LARRY A. CERUTTI
Direct Dial: (714) 641-3450
E-mail: lcerutti@rutan.com June 28, 2005
VIA FEDERAL EXPRESS AND
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EDGAR CORRESPONDENCE
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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
Amendment No. 3 to Registration Statement on Form S-1
Filed June 17, 2005
Registration No. 333-122394
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Dear Mr. Mancuso:
On behalf of Emrise Corporation ("Company"), this letter responds to
your letter to the Company dated June 22, 2005. The comments contained in your
letter are set forth below in their entirety for your convenience.
Enclosed are clean and marked to show changes copies of Amendment No. 4
to the Company's Registration Statement on Form S-1, Registration No. 333-122394
("Registration Statement"). Also enclosed are clean and marked to show changes
copies of the Company's Form 8-K/A No. 3 for March 18, 2005 relating to the
Pascall acquisition ("Form 8-K/A").
We have indicated below 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.
Amendment No. 3 to Registration Statement on Form S-1
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January 2005 Private Placement of Common Stock and Warrants, page 98
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1. WE NOTE YOUR RESPONSE TO PRIOR COMMENT NUMBER 3. PLEASE TELL US HOW YOU
ARE ACCOUNTING FOR AND VALUING THE REGISTRATION RIGHTS AGREEMENT. REFER
TO EITF 00-19 AND 05-04 AND SFAS 129 AND 133 AS APPLICABLE. CITE THE
ACCOUNTING UPON WHICH YOU RELIED.
On January 5, 2005, the Company issued 12,503,500 shares of common
stock and 3,776,185 investor and placement agent warrants for $18,005,040 in
cash in a private offering. A total of $961,446 cash was paid from these funds
to the placement agent for placement agent fees and expenses. In addition, the
Company incurred various legal and accounting fees associated with the offering.
Russell Mancuso, Esq.
June 28, 2005
Page 2
The offering documents included a registration rights agreement that
called for initial liquidated damages equal to 1% of the amount paid by each
investor to the Company in the offering, which damage payments totaled an
aggregate of approximately $180,000, because the common stock and the shares of
common stock underlying the warrants were not registered within 150 days
following the closing date. The Company also must pay to each investor
liquidated damages for the period from June 5, 2005 through the date the
registration is declared effective, and for any future periods in which the
Company is unable to maintain the effectiveness of the registration in
accordance with the requirements contained in the registration rights agreement.
These liquidated damages are equal to 2% of the amount paid by each investor for
the common shares still owned by the investor on each monthly anniversary of the
date of the default that occurs prior to the cure of the default, pro rated on a
daily basis for periods of default shorter than one month. 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 the liquidated damages provisions is 10% of the $18,005,000 initial
purchase price of the common stock, which would be approximately $1,801,000.
The offering documents and related registration rights agreement do
not provide any provision for the net cash settlement of the warrants. The
warrants do permit the Company to settle the warrants in unregistered shares.
All other conditions required under EITF 00-19 were met. Consequently, the
warrants were classified as permanent equity, in accordance with paragraph 7
of EITF 00?19.
The Company considered whether the liquidated damages clause
payable in cash affected the accounting for the financial instrument subject
to the provisions of EITF 00-19. The Company's accounting for the registration
right is consistent with "View A" described in paragraphs 15 through 18 of
EITF 05-04. The registration rights agreement and the warrants were considered
together as a unit and analyzed under EITF 00-19. The agreements were entered
into contemporaneously and between the same parties. Further, the common
stock to be registered pursuant to the registration rights agreement are the
same shares that will be used to settle the warrants upon exercise.
The Company believes that the payment of the liquidated damages penalty
should be combined with the Company's right to deliver unregistered shares in
evaluating the financial instrument. The warrant has two settlement
alternatives: (a) the delivery of registered shares in exchange for the exercise
price or (b) the delivery of unregistered shares, plus the liquidated damages
cash penalty required to be paid under the registration rights agreement, in
exchange for the exercise price. The Company compared the maximum potential
liquidated damages penalty under the registration rights agreement (maximum
of 10%) to the difference between the fair values of the registered shares
and unregistered shares. The Company determined that the maximum liquidated
damages penalty of 10% was less than the difference between the fair values
of registered and unregistered shares of its common stock. Consequently,
the delivery of unregistered shares would be considered an economic
alternative and the combined financial instrument would be classified as
equity (note that the Company believes that all other criteria in paragraphs
12 through 32 of EITF 00-19 were met).
The Company believes it has complied with the presentation and
disclosure requirements of SFAS 129 and does not believe SFAS 133 applies to
its financing transaction because the stock issued is not a derivative per
paragraph 5 of SFAS 133 and the warrants are exempt under paragraph 11 of
SFAS 133. The payments made to the Company shareholders in the second quarter
of 2005 under the liquidated damages clause have been excluded from net income
and recorded as a reduction of additional paid-in capital.
Russell Mancuso, Esq.
June 28, 2005
Page 3
Report of the Independent Auditors - Pascall Electronic (Holdings) Limited, page
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F-63
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2. WE NOTE THAT YOU AMENDED YOUR U.S. GAAP RECONCILIATION INCLUDED IN NOTE
29. HAVE YOUR AUDITORS DISCUSS THE CONSIDERATION OF SAS NO. 1, SECTION
530, DATING OF THE INDEPENDENT AUDIT REPORT.
The independent auditors have updated to June 27, 2005 the date of
their report contained at page 61 of the Registration Statement and page F-1 of
the Form 8-K/A.
Note 29. Summary of Certain Differences between Accounting Principles Generally
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Accepted in the United Kingdom and the United States of America, page F-90
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3. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 7. WITH REGARD TO ADJUSTMENT
(C), WE NOTE THAT UNDER U.S. GAAP YOU WOULD HAVE BEEN REQUIRED TO
RECOGNIZE AS NET PERIOD PENSION COST THE REQUIRED CONTRIBUTION FOR THE
PERIOD AND ANY CONTRIBUTIONS DUE AND UNPAID WOULD HAVE BEEN REFLECTED
AS A LIABILITY OF THE COMPANY. PLEASE TELL US WHERE THIS IS REFLECTED
IN THE U.S. GAAP RECONCILIATION. YOUR RECONCILIATION TO U.S. GAAP
SHOULD ALLOW THE READER TO DETERMINE THE AMOUNT OF EACH ADJUSTMENT TO
EACH LINE ITEM OF THE FINANCIAL STATEMENTS.
As noted in the Company's previous response, Pascall was allocated a
charge from its parent company (Intelek) representing its annual required
contribution to the group defined benefit plan. As a result, the amounts
expensed by Pascall for the periods ended March 31, 2004 and March 18, 2005
under U.K. GAAP are equal to the required contributions required to be
recognized as net periodic pension cost under U.S. GAAP. A reconciling item is
not required in the U.S. GAAP reconciliation for either period since the
reported expense and liability would have been the same as that reported under
the U.K. GAAP financial statements. To clarify this point, the Company has
modified the footnote disclosure with respect to adjustment (c) at page F-32 of
the Form 8-K/A and pages F-91 and F-92 of the Registration Statement.
In addition, the Form 8-K/A and Registration Statement have been
revised to reflect the amount of each adjustment to each line item of the
financial statements. The Company previously provided this detail on each
balance sheet account and has now supplemented this disclosure at pages F-30 and
F-31 of the Form 8-K/A and page F-90 of the Registration Statement to include
the impact on the profit and loss accounts for both periods.
4. REVISE TO DISCLOSE THE BASIC AND DILUTED EPS CALCULATED IN ACCORDANCE
WITH U.S. GAAP, IF MATERIALLY DIFFERENT THAN U.K. GAAP. NET LOSS PER
SHARE
The following disclosure has been included in Note 29 at page F-93 of
the Registration Statement and pages F-33 and F-34 of the Form 8-K/A:
NET LOSS PER SHARE
U.S. GAAP requires the disclosure of net loss per share. The following
tables compare net loss per share calculated under U.K. GAAP to net
loss per share calculated under U.S. GAAP:
U.K. GAAP U.S. GAAP
PERIOD PERIOD
ENDED ENDED
18 MARCH 2005 18 MARCH 2005
(POUND) (POUND)
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Net loss (33,939) (115,744)
Outstanding shares - basic and diluted 224,391 224,391
Net loss per share (0.15) (0.52)
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Russell Mancuso, Esq.
June 28, 2005
Page 4
U.K. GAAP U.S. GAAP
YEAR YEAR
ENDED ENDED
31 MARCH 2005 31 MARCH 2005
(POUND) (POUND)
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Net loss (25,783) (86,399)
Outstanding shares - basic and diluted 224,391 224,391
Net loss per share (0.11) (0.39)
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There were no potentially dilutive options or warrants outstanding
during the periods presented.
If you would like to discuss any of these responses, please call me at
(714) 641-3450.
Sincerely yours,
RUTAN & TUCKER, LLP
/s/ Larry A. Cerutti
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)
Mr. Fred Furry, CPA (w/enclosures, via e-mail)
Mr. Kevin Hartley, CPA (w/enclosures, via e-mail)