, the media, local communities and government officials. Our CEO serves as the Company's spokesperson in both routine and crisis situations. We will not allow retaliation against an employee for reporting a possible violation of this Code in good faith. Retaliation for reporting a federal offense is illegal under federal law and prohibited under this Code. Retaliation for reporting any violation of a law, rule or regulation or a provision of this Code is prohibited. Retaliation will result in discipline, up to and including termination of employment, and may also result in criminal prosecution. However, if a reporting individual was involved in improper activity the individual may be appropriately disciplined even if he or she was the one who disclosed the matter to the Company. In these circumstances, we may consider the conduct of the reporting individual in reporting the information as a mitigating factor in any disciplinary decision. POLITICAL CONTRIBUTIONS You must refrain from making any use of Company, personal or other funds or resources on behalf of the Company for political or other purposes which are improper or prohibited by the applicable federal, state, local or foreign laws, rules or regulations. Company contributions or expenditures in connection with election campaigns will be permitted only to the extent allowed by federal, state, local or foreign election laws, rules and regulations. You are encouraged to participate actively in the political process. We believe that individual participation is a continuing responsibility of those who live in a free country. PROHIBITED SUBSTANCES We have policies prohibiting the use of alcohol, illegal drugs or other prohibited items, including legal drugs which affect the ability to perform one's work duties, while on Company premises. We also prohibit the possession or use of alcoholic beverages, firearms, weapons or explosives on our property. You are also prohibited from reporting to work while under the influence of alcohol or illegal drugs. We reserve the right to perform pre-employment and random drug testing on employees, as permitted by law. RECORD RETENTION The alteration, destruction or falsification of corporate documents or records may constitute a criminal act. Destroying or altering documents with the intent to obstruct a pending or anticipated official government proceeding is a criminal act and could result in large fines and a prison sentence of up to 20 years. Document destruction or falsification in other contexts can result in a violation of the federal securities laws or the obstruction of justice laws. REPORTING VIOLATIONS OF THIS CODE You should be alert and sensitive to situations that could result in actions that might violate federal, state, or local laws or the standards of conduct set forth in this Code. If you believe your own conduct or that of a fellow employee may have violated any such laws or this Code, you have an obligation to report the matter. Generally, you should raise such matters first with an immediate supervisor. However, if you are not comfortable bringing the matter up with your immediate supervisor, or do not believe the supervisor has dealt with the matter properly, then you should raise the matter with our CEO who may, if a law, rule or regulation is in question, then refer you to our legal counsel. The most important point is that possible violations should be reported and we support all means of reporting them. Directors and officers should report any potential violations of this Code to the chairman of the Board of Directors or to our legal counsel. WAIVERS There shall be no waiver of any part of this Code for any director or officer except by a vote of the Board of Directors. In case a waiver of this Code is granted to a director or officer, the notice of such waiver shall be posted on our website within five days of the Board's vote or shall be otherwise disclosed as required by applicable law or the rules of any stock exchange or market on which the Company's securities are listed for trading. Notices posted on our website shall remain there for a period of 12 months and shall be retained in our files as required by law. CONCLUSION This Code is an attempt to point all of us at the Company in the right direction, but no document can achieve the level of principled compliance that we are seeking. In reality, each of us must strive every day to maintain our awareness of these issues and to comply with the Code's principles to the best of our abilities. Before we take an action, we must always ask ourselves: o Does it feel right? o Is this action ethical in every way? o Is this action in compliance with the law? o Could my action create an appearance of impropriety? o Am I trying to fool anyone, including myself, about the propriety of this action? If an action would elicit the wrong answer to any of these questions, do not take it. We cannot expect perfection, but we do expect good faith. If you act in bad faith or fail to report illegal or unethical behavior, then you will be subject to disciplinary procedures. We hope that you agree that the best course of action is to be honest, forthright and loyal at all times. EX-21 6 exh21_12581.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 ---------- SUBSIDIARIES OF THE REGISTRANT - ------------------------------ 1. RAP Group, Inc. 2. Voltage Vehicles 3. ZAP Rentals 4. ZAP Stores Inc EX-23.1 7 exh23-1_12581.txt CONSENT OF ODENBERG ULLAKKO MURANISHI & CO., LLP EXHIBIT 23.1 ------------ CONSENT OF ODENBERG ULLAKKO MURANISHI & COMPANY, LLP CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use in this Annual Report on Form 10-KSB of ZAP of our report dated March 26, 2004, relating to the financial statements of ZAP and Subsidiaries, which appear in such Annual Report. We also consent to the reference to us under the heading "Experts" in such Annual Report. /s/ ODENBERG, ULLAKKO, MURANISHI & CO. LLP - ------------------------------------------- Odenberg, Ullakko, Muranishi & Co. LLP San Francisco, CA March 26, 2004 EX-31.1 8 exh31-1_12581.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 31.1 ------------ CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULES 13A-14(A) AND 15D-14(A) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, Steven M. Schneider., certify that: 1. I have reviewed this annual report on Form 10-KSB of ZAP; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2004 /s/ Steven M. Schneider ----------------------- Steven M. Schneider Director and (Chief Executive Officer) EX-31.2 9 exh31-2_12581.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 ------------ CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULES 13A-14(A) AND 15D-14(A) AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002 I, William R. Hartman, certify that: 1. I have reviewed this annual report on Form 10-KSB of ZAP; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2004 /s/ William R. Hartman ----------------------------- William R. Hartman Chief Financial Officer (Principal Financial Officer) EX-32.1 10 exh32-1_12581.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 ------------ CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Form 10-KSB of ZAP for the year ended December 31, 2003, Steven M. Schneider, Director and Chief Executive Officer of ZAP, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) such Form Type of ZAP for the year ended December 31, 2003,fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange of 1934; and (2) the information contained in such Form 10-KSB of ZAP for the year ended December 31, 2003, fairly presents, in all material respects, the financial condition and results of operations of ZAP. A signed original of this written statement required by Section 906, another document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ZAP and will be retained by ZAP and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Steven M. Schneider - ------------------------ Steven M. Schneider Director and Chief Executive Officer March 26, 2004 EX-32.2 11 exh32-2_12581.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 ------------ CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the accompanying Form 10-KSB of ZAP for the year ended December 31, 2003 (the "Report"), William R. Hartman, Chief Financial Officer of ZAP, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that: (1) such Form Type of ZAP for the year ended December 31, 2003,fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange of 1934; and (2) the information contained in such Form 10-KSB of ZAP for the year ended December 31, 2003,fairly presents, in all material respects, the financial condition and results of operations of ZAP. A signed original of this written statement required by Section 906, another document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to ZAP and will be retained by ZAP and furnished to the Securities and Exchange Commission or its staff upon request. /s/ William R. Hartman - ----------------------- William R. Hartman Chief Financial Officer March 26, 2004 -----END PRIVACY-ENHANCED MESSAGE-----