Greenfield Pitts has his work cut out for him. The new chief financial officer of Emerson Radio Corp., will have to contend with corporate accounting problems, a late regulatory filing, a possible loan covenant default, and potential delisting negotiations with the American Stock Exchange (AMEX), before he sips his first cup of coffee.
On Wednesday, Pitts was named new CFO of the electronics and appliance maker, the same day company officials announced that Emerson would delay the filing of its third quarter financial results for the fiscal 2007. The delay is being blamed on “material weaknesses” in the company’s internal controls process, specifically linked to related-party transactions, said an audit committee report. The audit committee’s review is ongoing, and so are the problems.
The late filing could trigger a default by the company on its $45 million credit facility, and force Emerson to start repaying its lender, Wachovia Bank, immediately. Furthermore, the tardy Form 10-Q means that Emerson is not currently in compliance with AMEX listing requirements, which in an extreme case, could mean Emerson’s stock will be delisted. Emerson has notified AMEX officials regarding it late filing, but has yet to hear from the exchange regarding its non-compliance issues.
At the heart of Emerson’s problems is the controls environment surrounding related-party transaction between Emerson and affiliates of Grande Holdings Ltd., a company that owns 50.8 percent of the manufacturer. Four Grande affiliates entered into a three-month agreement (April 2007 through June 2007) to borrow a total of $23.5 million from Emerson’s existing credit facilities. According to the audit committee review, the loans were not drawn up using prevailing market terms and interest rates. In addition, the transactions involved “more than the normal risk of collectibility,” as compared to loans provided to non-related parties.
After reviewing the transactions, the audit committee’s found two glaring problems: that one or more senior managers failed to follow the company’s existing internal controls procedure over purchases and sales of inventory and the use of Emerson’s credit facilities; and that there was lack of documentation for these related-party transactions. The audit committee also noted that finding these deficiencies have raised concerns about the company’s overall internal controls environment.
Emerson currently has $7.8 million in letters of credit outstanding under its $45 million credit facility. And if Wachovia considers Emerson in default of its debt covenant, the lender could accelerate repayment of all outstanding amounts due under the facility. In addition, the company could be required to write-off deferred financial costs in the amount of $330,000. While Emerson officials say that they do not anticipate any difficulty in repaying such amounts, they point out that it would be difficult to operate the business without future credit commitments from new or existing lenders.
Pitts may be especially qualified to enter into bank negotiations on behalf of his company. An Emerson director since March 2006 (he will retain his director’s position while CFO), Pitts was a director for the Asian Corporate Finance division of Wachovia Securities in Hong Kong for four years. He also headed up a strategic alliance between HSBC Holdings and Wachovia. All told, Pitts has a 33-year background in international banking and was associated with Wachovia Bank for more than 25 years. Pitt replaces Guy Paglinco who left the company last April. Deputy CFO John Florian, who was named finance chief of Emerson’s North American Operations, assumed Paglinco’s duties until Pitts took the reins.
As part of the company’s remedial plan, the board announced formation of a committee made up of independent directors as well as executives—including Pitts, company CEO Adrian Ma, and division presidents Michael Binney and Eduard Will—to review and approve all related party transactions in excess of $500,000. Following these reviews, all related party transaction will be reviewed and approved by the audit committee.
Despite the accounting and banking woes, preliminary financial results for the third quarter were relatively good. Third-quarter revenues at Emerson climbed by 17 percent to $89 million compared to the same period last year, mostly driven by holiday shoppers who bought new branded products and iPod accessories. Net income also increased to $3.7 million, compared to $1.4 million in last year’s third quarter.