-----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, HvP1qteqjC6850RGmNnCZePZtUuNgoCnnVWa04+fQGSSvtZlY8dTTnM1DM4emVwi 6IiQ18LBRHJfG1C79eUC6Q== 0001072613-09-000640.txt : 20090331 0001072613-09-000640.hdr.sgml : 20090331 20090331140446 ACCESSION NUMBER: 0001072613-09-000640 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20081231 FILED AS OF DATE: 20090331 DATE AS OF CHANGE: 20090331 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-32534 FILM NUMBER: 09717730 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 10-K 1 form10-k_16369.txt ZAP FORM 10-K DATED 12-31-08 ============================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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, 2008 [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ________________ Commission file number 0-303000 ZAP ---------------------------------------------- (Name of small business issuer in its charter) California 94-3210624 - --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 501 Fourth Street, Santa Rosa California 95401 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Issuer's telephone number (707) 525-8658 Securities registered under Section 12(b) of the Exchange Act: Common Stock, no par value OTC BB - ------------------------------ --------------------------------- Title of Each Class Name Exchange on Which Registered Securities registered under Section 12(g) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold or the average bid and asked prices as of March 27, 2009 was $3,240,000. There were a total of 70,010,606 shares of the Registrant's Common Stock outstanding as of March 27, 2009. ================================================================================ TABLE OF CONTENTS ITEM NO. PAGE - -------------------------------------------------------------------------------- PART I - ------ ITEM 1. DESCRIPTION OF BUSINESS............................................. 4 ITEM 2. DESCRIPTION OF PROPERTY............................................. 14 ITEM 3. LEGAL PROCEEDINGS................................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 16 PART II - ------- ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES ................... 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........... 18 ITEM 8. FINANCIAL STATEMENTS................................................ 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................................. 45 ITEM 9A. CONTROLS AND PROCEDURES............................................. 45 ITEM 9B. OTHER INFORMATION................................................... 46 PART III - ------- ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT .............. 46 ITEM 11. EXECUTIVE COMPENSATION ............................................. 49 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ...................................... 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 54 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................. 55 ITEM 15. EXHIBITS............................................................ 56 2 PART 1 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE "FILINGS") CONTAIN FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH WORDS AND PHRASES SUCH AS "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT", "INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY RESULT", AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING FACTORS: o WHETHER THE ALTERNATIVE ENERGY AND ALTERNATE FUEL VEHICLE MARKET FOR OUR PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH IT MAY GROW; o OUR ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENT OUR GROWTH STRATEGIES, o OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OURPRODUCTS; o OUR ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY; o OUR ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS; o OUR ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGING MARKET FOR ELECTRIC AND FUEL-EFFICIENT VEHICLES; o CHANGES IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND o OTHER RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS SECTIONS OF THIS REPORT, PARTICULARLY THE SECTION CAPTIONED "RISK FACTORS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED. EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT REQUIRED BY APPLICABLE LAW. In this annual report on Form 10-K the terms "ZAP," "Company," "we," "us" and "our" refer to ZAP and its subsidiaries. 3 OVERVIEW GENERAL ZAP stands for Zero Air Pollution(R). With its new product offerings, the Company is positioned to become a leading brand and distribution portal of electric and other advanced technology vehicles. ZAP is committed to running its business based on a strong philosophical foundation that supports the environment, social responsibility and profitability. ZAP's strategy is to serve the growing and underrepresented consumer that seeks electric and fuel efficient vehicles. With the recent increases in the cost of oil and increasing concern about the environment and the effects of global warming, we believe there is a large and untapped demand in the areas of transportation and consumer products. During the energy crisis of the 1970s, Japanese automobile manufacturers penetrated the United States market when domestic automobile manufacturers failed to anticipate changes. ZAP believes a similar opportunity is present today, enhanced by heightened environmental awareness, climate changes and economic pressures. ZAP has assembled a complete line of products to meet the growing demands of the environmentally conscious consumer focused on two primary businesses: ZAP Automotive and ZAP Power Systems. ZAP was incorporated under the laws of the State of California, on September 23, 1994, as "ZAP Power Systems." The name of the Company was changed to "ZAPWORLD.COM" on May 16, 1999 in order to increase our visibility in the world of electronic commerce. We subsequently changed our name to ZAP on June 18, 2001 in order to reflect our growth and entry into larger, more traditional markets. Our principal executive offices are located at 501 Fourth Street Santa Rosa, California, 95401. Our telephone number is (707) 525-8658. Our website is www.zapworld.com. Please refer to it for further information on ZAP. SUBSIDIARIES We have the following wholly owned subsidiaries : Voltage Vehicles, a Nevada company ("Voltage Vehicles"), ZAP Rental Outlet, a Nevada company ("ZAP Rentals"), ZAP Stores, Inc., a California company ("ZAP Stores"), ZAP Manufacturing, Inc., a Nevada company ("ZAP Manufacturing") and ZAP World Outlet, Inc., a California company ("ZAP World") ; Voltage Vehicles is engaged primarily in the distribution and sale of advanced technology and conventional automobiles; ZAP Stores is engaged primarily in consumer sales of ZAP products at one location and ZAP Manufacturing is engaged primarily in the distribution of ZAP products. ZAP World Outlet, ZAP Rental Outlet and RAP Group are not currently operating subsidiaries. 4 BUSINESS DEVELOPMENT Founded in 1994, ZAP has invented, designed, manufactured, and marketed numerous innovative products since the Company's inception. In 1995, ZAP began marketing electric transportation on the Internet through our website, www.zapworld.com. ZAP has been a pioneer in developing and marketing electric vehicles such as a zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to most bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through 1998, we continued to add to our product line; in 1999, ZAP added electric motorbikes; in 2001, it added electric dive scooters; in 2003, ZAP announced its first electric automobiles, including the first-ever production electric automobile imported from its manufacturing partner in China; in 2004 ZAP introduced electric all-terrain vehicles and the fuel-efficient Smart Car; and in 2006 ZAP introduced pure plug-in cars and trucks, capable of running on electricity. To date, we have delivered more than 100,000 electric vehicles and consumer products to customers in more than 75 countries, which we believe establishes us as one of the leaders in the alternative transportation marketplace. Today, ZAP is continuing its focus as one of the pioneers of advanced transportation technologies and leveraging its place in the market as a magnet for new technologies. The Company believes there is a growing and underrepresented market for fuel efficient transportation vehicles and we are capitalizing on the opportunities enhanced by heightened environmental awareness, climate changes and economic pressures. The technology is available to deliver transportation solutions that are practical and affordable. With our products such as the XEBRA and ZAPPY 3, ZAP is already delivering such solutions to the market. Our goal is to become one of the largest and most complete brand and distribution portals in the United States for advanced technology vehicles and 100% plug-in electrics. To distribute our practical, affordable and advanced transportation technologies, we have established and are growing both our portal of qualified automotive dealers and our relationships with specialty dealers/distributors for our power system products. Through these distribution channels, coupled with the continued establishment of partnerships with select manufacturers, we intend to expand our market recognition by building awareness of the evolving technologies available for automotive transportation and in reducing our nation's dependency on foreign oil. PRODUCT SUMMARY Our existing product line, which includes completed, market ready products and planned introductions, is as follows: ZAP AUTOMOTIVE - -------------- ZAP believes it is positioned to become one of the leading distributors of fuel efficient alternative energy vehicles in the United States. We believe that we are one of only a few companies distributing a 100% production electric vehicle capable of speeds up to 40 mph. Within the next twelve to thirty-six months, we hope to have distribution agreements in place with vehicle manufacturers whose products fit ZAP's mission. To distribute our product to end consumers and fleets, we have established more than 50 licensed automotive dealers and intend to grow this base significantly over the next several years. In 2006, ZAP Automotive introduced the following automobile products: o the 100% electric XEBRA sedan with an MSRP of approximately$11,000; o the 100% electric XEBRA utility vehicle truck with an MSRP of approximately $12,000; and In 2007, ZAP Automotive introduced a new electric scooter, the ZAPINO, with an advanced 3,000 watt brushless DC hub motor, perfect for city commuting and able to reach speeds of 30 MPH with an MSRP of $3,500. In 2008, ZAP Automotive introduced the ZAP truck XL and ZAPVAN Shuttle, two low speed vehicles with MSRP of $14,500 and $14,700, respectively. Our future offerings that are currently in the developmental stage include: o The ZAP Alias, which has a target price of $35,000 to $45,000 per vehicle and an estimated range of 100 miles per charge. This vehicle launch date is for late 2009. We are also in discussions with other foreign manufacturers and hope to establish additional relationships within the next twelve to thirty-six months for other vehicle platforms. 5 XEBRA We believe that XEBRA is one of the only series production electric vehicle in the United States that can legally travel faster than 25 mph. The car's suggested retail price of $11,700 is significantly less expensive than most of its competitors, some of which cost more than $100,000 and are not yet widely available today. XEBRA has three wheels and is being imported as a motor-driven cycle, yet, unlike most other motor-driven cycles, the XEBRA is enclosed with windows and a roof, affording it protection from inclement weather. Working with our Chinese manufacturing partner, we have designed two XEBRA models: a sedan and a utility pick-up truck. The Chinese manufacturer's current manufacturing capacity is approximately 1,000 vehicles per month. Initial market demand has been strong, both from end consumers using the vehicle as a "city-car" and from fleet managers of municipalities, states, green friendly corporations, and universities who have a preference or mandate to purchase zero emission vehicles. XEBRA Sedan (ZAPCAR (R)) ZAP launched the sedan version of its XEBRA ZAPCAR on July 11, 2006. The sedan has a seating capacity for four and is being targeted for city/commuter use. Based on initial feedback, ZAP will be marketing the XEBRA sedan to government and corporate fleets as well as to families with two or more cars, but with plenty of occasion to use their vehicles for short, city drives. XEBRA PK (ZAPTRUCK(R)) ZAP launched its utility pick-up truck version of the XEBRA, the XEBRA ZAPTRUCK, on August 24, 2006. This electric vehicle seats two with a multi-purpose platform behind the passenger compartment that serves as a hauler, dump truck or flatbed. The XEBRA ZAPTRUCK is targeted to municipalities, maintenance facilities, universities, ranches and warehouses. Since its launch, we have received overwhelming inquiries for test drives. To date, we have focused on our west coast market and sales have exceeded our initial distribution and sales plans. LOTUS In 2007, we announced and entered into a development and feasibility contract with Lotus Engineering to develop an electric all-wheel drive crossover high performance vehicle for the U.S. market. A combination of the lightweight aluminum vehicle architecture, a new efficient drive and advanced battery management systems is intended to enable a range of up to 350 miles between charges. An auxiliary power unit is planned to support longer distance journeys. We are also developing an all electric sport vehicle with a targeted 100 mile range, the ZAP Alias (TM), which is expected late in 2009. Future Automotive Offerings - --------------------------- Over the next 36 months, we hope to establish relationships with additional manufacturers who can supply automobiles and related vehicles that meet our mission of affordable, advanced transportation technologies that are socially responsible and environmentally sustainable. In 2008, we have identified the following products as potential future offerings for the Company: (1) an affordable 100% electric two-seater sports coupe; (2) a high performance highway all electric vehicle and (3) electric trucks. ZAP Power Systems - ----------------- We launched the Company in 1994 with the invention of the ZAPPY electric scooter and quickly established a presence as one of the market leaders in the electric "personal" transportation product segment. Since inception, the Company has been able to maintain a steady business and committed buyers in this segment. In keeping with our initial product 6 offerings, at the beginning of 2006, we revitalized our consumer products line (recently renamed "Power Systems"), including an updated version of the electric scooter. As part of the segment's revitalization, we reduced the number of suppliers and placed more emphasis on upgrading existing models with newer component technology and more robust features in order to provide a higher quality consumer experience and product. Our current product offerings include: o Three-wheeled personal transporters (ZAPPY3, ZAPPY3 Pro, ZAPPY3 EZ); o Off-road vehicles (electric quads and motorcycles); and The ZAPPY 3 Personal Transporters Segway's highly publicized "human transporter to change the world" unearthed a growing need for a "scooter for adults," better known as personal electric transportation. The Company responded to this demand by designing the ZAPPY3. Unlike the Segway, the ZAPPY3's 3-wheeled vehicle design provides stability and maneuverability allowing just about anyone to ride this vehicle without training. It has a top speed of 15 mph, and the Pro has the farthest range of any personal transporter available today at up to 25 miles range per charge. The Company initially thought that the ZAPPY3 would be great for the consumer market. Over the past year, the Company has revisited its sales strategy and come to recognize that the largest market opportunities are in the industrial and commercial applications. The Company's primary sales channels are now more clearly defined as security, sporting goods and material handling. With the increased emphasis on homeland security, there are several product competitors in the security and police market segment. Segway, the most well known, can be found in select police departments and airports and sells for about $5,500. American Chariot, which is a chariot-like transporter, has entered the market selling between $1,500 to $2,500. T3Motion, which is built like a small tank and priced at up to $8,000. The ZAPPY3 meets the need of a majority of the security transportation needs and with a selling price range of $530 to $900, depending on the model purchased, which we believe is the most economical of all offerings. The ZAPPY3 retail focus has continued in 2008. As the product line has gained momentum and market acceptance, we plan to grow distribution in the retail channel through larger regional and specialized chain stores. The material handling, warehousing, fabrication, and construction industries are the ideal markets for the ZAPPY3 Pro. We are not currently aware of any major competitors in this market. The traditional solution for short distance transportation has been bicycles. The ZAPPY Pro offers the perfect utility vehicle for shuttling, picking and packing and getting into small areas like elevators. While the Company's entrance into this market is still in the early stages, the product response has been very favorable, demonstrated by our newly established relationship with Indoff, the largest distributor of material handling equipment in the United States. The Zapino is an electric scooter that is a great link between ZAP's personal transporters and electric cars. Not only economical and eco-friendly, the Zapino is powerful with an advanced 3000-watt brushless DC hub motor, perfect for city commuting. Able to reach speeds of 30 MPH, the Zapino is able to keep up with city traffic without contributing to city pollution. The rear wheel hub motor on the Zapino creates more room on board for additional batteries and performance. This innovative drive system eliminates the need for belts or chains with lower overall maintenance. It also delivers a more enjoyable ride because it is nearly silent, accelerates smoothly with no shifting, has no engine vibration, no tailpipe or heat exhaust -- just good, clean fun. Off-Road Vehicles All terrain vehicle ("ATV") manufacturers recognized in excess of $5.0 billion in revenues in 2006 with the market for ATVs. In the United States alone, approximately 800,000 units were sold in 2006. To date, all of the ATV's on the market are gas-powered. We believe electric ATV's have practical environmental benefits over their gas-powered counterparts: they are silent and generate no emissions. Moreover, there are now over 8,000 organic farms in the United 7 States which are committed to reducing pollutants that may put organic certification at risk. The electric ATVs can provide the ruggedness of the traditional ATV in areas never before accessible, while being more versatile than golf carts. We entered the electric ATV market in 2006 with our ZAP Buzz mini ATV. The Buzz has a 450 watt geared-motor and a top speed of 15 mph with a range of approximately 20 miles. In the 1st quarter of 2007, we introduced the 800 watt "mid size" ATV for sale in the United States and some of our existing ZAP dealers already have placed preorders. We launched a heavy duty ATV, the ZAP Dude in the 3rd quarter 2008 with product features and styling comparable to existing gas-models. If we are able to capture 1% of the all terrain vehicle market share, it could equate to over $40 million in revenues per year. However, there can be no assurances that we will be able to achieve such market share. RISK FACTORS We have a history of losses and our future profitability on a quarterly or annual basis is uncertain, which could have a harmful effect on our business and the value of ZAP's common stock. We incurred net losses of $9.8 million, $28 million, $11.9 million, for the years ended December 31, 2008, 2007 and 2006 respectively. We can give no assurance that we will be able to operate profitably in the future. WE FACE INTENSE COMPETITION WHICH COULD CAUSE US TO LOSE MARKET SHARE. In the advanced technology vehicle market in the United States, we compete with large manufacturers, including GM, Honda, Toyota, and Chrysler, who have more significant financial resources, established market positions, long-standing relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, manufacturing, distribution, financial and other resources than we do. Each of these companies is currently working to develop, market, and sell advanced technology vehicles in the United States market. The resources available to our competitors to develop new products and introduce them into the marketplace exceed the resources currently available to us. We also face competition from smaller companies with respect to our consumer products, such as our electric bicycle and scooter. This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution, or marketing to develop, maintain, and extend our current technology and market position. CHANGES IN THE MARKET FOR ELECTRIC VEHICLES COULD CAUSE OUR PRODUCTS TO BECOME OBSOLETE OR LOSE POPULARITY. The electric vehicle industry is in its infancy and has experienced substantial change in the last few years. To-date, demand for and interest in electric vehicles has been sporadic. As a result, growth in the electric vehicle industry depends on many factors, including: o continued development of product technology; o the environmental consciousness of customers; o the ability of electric vehicles to successfully compete with vehicles powered by internal combustion engines; o widespread electricity shortages and the resultant increase in electricity prices, especially in our primary market, California, which could derail our past and present efforts to promote electric vehicles as a practical solution to vehicles which require gasoline; and o whether future regulation and legislation requiring increased use of nonpolluting vehicles is enacted. 8 We cannot assure you that growth in the electric vehicle industry will continue. Our business may suffer if the electric vehicle industry does not grow or grows more slowly than it has in recent years or if we are unable to maintain the pace of industry demands. WE MAY BE UNABLE TO KEEP UP WITH CHANGES IN ELECTRIC VEHICLE TECHNOLOGY AND, AS A RESULT, MAY SUFFER A DECLINE IN OUR COMPETITIVE POSITION. Our current products are designed for use with, and are dependent upon, existing electric vehicle technology. As technologies change, we plan to upgrade or adapt our products in order to continue to provide products with the latest technology. However, our products may become obsolete or our research and development efforts may not be sufficient to adapt to changes in or create necessary technology. As a result, our potential inability to adapt and develop the necessary technology may harm our competitive position. THE FAILURE OF CERTAIN KEY SUPPLIERS TO PROVIDE US WITH COMPONENTS COULD HAVE A SEVERE AND NEGATIVE IMPACT UPON OUR BUSINESS. We rely on a small group of suppliers to provide us with components for our products, some of whom are located outside of the United States. If these suppliers become unwilling or unable to provide components, there are a limited number of alternative suppliers who could provide them. Changes in business conditions, wars, governmental changes, and other factors beyond our control or which we do not presently anticipate could affect our ability to receive components from our suppliers. Further, it could be difficult to find replacement components if our current suppliers fail to provide the parts needed for these products. A failure by our major suppliers to provide these components could severely restrict our ability to manufacture our products and prevent us from fulfilling customer orders in a timely fashion. PRODUCT LIABILITY OR OTHER CLAIMS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. The risk of product liability claims, product recalls, and associated adverse publicity is inherent in the manufacturing, marketing, and sale of electrical vehicles. Although we have product liability insurance for our consumer products for risks of up to an aggregate of $5,000,000, that insurance may be inadequate to cover all potential product claims. We also carry liability insurance on our automobile products. Any product recall or lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a material adverse effect on our business and financial condition. We may not be able to secure additional product liability insurance coverage on acceptable terms or at reasonable costs when needed. A successful product liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates. We cannot assure you that such claims and/or recalls will not be made in the future. WE MUST DEVOTE SUBSTANTIAL RESOURCES TO IMPLEMENTING A PRODUCT DISTRIBUTION NETWORK. Our dealers are often hesitant to provide their own financing to contribute to our product distribution network. As a result, we anticipate that we may have to provide financing or other consignment sale arrangements for dealers who would like to participate as our regional distribution centers. The further expansion of our product distribution network will require a significant capital investment and will require extensive amounts of time from our management. A capital investment such as this presents many risks, foremost among them being that we may not realize a significant return on our investment if the network is not profitable. Our inability to collect receivables from our dealers could cause us to suffer losses. Lastly, the amount of time that our management will need to devote to this project may divert them from performing other functions necessary to assure the success of our business. FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD ADVERSELY AFFECT OUR BUSINESS. We plan to increase sales and expand our operations substantially during the next several years through internally-generated growth and the acquisition of businesses and products. 9 To manage our growth, we believe we must continue to implement and improve our operational, manufacturing, and research and development departments. We may not have adequately evaluated the costs and risks associated with this expansion, and our systems, procedures, and controls may not be adequate to support our operations. In addition, our management may not be able to achieve the rapid execution necessary to successfully offer our products and services and implement our business plan on a profitable basis. The success of our future operating activities will also depend upon our ability to expand our support system to meet the demands of our growing business. Any failure by our management to effectively anticipate, implement, and manage changes required to sustain our growth would have a material adverse effect on our business, financial condition, and results of operations. We cannot assure you that we will be able to successfully operate acquired businesses, become profitable in the future, or effectively manage any other change. An inability to successfully operate recently acquired businesses and manage existing business would harm our operations. THE LOSS OF CERTAIN KEY PERSONNEL COULD SIGNIFICANTLY HARM OUR BUSINESS. The Company's performance is substantially dependent upon the services of its executive officers and other key employees, as well as on its ability to recruit, retain, and motivate other officers and key employees. Competition for qualified personnel is intense and there are a limited number of people with knowledge of and experience in the advanced technology vehicle industry. The loss of services of any of our officers or key employees, or our inability to hire and retain a sufficient number of qualified employees, will harm our business. Specifically, the loss of Mr. Schneider, our Chief Executive Officer or Mr. Starr, our founder, who is also head of our R&D efforts, whose specialized knowledge of the electric vehicle industry is essential to our business, would be detrimental. We have employment agreements with Mr. Schneider and Mr. Starr that provide for their continued service to the Company until October 1, 2013. REGULATORY REQUIREMENTS MAY HAVE A NEGATIVE IMPACT UPON OUR BUSINESS. While our products are subject to substantial regulation under federal, state, and local laws, we believe that the products we have sold are materially in compliance with all applicable laws. However, to the extent the laws change, or if we introduce new products in the future, some or all of our products may not comply with applicable federal, state, or local laws. Further, certain federal, state, and local laws and industrial standards currently regulate electrical and electronics equipment. Although standards for electric vehicles are not yet generally available or accepted as industry standards, our products may become subject to federal, state, and local regulation in the future. Compliance with this regulation could be burdensome, time consuming, and expensive. Our automobile products are subject to environmental and safety compliance with various federal and state regulations, including regulations promulgated by the EPA, NHTSA, and Air Resource Board of the State of California, and compliance certification is required for each new model year. The cost of these compliance activities and the delays and risks associated with obtaining approval can be substantial. Although the Company had marketed its Smart Car product in the United States, the car must be certified by the California Air Resources Board before it can be sold in California, New York, and three other states. In addition, the two models of our OBVIO products will need to satisfy all regulatory requirements before they can be sold in the United States. The risks, delays, and expenses incurred in connection with such compliance could be substantial. MANUFACTURING OVERSEAS MAY CAUSE PROBLEMS FOR US. We have been shifting our manufacturing overseas. There are many risks associated with international business. These risks include, but are not limited to, language barriers, fluctuations in currency exchange rates, political and economic instability, regulatory compliance difficulties, problems enforcing agreements, and greater exposure of our intellectual property to markets where a high probability of unlawful appropriation may occur. A failure to successfully mitigate any of these potential risks could damage our business. WE MAY NOT BE ABLE TO PROTECT OUR INTERNET ADDRESS. We currently hold the internet address, http://www.zapworld.com, a portal through which we sell our products. We may not be able to prevent third parties from acquiring internet addresses that are confusingly similar to our address, which could adversely affect our business. Governmental agencies and their designees generally regulate the 10 acquisition and maintenance of internet addresses. However, the regulation of internet addresses in the United States and in foreign countries is subject to change. As a result, we may not be able to acquire or maintain relevant internet addresses in all countries where we conduct business. OUR SUCCESS IS HEAVILY DEPENDENT ON PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS. We rely on a combination of patent, copyright, trademark, and trade secret protections to protect our proprietary technology. Our success will, in part, depend on our ability to obtain trademarks and patents. We hold several patents registered with the United States Patent and Trademark Office. These registrations include both design patents and utility patents. In addition, we have recently submitted provisional patents which may or may not be afforded the limited protection associated with provisional patents. We have also registered numerous trademarks with the United States Patent and Trademark Office, and have several pending at this time. We cannot assure you that the trademarks and patents issued to us will not be challenged, invalidated, or circumvented, or that the rights granted under those registrations will provide competitive advantages to us. We also rely on trade secrets and new technologies to maintain our competitive position. Although we have entered into confidentiality agreements with our employees and consultants, we cannot be certain that others will not gain access to these trade secrets. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. WE MAY BE EXPOSED TO LIABILITY FOR INFRINGING INTELLECTUAL PROPERTY RIGHTS OF OTHER COMPANIES. Our success will, in part, depend on our ability to operate without infringing on the proprietary rights of others. Although we have conducted searches and are not aware of any patents and trademarks which our products or their use might infringe, we cannot be certain that infringement has not or will not occur. We could incur substantial costs, in addition to the great amount of time lost, in defending any patent or trademark infringement suits or in asserting any patent or trademark rights, in a suit with another party. RISK OF UNREGISTERED SECURITIES OFFERING. In the past, we have had numerous sales of our securities which were not registered under federal or state securities laws. We have strived to comply with all applicable Federal and state securities laws in connection with our issuances of unregistered securities. However, to the extent we have not complied, there may be liability for the purchase price of the securities sold together with interest and the potential of regulatory sanctions. OUR STOCK PRICE AND TRADING VOLUME MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR OUR STOCKHOLDERS. The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We have experienced significant volatility in the price of our stock over the past few years. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations. We have not paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We have not achieved profitable operations and if we do realize a profit in the future, we anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. Accordingly, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the direction of our board of directors after taking into account many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion. 11 SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal influences for consumer products. Sales volumes in this industry typically slow down during the winter months, November to March in the U.S. The Company's auto distribution network is affected by the availability of cars ready to sell to dealers. INFLATION Our raw materials and finished products and automobiles are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our product sources. SOURCES AND AVAILABILITY OF PARTS AND SUPPLIES Materials, parts, supplies and services used in our business are generally available from a variety of sources. However, interruptions in production or delivery of these goods could have an adverse impact on our general operations, or our manufacturer's operations and production of ZAP products. We strive to have dual sources. LICENSES, PATENTS AND TRADEMARKS We have the following patents covering our electric vehicles: - ------------------------ ------------- ----------------------------------------- United States Patent Date Subject - ------------------------ ------------- ----------------------------------------- Patent No. 5,491,390 2/13/1996 Electric motor power system for bicycles, tricycles, and scooters - ------------------------ ------------- ----------------------------------------- Patent No. 5,671,821 9/30/1997 Electric motor system - ------------------------ ------------- ----------------------------------------- Patent No. 5,848,660 12/15/1998 Portable Collapsible Scooter (ZAPPY) - ------------------------ ------------- ----------------------------------------- Patent No. 5,634,423 6/3/1997 Personal Submersible Marine Vehicle - ------------------------ ------------- ----------------------------------------- Patent No. 5,423,278 6/13/1995 Submersible Marine Vessel - ------------------------ ------------- ----------------------------------------- Patent No. 5,303,666 4/19/1994 Submersible Marine Vessel - ------------------------ ------------- ----------------------------------------- Patent No. 6,748,894 6/15/2004 Submersible Marine Vessel (sea scooter) - ------------------------ ------------- ----------------------------------------- Patent No. 6,588,528 7/8/2003 Electric Vehicle Drive System - ------------------------ ------------- ----------------------------------------- Patent No. 5,842,535 12/1/1998 Electric Drive Assembly for Bicycles - ------------------------ ------------- ----------------------------------------- Patent No. 6,050,357 4/18/2000 Powered Skateboard - ------------------------ ------------- ----------------------------------------- Patent No. 6,059,062 5/9/2000 Powered Roller Skates - ------------------------ ------------- ----------------------------------------- Patent No. 5,735,361 4/7/1998 Dual-Pole Personal Towing Vehicle - ------------------------ ------------- ----------------------------------------- Patent No. 5,913,373 6/22/1999 Dual-Pole Dual-Wheel Personal Towing Vehicle - ------------------------ ------------- ----------------------------------------- Patent No. DS40400 Pending Three-Wheeled Vehicle (ZAPPY 3 Scooter) - ------------------------ ------------- ----------------------------------------- Patent No. D433,718 11/14/2000 Portable Collapsible Scooter (ZAPPY) - ------------------------ ------------- ----------------------------------------- Patent No. D347,418 5/31/1994 Scuba Scooter - ------------------------ ------------- ----------------------------------------- Patent No. D359,022 6/6/1995 Scuba Scooter - ------------------------ ------------- ----------------------------------------- We have the following trademarks covering our electric vehicles: - ------------------------ --------------------- --------------------------------- United States Trademark Subject - ------------------------ --------------------- --------------------------------- Trademark No. 2759913 Cap'n Billy's Wiz-Bang and design - ------------------------ --------------------- --------------------------------- Trademark No. 2240270 Electricruizer - ------------------------ --------------------- --------------------------------- Trademark No. 2534197 ETC Express - ------------------------ --------------------- --------------------------------- Trademark No. 2878219 ETC Traveler - ------------------------ --------------------- --------------------------------- Trademark No. 2248753 Powerbike - ------------------------ --------------------- --------------------------------- Trademark No. 2224640 Powerski - ------------------------ --------------------- --------------------------------- 12 - ------------------------ --------------------- --------------------------------- Trademark No. 2329466 The Future is Electric - ------------------------ --------------------- --------------------------------- Trademark No. 1794866 ZAP - ------------------------ --------------------- --------------------------------- Trademark No. 2912329 ZAP Car - ------------------------ --------------------- --------------------------------- Trademark No. 2335090 ZAP Electric Vehicle Outlet - ------------------------ --------------------- --------------------------------- Trademark No. 2885816 ZAP Seascooter - ------------------------ --------------------- --------------------------------- Trademark No. 2330894 ZAPPY - ------------------------ --------------------- --------------------------------- Trademark No. 2371240 Zapworld.com - ------------------------ --------------------- --------------------------------- Trademark No. 2320346 Zero Air Pollution - ------------------------ --------------------- --------------------------------- Trademark No. 2689203 Swimmy - ------------------------ --------------------- --------------------------------- BACKLOG As of March 27, 2009, the Company has over $2 million in backlog orders from auto-dealer purchase contracts for Xebra(TM)Electric vehicles. We anticipate shipping these units from on hand inventory and future shipments. ZAP has a ready supply of Xebras from our China manufacturer. The backlog for our consumer products on the same date was $18,000. We anticipate shipping the consumer products throughout the year of 2009. COMPETITIVE CONDITIONS The competition to develop and market advanced technology vehicles has been intense and is expected to continue to increase. Our principal competitive advantages over our competitors are our ownership of fundamental technology, our trade name and brand recognition, our ability to be a low cost manufacturer through domestic and international contract manufacturing arrangements and our growing distribution network. We benefit from our high name recognition in the advanced transportation vehicle industry coupled with a rapidly developing consumer sales business on our website. In order to reduce costs, our production activities have been transferred to lower cost contract manufacturers outside the United States, which enables us to offer our products at competitive prices. This also enables us to concentrate on our marketing and sales efforts and the growth of our distribution network. We offer one of the broadest lines of personal electric vehicles currently available, which we believe reinforces our name recognition in the market place. In the advanced technology vehicle market in the United States, we compete with large manufacturers, including Honda and Toyota, who have more significant financial resources, established market positions, longstanding relationships with customers and dealers, and who have more significant name recognition, technical, marketing, sales, manufacturing, distribution and other resources than we do. Each of these companies is currently working to develop, market and sell advanced technology vehicles in the United States market. The resources available to our competitors to develop new products and introduce them into the market place exceed the resources currently available to our Company. We also face competition from smaller companies with respect to our consumer products, such as our electric bicycle and scooter. We expect to face competition from the makers of consumer batteries and small electronics with respect to the ZAP portable energy line. This intense competitive environment may require us to make changes in our products, pricing, licensing, services, distribution or marketing to develop, maintain and extend our current technology and market position. EMPLOYEES As of March 30, 2009, the Company had a total of 48 employees. We have employment agreements with the following: Mr. Schneider (Chief Executive Officer and Director), Mr. Starr (Head of R&D), until 2013, Mr. Hartman (Chief Financial Officer) until August 2009 with annual extensions and Mr. Kazzaz (Chief Operating Officer) until 2010. We believe our employee relations are generally good. Our employees are not represented by a collective bargaining unit. 13 ITEM 2. DESCRIPTION OF PROPERTY. The chart below contains a summary of our principal facilities Location Use Square Feet Rent - ------------------------ ---------------------- ----------- ------- 501 Fourth Street, SR Corporate Headquarters 20,000 $ - (1) 9 th Street,SR Warehousing 58,700 $ 14,109 3362 &3405 Fulton Road, SR Office, Automobile Lot 21,780 $ 7,000 44720 Main Street,Mendocino Retail Outlet 5,500 $ - (1) The building debt is due to Al Yousuf LLC, whose president is the Chairman of the Board of ZAP, with a scheduled maturity on February 28, 2010. The loan may be extended by mutual agreement between the parties. The Company purchased the Fourth Street building in March 2003 to use as our principal executive offices. The building was built originally in 1906 and is in downtown Santa Rosa. Over the years it was updated and remodeled by previous owners and the Company. The Company has renovated the building during its ownership with new carpets, paint and remodeled to include a new showroom and conference room. The building and contents are adequately insured in the opinion of management. The Company occupies more than 90 percent of the building. The property tax rate is set at 1 percent per year of the assessed value of $3.1 million. The building is being depreciated over a 30 year useful life. The Company purchased the Mendocino California property in May 2005 which is currently being used as a retail outlet. The net book value of our real estate holdings at December 31, 2008 was approximately $3.7 million. The rest of our facilities are rented or leased. The properties located at 3362 and 3405 Fulton Road are rented on a month-by-month basis from ZAP's Chief Executive Officer. The Company plans to continue to rent properties based on the Company's needs. The Company believes these properties are adequate for the Company's foreseeable needs. It is management's opinion that our insurance policies cover all insurance requirements of the landlords. We own the basic tools, machinery and equipment necessary for the conduct of our repairs, our minimal research and development, and vehicle prototyping activities. We believe that the above facilities are generally adequate for present operations. At present, the manufacturing for the Company is being contracted out. ITEM 3. LEGAL PROCEEDINGS. In the normal course of business, we may become involved in various legal proceedings. Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition. However, as with most businesses, we are occasionally parties to lawsuits incidental to our business, none of which are anticipated to have a material adverse impact on our financial position, results of operations, liquidity or cash flows. The Company has estimated the amount of potential exposure, if any, it may have with respect to litigation claims and assessments. Robert Chauvin; Mary Chauvin; Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks ("Robert Chauvin, et al.") v. Voltage Vehicles; ZAP; ZAP Power Systems Inc.; ZAPWORLDCOM; Elliot Winfield; Steven Schneider; Phillip Terrazzi; Max Scheder-Breschin; Renay Cude; [sic] and Does I-XX, Second Judicial District Court State of Nevada, County of Washoe, Case No. CV06 02767. On November 17, 2006, Robert Chauvin, et al. filed a complaint alleging breach of contract, breach of the covenant of good faith and fair dealing, breach of warranties, fraud/misrepresentation, negligent misrepresentation, quantum merit or unjust enrichment, civil conspiracy, violation of Security [sic] and Exchange Act/federal securities law, and deceptive trade practices, pursuant to a License Agreement (for a distribution license) entered into between Rajun Cajun, Inc. dba ZAP of Carson City, dba ZAP of Reno, dba ZAP of Sparks ("Rajun Cajun") and Voltage Vehicles. The complaint seeks general damages in an amount in excess of 14 $10,000, special damages in an amount in excess of $10,000, punitive damages in an amount in excess of $10,000, attorneys' fees and cost of suit, for judgment in an amount equal to treble actual damages, and recession in the amounts of $397,900 and $120,000. On January 19, 2007, defendants Voltage Vehicles and ZAP filed a Motion to Dismiss on the grounds that the License Agreement entered into between Rajun Cajun and Voltage contains a forum selection clause designating Sonoma County, State of California as the only appropriate forum. The court granted that Motion on April 13, 2007. In its order on that motion, the court also found that all other motions pending in the Nevada court in this matter are now moot. (As of that time, the following motions were still pending: (1) Chauvin, et al.'s Notices of Intent to Take Default against two of the named corporate defendants and against the individual defendants, except Renay Cude; (2) a Motion to Quash Service of Process or Alternatively for Dismissal by each of the individual defendants and both of the defunct corporate defendants; and (3) Chauvin, et al.'s Motion for Publication of Summons against the named individual defendants.) Voltage Vehicles v. Rajun Cajun, et al., Superior Court of California, County of Sonoma, Case No. SCV 240179, filed February 9, 2007. (This suit is related to the Nevada case of Robert Chauvin, et al. v. Voltage Vehicles, et al. discussed immediately above.) In its complaint, Voltage Vehicles requests Declaratory Relief against Rajun Cajun, asking the Court to declare that the License Agreement between those two parties does not grant Rajun Cajun an exclusive dealership in northern Nevada to distribute Voltage Vehicle products and that Voltage Vehicles has performed its obligations under the License Agreement. On May 24, 2007, Rajun Cajun filed a Cross-Complaint in substantially the same form as the Complaint filed in Nevada, alleging breach of contract, breach of the covenant of the good faith, etc. The Cross-Complaint seeks general damages in an amount in excess of $25,000, special damages in an amount in excess of $25,000, punitive damages in an amount in excess of $25,000, attorneys' fees and cost of suit, for judgment in the amount equal to treble actual damages, and rescission in the amounts of $397,900 and $120,000, plus interest. Cross-Defendants intend to vigorously defend against the claims set forth in the Cross-Complaint and so, on August 22, 2007, Cross-Defendants filed both a special demurrer for abatement to prohibit Cross-Complainants from maintaining a cross-complaint and a demurrer to the Cross-Complaint itself. On February 11, 2008 ZAP and Voltage Vehicles filed a demurrer to Cross-complainants' third through fifteenth causes of action. A hearing on that demurer is currently set for June 11, 2008. In its tentative ruling, the Court ruled in ZAP and Voltage Vehicles' favor and granted Rajun Cajun leave to file a Second Amended Cross-Complaint. The Second Amended Cross-complaint seeks general damages in an amount in excess of $50,000, damages for Cross-plaintiffs' lost earnings, both past and future, in a sum to be proven at trial, a sum in excess of $50,000 for Cross-complainants' mental pain, a sum in excess of $50,000 for willful and wanton misconduct, and such other and further relief the court may deem just and equitable. On September 16, 2008 ZAP and Voltage Vehicles filed a demurrer to the Second Amended Cross-complaint. The hearing on Zap and Voltage Vehicle's demurrer to the Second Amended Cross-complaint is set for November 19, 2008. A Settlement Conference is set for March 25, 2009 and Trial Call is set for April 24, 2009. In the meantime, discovery is ongoing. CIT Communications Finance Corporation v. ZAP, formerly known as ZapWorld.com and as Zap Power Systems, and DOES 1-20, complaint filed on February 26, 2008, Case No. 242445, in the Superior Court of California, County of Sonoma. CIT Communications Finance Corporation ("CIT") has served ZAP with a complaint, an application for writ of possession, and an application for writ of attachment. CIT's complaint and its applications for the two writs are based on three telephone equipment leases CIT alleges it has with ZAP, through predecessors in interest. The Complaint includes five causes of action: (1) breach of written lease agreements; (2) recovery of personal property; (3) conversion; (4) quantum valebant; and (5) quantum meruit or unjust enrichment. For each of those claims, CIT alleges that ZAP entered into the leases, never returned the equipment, and, in or about June 2002, ceased payment of amounts owed under the leases. CIT is now seeking both return of the equipment and a monetary award covering amounts owed under the leases. More particularly, for its breach of contract claim, CIT is seeking recovery of $108,967.26 allegedly owed on the leases. On its recovery of personal property claim, CIT is seeking either return of all the leased equipment or a monetary damages to cover the value of the leased equipment. On the conversion claim, CIT is seeking general damages for ZAP's continued possession and use of the equipment, as well as punitive damages based on a claim that ZAP's actions were malicious, willful, and oppressive. On its quantum valebant and quantum meruit claims, CIT is seeking general damages for the value of ZAP's continued use and possession of the equipment since June 24, 2002. CIT is also seeking reimbursement of all of its attorneys' fees and costs of suit, as well as any additional legal and equitable relief that the court may deem proper. ZAP's Answer to the Complaint was filed on April 24, 2008. CIT has also applied for both a writ of possession, seeking return of all of the leased 15 equipment, and a writ of attachment, seeking attachment of $122,588.26 against ZAP. The hearing on CIT's writ applications was held on June 3, 2008. At that hearing, the Court denied CIT's application for writ of attachment, finding that CIT had not proven, based on the record to date, that it was more likely than not to prevail at trial on its breach of contract cause of action against ZAP. The Court did, however, grant CIT's application for writ of possession, finding no dispute between the parties regarding ZAP's willingness to give to CIT all components of the at-issue telephone equipment still in ZAP's possession. Given ZAP's multiple offers to date to cooperate in returning any such equipment, the Court refused CIT's demand that ZAP be required to post a bond to support the writ of possession. The writ of possession was issued on June 17, 2008, but, to date, ZAP is unaware of any action by CIT to enforce that writ. On June 20, 2008, ZAP sent CIT an Offer to Compromise, offering to settle the matter with ZAP's payment to CIT of $2,500, inclusive of attorneys' fees and costs to date. CIT has rejected that offer. On February 11, 2009, ZAP filed a motion for summary judgment or, in the alternative, summary adjudication. CIT's opposition to that motion is due March 24, 2009, and the hearing on that motion is scheduled for April 7, 2009. In the meantime, ZAP and CIT attended a telephonic mediation on February 13, 2009, but the parties were unable to reach a settlement. The parties then attended a mandatory settlement conference on March 16, 2009, but were again unable to reach a settlement. Trial in this matter is scheduled for May 1, 2009. Discovery is ongoing. We intend to vigorously defend ourselves against these claims and believe that we have adequately provided in our financial statements for this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The following matters were submitted to a vote of security holders during our annual meeting of shareholders held on November 29, 2008. - -------------------------------------------------------------------------------- To elect Steven Schneider to serve until the next annual meeting and until their successors are elected and qualified. - -------------------------------------------------------------------------------- FOR WITHHELD ABSTAIN - -------------------------------------------------------------------------------- 33,162,994 848,818 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To elect Gary Starr to serve until the next annual meeting and until their successors are elected and qualified. - -------------------------------------------------------------------------------- FOR WITHHELD ABSTAIN - -------------------------------------------------------------------------------- 33,150,669 861,143 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To elect Eqbal Al Yousuf to serve until the next annual meeting and until their successors are elected and qualified. - -------------------------------------------------------------------------------- FOR WITHHELD ABSTAIN - -------------------------------------------------------------------------------- 35,526,778 485,034 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To elect Peter Scholl to serve until the next annual meeting and until their successors are elected and qualified. - -------------------------------------------------------------------------------- FOR WITHHELD ABSTAIN - -------------------------------------------------------------------------------- 33,483,190 528,622 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- To elect Randall Waldman to serve until the next annual meeting and until their successors are elected and qualified. - -------------------------------------------------------------------------------- FOR AGAINST ABSTAIN - -------------------------------------------------------------------------------- 33,299,422 712,390 - - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Approval of the Company's 2008 Employee Stock Option Plan - -------------------------------------------------------------------------------- FOR AGAINST ABSTAIN - -------------------------------------------------------------------------------- 13,617,054 1,059,800 143,261 - -------------------------------------------------------------------------------- To ratify the appointment of Bagell,Josephs & Levine & Co. LLC as the Company's independent accountant. - -------------------------------------------------------------------------------- FOR AGAINST ABSTAIN - -------------------------------------------------------------------------------- 33,545,927 255,460 210,425 - -------------------------------------------------------------------------------- 16 PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND SMALL BUSINESS PURCHASES OF EQUITY SECURITIES. MARKET INFORMATION ZAP's common stock is quoted on the OTC Bulletin Board under the symbol "ZAAP.OB". BID PRICE ------------------------- PERIOD HIGH LOW - ------------------------------- ------ ------ FISCAL YEAR 2008: DECEMBER 31, 2008 $ 0.27 $ 0.24 SEPTEMBER 30, 2008 0.60 0.51 JUNE 30, 2008 0.75 0.65 MARCH 31, 2008 0.47 0.42 FISCAL YEAR 2007: DECEMBER 31, 2007 $ 0.81 $ 0.74 SEPTEMBER 30, 2007 1.04 1.02 JUNE 30, 2007 0.96 0.93 MARCH 31, 2007 1.15 1.05 HOLDERS We have approximately 3,494 record holders of our common stock as of March 27, 2009, according to a shareholders' list provided by our transfer agent as of that date. The number of registered shareholders does not include any estimate by us of the number of beneficial owners of common shares held in street name. The transfer agent and registrar for our common stock is Continental Trust & Transfer Company. DIVIDENDS We have never declared nor paid any cash dividends on our common stock, and we do not anticipate that we will pay any cash dividends on our common stock in the foreseeable future. Any future determination to declaration and payment of cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time. On November 9, 2006, ZAP's Board of Directors approved a 10% stock dividend to be issued, effective February 28, 2007, to all shareholders of record as of February 15, 2007. RECENT SALES OF UNREGISTERED SECURITIES The following lists sales of unregistered securities during the last fiscal year that were not previously included in a Quarterly Report on Form 10-Q or a Current Report on Form 8-K. We relied on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") for the issuance of these securities. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions. The offer and sale of the following securities was exempt from the registration requirements of the Securities Act under Rule 506 insofar as (1) except as stated below, each of the investors was accredited within the 17 meaning of Rule 501(a); (2) the transfer of the securities were restricted by the company in accordance with Rule 502(d); (3) there were no more than 35 non-accredited investors in any transaction within the meaning of Rule 506(b), after taking into consideration all prior investors under Section 4(2) of the Securities Act within the twelve months preceding the transaction; and (4) none of the offers and sales were effected through any general solicitation or general advertising within the meaning of Rule 502(c). On October 30, 2008 the Company issued 12,945 shares for outside services valued at $5,178. On November 28, 2008 the Company issued 2,140,974 shares valued at $492,424 to the Al Yousuf Group LLC . The stock was issued for the conversion into equity of the convertible debt principle and interest. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THIS ANNUAL REPORT, INCLUDING THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE "FILINGS") CONTAIN FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH WORDS AND PHRASES SUCH AS "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT", "INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY RESULT", AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING FACTORS: o WHETHER THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOR OUR PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH IT MAY GROW; o OUR ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENT OUR GROWTH STRATEGIES, o OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OUR PRODUCTS; o OUR ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY; o OUR ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS; o OUR ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGING MARKET FOR ELECTRIC AND GAS-EFFICIENT VEHICLES; o CHANGES IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND o OTHER RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS SECTIONS OF THIS REPORT, PARTICULARLY THE SECTION CAPTIONED "RISK FACTORS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED. EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT REQUIRED BY APPLICABLE LAW. 18 SUMMARY OF KEY ACCOMPLISHMENTS DURING 2008 Recent Developments Some of the significant events for the Company that occurred during the year of 2008 and through the date of this report are as follows: 1. We introduced a new four wheeled Electric Van and a Truck in December 2008. ZAP's new Shuttle was designed for passenger transport or cargo. The seats are removable so it can convert into a cargo vehicle with 108 cubic feet and a 900 lb. total carrying capacity. ZAP's new XL Truck was designed with a roomy cab for two and a sturdy bed platform capable of transporting 800 lbs. for on-road use and up to 1,600 lbs. capacity for private roads and facilities. 2. In January of 2009 we also introduced the ZAP Alias which is a stylish, 100% electric, 2-seater capable of freeway speeds. ZAP indicated the mass-production version of the Alias is targeted to be priced under $35,000. In the fourth quarter of 2009, ZAP plans to produce a limited number of hand-crafted, Signature Series Alias roadsters. 3. We are currently engaged in ongoing talks with Franklin-based ZAP Motor Manufacturing Kentucky led by CEO Gary Dodd and his new management team to build and assemble several of ZAP's best-selling electric vehicles. 4. On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a major investor of ours and the President of Al-Yousuf LLC, Mr. Eqbal Al-Yousuf is our Chairman of the Board. The financing arrangement allows for advances by ZAP over the next few years. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007 NET SALES for the year ended December 31, 2008, were $7.5 million compared to $5.7 million for the year ended December 31 in the prior year which is an increase of $1.8 million or 31%. Some of the reasons for the increase in sales are as follows: 19 Sales in the Advanced Technology segment increased from $2.8 million in 2007 to $4.9 million in 2008 primarily due to greater demand. With the higher price of gasoline in the U.S. during a major part of 2008 many consumers are seeking alternatives such as electric vehicles both our Xebra electric vehicle and our Zapino a full-size electric scooter. We experienced a decrease of $39,000 in sales of consumer products from $742,000 in 2007 to $703,000 in 2008. Our main consumer product the ZAPPY3 electric scooter was not available until late in 2008 since our previous manufacturer experienced financial difficulties and discontinued production. We have located a new supplier to a new contractor but did not receive new products until March 2009. Sales in our Portable Energy segment decreased from $875,000 in 2007 to $173,000 in 2008. The primary reason for the decrease was the transfer in June of 2008 of this product line to a new company, Portable Energy LLC in exchange for a 50% interest and a new product mix. Our retail car lot experienced a slight increase in sales from $1.3 million in 2007 to $1.7 million in 2008. However, the overall U.S. market for retail cars remains sluggish due to the tight economic conditions. GROSS PROFIT was $799,000 for the year ended December 31, 2008 compared to 775,000 for the year ended December 31, 2008 resulting in a increase of $24,000. The reasons for the increase were as follows: In our Advanced Technology segment our gross profit increased from $247,000 in 2007 to $709,000 in 2008. The increase was due to greater units sold from 287 vehicles in 2007 to 554 in 2008. The gross margins also increased from 9% to 14% due to less minor repairs to the finished vehicles sent by the factory in China. In our Consumer Products segment we experienced a decrease of $224,000 in gross loss from $88,000 in 2007 to a gross loss of $312,000 in 2008. As per above, we did not have product available in 2008 but still incurred fixed expenses for labor, rents etc. Gross profits in our retail car lot decreased from $331,000 or 25% of sales to $298,000 or 14 % of sales in 2008. This reflects lower margins on car sales due to the tight economy. SALES AND MARKETING EXPENSES for the year of 2008 increased by $300,000 from $1.5 million in 2007 to $1.8 million in 2008. The increase was due to higher salaries with more personnel in the function and outside consultants used to promote the sales efforts in the Advanced Technology Segment. GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December 31, 2008 decreased by $17.4 million from $25.3 million in 2007 to $7.8 million in 2008. The primary reason for the decrease was due to the 2007 one-time non-cash expense of $12 million to account for the modification and extension of certain expiring warrants that were issued to shareholders pursuant to the plan of reorganization in June of 2002 and also to current ZAP employees for compensation purposes. The warrants were extended by five years until July 2012 with the exercise prices also adjusted. We also experienced a decrease in professional fees of approximately $600,000 in 2008. RESEARCH AND DEVELOPMENT EXPENSES DECREASED by $200,000 from $616,000 in 2007 to $416,000 in 2008. The expenses in 2008 were due additional costs to build a full scale model of our new vehicle, the ZAP-Alias. This vehicle will be a production-ready all electric highway vehicle. In 2008 we also incurred expenses to develop a heavy duty ATV for ZAP in the USA market and a four wheeled electric truck. During 2007 we spent approximately $600,000 for a project with Lotus Engineering for research and development for two concept electrical vehicles. INTEREST EXPENSE, NET decreased by $998,000 from an interest expense of $1.4 million for the year ended December 31, 2007 to interest expense of $395,000 for the year ended December 31, 2008. The decrease was due to less interest and penalties paid in connection with the senior convertible debt that was issued in late 2006 and early 2007. OTHER INCOME (EXPENSE) decreased from income of $199,000 for the year ended 2007 to an expense of $52,000 for 2007. In 2008 the expense includes our donation of $25,000 to the Red Cross for China earthquake relief and expensing the remaining balance of offering costs in connection with the convertible debt offering. In 2007 we recorded other 20 income due to the favorable valuation of stock that was issued in connection with the property we purchased in Mendocino, California. NET LOSS was $9.8 million for the year ended December 31, 2008 as compared to a net loss of $28 million for period ended December 31, 2007. The additional losses in 2007 were primarily due to the modification and extension of certain expiring warrants that were issued by the Company to selected shareholders and current ZAP employees. In 2008 we also experienced a $1.8 million increase in sales of our Advanced Technology electric vehicles. Many consumers are seeking sources of alternate energy transportation. LIQUIDITY AND CAPITAL RESOURCES The Company used cash in operations of $ 6.9 million and $5.3 million during the years ended December 31, 2008 and 2007, respectively. Cash used in operations in 2008 was the result of the net loss incurred for the year of $9.8 million, offset by non-cash expenses of $2.8 million. In 2008, non-cash expenses included $1.8 million for stock -based compensation for consulting and other services, $2.7 million for stock-based compensation to employees. Cash used in operations in 2007 was the result of the net loss incurred for the year of $28 million, offset by non-cash expenses of $5.1 million. In 2007,non-cash included $4.4million related to stock-based compensation for consulting and other services, $17.3million for stock-based compensation to employees. In 2008, the net change in operating assets and liabilities resulted in a cash decrease of $2.1 million. The change was primarily due to increases for inventory. In 2007,The net change in operating assets and liabilities resulted in a cash decrease of $739,000. The change was primarily due to decreases for inventory to generate cash. Investing activities used cash of $110,000 and $189,000 during the year ended December 31, 2008 and 2007, respectively. Financing activities provided cash of $3.1 million and $7.7 million during the year ended December 31, 2008 and 2007, respectively. In 2008, the Company borrowed funds on a $10 million financing facility established by Al Yousuf. In 2007, the Company received a $5 million investment by Al Yousuf. The Company had cash and cash equivalents of $341,000 at December 31, 2008 as compared to $4.3 million at December 31, 2007. The Company had a working capital deficit of $981,000 at December 31, 2008 as compared to working capital of $3.4 million at December 31, 2007. We do not have a bank operating line of credit, and there can be no assurance that any required or desired financing will be available through bank borrowings, debt or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock, and there is no guarantee that a market will exist for the sale of the Company's shares. On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a major investor of ours and the President of Al-Yousuf, Mr. Eqbal Al-Yousuf is our Chairman of the Board. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note. Even though we received the $10 million financing arrangement noted above, we are still seeking additional capital to expand our current product line. The Company's primary capital needs are to continue building our dealer network 21 and expanding ZAP's market initiatives. ZAP also requires financing to purchase consumer product inventory for the continued roll-out of new products, to add qualified sales and professional staff to execute on ZAP's business plan, and to expand ZAP's efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias and other fuel efficient vehicles. STOCK ISSUED AS COLLATERAL The stock was returned to the Company in January, 2008 and cancelled. 8% Senior Convertible Notes On December 5, 2006, when the market price of the Company's common stock was $0.89 per share, the Company entered into a Securities Purchase Agreement with three institutional and accredited investors or purchasers pursuant to which the Company sold to the purchasers $1.5 million aggregate principal amount of 8% senior convertible notes due December 5, 2008 (the "Notes due 2008") and warrants to purchase 450,000 shares of common stock of the Company (the "Initial Warrants") in a private placement. The Notes due 2008 were originally convertible at $1.00 per share (the "Conversion Price") into 1,500,000 shares of the Company's common stock, subject to anti-dilution and other adjustments. The Initial Warrants, each immediately exercisable and expiring on December 5, 2011, are exercisable at $1.10 per share, subject to anti-dilution and other adjustments. On February 20, 2007, when the market price of the Company's common stock was $1.08 per share, the Company entered into a Purchase and Amendment Agreement (the "Amendment"), amending the Securities Purchase Agreement entered into by the Company on December 5, 2006 (the "Original Agreement" and as amended by the Amendment, the "Agreement"), with several institutional and accredited investors or purchasers pursuant to which the Company sold to the purchasers $1.2 million aggregate principal amount of 8% senior convertible notes due February 2009 (the "Notes due 2009" and with the Notes due 2008, the "Notes") and warrants to purchase 360,000 shares of the common stock of the Company (the "Additional Warrants" and with the Initial Warrants, the "Warrants"), in a private placement. The transaction closed on February 22, 2007 (the "February 2007 financing"). The Notes due 2009 were originally convertible at $1.00 per share into 1,200,000 shares of the Company's common stock, subject to anti-dilution and other adjustments. On June 26, 2007, the Company entered into an Amendment Agreement (the "Second Amendment") with the purchasers to adjust certain provisions of the Notes and Initial Warrants as a consequence of selling shares to a third party investor for per share consideration less than the conversion price of the Notes and exercise price of the Initial Warrants. As a result, the conversion price of the Notes was reduced to $0.72 per share. On May 7, 2008, the Company entered into a settlement with Gemini Master Fund, LTD and Gemini Strategies, LLC, the holders of the 8% Senior Convertible Notes. The agreement reached requires the termination and cancellation of the notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common stock. In connection with the aforementioned agreement ZAP has obtained the funds necessary for the payment of $475,000 through a note payable to Al Yousuf LLC. Eqbal Al Yousuf, who is the Chairman of the Board of ZAP, is also the President of Al Yousuf LLC. The note bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per annum and may be converted in whole or in part into securities of the Company by November of 2008 in accordance with the terms of the note. The price was agreed to be at 90% of the closing market price on the date selected for conversion. On November 28, 2008, Al Yousuf converted the debt of $492,424 which represented principal and interest into 2,140,974 shares of ZAP common stock. In order to finance our working capital requirements, we require additional financing, but there can be no assurances that we will obtain this capital or that it will be obtained on terms favorable to us. There can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may 22 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 The Company's business is subject to seasonal influences. Sales volumes in this industry typically slow down during the winter months, November to March in the U.S. The Company intends to develop a wide auto distribution network to counter any seasonality effects. INFLATION Our raw materials and finished products are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our raw materials and finished goods sources. USE OF ESTIMATES The preparation of financial statements in conformity with U. S. generally accepted accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results. 23 ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of ZAP We have audited the accompanying consolidated balance sheets of ZAP as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of internal control over financial reporting Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements audited by us present fairly, in all material respects, the consolidated financial position of ZAP at December 31, 2008, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. /s/ Bagell, Joseph, Levine Company, LLC ----------------------------------------- Marlton, New Jersey March 30, 2009 24 ZAP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2008 and 2007 (In thousands, except share data)
ASSETS ------ 12/31/08 12/31/07 ---------- ---------- Current assets: Cash and cash equivalents $ 341 $ 4,339 Accounts receivable, net of allowance of $33 in 2008 and $172 in 2007 377 373 Inventories 3,043 1,437 Prepaid non-cash professional fees 105 283 Other prepaid expenses and other current assets 765 747 ---------- ---------- Total current assets 4,631 7,179 Property and equipment, net 4,335 4,471 Other assets: Deposits and other 260 288 ---------- ---------- $ 9,226 $ 11,938 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Current portion of long-term debt and short term notes $ 2,976 $ 104 Accounts payable 474 128 Accrued liabilities 1,575 2,259 Deferred revenue 587 752 8% Senior convertible debt, net of discount of $136 -- 546 ---------- ---------- Total current liabilities 5,612 3,789 Secured convertible note, less current portion 1,772 1,724 ---------- ---------- Total Liabilities 7,384 5,513 ---------- ---------- Commitments and contingencies Shareholders' equity: Common stock;400 million shares authorized; no par value; 64,630,608 and 57,478,158 shares issued and outstanding at December 31 2008 and 2007,respectively 126,347 122,672 Common Stock issued as loan collateral -- (1,549) Accumulated deficit (124,505) (114,698) ---------- ---------- Total shareholders' equity 1,842 6,425 ---------- ---------- $ 9,226 $ 11,938 ========== ==========
See accompanying notes to consolidated financial statements. 25 ZAP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands; except per share data)
Year ended December 31 -------------------------- 2008 2007 ---------- ---------- Net sales $ 7,588 $ 5,712 Cost of goods sold 6,789 4,937 ---------- ---------- Gross profit 799 775 ---------- ---------- Operating expenses: Sales and marketing 1,808 1,508 General and administrative (non-cash of $4,326 2008 and $21,735 in 2007,respectively) 7,860 25,284 Research and development 416 616 Impairment loss on assets and goodwill 67 175 ---------- ---------- Total operating expenses 10,151 27,583 ---------- ---------- Loss from operations (9,352) (26,808) ---------- ---------- Other income (expense): Interest expense, net (395) (1,393) Other income (expense), net (56) 199 ---------- ---------- (451) (1,194) ---------- ---------- Loss before income taxes (9,803) (28,002) Provision for income taxes (4) (4) ---------- ---------- Net loss $ (9,807) $ (28,006) ========== ========== Net loss per share attributable to common shareholders: Basic and diluted $ (0.16) $ (0.59) Weighted average number of common shares outstanding: Basic and diluted 59,567 47,822
See accompanying notes to consolidated financial statements. 26 ZAP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2008 AND 2007 (In thousands)
Common stock Common stock issued -------------------------- Accumulated as loan Deficit collateral Total ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2006 38,414 $ 91,227 (86,692) $ (1,549) $ 2,986 ========== ========== ========== ========== ========== Issuance of common stock for: Inventory and other assets 242 237 237 Consulting and other services 3,448 3,415 3,415 Employee compensation 855 821 821 Cash 6,656 5,700 5,700 Exercise of warrants and options 955 719 719 Principle payments and conversion of convertible debt 2,931 2,166 2,166 Stock dividend 3,977 -- -- Fair value of warrants and options issued for: Cash 200 200 Warrants issued to convertible debt holders 1,256 1,256 Consulting and other services 457 457 Employee compensation 16,474 16,474 Net loss (28,006) (28,006) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2007 57,478 $ 122,672 (114,698) $ (1,549) $ 6,425 ========== ========== ========== ========== ========== Issuance of common stock for: Inventory and other assets 238 155 155 Cancellation of collateral (1,291) (1,549) (1,549) Consulting and other services 3,607 1,639 1,639 Employee compensation 870 585 585 Settlement of obligations 1,012 764 764 Exercise of warrants and options 173 72 72 Principle payments and conversion of convertible debt 2,543 743 743 Fair value of warrants and options issued for: Consulting and other services 200 200 Settlement of obligations 108 108 Employee compensation 958 958 Net loss (9,807) (9,807) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2008 64,630 $ 126,347 $ (124,505) $ -- $ 1,842 ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 27 ZAP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31 -------------------------- 2008 2007 ---------- ---------- Operating activities: Net loss $ (9,807) $ (28,006) Items not requiring the current use of cash: Amortization of note discount and deferred offering Costs 156 958 Stock-based employee compensation 1,852 17,295 Excess tax benefits from share-based payment arrangements 648 Stock-based compensation for consulting and other services 2,753 4,368 Stock-based compensation for interest and other penalities 17 314 Depreciation and amortization 215 318 Impairment of fixed assets and goodwill 67 175 Allowance for doubtful accounts (139) (7) Changes in other items affecting operations: Accounts receivable 135 (142) Inventories (1,606) 1,004 Prepaid expenses (20) (295) Other assets (150) (68) Accounts payable 345 (121) Accrued liabilities (677) (679) Deferred revenue (165) (438) ---------- ---------- Cash used for operating activities (6,376) (5,324) ---------- ---------- Investing activities: Acquisition of property and equipment (286) (189) Proceeds from sale of equipment 176 -- ---------- ---------- Cash used for investing activities (110) (189) ---------- ---------- Financing activities: Issuance of common stock -- 5,900 Exercise of warrants and options 72 719 Pay-off of convertible debt (431) -- Re-issuance of convertible debt 475 -- Proceeds from debt, net of issuance costs 2,976 1,185 Borrowings (repayments) on long-term debt 44 (112) Excess tax benefits from share-based payment arrangements (648) ---------- ---------- Cash provided by financing activities 2,488 7,692 ---------- ---------- Increase (decrease) in cash and cash equivalents (3,998) 2,179 Cash and cash equivalents at beginning of year 4,339 2,160 ---------- ---------- Cash and cash equivalents at end of year $ 341 $ 4,339 ========== ==========
See accompanying notes to consolidated financial statements. 28 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 alternative energy and fuel efficient automobiles, motorcycles, bicycles, scooters, personal watercraft, hovercraft, neighborhood electric vehicles, commercial vehicles and more. Additionally, the Company produces an electric scooter, known as the ZAPPY(R), using parts manufactured by various contractors. The Company's business strategy has been to develop, acquire and commercialize electric vehicles and electric vehicle power systems, which have fundamental practical and environmental advantages over available internal combustion modes of transportation that can be produced commercially on an economically competitive basis. The Company intends to further expand its technological expertise through an aggressive plan of acquisitions of companies with exciting new products in the advanced transportation industry and strategic alliances with certain manufacturers, distributors and sales organizations. The Company's business goal is to become the largest and most complete distribution portal for advanced transportation (fuel efficient) and electric vehicles. In 2008, the Company continued to accelerate its market positioning in the electric vehicle industry. The Company is now focused on creating a distribution channel for its vehicles, with special emphasis on entrepreneurs in the power-sport and independent auto industry. A summary of significant accounting policies is as follows: PRINCIPLES OF CONSOLIDATION - --------------------------- The accompanying consolidated financial statements include the accounts of ZAP, Voltage Vehicles ("VV") and ZAP Stores for the years ended December 31, 2008 and 2007. All subsidiaries are 100% owned by ZAP. All significant inter-company transactions and balances have been eliminated. REVENUE RECOGNITION The Company records revenues only upon the occurrence of all of the following conditions: - -The Company has received a binding purchase order or similar commitment from the customer or distributor authorized by a representative empowered to commit the purchaser (evidence of a sale); - -The purchase price has been fixed, based on the terms of the purchase order; - -The Company has delivered the product from its distribution center to a common carrier acceptable to the purchaser. The Company's customary shipping terms are FOB shipping point; and - -The Company deems the collection of the amount invoiced probable. The Company provides no price protection. Product sales are net of promotional discounts, rebates and return allowances. The Company does not recognize sales taxes collected from customers as revenue. DEFERRED REVENUE - ---------------- Voltage Vehicles sells licenses to auto dealerships under the ZAP name. The term of the license agreements range from four to five years and among other things, call for the licensee to purchase a minimum number of vehicles from ZAP each year. As of December 31, 2008, the Company has collected a total of $1,230,000 related to these agreements and has classified them as current deferred revenue. The Company's policy is to begin recognizing revenue when they 29 begin delivering a substantial number of vehicles to these dealerships on a regular basis. During the first quarter of 2007, the Company began recognizing revenue on various license agreements on a straight-line basis over the term of the agreements. The Company has recognized $165,000 and $478,000 of revenue and changes to the license agreements for the year ended December 31, 2008 and 2007 resulting in an ending balance in deferred revenue of $587,000 and $752,000 at December 31, 2008 and 2007. 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, 2008 and 2007. If the financial condition of the Company's customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. CASH AND CASH EQUIVALENTS - ------------------------- The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. The Company maintains the majority of its cash balances with one financial institution. At times the balances may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. INVENTORIES - ----------- Inventories consist primarily of vehicles (gas and electric), parts and supplies, and finished goods and are carried at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT - ---------------------- Property and equipment consists of land, building and improvements, machinery and equipment, office furniture and equipment, vehicles, and leasehold improvements. Property and equipment is stated at cost and is depreciated or amortized using straight-line and accelerated methods over the asset's estimated useful life. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows: Machinery and equipment 5 years Computer equipment and software 3-5 years Office furniture and equipment 5 years Vehicles 5 years Leasehold improvements 10 to 39.5 years or life of lease, whichever is shorter Building and improvements 39.5 years 30 PATENTS AND TRADEMARKS - ---------------------- Patents and trademarks consist of costs expended to perfect certain patents and trademarks acquired and are amortized over ten years. For each of the years ended December 31, 2008 and 2007, amortization expense was approximately $35,000 and $21,000, respectively. LONG-LIVED ASSETS - ----------------- Long-lived assets are comprised of property and equipment and intangible assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value. ADVERTISING - ----------- The cost of advertising is expensed as incurred. Advertising and marketing expenses amounted to $218,000 and $199,000 for the years ended December 31, 2008 and 2007, respectively. WARRANTY - -------- The Company provides 30 to 90 day warranties on its personal electric products and records the estimated cost of the product warranties at the date of sale. The estimated cost of warranties has not been significant to date. Should actual failure rates and material usage differ from our estimates, revisions to the warranty obligation may be required. The Company has provided a 6 month warranty for the Xebra(R) vehicles and varying monthly warranties on other products. Changes in the Company's warranty liability during the years ended December 31, 2008 and 2007 are as follows (in thousands): 2008 2007 -------- -------- Balance as of January 1, $ 293 $ 279 Provision for warranties 113 126 Charges against warranties (153) (112) -------- -------- Balance December 31, $ 253 $ 293 -------- -------- 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. 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. 31 RISKS AND UNCERTAINTIES - ----------------------- The Company relies on one manufacturer, Shandong Jindalu Vehicle Co., LTD of China ("Shandong") to supply 100% of Xebra(TM) Electric Vehicles. If Shandong is unable to supply electric vehicles and the Company is unable to obtain alternative sources of supply for these products and services, the Company might not be able to fill existing backorders and/or to sell more Xebra(TM) Electric Vehicles. Our other electric vehicles and products are supplied by various outside contract manufacturers. FAIR VALUE OF FINANCIAL INSTRUMENTS - ----------------------------------- The Company measures its financial assets and liabilities in accordance with U.S. generally accepted accounting principles. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. For certain of the Company's financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, the carrying amount approximates fair value because of the short maturities. The fair value of debt is not determinable due to the terms of the debt and the lack of a comparable market for such debt. STOCK-BASED COMPENSATION - ------------------------ We have stock compensation plans for employees and directors, which are described in Note 7 to our consolidated financial statements. Under the provisions of SFAS 123R, we recorded $957,000 and $16.9 million of stock-based compensation, net of estimated forfeitures, in selling, general and administrative expenses, in our consolidated statement of operations for the years ended December 31, 2008 and 2007. As of December 31, 2008 the total unrecognized stock-based compensation balance for unvested options was $863,900 which is expected to be amortized through the third quarter of 2011. We utilized the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123R, with the following range of assumptions: Twelve months ended December 31, ------------------------ 2008 2007 ---- ---- Expected dividend yield 0% 0% Expected volatility 103.14 to 109.91 114.3 to 126.2 Risk-free interest rate 2.82% to 3.31% 4.16% to 4.98% Expected life (in years) from grant date 5 to 6 2.5 to 5.75 Exercise price $.58 to $.97 $.91 to $1.32 The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based upon historical volatility of our common stock over the period commensurate with the expected life of the options. The risk-free interest rate is derived from the average U.S. Treasury Constant Maturity Rate during the period, which approximates the rate in effect at the time of the grant. Our unvested options vest over the next three years. Our options generally have a 10-year term. The expected term is calculated using the simplified method prescribed by the SEC's Staff Accounting Bulletin 107. Based on the above assumptions, the 32 weighted-average fair values of the options granted under the stock option plans for the years ended December 31, 2008 and 2007 was $0.80 and $1.00, respectively. As required by SFAS No. 123R, we now estimate forfeitures of employee stock options and recognize compensation cost only for those awards expected to vest. Forfeiture rates are determined based on historical experience. Estimated forfeitures are now adjusted to actual forfeiture experience as needed. The estimates of share-based compensation expenses are significant to our financial statements, but these expenses are based on option valuation models and will never result in the payment of cash by us. For this reason, and because we do not view share-based compensation as related to our operational performance, we exclude estimated share-based compensation expense when evaluating the business performance of our operations. Theoretical valuation models and market-based methods are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. Market-based methods are emerging that, if employed by us, may dilute our earnings per share and involve significant transaction fees and ongoing administrative expenses. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors. On January 26, 2007, the Company extended the expiration date of 21.8 million warrants previously issued to employees and officers by five years to July 1, 2012, with new exercise prices ranging from $1.00 to $1.20. As a result of the modification of the warrants, the Company determined the fair value of the warrants immediately prior to and after the modification. The incremental difference in value resulted in the recognition of $11.7 million in non-cash compensation expense during the first quarter of 2007. The Company valued the modified warrants at $0.57 per share using a Black-Scholes option pricing model with the following assumptions: risk free interest rate of 4.98%; dividend rate of 0.00%; volatility of 123%, and expected term of 2.7 years. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS - ------------------------------------------------------ Basic net loss per share is computed by dividing net loss attributable to common shareholders 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 shareholders, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of options and warrants to the extent they are dilutive using the treasury stock method. The weighted average shares used in computing basic and diluted net loss per share attributable to common shareholders were the same for the two years ended December 31, 2008 and 2007. Options, warrants and convertible debt for 59,140,633 shares and 68,172,008 shares were excluded from the computation of loss per share at December 31, 2008 and 2007, respectively, as their effect is anti-dilutive to. NOTE 2 - INVENTORIES Inventories at December 31, 2008 and 2007 are summarized as follows (thousands): 2008 2007 -------- -------- Advanced technology vehicles $ 1,977 $ 1,181 Vehicles-conventional 518 245 Parts and supplies 721 46 Finished goods 353 267 -------- -------- 3,569 1,739 Less - inventory reserve (526) (302) -------- -------- $ 3,043 $ 1,437 -------- -------- 33 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, 2007 are as follows (in thousands): 2008 2007 -------- -------- Balance as of January 1, $ 302 $ 518 Provision for slow moving inventory 307 155 Write-off of slow moving inventory (83) (371) -------- -------- Balance as of December 31, $ 526 $ 302 ======== ======== NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment at December 31, 2008 and 2007 are summarized as follows (thousands): 2008 2007 -------- -------- Land $ 1,078 $ 1,078 Buildings and improvements 3,184 3,184 Machinery and equipment 126 120 Computer equipment and software 258 229 Office furniture and equipment 73 64 Leasehold improvements 53 47 Vehicles 630 609 -------- -------- 5,402 5,331 Less - accumulated depreciation and amortization (1,067) (860) -------- -------- $ 4,335 $ 4,471 ======== ======== The land and building and certain equipment, with a net book value of $2.7million at December 31, 2008 and 2007 respectively, are pledged as security for certain indebtedness (see Note 5). Depreciation and amortization expense for the years ended December 31, 2008 and 2007 was approximately $215,000 and $318,000, respectively. 34 NOTE 4 - OTHER ACCRUED LIABILITIES Accrued liabilities at December 31, 2008 and 2007 consisted of the following (in thousands): 2008 2007 -------- -------- Accrued professional fees $ 443 $ 984 Accrued payables 128 129 Customer deposits 292 282 Warrant liabilities 253 292 Other accrued expenses 459 572 -------- -------- $ 1,575 $ 2,259 ======== ======== NOTE 5 FINANCING ARRANGEMENT PROMISSORY NOTE On July 30, 2008, ZAP (the "Company") executed a Promissory Note for a $10 million credit line (the "Note") and a Deed of Trust, Assignment of Leases and Rents and Security Agreement and Fixture Filing (the "Security Agreement"), both in favor of Al Yousuf LLC (the "Lender"). The Al Yousuf Group is a Dubai-based conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf who is also the Chairman of the Board of ZAP. The following description is a summary of the material terms and conditions of both the Note and the Security Agreement. The maximum principal loan under the Note is $10,000,000. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building. The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. Other advances shall be for (i) the purposes of inventory from June 1, 2008 consistent with the currently applicable budget of the Company, as approved by its board of directors (an "Inventory Advance") or (ii) general working capital for operations funding based upon the Company's budget (a "Working Capital Advance"). The interest rate shall accrue daily at a rate per annum equal to the greater of (i) one month LIBOR plus 3% per annum and (ii) eight percent (8.00%) per annum, commencing on the date of the Note. The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. Repayment of an Inventory Advance is due four (4) months after the date of such Advance. Repayment of a Working Capital Advance is due six (6) months after the date of such Advance. The repayment term may be extended upon written request of the Company and at the Lender's sole discretion. The Note is pre-payable in whole or in part without penalty and upon 30 days' written notice to Lender. All principal and interest due under the Note is secured by the corporate headquarters building in Santa Rosa, California. The Note contains customary Events of Default, including but not limited to the following: (i) failure by the Company to make any scheduled payment of principal, interest or other amounts due under the Note, (ii) failure to pay-off the Note upon the Maturity Date, (iii) any representation or warranty made in the Loan Documents by the Company being found false in any material respect, (iv) consent by the Company to appoint a conservator or liquidator in a bankruptcy proceeding relating to the Company or all or substantially all of its assets and (v) failure of the Company to maintain insurance required pursuant to the Loan Documents. Upon the occurrence of an Event of Default, the Note shall become due and payable and the interest rate shall increase by 3.00% per annum. All principal and interest due under the Note is secured by the Company's corporate headquarters building. The Majority of the Company's Short-term and Long Term debt is due on the Promissory note due to Al Yousuf. 35 SHORT-TERM DEBT During the second half of 2008, the Company had borrowed $2.3 million on the financing facility with Al Yousuf for inventory purposes and funding of operations. In addition, the Company borrowed $660,000 from Portable Energy LLC, a private company equally owned 50% by ZAP and Al Yousuf. These borrowings are due on demand. LONG TERM DEBT On July 30, 2008 the Company was also advanced $1.7 million on the promissory note to pay-off the existing secured note on the Company's corporate headquarters building which was previously held by an outside party. The loan is due on February 28, 2010. CONVERTIBLE DEBT 8% Senior Convertible Notes On December 5, 2006, when the market price of the Company's common stock was $0.89 per share, the Company entered into a Securities Purchase Agreement with three institutional and accredited investors or purchasers pursuant to which the Company sold to the purchasers $1.5 million aggregate principal amount of 8% senior convertible notes due December 5, 2008 (the "Notes due 2008") and warrants to purchase 450,000 shares of common stock of the Company (the "Initial Warrants") in a private placement. The Notes due 2008 were originally convertible at $1.00 per share (the "Conversion Price") into 1,500,000 shares of the Company's common stock, subject to anti-dilution and other adjustments. The Initial Warrants, each immediately exercisable and expiring on December 5, 2011, are exercisable at $1.10 per share, subject to anti-dilution and other adjustments. On February 20, 2007, when the market price of the Company's common stock was $1.08 per share, the Company entered into a Purchase and Amendment Agreement (the "Amendment"), amending the Securities Purchase Agreement entered into by the Company on December 5, 2006 (the "Original Agreement" and as amended by the Amendment, the "Agreement"), with several institutional and accredited investors or purchasers pursuant to which the Company sold to the purchasers $1.2 million aggregate principal amount of 8% senior convertible notes due February 2009 (the "Notes due 2009" and with the Notes due 2008, the "Notes") and warrants to purchase 360,000 shares of the common stock of the Company (the "Additional Warrants" and with the Initial Warrants, the "Warrants"), in a private placement. The transaction closed on February 22, 2007 (the "February 2007 financing"). The Notes due 2009 were originally convertible at $1.00 per share into 1,200,000 shares of the Company's common stock, subject to anti-dilution and other adjustments. On June 26, 2007, the Company entered into an Amendment Agreement (the "Second Amendment") with the purchasers to adjust certain provisions of the Notes and Initial Warrants as a consequence of selling shares to a third party investor for per share consideration less than the conversion price of the Notes and exercise price of the Initial Warrants. As a result, the conversion price of the Notes was reduced to $0.72 per share. On May 7, 2008, the Company entered into a settlement with Gemini Master Fund ,LTD and Gemini Strategies, LLC, the holders of the 8% Senior Convertible Notes. The agreement reached requires the termination and cancellation of the notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common stock. In connection with the aforementioned agreement ZAP has obtained the funds necessary for the payment of $475,000 through a note payable to Al Yousuf LLC. Eqbal Al Yousuf, who is the Chairman of the Board of ZAP, is also the President of Al Yousuf LLC. The note bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per annum and may be converted in whole or in part into securities of the Company November of 2008 in accordance with the terms of the note. The price was agreed to be at 90% of the closing market price on the date selected for conversion. On November 28, 2008, Al Yousuf converted the debt of $492,424 which represented principal and interest into 2,140,974 shares of ZAP common stock. 36 NOTE 6 - INCOME TAXES The provision for income taxes for all periods presented in the consolidated statements of operations represents minimum California franchise taxes. Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax losses as a result of the following: 2008 2007 -------- -------- Computed expected tax expense $ (3,334) $ (9,370) Losses and credits for which no benefits have been recognized 3,000 8,419 Stock grants and warrants not deductible for income tax purposes 324 952 Meals and entertainment expenses, and officers life insurance not deductible for income tax purposes 11 8 R&D credit (8) (8) State tax expense, net of federal income tax benefit 3 3 -------- -------- $ 4 $ 4 ======== ======== The tax effect of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2008 and 2007 is presented below: 2008 2007 -------- -------- Deferred tax assets: Net operating loss carryovers $ 32,641 $ 28,560 Fixed assets, due to differences in depreciation 288 346 Inventory 179 96 Accrued liabilities 453 500 Stock based compensation 4,595 5,790 Notes receivable reserves 340 428 Intangible assets due to impairment 150 201 Tax credits 147 -- Other 853 694 -------- -------- Total gross deferred tax assets 39,646 36,615 Valuation allowance (39,646 (36,615) -------- -------- Net deferred tax assets $ -- $ -- ======== ======== The net change in the valuation allowance for the year ended December 2008 was an increase of $3 million. Because there is uncertainty regarding the Company's ability to realize its deferred tax assets, a 100% valuation allowance has been established. As of December 31, 2008, the Company had federal tax net operating loss carry-forwards of approximately $75.4 million, which will expire in the years 2012 through 2027. The Company also has federal research and development credit carry forwards as of December 31, 2007 of approximately $147,000 which will expire in the years 2012 through 2026. State tax net operating loss carry forwards were approximately $67 million as of December 31, 2007. The state net operating loss carry forwards will expire in the years 2012 through 2018. The Company's ability to utilize its net operating loss and research and development tax credit carry forwards may be limited in the future if it is determined that the Company experienced an ownership change, as defined in Section 382 of the Internal Revenue Code. Federal and State tax laws impose substantial restrictions on the utilization of net operating loss and credit carry forwards in the event of an "ownership charge" for tax purposes as defined in the Internal Revenue Code Section 382. The Company accounts for income taxes using an asset and liability method for financial accounting and reporting purposes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, operating loss and tax credit carry-forwards and are measured using the currently enacted tax rates and laws. The Company has made no provision for income taxes except for the minimum state tax due in any period presented in the accompanying consolidated financial statements because it incurred operating losses in each of these periods. The Company analyzes its deferred tax assets with regard to potential realization. The Company has established a valuation allowance on its deferred tax assets to the extent that management has determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized based upon the uncertainty of their realization. The Company has considered estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. 37 NOTE 7 - STOCK OPTIONS The Company has five Equity Compensation Plans: The 2008 Equity Compensation Plan, the 2007 Equity Compensation Plan, the 2006 Incentive Stock Plan, the 2002 Incentive Stock Plan and the 1999 Incentive Stock Plan. There has been no activity in the 1999 Plan during 2008 or 2007. These Plans provide for the grant of incentive stock options and nonstatutory options to employees, directors and consultants to the Company. The Company granted incentive stock options and nonstatutory options at exercise price per share equal to the fair market value per of the common stock on the date of grant. The vesting generally, three years, and exercise provisions were determined by the Board of Directors , with a maximum life of ten years. The 2008 Equity Compensation Plan was approved by the Board of Directors and the shareholders in November of 2008. No options were issued under the plan as of December 31, 2008. Option activity under the 2007, 2006 and 2002 plans is as follows (thousands):
2007 Plan 2006 Plan 2002 Plan --------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Number of Exercise Number of Exercise Number of Exercise Shares Price Shares Price Shares Price --------------------- --------------------- --------------------- Outstanding at January 1, 2007 -- -- 4,781 $ 1.04 5,473 $ 1.20 Granted 1,000 1.03 612 0.57 208 1.11 Exercised -- -- (619) 0.34 -- -- Canceled -- -- (400) 1.07 -- -- ------- ------- ------- Outstanding at December 31, 2007 1,000 1.03 4,374 $ 0.99 5,681 $ 1.15 Granted -- -- 904 -- -- -- Exercised -- -- -- -- (137) 0.41 Canceled -- -- -- -- (156) -- ------- ------- ------- Outstanding at December 31, 2008 1,000 1.03 5,278 $ 0.93 5,388 $ 0.97 ======= ======= =======
The weighted average fair value of options granted during the years ended December 31, 2008 and 2007 was $0.80 and $1.07, respectively. 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: 2008 2007 --------------- ---------------- Dividends None None Expected volatility 109.68 - 106.38 114.00-152.00 Risk free interest rate 1.99 - 3.31% 3.20 -4.98% Expected life 2.5 -6 years 2.50-05.75 years 38 At December 31, 2008, the Company has outstanding stock options for employees to purchase 11.4 million shares at exercise prices ranging from $0.25 to $1.20. NOTE 8 - MAJOR CUSTOMERS During 2008, Voltage Vehicles has established relationships with 61dealers nationwide. Where seven of our dealers have purchased over $200,000 of Xebras or 30 % of its total sales. NOTE 9 - COMMITMENT Distribution Agreement - ---------------------- In May of 2007, ZAP signed a distribution agreement with PML FlightLink Limited ("PML") for the purchase of an advanced propriety wheel motor and control system. ZAP received the exclusive rights to use this system in its current and future product line. In conjunction with the agreement with PML, ZAP has committed to an initial order of approximately $10 million in PML wheel motors, subject to terms and conditions agreed on by the parties. PML has not presented us with a working commercial product through March 29, 2009 and we have not had any contact with them. As an alternate to PML, we have made an agreement with a Chinese company to develop a similar product. China Joint Venture - ------------------- On September 17, 2007, ZAP entered into a shareholders' agreement to form a joint venture with Youngman Automobile Co., Ltd. ("Youngman") also known as Youngman Automotive Group, a leading maker of luxury motor coaches and high-quality commercial trucks in China. ZAP and Youngman have agreed to pursue the joint venture under EV Holdings Limited, a newly formed corporation based in Hong Kong ("EV Holdings"). The name of the company was changed to " Detroit Electric" which is an historic manufacturer of electric vehicles. Under the agreement, ZAP and Youngman will jointly pursue the manufacture, marketing and distribution of electric and hybrid vehicles for the worldwide passenger car, truck and bus markets. The joint venture, EV Holdings, will also focus on the development and manufacturing of electric charging infrastructure. The joint venture partners have agreed to invest a total of $100 million into the new joint venture by December 31, 2008 (Zap to invest $49 million and Youngman to invest $51 million). In 2008, the parties informally agreed to a revised initial capital contribution of $2.5 million by each party subject to outside raising of funds. The agreement also provides that Youngman shall have rights to control the manufacturing of products licensed by EV Holdings, and that EV Holdings will sell its products to ZAP and Youngman for resale within exclusive territories worldwide. There has been no activity under the joint venture in 2008, both of the parties were seeking outside financing to fund the project, however given the tight economy, the efforts have not been successful. We also hired an outside investment firm to find acceptable funding sources with no success NOTE-10 SHAREHOLDERS' EQUITY STOCK DIVIDEND - -------------- On November 9, 2006, ZAP's Board of Directors approved a 10% stock dividend which issued, effective February 28, 2007, to all shareholders of record as of February 15, 2007. COMMON STOCK - ------------ During our annual meeting of shareholders held in July of 2007, an amendment to the Company's Amended and Restated Articles of Incorporation was approved to increase the authorized common stock from 200 million to 400 million shares. 39 2008 ISSUANCES STOCK ISSUED FOR ASSETS In 2008, the Company issued stock for inventory and assets and recorded the cost at the intrinsic value of the stock or the fair value of the assets, whichever is more reliably measurable. During 2008, there were 238,000 shares were issued for purchase of inventory and certain assets STOCK ISSUED FOR SERVICES. In 2008, the Company issued shares of its common stock for consulting and other services and employee compensation. The stock grants were recorded at the intrinsic value of the stock on the date of grant. During 2008, the Company issued grants for 2.5 million shares as consideration under agreements for consulting and related services, and 744,000 shares were issued for employee compensation. STOCK ISSUED FOR CASH. During 2008, the Company raised $72,000 in cash due to the conversions of 113,000 of options and warrants. STOCK ISSUED FOR CONVERSION OF SENIOR CONVERTIBLE DEBT. During 2008 the Company issued 2.5 million shares due to the conversion of the 8% Senior Convertible Debt into shares of common stock. WARRANTS ISSUED FOR SETTLEMENT OF OBLIGATIONS. The company issued warrants that may be converted into common stock of ZAP. They were valued at $200,000 utilizing the Black Scholes method. 2007 ISSUANCES STOCK ISSUED FOR ASSETS In 2007, the Company issued stock for inventory and assets and recorded the cost at the intrinsic value of the stock or the fair value of the assets, whichever is more reliably measurable. During 2007, 242,000 shares were issued for purchase of inventory and certain assets STOCK ISSUED FOR SERVICES. In 2007, the Company issued shares of its common stock for consulting and other services and employee compensation. The stock grants were recorded at the intrinsic value of the stock on the date of grant. During 2007, the Company issued grants for 3,448,000 shares as consideration under agreements for consulting and related services, and 855,000 shares were issued for employee compensation. STOCK ISSUED FOR CASH. During 2007, the Company raised $5.7 million in cash through the issuance of 6,656,000 shares of common stock. Another 955,000 shares were issued due to the conversions of options and warrants and resulted in cash of $719,000. STOCK ISSUED FOR CONVERSION OF SENIOR CONVERTIBLE DEBT. During 2007 the Company issued 2,931,000 shares due to the conversion of the 8% Senior Convertible Debt into shares of common stock. 40 STOCK DIVIDEND. In February of 2007, the Company issued 3,977,000 shares common stock for the 10% stock dividend. WARRANTS - -------- The Board of Directors of ZAP has established various series of restricted and unrestricted warrants as outlined below. They also 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. Shares acquired through exercises of warrants for all Series other than Series B, C, D and K are restricted as to sale. However, the warrants may be assigned, sold, or transferred by the holder without restriction. Series B, C, and D warrants not exercised may be redeemed by ZAP for a price of $0.01 per warrant upon thirty (30) days' written notice to the holders thereof; provided, however, that if not all unexercised warrants in a particular series are redeemed, then the redemption shall be pro-rated equally among the holders of unexercised warrants in the series. Total warrants outstanding at December 31, 2008 are summarized as follows (in thousands): Number of Exercise Expiration Warrants Price Dates -------- ----- ----- Series B-Unrestricted 3,127 1.09 7-1-12 Series B-2-Restricted 2,053 1.09 7-1-12 Series C-Unrestricted 6,045 1.09 7-1-12 Series C-2-Restricted 1,294 1.09 7-1-12 Series D-Unrestricted 6,649 1.09 7-1-12 Series D-2-Restricted 1,294 1.09 7-1-12 Series K-Unrestricted 4,356 0.91 7-1-12 Series K-2-Restricted 5,823 0.91 7-1-12 $0.70 Warrants-Unrestricted 100 0.70 6-2-13 $1.00 Warrants-Restricted 3,043 1.00 7-1-12 $1.10 Warrants Unrestricted 794 1.10 6-26-12 $1.20 Warrants-Restricted 5,673 1.20 various $1.32 Warrants -Unrestricted 432 1.32 2-20-12 $1.50 Warrants Restricted 2,049 1.36 1-2-12 $2.00 Warrants Restricted 385 1.82 various $2.50 Warrants Restricted 2,684 2.27 various $3.25 Warrants Restricted 330 3.25 various $3.50 Warrants Restricted 550 3.18 7-20-09 $4.50 Warrants Restricted 550 4.50 7-20-09 $5.50 Warrants Restricted 550 5.50 7-20-09 -------- 47,781 ======== MODIFIED WARRANTS - ----------------- On January 25, 2007, the Board of Directors extended by five years through July 1, 2012, the expiration date of certain of the Company's warrants, Series B through K. These warrants were issued for executive compensation and by the plan of reorganization. The exercise prices of the warrants were also revised from prices ranging from $1.00 to $8.00 to prices ranging from $0.91 to $1.20. As a result of the modification of the warrants, the Company determined the fair 41 value of the warrants immediately prior to and after the modification. The incremental difference in value resulted in the recognition of $11.7 million in non-cash compensation expense during the first quarter of 2007. NOTE 11 RELATED PARTY Rental arrangements - ------------------- The Company rents office space, land and warehouse space from Mr. Steven Schneider, its CEO and a major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense was approximately $84,000 for both years ended December 31, 2008 and 2007. Financing provided to the Company by Al-Yousuf LLC - -------------------------------------------------- The company entered into various financing arrangements during the second quarter ended September 30, 2008 with The Al Yousuf Group who is a Dubai-based conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf, who is also the Chairman of the Board of ZAP. On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building. The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. All principal and interest due under the Note is secured by the corporate headquarters building in Santa Rosa, California. On May 7, 2008, the Company entered into a settlement with Gemini Master Fund ,LTD and Gemini Strategies, LLC, the holders of the 8% Senior Convertible Notes. The agreement reached requires the termination and cancellation of the notes in exchange for $475,000 in cash and 100,000 shares of ZAP common stock. In connection with the aforementioned agreement ZAP has obtained the funds necessary for the payment of $475,000 through a draw on the financing facility with Al Yousuf LLC. NOTE 12 - LITIGATION In the normal course of business, we may become involved in various legal proceedings. Except as stated below, we know of no pending or threatened legal proceeding to which we are or will be a party which, if successful, might result in a material adverse change in our business, properties or financial condition. However, as with most businesses, we are occasionally parties to lawsuits incidental to our business, none of which are anticipated to have a material adverse impact on our financial position, results of operations, liquidity or cash flows. The Company has estimated the amount of potential exposure, if any, it may have with respect to litigation claims and assessments. Voltage Vehicles v. Rajun Cajun, et al., Superior Court of California, County of Sonoma, Case No. SCV 240179, filed February 9, 2007. (This suit is related to the Nevada case of Robert Chauvin, et al. v. Voltage Vehicles, et al. discussed immediately above.) In its complaint, Voltage Vehicles requests Declaratory Relief against Rajun Cajun, asking the Court to declare that the License Agreement between those two parties does not grant Rajun Cajun an exclusive dealership in northern Nevada to distribute Voltage Vehicle products and that Voltage Vehicles has performed its obligations under the License Agreement. On May 24, 2007, Rajun Cajun filed a Cross-Complaint in substantially the same form as the Complaint filed in Nevada, alleging breach of contract, breach of the covenant of 42 the good faith, etc. The Cross-Complaint seeks general damages in an amount in excess of $25,000, special damages in an amount in excess of $25,000, punitive damages in an amount in excess of $25,000, attorneys' fees and cost of suit, for judgment in the amount equal to treble actual damages, and rescission in the amounts of $397,900 and $120,000, plus interest. Cross-Defendants intend to vigorously defend against the claims set forth in the Cross-Complaint and so, on August 22, 2007, Cross-Defendants filed both a special demurrer for abatement to prohibit Cross-Complainants from maintaining a cross-complaint and a demurrer to the Cross-Complaint itself. On February 11, 2008 ZAP and Voltage Vehicles filed a demurrer to Cross-complainants' third through fifteenth causes of action. A hearing on that demurer is currently set for June 11, 2008. In its tentative ruling, the Court ruled in ZAP and Voltage Vehicles' favor and granted Rajun Cajun leave to file a Second Amended Cross-Complaint. The Second Amended Cross-complaint seeks general damages in an amount in excess of $50,000, damages for Cross-plaintiffs' lost earnings, both past and future, in a sum to be proven at trial, a sum in excess of $50,000 for Cross-complainants' mental pain, a sum in excess of $50,000 for willful and wanton misconduct, and such other and further relief the court may deem just and equitable. On September 16, 2008 ZAP and Voltage Vehicles filed a demurrer to the Second Amended Cross-complaint. The hearing on Zap and Voltage Vehicle's demurrer to the Second Amended Cross-complaint is set for November 19, 2008. A Settlement Conference is set for March 25, 2009 and Trial Call is set for April 24, 2009. In the meantime, discovery is ongoing. CIT Communications Finance Corporation v. ZAP, formerly known as ZapWorld.com and as Zap Power Systems, and DOES 1-20, complaint filed on February 26, 2008, Case No. 242445, in the Superior Court of California, County of Sonoma. CIT Communications Finance Corporation ("CIT") has served ZAP with a complaint, an application for writ of possession, and an application for writ of attachment. CIT's complaint and its applications for the two writs are based on three telephone equipment leases CIT alleges it has with ZAP, through predecessors in interest. The Complaint includes five causes of action: (1) breach of written lease agreements; (2) recovery of personal property; (3) conversion; (4) quantum valebant; and (5) quantum meruit or unjust enrichment. For each of those claims, CIT alleges that ZAP entered into the leases, never returned the equipment, and, in or about June 2002, ceased payment of amounts owed under the leases. CIT is now seeking both return of the equipment and a monetary award covering amounts owed under the leases. More particularly, for its breach of contract claim, CIT is seeking recovery of $108,967.26 allegedly owed on the leases. On its recovery of personal property claim, CIT is seeking either return of all the leased equipment or a monetary damages to cover the value of the leased equipment. On the conversion claim, CIT is seeking general damages for ZAP's continued possession and use of the equipment, as well as punitive damages based on a claim that ZAP's actions were malicious, willful, and oppressive. On its quantum valebant and quantum meruit claims, CIT is seeking general damages for the value of ZAP's continued use and possession of the equipment since June 24, 2002. CIT is also seeking reimbursement of all of its attorneys' fees and costs of suit, as well as any additional legal and equitable relief that the court may deem proper. ZAP's Answer to the Complaint was filed on April 24, 2008. CIT has also applied for both a writ of possession, seeking return of all of the leased equipment, and a writ of attachment, seeking attachment of $122,588.26 against ZAP. The hearing on CIT's writ applications was held on June 3, 2008. At that hearing, the Court denied CIT's application for writ of attachment, finding that CIT had not proven, based on the record to date, that it was more likely than not to prevail at trial on its breach of contract cause of action against ZAP. The Court did, however, grant CIT's application for writ of possession, finding no dispute between the parties regarding ZAP's willingness to give to CIT all components of the at-issue telephone equipment still in ZAP's possession. Given ZAP's multiple offers to date to cooperate in returning any such equipment, the Court refused CIT's demand that ZAP be required to post a bond to support the writ of possession. The writ of possession was issued on June 17, 2008, but, to date, ZAP is unaware of any action by CIT to enforce that writ. On June 20, 2008, ZAP sent CIT an Offer to Compromise, offering to settle the matter with ZAP's payment to CIT of $2,500, inclusive of attorneys' fees and costs to date. CIT has rejected that offer. On February 11, 2009, ZAP filed a motion for summary judgment or, in the alternative, summary adjudication. CIT's opposition to that motion is due March 24, 2009, and the hearing on that motion is scheduled for April 7, 2009. In the meantime, ZAP and CIT attended a telephonic mediation on February 13, 2009, but the parties were unable to reach a settlement. The parties then attended a mandatory settlement conference on March 16, 2009, but were again unable to reach a settlement. Trial in this matter is scheduled for May 1, 2009. Discovery is ongoing. We intend to vigorously defend ourselves against these claims and believe that we have adequately provided in our financial statements for this matter. 43 NOTE 13 - SEGMENT REPORTING In accordance with the provisions of SFAS No. 131, the Company has identified three reportable segments consisting of sales and marketing of electronic consumer products, the Zappy 3 scooters and ATV's, Rechargeable portable energy products, operation of a retail car outlet and sales to and sales of advanced technology vehicles for the Xebra ((TM)) electric vehicles. 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 ZAP's strategic segments, regularly evaluate the 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. Electric Consumer products and corporate expenses represent sales of our ZAPPY 3 which is a three wheeled electric scooter and the overall corporate expenses for the company. Many of these expenses relate to the overall development of our core business, Electric Consumer Products. The Portable energy Segment was sold in June of 2008. Car outlet represents the activity of a retail outlet that sells pre-owned conventional vehicles and advanced technology vehicles, now the Xebra a three-wheeled plug in electric vehicle to retail customers. Advanced Technology Vehicles represents the sales activity of advanced technology vehicles, now the Xebra a three-wheeled plug in electric vehicle to ZAP Dealers through-out the U.S. The performance of each segment is measured based on its profit or loss from operations before income taxes. Segment results are summarized as follows (in thousands):
Electric Advanced Consumer Portable Car Technology products Energy outlet Vehicles Total ---------- ---------- ---------- ---------- ---------- Year ended December 31, 2008: Net sales $ 703 $ 173 $ 1,727 $ 4,985 $ 7,588 Gross profit(loss) (312) 94 299 718 799 Depreciation, amortization and impairment 211 -- 22 46 279 Net (loss) income (9,390) 73 (132) (358) (9,807) Total assets 5,953 -- 571 2,702 9,226 Year ended December 31, 2007: Net sales $ 742 $ 875 $ 1,304 $ 2,791 $ 5,712 Gross profit(loss) (88) 287 330 246 775 Depreciation, amortization and impairment 202 -- 27 94 323 Net (loss) income (27,628) 194 (98) (474) (28,006) Total assets 10,102 70 488 1,278 11,938
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION A summary of non-cash investing and financing information is as follows (in thousands): Year ended December 31 ---------------------- 2008 2007 -------- -------- Cash paid during the year for: Income taxes $ 4 $ 4 Common stock and warrants and debt issuances for: Inventory 155 237 Prepaid professional fees 1,639 3,415 Property and Equipment -- 3 Debt converted to common stock 743 2,166 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None ITEM 9A. CONTROLS AND PROCEDURES. Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported within the specified time periods. Our Chief Executive Officer and its Chief Financial Officer (collectively, the "Certifying Officers") are responsible for maintaining our disclosure controls and procedures. The controls and procedures established by us are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. As of the end of the period covered by this report, the Certifying Officers evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, the Certifying Officers concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including the Certifying Officers, as appropriate to allow timely decisions regarding required disclosure. The Certifying Officers have also concluded, based on their evaluation of our controls and procedures that as of December 31, 2008, our internal controls over financial reporting are effective and provide a reasonable assurance of achieving their objective. The Certifying Officers have also concluded that there was no change in our internal controls over financial reporting identified in connection with the evaluation that occurred during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. (b) Changes in Internal Control Over Financial Reporting (b) Changes in Internal Control Over Financial Reporting. There were no changes our internal control over financial reporting that occurred during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 45 ITEM 9B. OTHER INFORMATION. The Company was not required to disclose information on Form 8-K that it did not report on a Form 8-K during the fourth quarter of the year covered by this Form 10-KSB. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The Company's directors and executive officers and their ages as of March 28, 2009 are as follows: Name Age Position --------------------- ---- ------------------------------------------- Steven M. Schneider 48 Chief Executive Officer and Director William Hartman 61 Chief Financial Officer Amos Kazzaz 53 Chief Operating Officer Peter H. Scholl 61 Director Eqbal Al Yousuf 49 Chairman of the Board of Directors Director Steven M. Schneider. Mr. Schneider has been director and Chief Executive Officer of ZAP since October 26, 2002. Schneider has a 30-year career in the automotive industry and a long-time interest in fun, fuel-efficient cars. He has served as ZAP's CEO since 2002, when the company acquired Auto Distributors, Inc. and Voltage Vehicles, businesses he founded which specialized in the distribution of electric and alternative fuel vehicles including automobiles, motorcycles and bicycles. Schneider also founded the RAP Group, an automotive liquidator and reseller, which ZAP also acquired. He serves on the board of directors of Apollo Energy Systems, a developer of fuel cells and advanced batteries. He also serves as a director of Rotoblock Corporation, a public company focused on the continued development of the oscillating piston engine. He is an active member with various industry groups, including the Electric Drive Transportation Association in Washington, DC. , and is a member of the Bay Area Alliance of CEOs. He lectures frequently on industry topics at universities and other organizations. William Hartman. Mr. Hartman was appointed Chief Financial Officer in March 2001. He was engaged with the Company as a financial consultant starting in January 2001. Prior to his engagement at ZAP, Mr. Hartman provided financial and accounting consulting services to various Internet start up companies in the San Francisco Bay Area from 1999 to 2001. Mr. Hartman is a Certified Public Accountant in the State of California with a Masters in Accounting Degree from the State University of New York. He also had previous public accounting experience as an audit manager with Price Waterhouse Coopers in San Francisco. Mr. Amos Kazzaz. Mr. Kazzaz was appointed Chief Operating Officer on March 26, 2007. Prior to joining ZAP, Mr. Kazzaz served as Vice President of Cost Management at United Airlines, Inc. where he oversaw United Airline's operations, process improvement, and cost management. From 2003 to 2006, Mr. Kazzaz served as United Airline's Vice President of Financial Planning and Analysis during which time he accounted for United Airline's planning and analysis function and capital budget. From 2002 to 2004, Mr. Kazzaz served as United Airline's Vice President of the Business Transformation Office, the company's first enterprise project management office, during which time he was responsible for identifying areas of revenue and cost improvements; concurrently, Mr. Kazzaz served as the Chief Operating Officer at Avolar, a subsidiary of United Airlines. He currently sits on the Boards of Directors of Alliant 46 Credit Union. Mr. Kazzaz holds a bachelors degree in International Affairs from the University of Colorado and a Masters in Business Administration from the University of Denver. Mr. Al Yousuf is the President of Dubai's Al-Yousuf Group and Al Yousuf LLC. He has held this position since 2005. Prior to this Mr. Al Yousuf has held the senior management positions of Vice Chairman and CEO of Dubai's Al-Yousuf Group and Al Yousuf LLC from 2001 to 2005. Peter H. Scholl. Mr. Scholl is currently an independent engineering consultant. From 2003 to 2005, Mr. Scholl served as President of Rotoblock Inc. in Canada and Rotoblock Corporation, a Nevada corporation, in the development of Oscillating Piston Engine technology. He served as President of Unimont Inc., a real estate development firm, in Penticton, Canada from 2001 to 2003. From 1996 to 2000, Mr. Scholl worked on the development of water purification systems in Arizona. Mr. Scholl has a Bachelor's of Science degree in Mechanical Engineering from the Institute of Technology in Biel, Switzerland. Family Relationships There are no family relationships among any of our officers or directors. Board of Directors Corporate Governance Principles and Board Matters ZAP is committed to having sound corporate governance principles and practices. ZAP's primary corporate governance documents, including our Code of Ethics and Committee Charters, are available to the public on our website at http://www.zapworld.com. The following is a discussion of our current governance principles and practices. Board Meetings During 2008, our Board met or conferred by telephone 6 times. During 2008, all directors attended at least 75% of the aggregate of (i) the total number of meetings of the Board during 2008 and (ii) the total number of meetings held by all committees of the Board on which such director served in 2008. The Company does not have a policy with regard to attendance of directors at annual meetings, but encourages them to be present. Committees of the Board Audit Committee The Board's Audit Committee is comprised of Peter Scholl. During 2008, the Audit Committee met 4 times. Our current Audit Committee is financially literate and are able to read and understand fundamental financial statements, including a balance sheet, income statement and cash flow statement. The Board has determined that Mr. Scholl qualifies as an audit committee financial expert as defined within Item 401 of Regulation S-B. The Audit Committee assists the Board of Directors in its oversight of the quality and integrity of the accounting, auditing, and reporting practices of the Company. The Audit Committee's role includes overseeing the work of the Company's internal accounting and financial reporting and internal auditing processes and discussing with management the Company's processes to manage business and financial risk, and for compliance with significant applicable legal, ethical, and regulatory requirements. The Audit Committee is responsible for the appointment, compensation, retention, and oversight of the independent auditor engaged to prepare or issue audit reports on the financial statements and internal control over financial reporting of the Company. The Audit Committee relies on the expertise and knowledge of management and the independent auditor in carrying out its oversight responsibilities. The Committee's specific responsibilities are delineated in the Audit Committee Charter. The Audit Committee Charter is available on the ZAP website at http://www.zapworld.com. 47 Compensation Committee The Board's Compensation Committee is comprised of Peter Scholl. During 2008, the Compensation Committee meets in conjunction with the Board of Directors meetings. A copy of the Compensation Committee Charter is available on the ZAP website at http://www.zapworld.com. The Compensation Committee, among other things, advises the Board on all matters pertaining to compensation programs and policies, approves the compensation payable to each of the officers of the Company, reviews proposed compensation of executives as provided in the Company's executive compensation plan and administers the Company's stock option plans. Corporate Governance and Nominating Committee The Board's Corporate Governance and Nominating Committee (the "Governance Committee") is comprised of Peter Scholl During 2006, the Governance Committee meets in conjunction with the Board of Directors meetings. The Governance Committee has adopted a charter, which has been ratified and approved by the Board. A copy of the committee's charter is available on the ZAP website at http://www.zapworld.com. The Governance Committee, among other things, identifies, evaluates and recommends individuals qualified to be directors of the Company. Members of the Board of Directors should have the highest professional and personal ethics and values. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be able to provide insights and practical wisdom based on their experience and expertise. They should be committed to enhancing shareholder value and should have sufficient time to effectively carry out their duties. Their service on other Boards of public companies should be limited to a reasonable number. The Governance Committee annually reviews the appropriate skills and characteristics required of Board members in the context of the current composition of the Board, the operating requirements of the Company and the long-term interests of the shareholders. In conducting this assessment, the committee considers diversity, age, skills, and such other factors as it deems appropriate given the current needs of the Board and the Company, to maintain a balance of knowledge, experience and capability. Code of Ethics The Board has adopted a Code of Ethics to provide guidance on maintaining the Company's commitment to being honest and ethical in its business endeavors. The Code of Ethics covers a wide range of business practices, procedures and basic principles regarding corporate and personal conduct and applies to all directors, executives, officers and employees. A copy of the Code of Ethics is available on the ZAP website http://www.zapworld.com or may be obtained by written request submitted to the Corporate Secretary at ZAP, 501 Fourth Street, Santa Rosa, CA 95401. The Company intends to satisfy any disclosure requirements regarding amendments to, or waivers from, any provision of the Code of Ethics by disclosing on the Company's website, by press release and/or on a current report on Form 8-K. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors and persons beneficially owning more than 10% of the outstanding common stock of the Company to file reports of beneficial ownership and changes in beneficial ownership with the Securities and Exchange Commission ("SEC"). Officers, directors, and greater than 10% beneficial owners of common stock are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. The Company believes that during the fiscal year ended December 31, 2008, all officers and directors timely filed the initial statement of beneficial ownership of securities on Form 3. The Company also believes that during the fiscal year ended December 31, 2008, all officers and directors timely reported certain transactions on Form 4s. 48 ITEM 11. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION The following executive compensation disclosure reflects all compensation awarded to, earned by or paid to the executive officers below for the fiscal year ended December 31, 2008. The following table summarizes all compensation for fiscal year 2008 received by our Chief Executive Officer, and the Company's other most highly compensated executive officers who earned more than $100,000 in fiscal year 2008.
SUMMARY COMPENSATION TABLE Non-Equity Incentive Nonqualified Stock Option Plan Deferred Name and principal Awards Awards Compensation Compensation All Other position Year Salary($) Bonus($) ($)(1) ($)(2) ($) Earnings($) Compensation($) Total($) Steven Schneider, CEO 2008 131,865 - 30,835 - - - - 162,700 Gary Starr, Cofounder 2008 125,965 - 30,835 - - - - 156,800 William Hartman,CFO 2008 121,500 - - 300,500 - - - 422,000 Amos Kazzaz, COO 2008 115,900 10,500 25,500 - - - - 151,900
(1) Stock awards are based on the stock price on the date of issue. (2) Represents 500,000 Stock Options at an exercise price of $0.78. The Option award value was determined using the Black Scholes Valuation Method. The options are fully vested and have a ten year life. Employment Agreements We currently have employment agreements with four of our Named Executive Officers as described below. Steve Schneider, Chief Executive Officer We entered into an employment agreement with Steve Schneider on October 1, 2003. The agreement provides that Mr. Schneider will serve as our Chief Executive Officer through October 1, 2008 and receive a salary, benefits and options equal to the highest paid employee of ZAP, but in no event less than $75,000 per year. Mr. Schneider's current salary is 49 set at $120,000. In addition, the agreement provides that should ZAP become profitable, Mr. Schneider's salary will automatically be increased by 10% for every $100,000 in profits calculated on a quarterly basis. Mr. Schneider annually receives a grant of stock options or warrants equal to 1% of the outstanding common stock of ZAP at an exercise price equal to 110% of the market price on the date of grant. Mr. Schneider also receives all other benefits as are afforded to our employees and a Company car, or a car allowance of $5,000 per year in lieu of a Company car. In the event ZAP terminates his employment without cause, Mr. Schneider is entitled to his full salary for the remainder of the term of the agreement. Should ZAP elect to terminate Mr. Schneider's employment in the case of a merger or reclassify Mr. Schneider without cause prior to the expiration of the employment agreement, the Company must retain Mr. Schneider as an employee or consultant for a period of five years for an aggregate salary of $500,000, payable bi-monthly, or make a lump sum payment of $300,000. The agreement automatically renews for successive five year periods unless terminated by either party upon proper notice. On March 30, 2007, The Board of Directors of ZAP did approve the extension of the employment agreement with Mr. Schneider through October 1, 2013. Gary Starr Cofounder We entered into an employment agreement with Gary Starr on October 1, 2003. The agreement provides that Mr. Starr will receive a salary, benefits and options equal to the highest paid employee of ZAP, but in no event less than $75,000 per year. Mr. Starr's current salary is set at $125,000. In addition, the agreement provides that should ZAP become profitable, Mr. Starr's salary will automatically be increased by 10% for every $100,000 in profits, calculated on a quarterly basis. Mr. Starr annually receives a grant of stock options or warrants equal to 1% of the outstanding common stock of ZAP at an exercise price equal to 110% of the market price on the date of grant. Mr. Starr also receives all other benefits as are afforded to our employees and a Company car, or a car allowance of $5,000 per year in lieu of a Company car. In the event ZAP terminates his employment without cause, Mr. Starr is entitled to his full salary for the remainder of the term of the agreement. Should ZAP elect to terminate Mr. Starr's employment in the case of a merger or reclassify Mr. Starr without cause prior to the expiration of the employment agreement, the Company must retain Mr. Starr as an employee or consultant for a period of five years for an aggregate salary of $500,000, payable bi-monthly, or make a lump sum payment of $300,000. The agreement automatically renews for successive five year periods unless terminated by either party upon proper notice. On March 30, 2007,The Board of Directors of ZAP did approve the extension of the employment agreement with Mr. Starr through October 1, 2013. William Hartman, Chief Financial Officer We entered into an employment agreement with Bill Hartman on August 1, 2007. The agreement provides that Mr. Hartman will serve as Chief Financial Officer of ZAP through August 1, 2008, with a yearly renewal clause and receive a salary at $120,000 Mr. Hartman also receives all other benefits as are afforded to our employees and a Company car, or a car allowance of $5,000 per year in lieu of a Company car. In the event ZAP terminates his employment without cause, Mr.Hartman is entitled to his full salary for the remainder of the term of the agreement. Amos Kazzaz, Chief Operating Officer We entered into an employment agreement with Amos Kazzaz on August 28, 2007. The agreement provides that Mr. Kazzaz will serve as Chief Operating Officer of ZAP through August 28, 2010, and receive a salary at $120,000, with annual reviews. Mr. Kazzaz also receives all other benefits as are afforded to our employees and a Company car, or a car allowance of $5,000 per year in lieu of a Company car. In the event ZAP terminates his employment without cause, Mr.Kazzaz is entitled to his full salary for the remainder of the term of the agreement. The following table sets forth certain information concerning stock option awards granted to our named executive officers. 50
- ------------------------------------------------------------------------------------------------------------------------------------ OPTION AWARDS STOCK AWARDS Equity incentive Equity plan incentive awards: plan Market or awards: payout Equity number of value of Incentive unearned unearned Plan Awards: Market shares, shares, Number of Number of Number of Number of value of units or units or securities securities Securities shares or shares or other other underlying underlying underlying units of units of rights rights unexercised unexercised unexercised Option Option stock that stock that that have that have options (#) options (#) unearned exercise expiration have not have not not vested not vested Name Exercisable Unexercisable options (#) price ($) date vested (#) vested ($) (#) ($) Steve Schneider (3) 220,000 - - 0.23 7/5/12 Steve Schneider (3) 550,000 - 1.15 6/23/14 Steve Schneider (2) 566,117 - 1.20 11/16/14 Steve Schneider (2) 348,588 - 0.85 6/7/15 Steve Schneider (2) 572,686 0.94 11/9/17 Steve Schneider (4) 1,063,480 1.08 7/1/12 Steve Schneider (4) 2,690,000 1.08 7/1/12 Steve Schneider (4) 3,190,000 1.08 7/1/12 Steve Schneider (4) 3,025,000 0.91 7/1/12 Steve Schneider (4) 1,690,786 0.91 7/1/12 Steve Schneider (1) 572,686 1.00 7/1/12 Steve Schneider (3) 390,966 0.83 8/11/16 Gary Starr (4) 1,155,930 1.08 7/1/12 Gary Starr (4) 1,144,930 1.08 7/1/12 Gary Starr (4) 734,630 1.08 7/1/12 Gary Starr (2) 128,334 - - 1.09 12/19/11 Gary Starr (2) 100,000 - - 0.23 7/5/12 Gary Starr (2) 550,000 - 1.15 6/23/14 Gary Starr (2) 566,117 - 1.20 11/16/14 Gary Starr (2) 348,588 - 0.85 6/7/15 Gary Starr (2) 390,966 - - 0.83 8/11/16 Gary Starr (2) 572,686 - - 0.94 11/9/17 Gary Starr (1) 572,686 - - 1.00 7/2/12 Gary Starr (4) 1,470,671 0.91 7/1/12 Gary Starr (4) 935,000 0.91 7/1/12 William Hartman (4) 807,369 - - 0.91 7/1/12 William Hartman (4) 22,000 1.08 7/1/2012 William Hartman (3) 55,000 - 1.20 11/16/14 William Hartman (3) 27,500 - - 1.09 12/19/11 William Hartman (3) 82,500 - 1.15 6/23/14 William Hartman (3) 110,000 - 0.94 9/18/16 William Hartman (3) 119,869 - - 1.15 03/30/17 William Hartman (5) 500,000 - - 1.07 07/30/17 William Hartman (6) 500,000 0.78 08/28/18 Amos Kazzaz (3) 439,737 1.15 03/30/17 Amos Kazzaz (5) 500,000 1.08 08/28/17
51 Note: All options and warrants issued before February 28, 2007 were adjusted for the 10% stock dividend authorized by the Board of Directors effective on this date. (1) The award represents warrants which are exercisable at the time of issuance per employment agreement (2) The award vest at the date of grant. The option has a ten year life. Issued per the employment agreements (3) The award vests equally over 36 months from date of grant. The option has a ten year life. (4) The award is warrants to purchase ZAP Common stock, these five year warrants were initially issued on June 1, 2002. In January,2007 they were extended another five years until June 1, 2012 with their original exercise prices also adjusted. (5) The award vests equally over 36 months from date of grant. The option has a ten year life. Issued per the employment agreement. (6) The award vested at the date of grant. The option has a ten year life. Issued per the employment agreement DIRECTOR COMPENSATION The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the outside directors below for the fiscal year ended December 31, 2008. Compensation of Directors The outside directors receive $500 and a grant of $500 of common stock for attendance at each Board meeting and each committee meeting. Directors are also reimbursed for out-of-pocket travel and other expenses incurred in attending Board and/or committee meetings. Only Peter Scholl received funds of $11,250 for the year ended December 31, 2008. Both Gary Starr and Randall Waldman resigned as Directors in early 2009. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth certain information, as of March 27, 2009, with respect to the holdings of (1) each person who is the beneficial owner of more than five percent of our common stock, (2) each of our directors, (3) the CEO and each Named Executive Officer, and (4) all of our directors and executive officers as a group. Beneficial ownership of the common stock is determined in accordance with the rules of the Securities and Exchange Commission and includes any shares of common stock over which a person exercises sole or shared voting or investment powers, or of which a person has a right to acquire ownership at any time within 60 days of March 21, 2009. Except as otherwise indicated, and subject to applicable community property laws, the persons named in this table have sole voting and investment power with respect to all shares of common stock held by them. Applicable percentage ownership in the following table is based on 70,010,606 shares of common stock outstanding as of March 27, 2009, plus, for each individual, any securities that individual has the right to acquire within 60 days of March 27, 2009. Unless otherwise indicated below, the address of each of the principal shareholders is c/o ZAP, 501 Fourth Street, Santa Rosa, California 95401. 52 Shares Beneficially Percentage Name and Address Owned of Class - -------------------------------------------------------------------------------- Beneficial Owners of More than 5%: Jeffrey G. Banks (1),the Banks Group 4,136,297 5.91% Current Directors, Nominees and Named Executive Officers: Steven Schneider (2) 17,952,487 25.64% Gary Starr (3) 9,679,287 13.83% Eqbal Al Yousuf (4) 9,303,428 13.29% William Hartman (5) 2,625,639 3.75% Amos Kazzaz (6) 1,123,819 1.61% Peter Scholl * All Directors and Executive Officers as a group (6) persons) 40,684,660 58.12% - -------------------------------------------------------------------------------- - --------------- * Less than 1%. (1) Includes 2,505,000 warrants to purchase common stock. (2) Includes 12,231,952 shares of common stock issuable upon the exercise of various warrants and 2,648,357 shares of stock issuable upon the exercise of stock options. (3) Includes 6,013,846 shares of common stock issuable upon the exercise of various warrants and 2,656,691 shares of stock issuable upon the exercise of stock options. (4) Shares were issued to Al-Yousuf LLC of which Mr Al-Yousuf is the President (5) Includes 829,369 shares of common stock issuable upon the exercise of various warrants and 1,394,869 shares of stock issuable upon the exercise of stock options. (6) Includes 939,721 shares of stock issuable upon the exercise of stock options. Equity Compensation Plan Information We have adopted stock incentive plans to provide incentives to attract and retain officers, directors, key employees and consultants. We currently have reserved a total of 30,000,000 shares of our common stock for granting awards, including 1,500,000 shares under our 1999 Incentive Stock Option Plan, 10,000,000 shares under our 2002 Incentive Stock Option Plan, and 4,000,000 shares under our 2006 Incentive Stock Option Plan and 14,500,000 under our 2007 Stock Incentive Plan. All plans were approved by our shareholders. As of December 31, 2008, 643,870 shares of common stock had been issued pursuant to options exercised out of the 2002 plan. 53 A summary of options under the Company's stock option plans from December 31, 2007 through December 31, 2008 is as follows: (the number of shares is in thousands) Weighted Average Remaining Weighted Contractual Number of Average Term Shares Exercise Price (in years) - -------------------------------------------------------------------------------- Outstanding December 31, 2007 11,276 $ 1.03 8.32 Options granted under the plan 104 $ 0.84 9.75 Options exercised -- -- -- Options forfeited and expired -- -- -- ------------ ------------ ------------ Outstanding March 31, 2008 11,380 $ 1.03 8.33 Options granted under the plan 72 $ 0.97 10.0 Options exercised (38) $ 0.29 Options forfeited and expired (33) -- -- ------------ ------------ ------------ Outstanding June 30, 2008 11,380 $ 1.03 8.39 Options granted under the plan 904 $ 0.78 10.0 Options exercised (137) $ 0.45 Options forfeited and expired -- -- -- ------------ ------------ ------------ Outstanding September 30, 2008 12,148 $ 1.00 8.41 ------------ ------------ ------------ Options granted under the plan -- $ -- ------------ ------------ ------------ Options exercised -- -- -- ------------ ------------ ------------ Options forfeited and expired (156) -- -- ------------ ------------ ------------ Outstanding December 31, 2008 11,992 $ 1.04 8.39 ------------ ------------ ------------ Aggregate intrinsic value is the sum of the amounts by which the quoted market price of our stock exceeded the exercise price of the options at December 31, 2008, for those options for which the quoted market price was in excess of the exercise price ("in-the-money-options"). There were 852,500 options were in the money at $0.01 or $8,525 as of December 31, 2008. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE RELATED PARTY TRANSACTIONS Rental arrangements - ------------------- The Company rents office space, land and warehouse space from Mr. Steven Schneider, its CEO and a major shareholder. These properties are used to operate the car outlet and to store inventory. Rental expense was approximately $84,000 for the both years ended December 31, 2008 and 2007, respectively. Financing provided to the Company by Al-Yousuf LLC - -------------------------------------------------- The company entered into various financing arrangements during the second quarter ended September 30, 2008 with The Al Yousuf Group who is a Dubai-based conglomerate and a major shareholder of ZAP. The President of Al Yousuf LLC is Mr. Eqbal Al Yousuf, who is also the Chairman of the Board of ZAP. On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note. The initial outstanding principal sum advanced to the Company is $1,760,000. This advance was used to pay-off the existing secured note payable on the building. The Note matures February 28, 2010. Interest only payments are due under the Note monthly commencing August 30, 2008. All principal and interest due under the Note is secured by the corporate headquarters building in Santa Rosa, California. On May 7, 2008, the Company entered into a settlement with Gemini Master Fund, LTD and Gemini Strategies, LLC, the holders of the 8% Senior Convertible Notes. The agreement reached requires the termination and cancellation of the notes in exchange for $475,000 in cash and 100,000 shares of ZAP common stock. In connection with the aforementioned agreement ZAP has obtained the funds necessary for the payment of $475,000 through a note payable to Al Yousuf LLC. 54 DIRECTOR INDEPENDENCE The following director is an independent director as that term is defined under NASDAQ Rule 4200(a)(15): Peter Scholl ITEM 14. PRINCIPAL ACCOUTANT FEES AND SERVICES. Audit and Non-Audit Fees The following table presents fees for professional audit services rendered by Bagell Josephs,Levine & Co. LLP for the audit of the Company's annual financial statements for the year ended December 31,2008 and 2007 2008 2007 ------------ ------------ Audit fees:(1) $ 140,000 $ 133,000 Audit-related fees: (2) -- -- Tax fees:(3) -- -- All other fees:(4) -- -- ------------ ------------ Total $ 140,000 $ 133,000 ============ ============ (1) Audit fees include fees invoiced for the audit of the Company's annual financial statements and the quarterly reviews of these statements, as well as fees for consultation regarding accounting issues and their impact on or presentation in the Company's financial statements. (2) This category includes fees billed for assurance and related services that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported under "Audit Fees," and generally consist of fees for due diligence in connection with acquisitions, registration statements, accounting consultation and audits of employee benefit plans. (3) This category includes fees billed for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice. (4) The Company generally does not engage Bagell, Joseph, Levine Company, LLC for "other" services. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Public Accounting Firm The Audit Committee's policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. 55 ITEM 15. EXHIBITS. EXHIBITS. 2.1 Approved Second Amended Plan of Reorganization, dated as June 20, 2002. (5) 3.1 Amended and Restated Articles of Incorporation. (4) 3.2 Certificate of Determination of Series SA Convertible Preferred Stock. (14) 4.1 Form of common share purchase warrant of the Company held by Fusion Capital Fund II, L.P. (6) 4.2 Form of Series B common stock purchase warrant of the Company. (14) 4.3 Form of Series K common stock purchase warrant of the Company. (14) 10.1 Settlement Agreement Between ZAPWORLD.COM, Ridgewood ZAP, LLC, and the Shareholders dated June 27, 2001. (3) 10.3 2004 Consultant Stock Plan. (7) 10.4 Convertible Promissory Note, dated April 26, 2004, issued to Banks Living Trust. (1) 10.5 Purchase and Sale Agreement dated March 7, 2003 between ATOCHA Land LLC and ZAP. (3) 10.6 Promissory Note $2,000,000 - Atocha Land LLC and ZAP. (3) 10.7 Warrant Agreement dated April 26, 2004, issued to Banks Living Trust. (1) 10.8 Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC. (6) 10.9 Registration Rights Agreement between ZAP and Fusion Capital Fund II, LLC. (6) 10.10 Form of Common Stock Purchase Warrant between ZAP and Fusion Capital Fund II, LLC (6) 10.11 Agreement for Consulting Services with Evan Rapoport dated January 8, 2004. (1) 10.12 Asset Purchase Agreement dated April 12, 2004 with Jeffrey Banks for purchase of various autos (1) 10.13 Agreement for Private Placement Investment received dated April 14, 2004 with Phi-Nest Fund LLP (1) 10.14 Consulting Agreement dated April 21, 2004 with Elexis International(1) 10.15 Consulting Agreement dated April 21, 2004 with Sunshine 511 Holdings (1) 56 10.16 Definitive Stock Agreement dated October 25, 2004 with Smart-Automobile, LLC (2) 10.17 Master Distribution Agreement between Apollo Energy Systems, Inc. and Voltage Vehicles Corporation, a subsidiary of ZAP. (8) 10.18 ZAP Floor Line and Dealer Development Agreement with Clean Air Motors, LLC for a $45 Million Floor Plan Line of Credit for Qualified ZAP Dealers (9) 10.19 Exclusive Purchase, License and Supply Agreement between Smart Automobile, LLC and ZAP. (10) 10.20 Amendment dated November 15, 2004 to previous consulting agreement with Sunshine Holdings 511 (14) 10.21 Secured Promissory Note Payable dated December 30, 2004 with Phi-Nest Fund, LLP. (14) 10.22 ZAP assignment of 2.9 million shares of Restricted Common Stock to Phi-Nest Fund, LLP as collateral on note payable (14) 10.23 Promissory note receivable dated January 6, 2005 for $1 million loan due from Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile, LLC) (14) 10.24 Security Agreement dated January 6, 2005 from Smart Automobile, LLC and Thomas Heidemann (President Smart Automobile ,LLC) to secure loan above. (14) 10.25 Common Stock Purchase Agreement between ZAP and Platinum Partners Value Arbitrage Fund LP (14) 10.26 Form of Common Stock Purchase Warrant between ZAP and Platinum Partners Value Arbitrage Fund LP (14) 10.27 Common Stock Purchase Agreement between ZAP and Lazarus Investment Partners LLP (14) 10.28 Form of Common Stock Purchase Warrant between ZAP and Lazarus Investment Partners LLP (14) 10.29 Termination of Common Stock Purchase Agreement between ZAP and Fusion Capital Fund II, LLC (11) 10.30 Financing Agreement between ZAP and Surge Capital II, LLC (12) 10.31 Exclusive Purchase, License, and Supply Agreement between ZAP and Obvio! Automotoveiculos S.P.E. Ltda (13) 10.36 Agreement dated July 14, 2006 between ZAP, Thomas Heidemann and Smart Automobile (15) 10.37 Amendment Agreement Dated August 30, 2006 between ZAP and Smart Automobile LLC (16) 10.38 Exclusive Distribution Agreement dated May 1, 2005, as supplemented by a letter dated June 9, 2006 (17) 10.39 ZAP Guarantee (18) 10.40 Shandong Jindalu Vehicle Co., Ltd. Guarantee (19) 10.41 Joint Venture Negotiations dated September 21, 2006 (20) 10.42 Security Purchase Agreement between ZAP and Certain Institutional Investors (21) 10.43 Purchase and Amendment Agreement between ZAP and Certain Institutional Investors (22) 10.44 Form of Convertible Note (incorporated by reference from our Current Report on Form 8-K filed on February 26, 2007) 10.45 Form or Warrant (incorporated by reference from our Current Report on Form 8-K filed on February 26, 2007) 10.46 Purchase order from the Electric Vehicle Company, LLC ("EVC") for 10,000 of its Xebra 2007 model year electric vehicles(incorporated by reference from our Current Report on Form 8-K filed on April 26, 2007) 10.47 Distribution agreement this week with PML FlightLink Limited (PML) for the purchase of an advanced wheel motor and control system(incorporated by reference from our Current Report on Form 8-K filed on May 3, 2007) 57 10.48 Joint Venture Agreement with Youngman Automobile Co., Ltd to manufacture, market and distribute electric a and hybrid vehicles for the worldwide passenger car, truck and bus markets (incorporated by reference from our Current Report on Form 8-K filed on September 17, 2007) 10.49 Form SB-2 Registration of Common Stock incorporated by reference to SEC filing on September 24, 2007 effective on October 2, 2007. 10.50 Settlement and Mutual Release Agreement with Gemini Master Fund, LTD and Gemini Strategies, LLC dated May 7, 2008.(22) 10.51 Note Purchase Agreement with Al Yousuf dated May 8 ,2008.(22) 10.52 Promissory Note in favor of AlYousuf LLC,dated July 30, 2008 and Deed of Trust, Assignment of Leases, Rents and Security Agreement and Fixture Filing by ZAP in favor of Al Yousuf LLC, dated July 30, 2008.(23) 21.1 List of subsidiaries. (3) 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (14) 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (14) 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (14) 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (14) (1) Previously Filed as an exhibit to the Registrants's Form 8-K for the quarter ended March 31, 2004 and incorporated by reference. (2) Previously filed as an exhibit to the Registrant's Form 8-K of November 6, 2004 and incorporated by reference. (3) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated by reference. (4) Previously filed with Pre-effective Amendment Number 3 to Form SB-2 registration statement filed with the Securities and Exchange Commission on October 3, 2001. (5) Previously filed as an exhibit to the Registrant's Form 8-K of October 20, 2002 and incorporated by reference. (6) Previously filed as an exhibit to the Registrant's Current Report on Form 8-K dated July 22, 2004 and incorporated by reference. (7) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (File No. 333-117560) on July 22, 2004. (8) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on October 6, 2004 and incorporated herein by reference. (9) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10QSB for the period ended June 30, 2004 and incorporated herein by reference. (10) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on April 21, 2004 and incorporated herein by reference. (11) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on February 25, 2005 and incorporated herein by reference. 58 (12) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on September 16, 2005 and incorporated herein by reference. (13) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on September 21, 2005 and incorporated herein by reference. (14) Previously filed as an exhibit to the Registrant's Yearly Report on Form 10KSB for the period ended December 31, 2004 and incorporated herein by reference. (15) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on July 20, 2006 and incorporated herein by reference. (16) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on September 6, 2006 and incorporated herein by reference. (17) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference. (18) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference. (19) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference. (20) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on November 6, 2006 and incorporated herein by reference. (21) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on December 11, 2006 and incorporated herein by reference. (22) Previously filed as an exhibit to the Registrant's Current Report on Form 8K filed with the Securities and Exchange Commission on February 26, 2007 and incorporated herein by reference. 59 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ZAP By: /s/ Steven M. Schneider ------------------------------------- Steven M. Schneider Chief Executive Officer (Principal Executive Officer) Date: March 27, 2009 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name Position Date ---- -------- ---- By: /S/ STEVEN M. SCHNEIDER Director and Chief Executive March 27, 2009 -------------------------- Officer Steven M. Schneider (principal executive officer) By: /S/ WILLIAM HARTMAN Chief Financial Officer March 27, 2009 -------------------------- (principal financial and William Hartman accounting officer) By: /S/ Amos Kazzaz Chief Operating Officer March 27, 2009 -------------------------- Amos Kazzaz By: /S/ Eqbal Al Yousuf Director March 27, 2009 -------------------------- Raymond Byrne By: /S/ Peter Scholl Director March 27, 2009 -------------------------- Peter Scholl 60 EX-31.1 2 exh31-1_16369.txt SECTION 302 CERTIFICATION OF C.E.O. EXHIBIT 31.1 ------------ Certification pursuant to Exchange Act Rules13(a)-14(a) and 15(d)-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -------------------------------------------------------------------- I, Steve Schneider, certify that: 1. I have reviewed this annual report on Form 10-K 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 anual report. 4. The registrant's other certifying officer and I am 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, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 control over financial reporting. Date: March 27, 2009 By: /s/ Steve Schneider ---------------------- Steve Schneider Director and Chief Executive Officer EX-31.2 3 exh31-2_16369.txt SECTION 302 CERTIFICATION OF C.F.O. EXHIBIT 31.2 ------------ Certification pursuant to Exchange Act Rules13(a)-14(a) and 15(d)-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -------------------------------------------------------------------- I, William Hartman, certify that: 1. I have reviewed this annual report on Form 10-K 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 am 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, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 control over financial reporting. Date: March 27,2009 By: /s/ William Hartman --------------------------- William Hartman Chief Financial Officer EX-32.1 4 exh32-1_16369.txt SECTION 906 CERTIFICATION OF C.E.O. EXHIBIT 32.1 ------------ Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002 -------------------------------------------------------------------- In connection with the accompanying Form 10-K of ZAP for the year ended December 31, 2008, 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 10K of ZAP for the year ended December 31, 2008, 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-K of ZAP for the year ended December 31, 2008, fairly presents, in all material respects, the financial condition and results of operations of ZAP. Date: March 27, 2009 By: /s/ Steve Schneider ------------------------- Steve Schneider Director and Chief Executive Officer EX-32.2 5 exh32-2_16369.txt SECTION 906 CERTIFICATION OF C.F.O. EXHIBIT 32.2 ------------ Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002 -------------------------------------------------------------------- In connection with the accompanying Form 10-K of ZAP for the year ended December 31, 2008, William 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 10K of ZAP for the year ended December 31, 2008, 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-K of ZAP for the year ended December 31, 2008, fairly presents, in all material respects, the financial condition and results of operations of ZAP . Date: March 27, 2009 By: /s/ William Hartman ---------------------------- William Hartman Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----