klingertermination.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported): April 22, 2009
EDCI
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
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DELAWARE
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001-34015
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26-2694280
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(State
or other jurisdiction
of
incorporation)
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(Commission
File
Number)
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(IRS
Employer
Identification
No.)
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1755
Broadway, 4th Floor
New
York, New York 10019
(Address
of Principal
Executive
Offices)
(212)
333-8400
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR 240.14d- 2(b))
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR 240.13e-4(c))
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Item 5.02.
Departure of Directors or Certain Officers; Election of Directors; Appointment
of Certain Officers; Compensatory Arrangements of Certain Officers.
On
October 3, 2008, as previously filed with the Securities and Exchange
Commission, EDCI Holdings, Inc. (the “Company” or “EDCI”) and Mr. Michael
W. Klinger (“Mr. Klinger”) entered into an employment agreement (the “MWK CFO
Employment Agreement”) defining certain terms and conditions of Mr. Klinger’s
employment as Executive Vice President - Chief Financial Officer (“CFO”) and
Treasurer of the Company. The MWK CFO Employment Agreement provides that
either the termination of Mr. Klinger’s employment by the Company with “cause”
(“Cause,” as defined therein), or resignation without “good reason” (“Good
Reason,” as defined therein), shall result in the termination of Mr.
Klinger’s employment by the Company without severance payments.
Please see Exhibit 99.1 hereto.
As a
result of the January 2, 2009, assumption by Mr. Robert L. Chapman, Jr.
(“Mr. Chapman”) of the role of CEO of the Company and Entertainment Distribution
Company, LLC (“EDC LLC”), the Company’s majority owned subsidiary that provides
CD and DVD replication and logistics services, Mr. Chapman came into a position
of active oversight and supervision of the Company’s senior executives,
including Mr. Klinger.
On
January 8, 2009, EDC LLC and Company management held two separate telephonic
meetings, labeled the “EDC Operations/Finance Weekly Review/Cleanup” and “EDCI
Management Weekly Review/Cleanup” conference calls. At no point during
these meetings did Mr. Klinger make any mention of any
severance compensation that had been awarded to any Employees of the
Company or EDC LLC.
On
January 24, 2009, during an in-person meeting of the Company’s Chairman, Clarke
H. Bailey (“Mr. Bailey”) and the Company’s senior management including Mr.
Klinger, Mr. Klinger personally was reminded of the importance of his ceasing to
fail to communicate immediately information that reasonably could be considered
material to the Company’s decision makers, including Mr. Chapman. During
this same meeting, the Company’s actual and offered payment of severance to past
and current employees of the Company and EDC LLC was discussed and debated
actively. At no point during this meeting did Mr. Klinger make any mention
of any severance compensation that had been awarded to any Employees
of the Company or EDC LLC.
On March
9, 2009, Mr. Chapman sent written correspondence to Mr. Klinger related to Mr.
Chapman’s concern regarding Mr. Klinger’s performance deficiencies as the
Company’s CFO, specifically citing Mr. Klinger’s unacceptable preparation of a
presentation for the Company’s Audit Committee. See Exhibit 99.2
hereto
On March
13, 2009, Mr. Chapman sent written correspondence to Mr. Klinger, in which Mr.
Chapman cited his concern over Mr. Klinger’s confirmed non-communication with a
senior finance executive of EDC LLC for over one week. This senior finance
executive, at Mr. Klinger’s own request, had his direct, “solid” line of upward
organizational reporting redirected to Mr. Klinger on February 11, 2009.
Mr. Chapman conveyed to Mr. Klinger in this written correspondence that “this
modus operandi of extremely weak communications cannot continue. It must
end at once, as your continuance of exhibiting weak compliance with your
fiduciary duty of due care puts EDC, and EDCI, at serious risk.” See
Exhibit 99.3 hereto.
On March
13, 2009, Mr. Chapman sent written correspondence to Mr. Klinger, citing Mr.
Chapman’s and Mr. Bailey’s concerns regarding Mr. Klinger’s “imprecise, loose,
tardy, and at times non-existent business communications. On March 13,
2009, Mr. Klinger sent written correspondence to Mr. Chapman, in response to Mr.
Chapman’s March 13, 2009, correspondence, in which Mr. Klinger acknowledged
receipt of Mr. Chapman’s March 13, 2009 correspondence. See Exhibit 99.4
hereto.
On March
13, 2009, following Mr. Chapman’s written correspondences to Mr. Klinger on such
date (see above), Mr. Chapman and Mr. Klinger engaged in a telephone
conversation regarding Mr. Klinger’s unsatisfactory performance as the Company’s
CFO. Mr. Chapman indicated to Mr. Klinger that the Company’s Chairman of
the Board of Directors, Mr. Bailey, would be calling Mr. Klinger to engage in a
conversation on the same matter.
On March
14, 2009, Mr. Chapman and Mr. Bailey engaged in a telephone conversation
regarding Mr. Klinger’s unsatisfactory performance as the Company’s
CFO.
On March
14, 2009, following a conversation in which Mr. Klinger committed to improving
his performance as the Company's CFO, Mr. Chapman sent written
correspondence to Mr. Klinger conveying a critical review of Mr. Klinger’s
continued “deportment,” despite the conversation between Mr. Chapman and Mr.
Klinger of the prior day (see above). See Exhibit 99.5
hereto.
On March
14, 2009, Mr. Chapman discovered that on January 8, 2009, the same date of the
EDC LLC and Company management conference calls (see above), Mr. Klinger,
without proper authorization, and without any prior or post-notification to Mr.
Chapman, had bound legally Entertainment Distribution Company (USA) LLC (“EDC
USA”) to severance payments in violation of the explicit financial limitations
of EDC USA’s Severance Pay Policy dated just three months earlier in October
2008 (the “Severance Pay Policy”; see Exhibit
99.6 hereto). EDC USA is a wholly-owned subsidiary of EDC LLC.
The Severance Pay Policy provides that eligible employees may receive severance
of one week of pay for each complete year of service up to a maximum of 10
weeks’ pay. Modifications to the Plan may only be made by a written
instrument signed by the President of EDC USA, a requisite that at no time has
been met. However, despite the Severance Pay Policy’s financial limitation
of 10 weeks’ pay and the unmet governance requirement of EDC President’s
signature to any modification of that limitation, Mr. Klinger legally bound EDC
USA to make severance payments of twenty weeks’ pay to 12 employees, which
caused EDC USA to incur an unauthorized and thus improper severance expense of
approximately $176,000. (the “Double Severance Payments”). See
Exhibit 99.7 hereto.
In March
and April 2009, the Company investigated thoroughly Mr. Klinger’s actions (the
“Klinger Investigation”) in connection with the Double Severance Payments and
other matters. As part of the Klinger Investigation, on March 16, 2009,
Mr. Chapman sent written correspondence to Mr. Klinger summarizing the related
discoveries to that date, noting in particular that the Double Severance
Payments were a material breach of the Plan by Mr. Klinger. See
Exhibit 99.8 hereto.
On March
17, 2009, Mr. Klinger sent written correspondence to Mr. Chapman confirming
various conclusions of the Klinger Investigation, acknowledging that his own
“actions were wrong.” See Exhibit
99.9 hereto.
On March
18, 2009, Mr. Chapman sent written correspondence to Mr. Klinger in which Mr.
Chapman identified a second specific occurrence of Mr. Klinger’s own written
reference to the Double Severance Payments as related to “severance” vs.
“retention,” the latter of which Mr. Klinger initially had attempted to use as
justification for his binding of EDC USA, contrary to the Severance Pay Policy,
to make the Double Severance Payments (an obviously flawed justification as
retention compensation also requires Compensation Committee approval). The
first such discovered instance of Mr. Klinger’s own written reference to the
Double Severance Payments as “severance” was in Mr. Klinger’s December 9, 2008
E-mail to a senior EDC USA employee in which Mr. Klinger identified the Double
Severance Payments as “20 weeks of severance.” Following Mr. Chapman’s
March 18, 2009 written correspondence referenced above, Mr. Klinger ceased his
attempts to utilize the defense that he had believed the Double Severance
Payments were retention compensation, authorized or otherwise. See Exhibit
99.10 herein.
On March
18, 2009, Mr. Chapman sent written correspondence to Mr. Klinger regarding Mr.
Chapman’s concern related to Mr. Klinger’s continuing performance deficiencies
as the Company’s CFO, citing Mr. Klinger’s March 18, 2009, unacceptable
performance in connection with the improper completion of an important
presentation related to the Blackburn-Hannover Consolidation Feasibility
Study. See Exhibit 99.11 hereto.
On March
24, 2009, Mr. Chapman sent written correspondence to Mr. Klinger citing his
concerns over how Mr. Klinger, as the Company’s CFO who claimed to have reviewed
very recently EDC LLC’s most recent amended credit agreement, could not respond
to Mr. Chapman with an accurate answer to the question of what was the rate of
interest EDC LLC was paying to EDC LLC’s creditor per such credit
agreement. Mr. Chapman noted that such information in question, along with
a credit facility’s maturities/expirations, is “considered the most basic of any
loan agreement, whether it be a residential mortgage or corporate term
loan.” See Exhibit 99.12 hereto.
On March
24, 2009, Mr. Chapman sent written correspondence to Mr. Klinger, Michael D.
Nixon and Kyle E. Blue formalizing Mr. Chapman’s decision to create an Office of
the CFO. In such email, Mr. Chapman stated that the duties of each member
of the Office of the CFO will be “nearly identical” to those each individual had
been performing prior the time of the creation of said office. On March
24, 2009, Mr. Klinger sent written correspondence, in response to Mr. Chapman’s
March 24, 2009 written correspondence (see above), a) acknowledging receipt of
this correspondence and b) that in no way or form disputed the assertion made by
Mr. Chapman regarding these “nearly identical duties.” See Exhibit 99.13
hereto.
In March
and April 2009, during communications related to Mr. Klinger’s performance as
the Company’s CFO, Mr. Chapman informed Mr. Klinger, and Klinger acknowledged,
that Mr. Klinger’s improper conduct in connection with the Double Severance
Payments provided the Company with sufficient grounds for the termination of Mr.
Klinger’s employment by the Company with Cause.
On April
4, 2009, in line with the terms of the MWK CFO Employment Agreement, Mr. Chapman
conducted a telephonic review of Mr. Klinger’s first six months’ pay and
performance as the Company’s CFO (the “MWK Six Months Review.”) During the
MWK Six Months Review, Mr. Chapman reiterated that the Company had sufficient
grounds for the termination of Mr. Klinger’s employment by the Company with
Cause as a result of the Double Severance Payments, and also identified other
significant deficiencies in Mr. Klinger’s performance. Mr. Klinger and the
Company thereafter began negotiations for a separation of his employment from
the Company. In connection with such negotiations, Mr. Klinger explicitly
requested as particular consideration to his benefit the Company’s agreement not
to terminate his employment by the Company with Cause, based on the Double
Severance Payments.
On April
9, 2009, Mr. Chapman sent Mr. Klinger written correspondence defining key terms
of a Separation Agreement (the “Proposed Separation Agreement”) that had been
negotiated and agreed to verbally between the Company and Mr. Klinger on that
date. A material term of the Proposed Separation Agreement, as sought by
Mr. Klinger, was the Company’s agreement not to terminate Mr. Klinger’s
employment by the Company with Cause, based on the Double Severance
Payments. See Exhibit 99.14 hereto.
On April
9, 2009, Mr. Klinger sent Mr. Chapman written correspondence, in response to Mr.
Chapman’s written correspondence dated April 9, 2009, indicating that Mr.
Klinger had reviewed such written correspondence and confirmed that the terms
detailed in the Proposed Separation Agreement were “as agreed.” See
Exhibit 99.15 hereto. On April 9, 2009, Mr. Chapman sent Mr. Klinger
written correspondence, in response to Mr. Klinger’s most recent written
correspondence dated April 9, 2009 (see Exhibit 99.15 hereto), thanking Mr.
Klinger for confirming agreement to the terms of the Proposed Separation
Agreement. See Exhibit 99.16 hereto.
On April
13, 2009, despite the fact that the Company and Mr. Klinger had agreed, in
writing on April 9, 2009 (see
Exhibits 99.14 – 99.16) to the terms of the
Proposed Separation Agreement, which required only formal legal documentation be
completed through the weekend of April 10-12, 2009, Mr. Klinger unexpectedly
rescinded his agreement to the terms of the Proposed Separation Agreement before
such agreement could become finalized. Instead, Mr. Klinger E-mailed a
letter dated April 13, 2009 (the “MWK Termination for Good Reason Letter”), to
the Company’s Board of Directors, in which he baselessly asserted his right to
resign for Good Reason if certain changes were not made by the Company within
thirty days. The Company believes that the MWK Termination for Good Reason
Letter a) was constructed and delivered in order to attempt to preempt the
termination of his employment by the Company with Cause, and b) calls into
question whether the Proposed Separation Agreement was negotiated by Mr. Klinger
in good faith. See Exhibit 99.17 hereto.
On April
13, 2009, the Company served written notice to Mr. Klinger of the termination of
Mr. Klinger’s employment by the Company with Cause, subject to approval by the
Company’s Board of Directors. See Exhibit 99.18 hereto.
On April
14, 2009, the Company’s Board of Directors approved the termination of Mr.
Klinger’s employment by the Company with Cause. The Board of Directors
also considered, among other factors, six additional specific examples of
deficiencies in Mr. Klinger’s work performance in the 1Q2009 alone, such
deficiencies having been communicated previously by Mr. Chapman to the Company’s
Compensation Committee in written correspondence on March 27, 2009, as
follows:
1)
Severance Pay Policy Violation;
2)
March 2009 Board Meeting Preparation Disorganization;
3)
Blackburn – Hannover Consolidation Feasibility Study
Disorganization;
4)
EDC LLC Credit Agreement Ignorance;
5)
EDC LLC Creditor Mis-Communication;
6)
EDCI 4Q2008 Investor Conference Call Script Ghost-writing;
7)
EDC LLC Financial Statement Ignorance.
See
Exhibit 99.19 hereto.
The Company’s Board of Directors sent written correspondence to Mr.
Klinger notifying him of its unanimous vote to terminate his employment by
the Company on April 14, 2009. See Exhibit 99.20
hereto.
On April
14, 2009, concurrent with its approval of the termination of Mr. Klinger's
employment by the Company with Cause, the Company’s Board of Directors
authorized Mr. Chapman, with the assistance of Matthew K. Behrent, to continue
to consider a reasonable, negotiated legal settlement with Mr. Klinger. No
progress regarding such settlement was achieved by April 17, 2009, nor has been
achieved since that date.
On April
17, 2009, the Company, EDC LLC and EDC USA as plaintiffs, filed a legal
complaint against Mr. Klinger as defendant, in the United States District Court
for the Southern District of New York (the “The Klinger ERISA Complaint”; Case
#: 1:09-cv-03880-BSJ). The Klinger ERISA Complaint seeks: a) a
declaratory judgment that, pursuant to the MWK CFO Employment Agreement, the
circumstances of the termination of Mr. Klinger’s employment constitute Cause
and, in the alternative, that Mr. Klinger resigned without Good Reason, as a
result of which the Company may terminate Mr. Klinger’s employment by the
Company with Cause; b) recovery for the loss occasioned by the breach of
fiduciary duty perpetrated by Mr. Klinger in connection with the Double
Severance Payments; c) attorney’s fees and related costs and d) such other
relief as the Court deems appropriate. See Exhibit 99.21
hereto.
In April
2009, the Klinger Investigation has led to the discovery of other improprieties
by Mr. Klinger in his capacity as the Company’s CFO. The Company
expects to make further disclosures on Form 8-K updating the Company’s
shareholders on developments related to this matter.
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Item
9.01.
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Financial
Statements and Exhibits.
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(d)
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Exhibits
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99.1
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Michael
W. Klinger Employment Agreement dated 10/03/2008
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99.2
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/09/2009
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99.3
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/13/2009
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99.4
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/13/2009
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99.5
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/14/2009
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99.6
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EDC
LLC Severance Pay Policy dated 10/03/2008
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99.7
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EDC
Michael W. Klinger signed second retention letter dated
01/08/2009
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99.8
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Written
correspondence from Robert L. Chapman, Jr. to Michael W. Klinger dated
03/16/2009
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99.9
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Written
correspondence from Michael W. Klinger to Robert L. Chapman, Jr. dated
03/17/2009
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99.10
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/18/2009
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99.11
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/18/2009
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99.12
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/24/2009
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99.13
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 03/24/2009
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99.14
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 04/09/2009
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99.15
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Written
correspondence from Michael W. Klinger to Robert L. Chapman, Jr. dated
04/09/2009
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99.16
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Written
correspondence from Robert L. Chapman, Jr. to Michael W.
Klinger dated 04/09/2009
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99.17
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Written
correspondence from Michael W. Klinger to the Company’s Board of Directors
dated 04/13/2009
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99.18
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Written
correspondence from the Company to Michael W. Klinger dated
04/13/2009
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99.19
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Written
correspondence from Robert L. Chapman, Jr. to the Company’s
Compensation Committee dated 03/27/2009
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99.20
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Written
correspondence from the Board of Directors of the Company to Michael W.
Klinger dated 04/14/2009
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99.21
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Complaint
filed in the United States District Court by the Company, EDC LLC and EDC
USA against Michael W. Klinger dated 04/17/2009
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
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EDCI
HOLDINGS, INC.
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Date:
April 22, 2009
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By:
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/s/
Robert L. Chapman, Jr.
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Robert
L. Chapman, Jr.
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Chief
Executive Officer
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