CompUSA 2011 Annual Report Download - page 50

i) Mr. Fiorentino personally removed or caused to be removed from the Company’
s Miami premises product inventory, and/or kept or caused
others to receive at his direction such removed product inventory, without payment to the Company and for his own personal gain;
ii) Mr. Fiorentino caused substantial amounts of Company inventory purchases to be effected through Company credit cards in order to
accrue and/or use “reward points” for his personal benefit and which he improperly converted to his own use;
iii) Mr. Fiorentino caused his mother to be identified as an employee of the Company in positions for which she had no bona fide job
responsibility or function, and caused the Company to pay her a salary and employee benefits, including extended
COBRA reimbursements;
and
iv) Mr. Fiorentino engaged in fraudulent “kickback” arrangements with certain of the Company’s vendors, to the detriment of the Company
The Company stated in the Cause Notice that the foregoing activities were in violation of Company policy, the Company’
s Corporate Ethics
Policy, his fiduciary duties and applicable law.
The amounts involved in the employment of Mr. Fiorentino's mother are small in absolute terms.
The inventory removal constitutes a shortage that is not material for a company the size of Systemax. The credit card reward points scheme
involved the creation, and conversion, of non-
monetary assets. The finding involving the vendor overcharge/kickback allegations is not material
when compared to the Company's total inventory spend during the subject period. The Audit Committee’
s independent investigation determined
that the matters described above did not have any material impact on our previously reported financial results and were limited to the
Company’s Miami operations.
On May 9, 2011, following several meetings of the Executive Committee and after extensive discussions with Mr. Fiorentino and his counsel,
the Company announced that it had accepted the resignation of Mr. Fiorentino, and that it had executed an agreement with Mr. Fiorentino,
effective May 6, 2011, under which Mr. Fiorentino surrendered certain assets to the Company valued at approximately $11 million at May 9,
2011: these assets included the surrender of 1,130,001 shares of Systemax common stock and $480,000 in cash. The shares surrendered
consisted of 580,001 shares of fully vested unexercised stock options, 2) 100,000 shares of fully vested restricted stock awards and 3) 450,000
shares directly owned by Mr. Fiorentino. The shares surrendered were valued at fair value on May 6, 2011 in the case of the stock options and
restricted stock awards and at fair value on May 12, 2011 in the case of the owned shares. The agreement also requires Mr. Fiorentino to
disclose his and his immediate family’
s personal assets; forfeit undisclosed assets discovered by the Company; disclose information regarding
certain matters that led to his being notified of the Company’
s intent to terminate him; and to fully cooperate with the Company in the future.
Mr. Fiorentino and the Company also exchanged mutual general releases and nondisparagement commitments, and Mr. Fiorentino agreed to a 5
year noncompetition obligation. The $11 million settlement value included a financial statement benefit to the Company related to the surrender
of shares and cash payment of approximately $8.4 million which was recorded in the second quarter of 2011 under special (gains) charges, net
of related legal and professional fees of approximately $1.3 million for the quarter ended June 30, 2011 and $1.8 million for the first six months
of 2011. The remainder of the settlement value, approximately $2.6 million, was the intrinsic value of the fully vested unexercised stock options
on the date of the settlement agreement for which there is no financial statement impact. The amount of the settlement with Mr. Fiorentino was
based on negotiation with him, and was not based on any specific level or nature of damages incurred by the Company, and does not constitute
restitution.
On June 21, 2011 Systemax Inc. received notice that the Securities and Exchange Commission (“SEC”)
has initiated a formal investigation into
the matters discovered by the Audit Committee’
s internal investigation. The Company is fully cooperating with the SEC in its formal
investigation and does not expect to comment further on developments related to this matter and disclaims any intention or obligation to update
any of the information contained herein except as required by law.
For the third and fourth quarters of 2011, $0.4 million and $0.6 million, respectively, of additional legal and professional fees were incurred
related to follow up of the completed investigation and ancillary matters, and for the first nine months of 2011 and for fiscal 2011 related fees
totaled $2.2 million and $2.8 million, respectively. The Company expects to incur additional expenses related to this matter in future quarters in
connection with the ongoing follow up to the completed investigation of matters related to Mr. Fiorentino’
s actions, providing cooperation to
the SEC and in pursuing related matters.
In addition, in April 2011, the Company also terminated the employment of Carl Fiorentino and Patrick Fiorentino (employees of the Company
and Gilbert Fiorentino's brothers), and Mr. Gerdy Carballos based on the determination that they had assisted in, participated in and/or had
knowledge of the improper activities. The Company also terminated the employment of Ms. Andrea Fongyee (assistant to Mr. Gilbert
Fiorentino) in May 2011. In January 2012, the Company commenced a lawsuit in Miami-
Dade County Circuit Court in Florida against, among
others, Carl Fiorentino, Patrick Fiorentino, Andrea Fongyee and Gerdy Carballos, seeking recovery of damages incurred by the Company due to
their actions.
Stock based compensation plans
The Company currently has five equity compensation plans which reserve shares of common stock for issuance to key employees, directors,
consultants and advisors to the Company. The following is a description of these plans:
The 1995 Long-term Stock Incentive Plan - This plan, adopted in 1995, allowed the Company to issue qualified, non-qualified and deferred
compensation stock options, stock appreciation rights, restricted stock and restricted unit grants, performance unit grants and other stock based
awards authorized by the Compensation Committee of the Board of Directors. Options issued under this plan expire ten years after the options
are granted. The ability to grant new awards under this plan ended on December 31, 2005 but awards granted prior to such date continue until
their expiration. A total of 203,915 options were outstanding under this plan as of December 31, 2011.
Table of Contents
9.
SHAREHOLDERS
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EQUITY
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