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Last month, as Force Protection (FRPT) prepared to slash its workforce in an effort to save money, the company quietly adopted a new policy that could expand the bonus awarded to its well-paid CEO.
Michael Moody, who earned seven figures as Force Protection’s brand-new CEO in 2008, could score even more this year despite plummeting orders for the company’s military vehicles. Originally, Force Protection guaranteed Moody a salary of at least $540,000 – and a bonus that could equal up to 75% of that amount – under his formal contract with the company. With a recent amendment to that agreement, however, Force Protection essentially removed any limits on Moody’s 2009 cash bonus.
Meanwhile, Force Protection shareholders continue to wait in vain for their own generous rewards. The company’s stock, once a $30 highflier, has languished in the mid-single digits for most of the year.
“It’s staying around $5.50 in hopes of some Hail Mary while the vehicle sustainment business keeps the company’s head above water,” says Devin Weisleder, a Force Protection shareholder who used to work as an analyst at Keefe, Bruyette & Woods. “But the company will eventually be toast, as the upgrades and sustainment business eventually dry up and the company continues to lose market share.”
Peter Cohan, a Massachusetts-based investment strategist and frequent commentator on CNBC, says that Force Protection’s stock actually looks cheap based on future earnings projections. Cohan believes that the stock might trade much higher – perhaps topping $12 a share – if investors truly believed in those forecasts and trusted the company’s management team.
Yet Force Protection itself has refrained from placing any major bets on its own future. With at least $110 million in the bank, the company can certainly afford to invest in a stock repurchase program that might inspire shareholder confidence. So far, however, Force Protection has yet to repurchase a single company share. Force Protection executives have failed to dip into their own pockets for stock purchases as well.
The company declined to answer questions for this story.
Of course, thanks to Force Protection’s generosity, Moody has already struck it rich by now. Three years ago, Moody was running an obscure financial services firm when Force Protection tapped him to serve as an independent director and chair both its audit and compensation committees. One year later, he became president of the entire company. He took over as interim CEO four months after that, when Gordon McGilton left the post in disgrace, and landed the permanent job following a brief executive search that lasted less than 60 days.
With Force Protection rocked by falling vehicle orders and looming financial restatements, the company had by then seen its stock plummet from $31 in May 2007 – a high set before Moody ever entered the executive suite – to ever-sinking lows around $3.50 a share. Upon becoming Force Protection’s permanent CEO, Moody immediately tried to reassure investors by portraying himself as an accomplished turnaround artist with both the experience and the will to reshape the troubled company.
“There is no area of our business that will go untouched by the mandate we have to improve our company’s performance,” Moody vowed when taking over as Force Protection’s new chief in March of 2008. “We will quickly address our shortcomings and further strengthen the areas of our business that have carried us thus far.
“As we do so,” he added, “the culture at Force Protection will change.”
Math Maze
Over the coming weeks and months, however, scandals continued to erupt at Force Protection and hammer the company’s already battered stock.
First, in mid-March, Elliott Davis informed Force Protection that it would resign immediately as the company’s independent auditor. The accounting firm, hired shortly after Moody joined Force Protection’s board, warned of “material weaknesses” in financial controls and “significant risk of material misstatements” on its way out the door. With CFO Michael Durski ousted after just 13 months on the job, the auditing firm expressed concern about “turnover of key personnel” as well.
Force Protection brought in an interim CFO (an outsider who soon discovered that McGilton had improperly saddled the company with a large tax bill on a stock-option transaction) before settling on Charles Mathis as its permanent finance chief last October. Old accounting issues resurfaced three weeks later, however, when an industry oversight board revoked the registration of Jaspers + Hall – the firm that audited Force Protection’s books before Elliott Davis took over – and banned both of its partners from associating with registered accounting firms. The agency cracked down on Jaspers + Hall for violating professional accounting standards when auditing the books of four public companies -- including Force Protection -- over the previous three years. The U.S. Securities and Exchange Commission would instruct Force Protection to seek fresh audits of its past financial statements by reputable accountants as 2008 drew to a close.
Despite its escalating problems, Force Protection decided to reward its top executives in the meantime. In November of 2008, exactly one month after Jaspers + Hall lost its registration, Force Protection formally enacted new “long-term incentives” that added generous stock-based awards to its executive compensation plans.
All told, Force Protection granted 490,000 shares of restricted stock (worth almost $3 million at current prices) to its top five executives. The company gave those same executives 285,000 stock options as well. Those options, which begin vesting next month, will allow company leaders to buy stock at $3.28 a share – the lowest closing price recorded since the original grant date – and immediately sell it at a tidy profit.
Moody, by himself, picked up more than half of those stock-based awards.
Bonus Bucks
Force Protection’s generosity did not end there. This March, with the company’s stock back on the rise and management’s options already “in the money,” Force Protection took an extraordinary step that essentially doubled the cash bonuses allowed for some of its senior executives.
By then, Force Protection had already promised company leaders handsome bonuses if they met certain financial and operational targets. Once Force Protection had survived through a rough “turnaround” year, however, the company decided that several of its executives deserved even more. To show its appreciation, Force Protection issued additional “discretionary” bonuses to its three top executives – including $400,000 for its CEO – based on the company’s progress on such routine matters as regulatory compliance and corporate communications.
“That’s 100% crazy that their bonus is partly dependant on whether they have a conference call as a public company,” Weisleder declares. “These are things that NEED to be done in the normal course of business. Why should they be compensated ‘extra’ for doing the basics of their jobs?”
Cohan feels the same.
“I reviewed Force Protection’s proxy and agree that the bases for determining a bonus are silly,” says Cohan, who has no position in the company’s stock. “There is nothing on the list that warrants a bonus – unless employees need a bonus to do the bare minimum. Well-run companies award bonuses for things that are really worth something.”
For its part, Force Protection portrayed its top executives as significantly underpaid before last year’s compensation changes. As evidence, Force Protection pointed out that leaders of other defense contractors were making far more. While companies in its chosen peer group boasted market values of $500 million to $3 billion, however, Force Protection – with a market cap of just $400 million – fell below even the low end of that range.
Meanwhile, Force Protection’s executive compensation reached new highs. For 2008, regulatory filings show, Moody pocketed almost $1.4 million in cash payments alone. In comparison, Moody’s predecessor – regarded as wildly overcompensated by some – relied mostly on stock when achieving his own $1.4 million record payout.
As Force Protection’s new CFO, Mathis quickly struck it rich as well. For starters, Mathis picked up a bonus of $57,000 – more than twice his monthly salary – following his first 30 days on the job. He then went on to collect a performance-based bonus totaling more than $130,000, supplemented with a discretionary bonus of $75,000 (equal to half his 2008 salary), when regular bonus season arrived. In total, he scored a compensation package worth $400,000 for his six months of service to the company last year.
Denise Speaks, an in-house lawyer who had already departed the company, also hit pay dirt. Speaks joined Force Protection as co-general counsel in mid-2007 and resigned one year later, taking a severance payout of $405,000 – almost twice what she made for actually working at the company – along with her.
Lenna Ruth Macdonald, Force Protection’s current general counsel, fared even better. In addition to a base salary exceeding $300,000, she received a performance-based bonus of $160,000 and a discretionary bonus that was identical in size. She also picked up generous stock awards, exceeding those normally given to attorneys in her peer group, “to reflect (her) significant contributions … in guiding Force Protection through its broad financial and management transformation” last year.
Meanwhile, Macdonald’s previous employers had encountered devastating hardships after her departure. Just weeks before Force Protection effectively doubled Macdonald’s bonus, the parent of Commonwealth Industries – where Macdonald last served as general counsel – filed for Chapter 11 bankruptcy protection. Her more recent employer, a now-defunct technology company known as eSchoolware, failed to ever take off at all.
In August of 2006, with Macdonald installed as the company’s new CEO, eSchoolware found itself celebrating tiny orders that make even Force Protection’s most disappointing vehicle awards look downright gigantic.
“A salesman came in the other day with a two-year $50,000 contract,” eSchoolware’s chief technology officer told South Carolina’s Post and Courier at the time. “We get one or two more of those, and we’ll be feeling really good about ourselves.”
Serious Setbacks
Like eSchoolware, Force Protection knows exactly how it feels to bank on orders that never actually materialize. The military vehicle maker endured its own major setback – on a much grander scale – earlier this year.
Back in 2005, Force Protection began sensing an important shift in the needs of American military forces. In response, Force Protection started developing a new lightweight vehicle that would combine the bomb-protection offered by its original “MRAP” vehicles with the mobility needed to navigate Afghanistan’s rugged terrain. With demand for its heavier MRAPs already waning, hurt by late deliveries and stiff competition, Force Protection increasingly viewed its new Cheetah “M-ATV” as a key to its comeback.
By the time the Army began evaluating submissions for its massive M-ATV program this year, Force Protection had invested millions of dollars in its brand-new Cheetah – with plans to manufacture 50 of the high-priced vehicles in advance – in anticipation of a lucrative award. The company even assigned one of its most seasoned managers, Executive Vice President Damon Walsh, to a new post focused exclusively on the M-ATV program.
“Appointing Damon Walsh to the role of program director for Force Dynamics (a joint venture between Force Protection and General Dynamics) demonstrates our commitment to delivering the best vehicle possible for the M-ATV solicitation,” Moody stated in mid-February. “We are confident that he will bring the same high level of customer service and operational excellence to this role with the Force Dynamics M-ATV offering as he did in his previous role with the MRAP program.”
Force Protection actually suffered through some embarrassing missteps during the original MRAP program, however, so the company faced an uphill battle. Although the Army agreed to test a handful of Cheetahs during initial trials this spring, it ultimately favored a competing vehicle made by heavyweight defense contractor Oshkosh (OSK) when placing a full-blown order – worth more than $1 billion – for M-ATV vehicles in late June.
Force Protection’s stock, which had soared toward $9 a share on hopes for a big order, immediately tumbled 40% to $5.38 on news of that massive setback. Three months later, the shares have yet to recover.
Force Protection’s second-quarter results, delivered shortly after the M-ATV disaster, certainly failed to help. Hurt by weak orders and high overhead, the company barely made any money at all.
So far, 2009 has brought little good news for Force Protection shareholders at all. In total, Force Protection delivered just 178 vehicles – down from 1,364 a year earlier – during the first half of this year. At the same time, the company spent a bigger chunk of its revenue on overhead expenses – particularly on stock-based compensation – during that same period.
Weisleder, for one, is starting to cry foul.
“The money going into management’s pockets and the level of stock compensation is truly unbelievable,” he concludes. “It is appalling, sickening and borderline criminal.”
Note: The Street Sweeper hired an independent fact checker to verify the accuracy of this story. Whenever possible, it has also included links within the story to supporting documents used for its research. To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.
