RUTAN & TUCKER LETTERHEAD
LARRY A. CERUTTI
Direct Dial: (714) 641-3450
E-mail: lcerutti@rutan.com April 12, 2005
VIA FEDERAL EXPRESS AND
- -----------------------
EDGAR CORRESPONDENCE
- --------------------
Russell Mancuso, Esq.
Branch Chief
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0306
Re: Emrise Corporation
Registration Statement on Form S-1
Filed January 31, 2004
Registration No. 333-122394
Current Report on Form 8-K/A filed September 30, 2004
-----------------------------------------------------
Dear Mr. Mancuso:
On behalf of Emrise Corporation ("Company"), this letter responds to
your letter to the Company dated March 1, 2005. The comments contained in your
letter are set forth below in their entirety.
The enclosed clean and marked to show changes copies of Amendment No. 1
to the Company's Registration Statement on Form S-1, Registration No. 333-122394
("Registration Statement") contain revisions made in response to your comments.
We have also enclosed a copy of the Company's Form 10-K for the year ended
December 31, 2004, as recently filed ("2004 Form 10-K"), which contains
disclosures responsive to your comments. In addition, enclosed are clean and
marked to show changes copies of Amendment No. 4 to the Company's Form 8-K for
July 13, 2004, as recently filed ("Form 8-K/A").
We have indicated below whether and where disclosure in response to
your comments has been included in the Company's filings or the reasons why the
Company believes such disclosure is inapplicable or inappropriate. The page
numbers referenced below correspond to the clean non-EDGAR versions of the
enclosed documents.
Russell Mancuso, Esq.
April 12, 2005
Page 2
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.
Disclosure regarding the Pascall acquisition that was completed in
March 2005 has been included throughout the prospectus and 2004 Form 10-K.
Additional disclosure has been added to page 44 of the prospectus and page 6 of
the 2004 Form 10-K indicating that the Company is in discussions to acquire a
United States-based power supply company.
Fee Table
- ---------
2. PLEASE REVISE FOOTNOTE (1) TO REFLECT ONLY THOSE TRANSACTIONS PERMITTED
BY RULE 416.
Footnote (1) on the cover page of the Registration Statement has been
revised to delete the reference to "anti-dilution adjustments."
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.
The reference to "some" on the cover page of the prospectus has been
omitted.
Risk Factors - Page 6
- ---------------------
If we are unable to fulfill backlog - Page 8
- --------------------------------------------
4. CLARIFY WHY YOU MAY NOT BE ABLE TO FULFILL BACKLOG.
This risk factor has been revised on page 7 of the prospectus to
clarify why the Company may be unable to fulfill backlog orders.
Russell Mancuso, Esq.
April 12, 2005
Page 3
The unpredictability of our quarterly operating results - Page l0
- -----------------------------------------------------------------
5. IF THE COMPLETION OF CURRENTLY ANNOUNCED MERGER PLANS IN THE INDUSTRY
WILL ADVERSELY AFFECT YOUR BUSINESS, PLEASE SPECIFICALLY DISCLOSE THESE
EFFECTS.
The Company does not believe that any currently announced merger in the
telecommunications industry will adversely affect its business because the
Company is a qualified supplier to each of the RBOCs. Therefore, no new
disclosure has been added in that regard.
Capitalization - Page 14
- ------------------------
6. REVISE TO REMOVE THE CAPTION RELATING TO CASH AND CASH EQUIVALENTS FROM
YOUR PRESENTATION OF CAPITALIZATION.
The cash and cash equivalents line item has been deleted from the
capitalization table on page 14 of the prospectus.
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.
It appears that the error to which your comment refers was contained in
the September 30, 2004 column, which column has been eliminated from the tables
in both locations and replaced with a 2004 column on page 16 of the prospectus
that has been reconciled to the balance sheet.
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.
Appropriate descriptions or cross-references have been included at
pages 5, 16 and 36 of the prospectus.
Russell Mancuso, Esq.
April 12, 2005
Page 4
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."
The phrase "qualified in their entirety by reference" has been deleted
from the introductory paragraphs of the "Summary Consolidated Historical
Financial Data" at page 4 of the prospectus and "Selected Consolidated
Historical Financial Data" at page 15 of the prospectus.
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.
Additional disclosure has been added to the comparative information
contained at pages 24 to 29 of the prospectus and pages 37 to 42 of the 2004
Form 10-K in response to this comment.
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.
Additional disclosure has been added to the net sales discussions on
page 24 to 26 and 28 of the prospectus and at pages 37 to 39 and 41 of the 2004
Form 10-K to discuss the effects of price and product mix changes.
Russell Mancuso, Esq.
April 12, 2005
Page 5
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.
There are no liabilities for cost reduction programs reflected in the
Company's December 31, 2004, December 31, 2003 or September 30, 2004 balance
sheets. The "Overview" sections beginning at page 17 of the prospectus and page
30 of the 2004 Form 10-K have been revised to describe and quantify the actions
and savings.
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.
The financial statements in the S-1/A have been updated to include
annual financial statements for the year ended December 31, 2004. Accordingly,
interim financial statements are no longer required. The "Liquidity and Capital
Resources" section of the MD&A has been updated beginning at page 29 of the
prospectus and page 42 of the 2004 Form 10-K to discuss changes in financial
condition between December 31, 2004 and 2003.
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.
The expanded discussion has been included beginning at page 29 of the
prospectus and page 42 of the 2004 Form 10-K.
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.
The requested discussion and explanation as updated to December 31,
2004 have been included in the "Liquidity and Capital Resources" section of the
MD&A beginning at page 29 of the prospectus and page 42 of the 2004 Form 10-K.
Russell Mancuso, Esq.
April 12, 2005
Page 6
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.
The requested definitions and related discussion have been included in
the "Liquidity and Capital Resources" section beginning at page 29 of the
prospectus and page 42 of the 2004 Form 10-K.
17. CLARIFY HOW YOUR NEW CREDIT ARRANGEMENTS AFFECT YOUR HISTORIC COST OF
CAPITAL.
A discussion of the effects of the new credit arrangement on the
Company's historic cost of capital has been added in the "Liquidity and Capital
Resources" section of the MD&A at page 31 of the prospectus and page 43 of the
2004 Form 10-K.
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.
The references to the Form 8-K item number and deadline have been
corrected at page 67 of the prospectus and page 59 of the 2004 Form 10-K.
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.
There are no additional related party transactions to disclose pursuant
to Item 404. In that regard, we note that the relationships mentioned in
footnotes 24 and 27 of the selling security holders table on page 84 of the
prospectus did not meet the dollar threshold of Item 404.
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.
Russell Mancuso, Esq.
April 12, 2005
Page 7
The contractual limitations expressly state that they may not be
waived. The contracts contain a choice of law provision that selects New York
law as the governing law. The Company is not aware of any provisions of New York
law that would prevent the parties from exercising their freedom to
contractually agree that the beneficial ownership limitations may not be waived.
Accordingly, as discussed in the footnotes to the table of principal
stockholders and the table of selling security holders, a specified number of
securities has been excluded from the beneficial ownership figures for certain
of the 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.
Each selling security holder other than Roth Capital Partners has
represented to the Company that it is not a broker-dealer or an affiliate of a
broker-dealer.
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.
The footnotes have been reconciled to the selling security holders'
table, and a new footnote 30 has been added at page 84 of the prospectus to
include a portion of the information that previously was included in footnotes
10 and 11.
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.
A typographical error that was on page 88 has been corrected on page 87
of the prospectus to reflect that Mr. Oliva received warrants for only 200,500
shares. The descriptions that were on pages 86-88 and are now on pages 85 to 87
of the prospectus have been reconciled to the selling security holders' table.
Russell Mancuso, Esq.
April 12, 2005
Page 8
Description of Capital Stock - Page 91
- --------------------------------------
24. YOUR DISCLOSURE MAY NOT BE QUALIFIED BY REFERENCE TO STATUTES. PLEASE REVISE
ACCORDINGLY.
The reference to applicable statutes has been deleted from the
disclosure appearing at page 90 of the prospectus.
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.
The filing has been updated to include December 31, 2004 audited
financial statements.
26. PROVIDE A CURRENT CONSENT OF THE INDEPENDENT ACCOUNTANTS IN ANY
AMENDMENT TO THE REGISTRATION STATEMENT.
The current consent of independent accountants has been included as
Exhibit 23.1 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.
References to the accountants have been limited to the "Experts"
section at page 93 of the prospectus. This section is specifically referenced in
their 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.
The Company has included in the 2004 Form 10-K disclosures in response
to your comments and has made corresponding changes where appropriate in the
comparative financial statements included in the 2004 Form 10-K and intends to
make similar corresponding changes in its future filings. The Company does not
intend to file amendments to its 2003 Form 10-K or September 30, 2004 Form 10-Q.
The Company believes that any changes that would be reflected in such amendments
would not, individually or in the aggregate, be material.
Russell Mancuso, Esq.
April 12, 2005
Page 9
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.
Under Rule 5-03.1 and 5-03.2 of Regulation S-X, if the Company derives
income from more than one class described in 5-03.1 (e.g., tangible products,
services, other), then the Company may combine with another class the income and
related costs and expenses for each class that is not more than 10% of total
revenue for the period. These rules did not require the Company to separately
disclose sales of products and services because no individual class, other than
"Products," consisted of 10% or more of the Company's total revenues.
For the three months ended September 30, 2004 and 2003, the combined
"Other" (i.e., non-Product) class for the communications equipment segment was
3% and 3% respectively, and the combined "Other" class for the electronic
components segment was 5% and 3%, respectively. Therefore, neither of these two
"Other" classes was required to be disclosed separately. Further, even if these
two "Other" classes had been combined during each of those three month periods,
the combined amount still would not have met the 10% threshold of Rule 5-03.
Similarly, for the nine months ended September 30, 2004 and 2003, the
combined "Other" class for the communications equipment segment was 3% and 3%,
respectively, and the combined "Other" class for the electronic components
segment was 6% and 4%, respectively. Combining these two "Other" classes
together also would not have met the 10% threshold.
Further, for the years ended December 31, 2004 and 2003, the combined
"Other" class for the communications equipment segment was 3% and 3%,
respectively, and the combined "Other" class for the electronic components
segment was 5% and 2%, respectively. Combining these two "Other" classes
together also would not have met the 10% threshold.
Russell Mancuso, Esq.
April 12, 2005
Page 10
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.
Historically, the majority of the Company's borrowings have consisted
of short-term revolving accounts or overdrafts that experience drawings and
repayments daily. Under paragraph 13 of SFAS 95, these borrowings and repayments
are appropriately presented on a net basis due to their quick turnover and
original maturity of less than three months.
The majority of long-term debt at September 30, 2004 and December 31,
2004 consisted of notes issued in the Larus Corporation acquisition with an
aggregate original principal amount of $3,000,000. These notes had been paid
down by $125,000 as of September 30, 2004 and by $250,000 as of December 31,
2004. Borrowings and repayments on long-term debt for the year ended December
31, 2004 have been presented on a gross basis in the statements of cash flows at
page F-7 of both the 2004 Form 10-K and the prospectus and will be so presented
for future periods. Borrowings and repayments on long-term debt for previous
periods were not material and, therefore, their presentation has not been
revised.
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.
The Company followed the guidance of paragraph 37 of SFAS 141 to
allocate the purchase price to the acquired assets and liabilities assumed,
except goodwill. The Company allocated the remaining purchase price to goodwill.
The intangible assets acquired, including goodwill, are currently being
appraised by an independent appraisal firm, as discussed in response to comment
32 below and at pages 36 and F-35 of the 2004 Form 10-K and pages 23 and F-35 of
the prospectus. The Company's purchase price allocation did not result in a
significant increase or decrease from the historical book value of any assets or
liabilities recorded by Larus Corporation because the assets had book values
that the Company deemed to be approximately equivalent to their fair values.
Inventories acquired included finished goods, work in process and raw
materials. Finished goods were valued at the fully absorbed cost, which
approximated the selling price less costs of disposal and a reasonable profit
allowance. Work in process was valued at the cost of materials plus labor and
burden, which resulted in a value equivalent to estimated selling price less
cost to complete, cost of disposal and a reasonable profit allowance. Raw
materials were valued at current replacement cost.
Russell Mancuso, Esq.
April 12, 2005
Page 11
Plant and equipment acquired were old and nearly fully depreciated.
After reviewing the physical status of the plant and equipment, the Company
determined that the current replacement cost of the plant and equipment was
similar to the book value at the time of the acquisition.
Accounts receivable were valued at their net realizable values, taking
into account their present values and apparent collectibility. Accounts payable
had short-term maturities and, therefore, were valued at their face amounts. The
unfavorable lease obligation was valued in the manner described in response to
comment 33 below.
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.
The Company has referred to paragraphs 51-52 of SFAS 141 for guidance.
The goodwill and other intangible assets applicable to each segment is as
follows:
Other
Goodwill Intangibles
-------- -----------
Electronic components segment: $ 1,085,000 $ 0
Communications equipment segment: 4,796,000 3,560,000
-------------------------------- ------------ ------------
Total at December 31, 2004: $ 5,881,000 $ 3,560,000
The Larus Corporation acquisition occurred in July 2004. As of
September 30, 2004, the Company had not yet completed its purchase price
allocation for intangible assets. The Company has commissioned a valuation firm
to determine what portion of the purchase price should be allocated to
identifiable intangible assets. Although the valuation analysis is still in
progress, the Company has estimated that the Larus tradename and trademark are
valued at $2,800,000 and that the technology and customer relationships are
valued at $800,000. Goodwill associated with the Larus Corporation acquisition
totaled $3,363,000. The Larus tradename and trademark were determined to have
indefinite lives and therefore are not being amortized but rather are being
periodically tested for impairment. The technology and customer relationships
were both estimated to have ten-year lives and, as a result, $40,000 of
amortization expense was recorded and charged to administrative expense in 2004.
The valuation of the identified intangible assets is expected to be completed in
May 2005 and could result in changes to the value of these identified intangible
assets and corresponding changes to the value of goodwill. The Company will
revise the purchase price allocation, if necessary, when the Company completes
the fair value analysis.
Russell Mancuso, Esq.
April 12, 2005
Page 12
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.
A component of the opening balance sheet for Larus Corporation, the
subsidiary the Company acquired in July 2004, was a liability of $756,000 for an
above market lease obligation. The Company entered into this lease obligation as
a condition of buying Larus Corporation and, therefore, this lease obligation
became part of the acquisition accounting. Pursuant to paragraph 37(k) of SFAS
141, the Company established a liability for an unfavorable lease arrangement.
Larus Corporation was leasing a 30,000 square foot building from its
stockholders. The Company continued to lease the building after the acquisition
under a new lease agreement at $0.90 per square foot, subject to increases based
on changes in the 30-day LIBOR rate. Near the time of the acquisition, local
real estate agents confirmed to the Company that this type of building in the
same area generally leased for $0.60 per square foot. Accordingly, the Company
calculated the above market portion of the lease obligation as follows:
$0.90 per square foot actual rent minus $0.60 per square foot market
rent = $0.30 above market rent per square foot per month
$0.30 multiplied by 30,000 square feet = $9,000 total above market rent
per month
$9,000 above market rent per month multiplied by 84-month lease term
= $756,000 total above market rent for the lease term.
The Company recorded this liability pursuant to paragraph 37(k) of SFAS
141 and is amortizing it against rent expense at the rate of $9,000 per month.
34. PLEASE DISCLOSE THE AMOUNTS AND METHODS USED TO VALUE THE 1,213,592
SHARES AND 150,000 WARRANTS ISSUED TO ACQUIRE LARUS.
The amounts and methods used to value the shares and warrants have been
disclosed in note 15 to the 2004 financial statements at page F-34 of both the
2004 Form 10-K and the prospectus and in the "Overview" section of the MD&A
discussion at page 32 of the 2004 Form 10-K and page 18 of the prospectus.
Russell Mancuso, Esq.
April 12, 2005
Page 13
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.
The Hayden Communications warrants were valued at $38,977 using a
Black-Scholes formula that included a volatility of 107.18%, an interest rate of
2.5%, a life of 3 years and no assumed dividend. The amounts and methods used to
value warrants issued during the periods presented in the prospectus and the
2004 Form 10-K have been disclosed in note 8 to the 2004 financials at page F-22
of both the prospectus and the 2004 Form 10-K.
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.
If the Company is unable to meet this obligation or unable to maintain
the effectiveness of the registration in accordance with the requirements of the
registration rights agreement that the Company entered into with the investors,
then the Company will be required to pay to each investor liquidated damages
equal to 1% of the amount paid by the investor for the shares of common stock
still owned by the investor on the date of the default and 2% of the amount paid
by the investor for the shares of common stock still owned by the investor on
each monthly anniversary of the date of the default that occurs prior to the
cure of the default. The maximum aggregate liquidated damages payable to any
investor will be equal to 10% of the aggregate amount paid by the investor for
the shares of the Company's common stock. Accordingly, the maximum aggregate
penalty that the Company would be required to pay under this provision is 10% of
the $18,005,000 initial purchase price of the common stock, which would be
$1,801,000. This information has been included in note 17 to the 2004 financials
at page F-38 of both the 2004 Form 10-K and the prospectus and in "Liquidity and
Capital Resources" at page 33 of the prospectus and page 46 of the Form 10-K.
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.
Please refer to the response to comment 28 above.
Russell Mancuso, Esq.
April 12, 2005
Page 14
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.
Accrued expenses consisted of the following as of December 31 (in
thousands):
2004 2003 2002
--------- --------- ---------
Accrued salaries $ 805 $ 593 $ 519
Accrued vacation 240 127 106
Other taxes / social security 251 261 319
Other payroll related 43 37 36
Other taxes - VAT, sales, property 112 99 84
Accrued audit fees 276 199 148
Accrued director fees -- 27 106
Accrued legal fees 26 15 24
State income tax -- 27 --
Accrued warranty 64 80 72
Accrued commissions 200 110 146
Accrued bonus 260 215 --
Accrued insurance 39 56 48
Provision for leasehold repair 43 40 165
Goods received not invoiced 8 31 51
Advance payments from customers 77 656 40
Deferred income 19 -- 1,086
Deferred compensation 233 201 --
Customer credits 65 -- 228
Unrealized currency exchange 60 26 --
Unfavorable leasehold 108 -- --
Other accrued expenses 85 35 --
--------- --------- ---------
Total accrued expenses $ 3,014 $ 2,861 $ 3,209
========= ========= =========
The Company has disclosed in note 7 of the December 31, 2004 financials
at page F-19 of both the 2004 Form 10-K and the prospectus its accrued expenses
for 2004, 2003 and 2002 and has specified in that disclosure each accrued
expense that exceeded 5% of current liabilities as of December 31, 2004, 2003
and 2002.
Russell Mancuso, Esq.
April 12, 2005
Page 15
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.
Other, net income consisted of the following for the year ended
December 31:
2004 2003 2002
--------- --------- ---------
Other Income (Expense) $ 21,019 $ 38,676 $(75,598)
Employee Litigation -- 22,692 --
Fixed Asset Depreciation Adjustment -- 10,214 --
Loss on Sale of Asset (1,856) -- (9,076)
Gain (Loss) on Foreign Exchange 28,689 (13,205) 4,409
--------- --------- ---------
Total Other, Net Income $ 5,814 $ 58,377 $(80,265)
========= ========= =========
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.
Shipping costs are immaterial to the Company's consolidated financial
statements. Handling costs are not charged. The Company considered the guidance
in EITF 00-10 and has included the required disclosure under the "Revenue
Recognition" heading in note 1 at page F-10 of both the 2004 Form 10-K and the
prospectus.
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.
An expanded discussion of the Company's revenue recognition policies
has been included under the "Revenue Recognition" heading in the "Critical
Accounting Policies" section of the MD&A at page 34 of the 2004 Form 10-K and
page 20 of the prospectus and under the "Revenue Recognition" heading in note 1
of the 2004 financials at page F-9 of both the 2004 Form 10-K and the
prospectus. The criteria outlined in SAB 104 and SFAS 48 have been addressed in
that discussion.
Russell Mancuso, Esq.
April 12, 2005
Page 16
The Company's United Kingdom operations are subject to laws and
business practices in which title to goods remains with the seller until the
goods are fully paid for, effectively giving the seller a financial security
interest similar to that provided by UCC filings in the United States that
permits the seller to take the goods back if non-payment occurs. As addressed in
Question 3 of SAB 104, because the only right the Company retains with the title
to goods is that enabling recovery of the goods if the customer defaults on
payment, and because all other revenue recognition criteria of SAB 104 and SFAS
48 are met at the point of shipment, revenue recognition at the point of
shipment is appropriate for these goods.
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 ITS 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.
The sentence regarding the right to return communications equipment
products within 30 days of purchase if a new order is received has been deleted.
The Company's current policy is that returns are not allowed without prior
authorization. Returns are not a normal occurrence because products are produced
based on a duly authorized and legally binding purchase order. Normally, when a
customer requests authorization to return a product, the request is supported by
a new purchase order for a replacement product. This policy and a dollar
estimate have been included under "Revenue Recognition" at page 20 of the
prospectus and page F-9 of both the 2004 Form 10-K and the prospectus.
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.
The Company has considered the accounting guidance of EITF 99-19 and
02-16. The Company designs and manufactures most of the products it sells. The
Company records at cost, at the time title and risk of loss pass to the Company,
any inventory purchased from outside vendors, whether the inventory is obtained
from domestic or foreign vendors and whether the inventory is intended for
resale by the Company's domestic or foreign operations. Payment generally is due
to vendors within 30 days after the Company's receipt of the product. The
Russell Mancuso, Esq.
April 12, 2005
Page 17
Company generally does not receive rebates from vendors, and any rebates would
be recorded as an offset to cost of sales in accordance with EITF 02-16. There
are numerous vendors from which the Company may purchase inventory to satisfy
its customers' requirements. The Company recognizes sales on a gross basis
because it has satisfied the indicators of gross revenue reporting required by
EITF 99-19. Based on the foregoing, the Company believes that its revenue
recognition policy described at pages 34 and F-9 of the 2004 10-K and pages 20
and F-9 of the prospectus is applicable to its reseller arrangements and that no
specific discussion of reseller arrangements is required.
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.
The Company's products and services are described in detail beginning
at page 45 of the "Business" section of the prospectus and at page 7 of the
"Business" section of the 2004 Form 10-K. The Company does not sell software.
However, many of the Company's products have software embedded in them to make
them function. Such software is among many other components that make up the
Company's products and contribute to their functionality, and the software is
not sold or billed separately.
Relative to multiple element arrangements under EITF 00-21, the Company
does offer product training for certain of its products that is usually provided
within a very short time following the delivery of the product. The Company
generally charges $2,500 per day for such training, and one day of training is
usually all that is necessary for a typical product sale. The Company's products
include training manuals, and customers often do not purchase the training.
Therefore, the training is not integral to the functionality of the product.
When training is provided, customer acceptance of the product is not contingent
upon, and there are no product sales refund provisions related to, the training.
The amount of training that is undelivered at the end of a reporting period has
historically been insignificant. If such undelivered training was material at
the end of a reporting period, the Company would follow the guidance outlined by
EITF 00-21 and allocate the recognition of revenue of the delivered and
undelivered elements based on the relative fair values of the items sold.
Russell Mancuso, Esq.
April 12, 2005
Page 18
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.
The Company's inventory reserves for excess and obsolete inventory
reduce the net value of the related inventory. After the Company establishes a
reserve, the reserve is never reversed. Rather, the obsolete items reserved for
usually are discarded and, at that point, the reserve is charged for the
physical abandonment of the inventory. The excess items often are discarded but
sometimes are eventually partially or wholly used in production. The usage in
production of those items would cause a charge to its corresponding part of the
reserve.
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
CIRCUMSTANCES YOU REVIEW. REVISE YOUR DISCLOSURE TO DISCUSS THESE
MATTERS AS WELL.
The Company analyzes its perpetual inventory against historical usage
and forecasted sales on an individual item basis to estimate product demand.
Financial and operational management reviews the analysis and categorizes
inventory based on levels of actual and forecasted usage. The Company considers
factors such as inventory aging, new products categories, new or lost customer
requirements, and changing market circumstances in the Company's inventory
analysis.
The Company has indicated in its "Inventory Valuation" disclosure at
page 21 of the prospectus and page 34 of the 2004 Form 10-K and in its
"Inventories" disclosure at page F-10 of both the 2004 Form 10-K and the
prospectus that in order to determine inventory write-down provisions, the
Company reviews product line inventory levels and individual items as necessary
and periodically reviews assumptions about forecasted demand and market
conditions.
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
Russell Mancuso, Esq.
April 12, 2005
Page 19
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.
The Company is aware of and in compliance with the requirements of
paragraph 28 of SFAS 142. No events occurred or circumstances changed between
annual tests that would have required an interim goodwill impairment assessment.
Note 4 at page F-15 of both the 2004 Form 10-K and the prospectus and the
discussion under "Intangibles, Including Goodwill" at page 36 of the 2004 Form
10-K and page 23 of the prospectus have been revised to discuss the requirement
for interim tests and to indicate that no such events or changes in
circumstances have occurred.
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
MAYBE A LEVEL BELOW AN OPERATING SEGMENT. THE DISCLOSURE IN THE FILING
SHOULD SUPPORT YOUR CONCLUSIONS AS WELL.
The Company's business segment and component structure is consistent
with the guidance in paragraph 30 of SFAS 142. The Company has two business
segments: electronic components and communications equipment. Each segment has
business units or components as described in paragraph 30. Each component has
discrete financial information and a management structure. Following is a
description of the Company's segment and component structure:
Reporting Units Within Electronic Components Segment:
-----------------------------------------------------
o XET Corporation - Rancho Cucamonga, California: Digitran
Division- digital and rotary switches, and electronic
subsystem assemblies for defense and aerospace applications
and keypads
o XET Corporation - Monrovia, California: XCEL Circuits Division
- printed circuit boards mostly for intercompany sales
o XCEL Japan Ltd. - Tokyo, Japan: Reseller of Digitran switches
and other third party electronic components
Russell Mancuso, Esq.
April 12, 2005
Page 20
o XCEL Corporation Ltd. - Ashford, Kent, England: Power supplies
and conversion for defense and aerospace applications; this
reporting unit also includes XCEL Power Systems, Ltd., Belix
Power Conversions Ltd., Belix Wound Components Ltd., The Belix
Company Ltd., Pascall Electronic (Holdings) Limited and
Pascall Electronics Limited
Reporting Units Within Communications Equipment Segment:
--------------------------------------------------------
o CXR Telcom division of CXR Larus Corporation - San Jose,
California: Telecom test equipment for the field and central
office applications and
o Larus division of CXR Larus Corporation - San Jose,
California: Telecom synchronous timing devices and network
access equipment
o CXR-Anderson Jacobson - Abondant, France: network access and
modem equipment
A similar description has been included in note 12 to the 2004
financials at page F-28 of both the prospectus and the 2004 Form 10-K.
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.
Warrants issued for services are valued using the Black-Scholes
formula. The amount so determined is recorded as an expense as earned and
additional paid in capital is credited.
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.
Emrise Corporation acquired 100% of the equity interests in Larus
Corporation in July 2004. Based on the following calculations under Rule 1-02(w)
of Regulation S-X, Larus Corporation became a "significant subsidiary" of the
Company at the time of acquisition:
Russell Mancuso, Esq.
April 12, 2005
Page 21
Investment Test (Rule 1-02(w)(1))
---------------------------------
$6,539,500 Total GAAP purchase price for Larus Corporation
(described below this table)
$17,169,000 Company total consolidated assets as of December 31, 2003
38.1% Total GAAP purchase price for Larus Corporation as a
percentage of Company total consolidated assets as of
December 31, 2003
Asset Test (Rule 1-02(w)(2))
----------------------------
$2,662,000 Larus Corporation total assets acquired
$17,169,000 Company total consolidated assets as of December 31, 2003
15.5% Larus Corporation total assets as a percentage of Company
consolidated assets as of December 31, 2003
Income Test (Rule 1-02(w)(3))
-----------------------------
$(145,000) Company equity in Larus Corporation's income from continuing
operations before income taxes, extraordinary items and
cumulative effect of a change in accounting principle for the
year ended November 30, 2003
$1,161,000 Company consolidated income from continuing operations before
income taxes, extraordinary items and cumulative effect of a
change in accounting principle for the year ended December 31,
2003
12.5% Company equity in Larus Corporation's income as a percentage
of Company income for the year ended December 31, 2003
Total GAAP purchase price for Larus Corporation consisted of:
$ 1,000,000 cash
887,500 zero interest promissory notes
3,000,000 subordinated promissory notes
1,000,000 value of Company common stock issued (1,213,592 shares)
580,000 acquisition costs
value of Company common stock purchase warrants issued
72,000 (150,000 underlying shares)
------------ -----------------------------
$ 6,539,500 Total
============
Russell Mancuso, Esq.
April 12, 2005
Page 22
Pursuant to Rule 3-05 of Regulation S-X, because at least one of the
three tests described above exceeded 20% but none exceeded 40%, financial
statements for Larus Corporation were required to be furnished for the most
recent fiscal year and any interim periods specified in Rules 3-01 and 3-02.
Rule 3-01(e) specifies that non-accelerated filers must include an
interim balance sheet dated within 135 days of the date of the filing. Rule
3-02(b) requires the inclusion of statements of income and cash flows for the
interim period between the latest audited balance sheet and the date of the most
recent interim balance sheet being filed, and for the corresponding period of
the preceding fiscal year.
The 135th day before the filing of the Form 8-K/A on September 30, 2004
was May 18, 2004. Larus Corporation's most recent fiscal year end was November
30, 2003. Accordingly, the Form 8-K/A filed on September 30, 2004 included
audited financial statements for November 30, 2003, interim balance sheets as of
May 31, 2004, and statements of operations and cash flows for the six months
ended May 31, 2004 and 2003 in accordance with the requirements of Rule 3-05 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?
The calculation and components of the purchase price and the allocation
of the purchase price are now disclosed in the notes to the pro forma financial
statements at page F-21 of the Form 8-K/A. A discussion of the reason for
the significant premium paid is now disclosed in Item 2.01 at page 2 of the
Form 8-K/A.
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.
Each pro forma adjustment is now reflected on a separate line as a
self- balancing entry on the pro forma statements of operations at pages F-18
and F-22 of the Form 8-K/A.
Russell Mancuso, Esq.
April 12, 2005
Page 23
53. IN THIS REGARD, PLEASE EXPAND THE NOTES TO PROVIDE ENOUGH INFORMATION
FOR THE READER TO UNDERSTAND HOW THE ADJUSTMENTS WERE DETERMINED.
The notes have been expanded at pages F-18 to F-23 of the Form 8-K/A to
provide additional information to assist the reader in understanding 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.
The requested disclosure has been included in the notes to the pro
forma statements of operations at pages F-19 and F-23 of the Form 8-K/A.
If you would like to discuss any of these responses, please call me at
(714) 641-3450 or my associate, Cristy Parker, at (714) 641-3446.
Sincerely yours,
RUTAN & TUCKER, LLP
/s/ Larry A. Cerutti (by Cristy Parker)
Larry A. Cerutti
Enclosures
cc: Mr. Tim Buchmiller (w/enclosures)
Mr. Carmine T. Oliva (w/enclosures, via e-mail)
Mr. Randolph D. Foote (w/enclosures, via e-mail)
Cristy Parker, Esq. (w/enclosures, via e-mail)
Mr. Richard Simitian, CPA (w/enclosures, via e-mail)
Mr. Joe Rumley, CPA (w/enclosures, via e-mail)
Mr. Anthony Sanchez, CPA (w/enclosures, via e-mail)