Board Member Calls Emerson Abused by Corporate Parent, Quits

Driscoll, who joined Emerson’s board in March 2006, said he was optimistic when Grande bought the company. But since then, instead of “gaining opportunities,” Emerson has been “exploited as a financial resource” by Grande “in ways both large and small, direct and insidious,” he said. In 2006, Grande bought former Emerson CEO Geoffrey Jurick’s 37-percent stake in the company, later increasing its stake to 57.6 percent. An Emerson spokesman said the SEC filing “stands on its own” and declined further comment.

Much alleged damage to Emerson occurred in “egregious” third-party transactions involving Grande- affiliated directors and employees, said Driscoll, a former Dazzle Multimedia and Smith Corona executive who chaired the Emerson board audit committee. Issues raised by so-called related-party transactions involving Grande affiliates Akai, Capetronics and Sansui were “developed well” in an audit committee report sent to Emerson’s board in April. It wasn’t available Monday at our deadline. Emerson spent about $1.7 million in fiscal 2008 on legal fees, some to law firm Pinnisi & Anderson to review related-party agreements, Emerson said in a 10-K filing to the SEC.

Issues included a $23 million promissory note issued Emerson in February 2007 by affiliates Akai, Capetronics, Nakamichi and Sansui and repaid four months later. A $4.6 million debit note later was issued Capetronics for overpaying, the 10-K stated. An Emerson office in Macao was sold in fiscal 2007 for $2 million, netting the company $854,000, the 10K said. The price included a $20,000 commission to an unidentified third party, the 10- K said. Emerson had $373,000 in net receivables tied to related parties March 31, up from $233,000 a year earlier, the company said.

Other issues included Christopher Ho’s position as chairman and Adrian Ma’s as CEO of both Grande Holdings and Emerson. Distributor APH, which signed a licensing agreement with Emerson for the H.H. Scott brand, also did business with Grande. Emerson parted with APH this year (CED July 17 p7). Emerson was repaid $546,000 in June by Capetronics, about a year after being advanced the money, the 10-K said. In fiscal 2007, Wachovia -- which supplied Emerson with a $45 million revolving credit facility -- waived a violation of a covenant barring Emerson from entering related-party transactions without the bank’s consent, the 10-K said.

“These relationships create, or, at a minimum, appear to create potential conflicts of interest when members of our senior management are faced with decisions that could have different implications for us and Grande,” Emerson said in the 10-K. The related-party pacts have been seen as “possibly problematic,” Emerson said. Grande doesn’t “owe us any amounts,” but has not made payments on a “timely basis,” said Emerson. The related-party agreements are central to a 2007 shareholder suit accusing Emerson and Grande executives of breaching their fiduciary duties.

“I acted to the best of my ability to mitigate harm to Emerson from such dealings, and to ensure that these matters were properly reported in public disclosures,” Driscoll said. The audit committee succeeded in “making certain that adequate and accurate disclosures were made despite considerable resistance,” he said. David Petersen, who chaired the board’s corporate governance, nominating and compensation committee formed in April, resigned Tuesday, Emerson said. Petersen was appointed to the board last year.

Despite the audit committee’s progress, “additional work” remains, Driscoll said. Emerson still is owed for related-party transactions and recent “more problematic” deals haven’t been “fully reviewed, much less redressed,” he said. The financial controls created must be “monitored diligently” and “enforced aggressively,” and “I lack the confidence that the highest levels of Emerson’s management can be trusted to police themselves in these matters,” Driscoll said. - Mark Seavy