Mail Stop 03-06
March 1, 2005
Carmine T. Oliva
President and Chief Executive Officer
Emrise Corporation
9485 Haven Avenue, Suite 100
Rancho Cucamonga, California 91730
Re: Emrise Corporation
Registration Statement on Form S-1
Filed January 31, 2004
File No. 333-122394
Current Report on Form 8-K/A filed September 30, 2004
Dear Mr. Oliva:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. We note from your press release dated January 6, 2005 that you
expect that approximately $4 million of the proceeds of your
January
2005 private equity financing will be used in February 2005 to
complete the financing of a planned acquisition of a profitable
European company, an acquisition expected to generate
approximately
$15 million in annual revenues and be accretive to your overall
earnings in 2005 and that management has identified an additional
acquisition in the United States. Please update your prospectus
to
describe any material developments regarding your proposed
acquisitions. In addition, please expand your risk factors to
address any material risks that you may face as a result of your
acquisition strategy.
Fee Table
2. Please revise footnote (1) to reflect only those transactions
permitted by Rule 416.
Prospectus Cover
3. We note your reference to page 6 for "some of the factors."
Please revise to remove any implication that you have omitted
material risk factors.
Risk Factors - Page 6
If we are unable to fulfill backlog - Page 8
4. Clarify why you may not be able to fulfill backlog.
The unpredictability of our quarterly operating results - Page 10
5. If the completion of currently announced merger plans in the
industry will adversely affect your business, please specifically
disclose these effects.
Capitalization - Page 14
6. Revise to remove the caption relating to cash and cash
equivalents
from your presentation of capitalization.
Selected Consolidated Historical Financial Data - Page 15
7. Revise to reconcile your "long-term debt, net of current
portion"
with your Condensed Consolidated Balance Sheet on page F-2. This
comment also applies to your Summary of Consolidated Historical
Financial Data on page 4. Please revise as necessary.
8. We note the Larus acquisition in July 2004. Revise to describe
or
cross-reference to a discussion of significant matters that affect
the comparability of the financial data presented. Refer to
Instruction 2 to Item 301 of Regulation S-K. This comment also
applies to your quarterly data.
9. We note that the financial statements are "derived from" the
audited financial statements. Please supplementally clarify what
is
meant by the phrase "qualified in their entirety by reference."
Management`s Discussion and Analysis... - Page 17
Results of Operations - Page 17
Nine Months ended September 30, 2004 Compared to Nine Months ended
September 30, 2003 - Page 21
10. Where changes in line items of the financial statements are
the
result of more than one factor and/or of offsetting factors, the
impact of each individually significant factor should be
quantified
to the extent practicable. Also, include an explanation of how or
why these factors arose. For example, we would expect to see the
impact of the Larus acquisition on each significant line item of
the
financial statements quantified in your MD&A discussion. Apply
this
guidance throughout MD&A.
11. Please provide more detailed discussion of the effects of
price
and product mix changes. In general, your discussion should
separately quantify the effects of changes in rate and volume on
reported revenue. Refer to paragraph (a)(3)(iii) of Item 303 of
Regulation S-K for guidance.
12. We note your reference to work force reductions and cost
cutting
efforts in your overview section. Tell us whether any liabilities
from these referenced programs are reflected in your December 31,
2003 or September 30, 2004 balance sheets. Revise to describe and
quantify the actions undertaken in these reduction programs and to
quantify the known or expected savings that have resulted from
them.
Liquidity and Capital Resources - Page 28
13. Note that Item 303 of Regulation S-K requires discussion of
changes in financial condition between the two fiscal years and
any
subsequent interim period for which financial statements are
required
to be included in the filing on Form S-1. Accordingly, you must
describe changes in financial condition between December 31, 2003
and
2002 and between September 30, 2004 and December 31, 2003. Revise
as
necessary.
14. In this regard, expand to describe the reasons for the
increases
and decreases in the various components of working capital cited
as
impacting cash flow from operations. In general, when you
describe
the effects of changes in working capital on cash flow from
operations, the reasons for these changes should also be
described.
15. As related matter, we note the significant inventory and
accounts
receivable balances at September 30, 2004. Please discuss these
balances and their related turnover/collection rates on a
comparative
basis. Also, explain the basis of your conclusions regarding the
recoverability of inventory and accounts receivable as of the most
recent balance sheet date.
16. Revise to define the financial ratios and minimum net worth
levels required in your financial covenants. What would happen if
you were unable to obtain a waiver or amendment from your lender
on
reasonable terms? What kind of interest rate increases could be
imposed? Supplementally discuss.
17. Clarify how your new credit arrangements affect your historic
cost of capital.
Management - Page 65
Code of Ethics - Page 67
18. Please reconcile the disclosure in the second paragraph with
the
current Form 8-K item numbers and deadlines.
Related-Party Transactions - Page 79
19. Please ensure that you have disclosed all related party
transactions during the last three years. See Instruction 2 to
Regulation S-K Item 404. For example, we note the relationship
mentioned in footnote 27 to your table of selling security
holders.
Principal Stockholders - Page 80
20. We note in the second paragraph your exclusion of securities
underlying specified derivative securities. If the exclusions are
based on contractual limitations that can be waived by the
parties,
the related securities should be included in the beneficial
ownership
table. You may include appropriate explanatory footnotes. In
this
regard, we note your reference to non-waivable provisions in
footnote
(8). Please tell us how, under applicable state law, contract
provisions may not be waived. This comment also applies to the
disclosure in your table of selling security holders.
Selling Security Holders - Page 82
21. We note your reference to Roth Capital Partners in the third
paragraph. Please tell us whether any other selling security
holders
are broker-dealers or affiliates of broker-dealers.
22. Refer to the column entitled "Shares of Common Stock Being
Offered." Please ensure that the footnotes to this column are
reconcilable to the numbers in the table. For example, footnotes
10
and 11 describe more shares than are reflected in the column.
23. Please reconcile the 200,500 shares registered for Jason Oliva
with the 250,500 shares described as issued to Mr. Oliva on page
88.
Also, it appears that on pages 86-88 you have described more
shares
as being included for sale in the prospectus than are included in
the
selling security holders` table.
Description of Capital Stock - Page 91
24. Your disclosure may not be qualified by reference to statutes.
Please revise accordingly.
Financial Statements
25. The financial statements should be updated, as necessary, to
comply with Rule 3-12 of Regulation S-X. Accordingly, it appears
that you are required to update your filing to include December
31,
2004 audited financial statements if all conditions set forth in
paragraph (c) of Rule 3-01 of Regulation S-X are not met.
Alternatively, if effectiveness occurs prior to updating the
Recent
Developments section of the filing should be significantly
expanded.
Please revise your filing as appropriate.
26. Provide a current consent of the independent accountants in
any
amendment to the registration statement.
27. Additionally, please have your accountants update their
consents
to include all headings in which their name appears in the
registration statement. For instance, we note that the
accountants`
names are included under the "Summary Consolidated Historical
Financial Data" and "Selected Consolidated Historical Financial
Data," but are not included in the consent.
28. If you make changes to the December 2003 or September 30, 2004
financial statements in response to our comments, make
corresponding
changes where applicable to the comparative financial statements
included in the Form 10-K and Form 10-Q in your future filings.
Condensed Consolidated Financial Statements for the three and nine
months ended September 30, 2004 and 2003
Condensed Consolidated Statement of Operations - Page F-3
29. Your statement of operations should separately disclose
revenues
from the sale of products, services, and other products if
revenues
from any individual referenced component are more than 10 percent
of
the total revenue for the year. Related cost and expenses should
be
combined and disclosed separately. Refer to Regulation S-X,
Article
5-03(b)(1) and (2). Revise as necessary.
Condensed Consolidated Statements of Cash Flows - Page F-6
30. Revise to present borrowings and repayments on notes payable
and
long-term debt on a "gross" basis, or tell us why the current
presentation is appropriate. Refer to paragraph 13 to SFAS 95.
31. Please explain supplementally the valuation methodology and
significant assumptions used to allocate the purchase price to the
acquired assets and liabilities, including goodwill and the
consideration of identifiable intangible assets, such as the
intellectual property in Larus. If your purchase price allocation
resulted in a significant increase or decrease from the historical
book value of an asset or liability recorded by Larus, please tell
us
how you made your valuation.
32. In this regard, we note that $5.5 million of the purchase
price
was allocated to goodwill. Revise to disclose the amount of
goodwill
by reportable segment. Supplementally address the consideration
given to the possibility that specifically identifiable
intangibles
may exist that should be valued. Explain why there have been no
allocations to patents, covenants not to compete, customers, work
force, software and/or completed technology. Refer to SFAS 141
paragraphs 51-52 for guidance.
33. In this regard, we note that you entered into an above market
real property lease with the sellers, which exceeds the fair
market
value by approximately $756,000. Supplementally tell us how you
accounted for and valued this lease. Support that your accounting
complied with GAAP.
34. Please disclose the amounts and methods used to value the
1,213,592 shares and 150,000 warrants issued to acquire Larus.
Note 9. Subsequent Events - Page F-14
35. Regarding the warrants issued to Hayden Communications for
investor relations services, please tell us and revise to disclose
the fair value assigned to the warrants and how it was determined.
Address both the method and the significant assumptions applied.
36. We note that the registration statement must be declared
effective no later than 150 days following the closing date
(January
5, 2005) or the company would be required to pay liquidated
damages
to investors, as discussed on page 86. Supplementally discuss and
quantify the amount of potential damages you would have to pay
investors. Revise to disclose, if you believe no disclosure is
necessary, supplementally explain and support.
Consolidated Financial Statements for the year-ended December 31,
2003
General
37. Please apply our comments on the financial statements for the
nine months ended September 30, 2004 to your year ended December
31,
2003 where applicable.
Consolidated Balance Sheets - Page F-17
38. Supplementally provide us with a schedule of the components of
"accrued expenses" as of December 31, 2003 and 2002.
Consolidated Statements of Operations - Page F-18
39. Supplementally provide us with a schedule of the components of
the income statement line item titled "other, net" for each of the
periods presented.
Note 1. Summary of Significant Accounting Policies - Page F-23
Revenue Recognition - Page F-23
40. If material, please disclose how you account for shipping and
handling costs, refer to EITF 00-10.
41. Your disclosure regarding revenue recognition is too vague.
Expand to describe your revenue recognition policy in greater
detail.
To the extent that policy differs among significant product lines
(i.e. electronic components and communications equipment), please
make your disclosure product line specific. Also, if the policies
vary in different parts of the world those differences should be
discussed. Provide details of discounts, return policies, post
shipment obligations, customer acceptance, warranties, credits,
rebates, and price protection or similar privileges and how these
impact revenue recognition. Also provide a supplemental analysis
that explains your revenue recognition practices and demonstrates
that your policies are SAB 104 and SFAS 48 compliant.
42. In this regard, supplementally describe and revise to disclose
the nature and extent of return rights associated with your
product
sales. If returns are permitted for other than normal warranty
matters, please explain how these rights are considered in your
revenue recognition policies. For example, we note that customers
are given a 30-day evaluation period for your communication
equipment. Explain and support why you believe it`s appropriate
to
recognize revenue upon shipment to customers. Address the factors
outlined in SAB 104 and paragraph 6-8 or SFAS 48 in your response.
Also, discuss the frequency with which such returns occur and
estimate the dollar amounts.
43. We see that you have relationships with offshore vendors as a
"reseller" of their products (page 45). Supplementally tell us
how
you account for these arrangements. Refer to EITF 99-19 and EITF
02-
16 in your response. Revise your revenue recognition policy, if
material.
44. Supplementally and in detail, explain the nature of your
product
or products. Do you sell hardware and software separately or
together? If together, how do you allocate revenue to these
elements? Do you have multiple deliverable arrangements? If so,
revise to disclose, (a) your accounting policy for recognition of
revenue from multiple deliverable arrangements and (b) a
description
and nature of such arrangements, including performance,
cancellation,
termination, or refund-type provisions. See paragraph 18 of EITF
00-
21.
Note 2. Inventories - Page F-28
45. We note the valuation allowances established for obsolete
inventory. With respect to these valuation allowances, confirm
that
inventory impairment charges establish a new cost basis for
inventory
and that charges are not subsequently reversed to income even if
circumstances later suggest that increased carrying amounts are
recoverable. Refer to SAB Topic 5-BB.
46. We note your allowance for inventory obsolescence is based
"primarily" on the estimated forecast of product demand and
production requirements for the next twelve months.
Supplementally
confirm that inventory is additionally reviewed for individual
facts
and circumstances, which determine the need for the write-off.
Discuss the individual facts and circumstance you review. Revise
your disclosure to discuss these matters as well.
Note 4. Goodwill Amortization and Impairment Testing - Page F-29
47. We note that you perform your annual goodwill impairment
assessment as of December 31, 2003 and 2002. You should test
goodwill
of a reporting unit for impairment between annual tests if an
event
occurs or circumstances change that would more likely than not
reduce
the fair value of a reporting unit below its carrying amount.
Paragraph 28 of SFAS 142 lists several examples of such events or
circumstances. We note no discussion in the notes to your
financial
statements of a requirement to test goodwill impairment of a
reporting unit between annual tests if an event occurs or
circumstances change that would more likely than not reduce the
fair
value of a reporting unit below its carrying amount. Please tell
us
and revise to clarify whether and how you comply with the
requirements of paragraph 28 of SFAS 142.
48. Please expand your disclosures to explain the concept of
reporting units and to identify yours. Supplementally and in
detail,
explain how your conclusions regarding reporting units are
consistent
with the guidance in paragraph 30 of SFAS 142. Please note that a
reporting unit may be a level below an operating segment. The
disclosure in the filing should support your conclusions as well.
Note 8. Stockholders` Equity - Page F-34
49. We note that you issued warrants for services rendered or to
be
rendered. Confirm that these services have been accrued and
expensed
as earned in the financial statements for the proper period.
Form 8-K/A filed September 30, 2004
General
50. We note in your 8-K/A filed on September 30, 2004 that you
include audited financial statements for the most recent fiscal
year
and unaudited financial statements for the latest interim period.
Supplementally demonstrate that the appropriate years were
presented
and provide your calculations under Rule 1-02(w) of Regulation S-
X.
Pro Forma Financial Information - Page 4
51. Revise to disclose in the notes a schedule showing the
calculation of the purchase price and its components, including
the
allocation. The following should be clearly identified: (i) net
tangible assets and liabilities acquired; (ii) identified
intangible
assets and (iii) fair value adjustments to net tangible and
intangible assets and liabilities. In addition, provide more
details
of reason for the significant amount allocated to goodwill. What
is
the reason for the significant premium paid for the acquisition?
52. All adjustments should be presented in the form of separate
and
self-balancing entries. You have combined separate pro forma
adjustments on several line items. Revise your presentation to
clearly indicate the dollar impact of each of the adjustments.
53. In this regard, please expand the notes to provide enough
information for the reader to understand how the adjustments were
determined.
54. Disclose historical basic and diluted earnings per share on
the
face of the pro forma statements of income, together with the
number
of shares used to compute such per share data for Larus. Refer to
Article 11 of Regulation S-X.
* * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Traci Hornfeck at (202) 824-5565 or Angela
Crane at (202) 942-1931 if you have questions regarding our
comments
on the financial statements and related matters. Please contact
Tim
Buchmiller at (202) 824-5354 or me at (202) 824-5697 with
questions
regarding our comments on any other part of your filing.
Sincerely,
Russell Mancuso
Branch Chief
cc: Larry A. Cerutti, Esq.
Cristy Lomenzo Parker, Esq.
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Carmine T. Oliva
Emrise Corporation
March 1, 2005
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