CompUSA 2012 Annual Report Download - page 18

Although the Company does not expect, based on currently available information, that the outcome in any of these matters, individually or
collectively, will have a material adverse effect on its financial condition or results of operations, the ultimate outcome is inherently
unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or
cash flows in a particular period. The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately
incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable and
estimable.
Audit Committee Investigation and Gilbert Fiorentino’s Resignation and Settlement .
In January and February 2011 the Company received anonymous whistleblower allegations concerning the Company’
s Miami Florida operations
involving the actions of Mr. Gilbert Fiorentino, then the Chief Executive of the Company’s Technology Products Group. In response to the
allegations, the Company commenced an internal investigation of the whistleblower allegations, which was conducted by the Company’s Audit
Committee of the Board of Directors with the assistance of independent counsel.
On April 18, 2011, following the independent investigation, the Company delivered a Cause Notice to Mr. Fiorentino pursuant to the terms of
his Employment Agreement dated October 12, 2004. The Cause Notice advised Mr. Fiorentino that the Company intended to terminate him for
“Cause” (as defined in the Employment Agreement) at a meeting of its Executive Committee scheduled for May 3, 2011, at which meeting Mr.
Fiorentino and his counsel could appear, and that Mr. Fiorentino was being placed on administrative leave pending the outcome of that meeting.
In the Cause Notice, the Company advised Mr. Fiorentino that the Audit Committee investigation had identified grounds to terminate him for
Cause under his Employment Agreement, and set forth the following findings by the Audit Committee constituting such grounds:
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 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 required 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 fully cooperated with the SEC in its formal investigation
and in February 2013 the SEC advised the Company that it had concluded its investigation and would not be recommending that any action be
taken against the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
Table of Contents
16