Saturday, April 04, 2009

Overstock.com Proxy Reveals Exit Payment to Departing Director James V. Joyce's Company is Equivalent to Three and One-Half Year's Fees

Updated:

According to Overstock.com's (NASDAQ: OSTK) proxy statement filed with the Securities and Exchange Commission on Friday, April 2, the company's $1,250,000 payment to terminate a management consulting agreement with Icent LLC, a company headed by departing Board Member James V. Joyce, was 3.5 times the amount of annual fees of $360,000 paid to Icent. In other words, the company paid Icent an equivalent to three and one-half year's fees to terminate its consulting agreement.

As I described in my last blog post, on Wednesday, April 1, James V. Joyce unexpectedly resigned from Overstock.com's Board of Directors. Overstock.com failed to mention the huge $1,250,000 termination payment to Joyce's consulting firm in its press release that announced Joyce's resignation. Instead, Overstock.com left investors with the mundane task of finding out about the $1,250,000 termination payment by disclosing it in a separate SEC filing.

See Overstock.com's recent proxy disclosure below:

James V. Joyce, who served on our Board of Directors from February 2008 through April 1, 2009, also has served as a consultant to us, through Icent LLC, a management consulting company of which Mr. Joyce serves as chief executive officer, for several years. We paid Icent LLC $360,000 annually, and paid approximately $75,187 of reimbursable expenses to Icent in 2008. On January 14, 2008 we granted 15,000 restricted stock units to Mr. Joyce, at which date the market price of the common stock was $12.21. On January 13, 2009 we granted 10,000 restricted stock units to Mr. Joyce, at which date the market price of the common stock was $9.89. The restricted stock units vest over a three-year period commencing on the date of grant at the rate of 25% at the end of year one, 25% at the end of year two, and 50% at the end of year three. On April 1, 2009, we terminated our consulting arrangement with Icent LLC, and Mr. Joyce resigned from the Board. Consequently, Mr. Joyce forfeited the unvested portion of the restricted stock units previously granted to him. In connection with the termination of the Icent LLC consulting arrangement, the Company agreed to pay Mr. Joyce $1,250,000.

Note: Bold print and italics added by me.

Let's compare Overstock.com $1,250,000 termination payment to Icent LLC to other payments made by the company in 2008:

  • Fees paid to PricewaterhouseCoopers (recently replaced by Grant Thornton): $820,100
  • Total salaries paid to principal executive officer, principal financial officer, and three most highly compensated executive officers: $809,760.

Therefore, Overstock.com's $1,250,000 termination payment to Icent was about 1.5 times the amounts paid to PricewaterhouseCoopers and its five senior executive officers.

As I described in my last blog post, a shrewd person posting on the Yahoo message board noted:

And another thing - why does a retailer that's been in business a decade need "management" consulting services (rhetorical question, I know the answer)? What aspect of "management" was Mr. Joyce consulting on? How many FTE's were consulting under Joyce's banner that would require a contractual payout of a whopping 1.25 million? How many man hours does that payout represent?

Let's see, the avg cost of a non top-tier name "management consultant" has gotta be billed at around $150/hr or so these days.

Sooooooo, that's a payoff of over 8,000 man hours.

Ok hec, let's say Joyce was worth every penny of $500/hr - that's a payout of 2,500 man hours. Under most standard per-diem consulting contracts, the contracting company only has to provide 2-weeks termination warning or forfeit 2 weeks of billings. Let's see...80 hours of billable hours at the fantastic rate of $500/hr = $40,000.

Ok longs - speak up - is THIS the kind of shareholder equity stewardship you are expecting from Patrick Byrne?

Stinky, stinky

Overstock.com CEO Patrick Byrne has not fully explained why such a large payment was made to James Joyce's consulting company or explained the exact nature of services provided by his company.

Update: Unlike other Overstock.com directors who received $60,000 in annual compensation, all fees paid for James V. Joyce's services were paid to Icent LLC, his consulting company. James Joyce was an Overstock.com board member for only about a year and two months.

If we factor out the $60,000 in annual fees that can be attributed to Joyce's services as a director, Icent LLC was paid $300,000 ($360,000 total fees minus $60,000 director fees) in annual compensation for so-called consulting services rendered to Overstock.com.

Assuming that James V. Joyce did not receive any termination fees as a board member, Overstock.com actually paid Icent LLC an equivalent to four year's fees to terminate its consulting agreement.

In addition, I have never heard of a public company paying a consulting company for services rendered by an individual as a Board Member. Other directors at the company received $60,000 in annual director's compensation paid to them. For Joyce, even that amount was paid to his consulting company. Why was $60,000 in director's compensation paid to Joyce's consulting company?

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

I have no position in Overstock.com securities, long or short.

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