A Look at ZAP’s Employment Agreements
ZAP [[ZAAP.OB]] executives Steve Schneider and Gary Starr entered into an employment agreement in October of 2003 that contains some unusual clauses. The base salaries are equal to that of the company’s highest paid employee, but it’s some of the other clauses in the agreements – from excessive dilution to an individual “poison pill” – that concern investors.
The agreement provides that if ZAP becomes profitable, Mr. Schneider’s and Gary Starr’s salary will automatically be increased by 10% for every $100,000 in profits calculated on a quarterly basis. In addition, they receive annual grants 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.
Additionally, ZAP is required to retain both as employees or consultants for five years for an aggregate salary of $500,000 bi-monthly or $300,000 upfront if they are terminated. Essentially, this portion of the agreement serves as a “poison pill” making it very expensive for the company to terminate either executive if they under-perform.
The question is: How aligned this compensation structure is with shareholder value? Both executives are incentivized to issue more stock as it allows them to receive more shares each year. In fact, the number of shares outstanding has more than doubled to over 70 million since March of 2006, with 400 million shares authorized going forward.
In addition, any profits obtained by ZAP may be diluted by the mandated executive raises. For example, if the company were to earn $100,000 in profits, executive compensation would increase by $24,500 or 24.5% of net income. Since this is calculated quarterly instead of annually, this number could become even more exponential as the company grows, especially in the early stages.
In the end, employment agreements are usually a good way to look at management. In this case, executives are issuing themselves exponential shares of stock, which incentives them to issue more and more stock each year. Meanwhile, setting raises equal to 10% for ever $100,000 in profits for two executives could lead to substantial compensation increases in the early stages.
Source: 10-K Filing
CONTACT: Daniel Minton, Managing Director, 406-862-5400, daniel@accelerize.com