AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 2005
REGISTRATION NO. 333-122394
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
EMRISE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0226211
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3825
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
--------------
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(909) 987-9220
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
CARMINE T. OLIVA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EMRISE CORPORATION
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(909) 987-9220
(909) 987-9228 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
COPIES OF ALL CORRESPONDENCE TO:
LARRY A. CERUTTI, ESQ.
CRISTY LOMENZO PARKER, ESQ.
RUTAN & TUCKER, LLP
611 ANTON BOULEVARD, 14TH FLOOR
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
(714) 546-9035 (FAX)
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
--------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================== ===================== ====================== ====================== ======================
Amount Proposed maximum Proposed maximum
Title of each class of to be offering price aggregate Amount of
securities to be registered registered(1) per share(2) offering price(2) registration fee
---------------------------------------- --------------------- ---------------------- ---------------------- ----------------------
Common stock, $0.0033 par value 18,388,777(3) $1.49 $27,399,277.73 $3,224.89(4)
======================================== ===================== ====================== ====================== ======================
(1) In the event of a stock split, stock dividend or similar transaction
involving common stock of the registrant, in order to prevent dilution, the
number of shares registered shall be automatically increased to cover the
additional shares in accordance with Rule 416(a) under the Securities Act.
(2) The proposed maximum offering price per share has been estimated solely for
the purpose of calculating the registration fee pursuant to Rule 457(c) of
the Securities Act and is based upon the average of the high and low sale
prices of the registrant's common stock reported on the OTC Bulletin Board
on January 25, 2005.
(3) Includes 4,606,685 shares of common stock issuable upon exercise of
warrants.
(4) Fee of $3,224.89 was paid with the initial filing of this registration
statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
SUBJECT TO COMPLETION, DATED JUNE 27, 2005
PROSPECTUS
18,388,777 SHARES
EMRISE CORPORATION
COMMON STOCK
____________________
This a public offering of 18,388,777 shares of our common stock. All
shares are being offered by selling security holders identified in this
prospectus. We will not receive any of the proceeds from the sale of shares by
the selling security holders. Our common stock is quoted on the OTC Bulletin
Board under the symbol "EMRI." On June 7, 2005, the closing sale price of our
common stock on the OTC Bulletin Board was $1.22 per share.
The mailing address and the telephone number of our principal executive
offices are 9485 Haven Avenue, Rancho Cucamonga, California 91730, (909)
987-9220.
____________________
Investing in our shares of common stock involves risks. See "Risk
Factors" beginning on page 8 for factors you should consider before buying
shares of our common stock.
____________________
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS ______________, 2005.
TABLE OF CONTENTS
Page
----
Prospectus Summary.................................................................................2
Risk Factors.......................................................................................8
Special Note Regarding Forward-Looking Statements.................................................14
Use of Proceeds...................................................................................14
Dividend Policy...................................................................................14
Price Range of Common Stock.......................................................................15
Capitalization....................................................................................15
Selected Consolidated Historical Financial Data...................................................16
Unaudited Condensed Consolidated Pro Forma Financial Data.........................................18
Management's Discussion and Analysis of Financial Condition and Results of Operations.............23
Business..........................................................................................52
Management........................................................................................77
Certain Relationships and Related Transactions....................................................91
Principal Stockholders............................................................................92
Selling Security Holders..........................................................................94
Plan of Distribution.............................................................................101
Description of Capital Stock.....................................................................103
Legal Matters....................................................................................106
Experts..........................................................................................106
Where You Can Find Additional Information........................................................106
Index to Financial Statements and Financial Statement Schedule...................................F-1
1
PROSPECTUS SUMMARY
TO FULLY UNDERSTAND THIS OFFERING AND ITS CONSEQUENCES TO YOU, YOU
SHOULD READ THE FOLLOWING SUMMARY ALONG WITH THE MORE DETAILED INFORMATION AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. IN THIS PROSPECTUS, THE WORDS "WE,"
"US," "OUR" AND SIMILAR TERMS REFER TO EMRISE CORPORATION TOGETHER WITH ITS
SUBSIDIARIES UNLESS THE CONTEXT PROVIDES OTHERWISE.
EMRISE CORPORATION
We are a Delaware corporation that was formed July 14, 1989. We have
three wholly-owned operating subsidiaries, Emrise Electronics Corporation, a New
Jersey corporation that was formed in 1983 ("Emrise Electronics"), CXR Larus
Corporation, a Delaware corporation that was formed in 1984 ("CXR Larus"), and
CXR-Anderson Jacobson, a French company that was formed in 1973 ("CXR-AJ").
Emrise Electronics and its subsidiaries design, develop, manufacture and market
electronic components for defense, aerospace and industrial markets. CXR Larus
and CXR-AJ design, develop, manufacture and market network access and
transmission products and communications test equipment. CXR Larus also
manufactures and sells communication timing and synchronization products.
In December 2004, CXR Larus changed its name from CXR Telcom
Corporation when it succeeded by merger to the assets and liabilities of Larus
Corporation, a San Jose, California-based manufacturer and seller of
telecommunications products, and Vista Labs, Incorporated, a subsidiary of Larus
Corporation that provided engineering services to Larus Corporation. As
described in more detail elsewhere in the prospectus, we acquired Larus
Corporation and Vista Labs, Incorporated in July 2004.
In March 2005, XCEL Corporation Ltd., a United Kingdom-based subsidiary
of Emrise Electronics ("XCEL"), acquired Pascall Electronic (Holdings) Limited
("PEHL") and its wholly-owned subsidiary, Pascall Electronics Limited
("Pascall"). Pascall is based in the United Kingdom and manufactures a range of
proprietary power systems and radio frequency ("RF") components and subsystems.
Through our operating subsidiaries, Emrise Electronics, CXR Larus and
CXR-AJ, and through the divisions and subsidiaries of those subsidiaries, we
design, develop, manufacture, assemble, and market products and services in the
following two material business segments:
o Electronic Components
-- digital and rotary switches
-- electronic power supplies
-- RF components
-- subsystem assemblies
o Communications Equipment
-- network access and transmission products
-- communication timing and synchronization products
-- communications test instruments
2
Our sales are primarily in North America, Europe and Asia. Sales to
customers in the electronic components segment, primarily to defense and
aerospace customers, defense contractors and industrial customers, were 52.2%
and 63.1% of our total net sales during the three months ended March 31, 2005
and 2004, respectively, and 51.1%, 63.4% and 59.1% of our total net sales during
2004, 2003 and 2002, respectively. Sales of communications equipment and related
services, primarily to private customers premises and public carrier customers,
were 47.8% and 36.9% of our total net sales during the three months ended March
31, 2005 and 2004, respectively, and 48.9%, 36.6% and 40.9% of our total net
sales during 2004, 2003 and 2002, respectively.
Our objective in our electronic components business is to become the
supplier of choice for harsh environment digital and rotary switches, custom
power supplies and RF and microwave products. Our objective in our
communications equipment business is to become a leader in quality, cost
effective solutions to meet the requirements of communications equipment
customers. We believe that we can achieve these objectives through
customer-oriented product development, superior product solutions, and
excellence in local market service and support.
CORPORATE INFORMATION
Our principal executive offices are located at 9485 Haven Avenue, Suite
100, Rancho Cucamonga, California 91730. Our telephone number is (909) 987-9220.
Our Internet address is http://www.emrise.com. Information contained on, or that
is accessible through, our websites should not be considered to be part of this
prospectus.
THE OFFERING
Common stock offered by the selling security holders 18,388,777 shares
Common stock to be outstanding after this offering 41,991,393 shares
Use of proceeds All proceeds of this offering will be
received by selling security holders
for their own accounts. See "Use of
Proceeds."
OTC Bulletin Board symbol EMRI
The number of shares of common stock being offered by the selling
security holders includes 13,782,092 outstanding shares of common stock held by
certain security holders and assumes the exercise of warrants whose underlying
shares of common stock are covered by this prospectus in exchange for 4,606,685
shares of common stock, and the immediate resale of all of those 4,606,685
shares of common stock. The number of shares of common stock that will be
outstanding upon the completion of this offering is based on the 37,384,708
shares outstanding as of June 7, 2005, and excludes the following:
o 2,557,550 shares of common stock reserved for issuance under
our stock option plans, of which options to purchase 1,458,998
shares were outstanding as of that date, at a weighted average
exercise price of $0.64 per share;
o 85,000 shares of common stock underlying warrants outstanding
as of that date, at an exercise price of $1.86 per share; and
o any additional shares of common stock we may issue from time
to time after that date.
You should read the discussion under "Management -- Stock Option Plans"
for additional information about our stock option plans.
3
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The following financial data should be read in conjunction with the
consolidated financial statements and the notes to those statements beginning on
page F-1 of this prospectus, and the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The consolidated statements of operations and
comprehensive income data for the three months March 31, 2005 and 2004 and the
consolidated balance sheet data as of March 31, 2005 and 2004 are derived from
unaudited financial statements included in the prospectus that, in the opinion
of our management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial data for these periods.
The consolidated statements of operations and comprehensive income data
for the years ended December 31, 2004, 2003 and 2002 and the consolidated
balance sheet data at December 31, 2004 and 2003 are derived from the
consolidated audited financial statements included in this prospectus. The
consolidated statements of operations and comprehensive income data with respect
to the years ended December 31, 2001 and 2000 and the consolidated balance sheet
data at December 31, 2001 are derived from our audited financial statements not
included in this prospectus. The historical results that appear below are not
necessarily indicative of results to be expected for any future periods.
THREE THREE
MONTHS MONTHS
ENDED ENDED
MAR. 31, MAR. 31, YEAR ENDED DECEMBER 31,
-------- -------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA:
Net sales ............................... $ 7,299 $ 6,192 $ 29,861 $ 25,519 $ 22,664 $ 27,423 $ 28,050
Cost of sales ........................... 4,187 3,445 16,146 14,835 14,147 15,456 15,529
-------- -------- -------- -------- -------- -------- --------
Gross profit ............................ 3,112 2,747 13,715 10,684 8,517 11,967 12,521
Selling, general and administrative
expenses .............................. 2,831 2,217 10,226 7,812 7,731 10,129 9,827
Engineering and product development
expenses .............................. 532 283 1,521 951 1,015 1,076 1,167
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ........... (251) 247 1,968 1,921 (229) 762 1,527
Total other income (expense) ............ (33) (102) (439) (474) (361) (414) 207
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes ........ (284) 145 1,529 1,447 (590) 348 1,734
Income tax (benefit) expense ............ 66 75 49 286 (20) 77 31
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations ............................ (350) 70 1,480 1,161 (570) 271 1,703
Discontinued operations:
Loss from operations of
discontinued segment ................ -- -- -- -- -- 56 (212)
Gain (loss) on disposal of
discontinued segment including
provision for phase out period
of $122 in 2000 ..................... -- -- -- -- -- -- (487)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ....................... (350) 70 1,480 1,161 (570) 327 1,004
Foreign currency translation
adjustment ............................ (441) (2) 379 705 446 (312) (505)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income (loss) ....... $ (791) $ 68 $ 1,859 $ 1,866 $ (124) $ 15 $ 499
======== ======== ======== ======== ======== ======== ========
4
THREE THREE
MONTHS MONTHS
ENDED ENDED
MAR. 31, MAR. 31, YEAR ENDED DECEMBER 31,
-------- -------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA
(CONTINUED):
Basic earnings (loss) per share
from continuing operations ............ $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.01 $ 0.09
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
from continuing operations ............ $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.01 $ 0.07
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share
from discontinued operations .......... $ -- $ -- $ -- $ -- $ -- $ -- $ (0.04)
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
from discontinued operations .......... $ -- $ -- $ -- $ -- $ -- $ -- $ (0.03)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share ......... $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.02 $ 0.05
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share ....... $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.01 $ 0.04
======== ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding, basic .................... 36,788 23,480 24,063 22,567 21,208 20,594 19,504
Weighted average shares
outstanding, diluted .................. 36,788 24,395 24,839 23,811 21,208 23,782 23,027
AT AT
MAR. 31, MAR. 31, AT DECEMBER 31,
-------- -------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ............... $ 6,861 $ 1,057 $ 1,057 $ 1,174 $ 254 $ 604 $ 756
Working capital ......................... 14,932 5,540 5,540 5,696 3,961 3,686 2,780
Total assets ............................ 41,541 25,086 25,086 17,169 16,786 17,688 19,484
Long-term debt, net of current
portion ............................... 377 985 985 819 927 763 282
Stockholders' equity .................... 27,047 10,909 10,909 7,916 5,732 5,862 5,807
Convertible redeemable preferred
stock ................................. -- -- -- -- 282 270 259
No cash dividends on our common stock were declared during any of the
periods presented above. In October 2000, we decided to discontinue our circuits
segment's operations. Accordingly, all current and prior financial information
related to the circuits segment operations have been presented as discontinued
operations in historical financial data above.
Various factors materially affect the comparability of the information
presented in the above table. These factors relate primarily to the acquisition
of Larus Corporation in July 2004, the acquisition of Pascall in March 2005,
changes in foreign currency conversion rates and new accounting pronouncements
that may affect the consistency in the generally accepted accounting principles
that we use. The year ended December 31, 2004 includes five months of Larus
Corporation activity. The three months ended March 31, 2005 includes 13 days of
Pascall activity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview."
5
SUMMARY UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following tables present a summary of our unaudited condensed
consolidated pro forma financial data for the three months ended March 31, 2005
and the year ended December 31, 2004. You should read this financial data
together with "Unaudited Condensed Consolidated Pro Forma Financial Data,"
"Selected Historical Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and our historical
audited and unaudited consolidated financial statements and the related notes
thereto and the historical audited financial statements of PEHL and subsidiary
appearing elsewhere in this prospectus. The unaudited condensed consolidated
statements of operations data for the periods ended March 31, 2005 and December
31, 2004 give effect to our acquisition of PEHL and Pascall as if the
acquisitions had been consummated on January 1, 2004. We previously acquired,
effective as of July 13, 2004, all of the issued and outstanding common stock of
Larus Corporation. The accompanying unaudited condensed consolidated statements
of operations data for the year ended December 31, 2004 also give effect to the
acquisition of Larus Corporation and Larus Corporation's subsidiary as if that
acquisition had been consummated on January 1, 2004. The summary unaudited
condensed consolidated pro forma financial data are presented for illustrative
purposes only and do not represent what our results of operations actually would
have been if the transactions referred to above had occurred as of the dates
indicated or what our results of operations will be for future periods. The
presented information does not include certain cost savings and operational
synergies that we expect to achieve upon fully consolidating our acquisitions.
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
PRO FORMA PRO FORMA
EMRISE AND EMRISE AND
EMRISE ACQUISITIONS EMRISE ACQUISITIONS
------------ ------------ ------------ ------------
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS DATA: (in thousands, except per share amounts)
Net sales ....................................... $ 7,299 $ 10,540 $ 29,861 $ 46,060
Cost of sales ................................... 4,187 5,835 16,146 28,005
------------ ------------ ------------ ------------
Gross profit .................................... 3,112 4,705 13,715 18,055
Selling, general and administrative expenses .... 2,831 3,904 10,226 14,228
Engineering and product development expenses .... 532 891 1,521 2,100
------------ ------------ ------------ ------------
Income (loss) from operations ................... (251) (90) 1,968 1,727
Total interest and other expense ................ (33) (33) (439) (531)
Income (loss) before income taxes ............... (284) (123) 1,529 1,196
Income tax (benefit) expense .................... 66 66 49 (132)
------------ ------------ ------------ ------------
Net income (loss) ............................... $ (350) $ (189) $ 1,480 $ 1,328
============ ============ ============ ============
Earnings (loss) per share, basic ........... $ (0.01) $ (0.01) $ 0.06 $ 0.04
Earnings (loss) per share, diluted ......... $ (0.01) $ (0.01) $ 0.06 $ 0.03
Shares outstanding, basic ..................... 36,788 37,344 24,063 37,781
Shares outstanding, diluted .................... 36,788 37,344 24,839 38,557
6
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2005 DECEMBER 31, 2004
------------------------------ ------------------------------
PRO FORMA PRO FORMA
EMRISE AND EMRISE AND
EMRISE ACQUISITIONS EMRISE ACQUISITIONS
------------ ------------ ------------ ------------
INCOME (LOSS) PER SHARE: (in thousands, except per share amounts)
Numerator:
Net income (loss) attributable to common
stockholders ................................. $ (350) $ (189) $ 1,480 $ 1,328
Denominator:
Weighted average number of common shares
outstanding during the period, basic ...... 36,788 36,788 24,063 24,063
Common shares issued to acquire Larus ........ -- -- -- 1,214
Additional weighted average common shares
if private placement occurred at
January 1, 2004 (considered necessary
to acquire PEHL) ........................... -- 556 -- 12,504
Adjusted weighted average shares ............. 36,788 37,344 24,063 37,781
Incremental shares from assumed
conversations of warrants, options and
preferred stock ............................ -- -- 776 776
Adjusted weighted average shares ............. 36,788 37,344 24,839 38,557
Income (loss) per share, basic ................. $ (0.01) $ (0.01) $ 0.06 $ 0.04
Income (loss) per share, basic ................. $ (0.01) $ (0.01) $ 0.06 $ 0.03
7
RISK FACTORS
THE FOLLOWING SUMMARIZES MATERIAL RISKS THAT YOU SHOULD CAREFULLY
CONSIDER BEFORE YOU DECIDE TO BUY OUR COMMON STOCK IN THIS OFFERING. ANY OF THE
FOLLOWING RISKS, IF THEY ACTUALLY OCCUR, WOULD LIKELY HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. AS A RESULT, THE TRADING PRICE OF
OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE THE MONEY YOU PAID TO BUY OUR
COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT
OUR BUSINESS IF DEMAND IS REDUCED.
During 2004 and the three months ended March 31, 2005, the sale of
electronic components accounted for 51.1% and 52.2%, respectively, of our total
net sales, and the sale of communications equipment and related services
accounted for 48.9% and 47.8%%, respectively, of our total net sales. In many
cases we have long-term contracts with our electronic components and
communications equipment customers that cover the general terms and conditions
of our relationships with them but that do not include long-term purchase orders
or commitments. Rather, our customers issue purchase orders requesting the
quantities of communications equipment they desire to purchase from us, and if
we are able and willing to fill those orders, then we fill them under the terms
of the contracts. Accordingly, we cannot rely on long-term purchase orders or
commitments to protect us from the negative financial effects of a reduced
demand for our products that could result from a general economic downturn, from
changes in the electronic components and communications equipment industries,
including the entry of new competitors into the market, from the introduction by
others of new or improved technology, from an unanticipated shift in the needs
of our customers, or from other causes.
MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO
COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN
ANTICIPATING AND RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC
COMPONENTS AND COMMUNICATIONS EQUIPMENT INDUSTRIES.
Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
electronic components and communications equipment markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could reduce our
competitiveness, revenues, profit margins or market share.
WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD
ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key
members of our management, including Carmine T. Oliva, our Chairman of the
Board, President and Chief Executive Officer, Graham Jefferies, our Executive
Vice President and Chief Operating Officer, and Randolph Foote, our Senior Vice
President, Chief Financial Officer and Secretary. Mr. Oliva co-founded Emrise
Electronics and has developed personal contacts and other skills that we rely
upon in connection with our financing, acquisition and general business
strategies. Mr. Jefferies is a long-time employee of Emrise who we have relied
8
upon in connection with our United Kingdom acquisitions and who fulfills
significant operational responsibilities in connection with our foreign and
domestic operations. We rely upon Mr. Foote's skills in financial reporting,
accounting and tax matters in addition to his skills in the analysis of
potential acquisitions and general corporate administration. Consequently, the
loss of Mr. Oliva, Mr. Jefferies, Mr. Foote or one or more other key members of
management could adversely affect us. Although we have entered into employment
agreements with each of our executive officers, those agreements are of limited
duration and are subject to early termination by the officers under some
circumstances. We maintain key-man life insurance on Mr. Oliva and Mr.
Jefferies. However, we cannot assure you that we will be able to maintain this
insurance in effect or that the coverage will be sufficient to compensate us for
the loss of the services of Mr. Oliva or Mr. Jefferies.
IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR MAKE STRATEGIC ACQUISITIONS,
OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
Our business strategy includes growth through acquisitions that we
believe will improve our competitive capabilities or provide additional market
penetration or business opportunities in areas that are consistent with our
business plan. Identifying and pursuing strategic acquisitions and integrating
acquired products and businesses requires a significant amount of management
time and skill. Acquisitions may also require us to expend a substantial amount
of cash or other resources, not only as a result of the direct expenses involved
in the acquisition transaction, but also as a result of ongoing research and
development activities that may be required to maintain or enhance the long-term
competitiveness of acquired products, particularly those products marketed to
the rapidly evolving telecommunications industry. If we are unable to make
strategic acquisitions due to our inability to identify appropriate targets, or
to manage the difficulties or costs involved in the acquisitions, our long-term
competitive positioning may suffer.
IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING
US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR ANTICIPATED RESULTS
OF OPERATIONS WILL SUFFER.
As of March 31, 2005, we had $15,021,000 in backlog orders for our
products. Backlog orders represent revenue that we anticipate recognizing in the
future, as evidenced by purchase orders and other purchase commitments received
from customers, but on which work has not yet been initiated or with respect to
which work is currently in progress. Our backlog orders are due in large part to
the long lead-times associated with our electronic components products, which
products generally are custom built to order. We cannot assure you that we will
be successful in fulfilling orders and commitments in a timely manner or that we
will ultimately recognize as revenue the amounts reflected as backlog. Factors
that could affect our ability to fulfill backlog orders include difficulty we
may experience in obtaining components from suppliers, whether due to
obsolescence, production difficulties on the part of suppliers or other causes,
or customer-induced delays and product holds. Our anticipated results of
operations will suffer to the extent we are unable to fulfill backlog orders
within the timeframes we establish, particularly if delays in fulfilling backlog
orders cause our customers to reduce or cancel their orders.
IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY
STANDARDS AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.
We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our communications equipment products must
comply with various regulations defined by the United States Federal
Communications Commission, or FCC, and Underwriters Laboratories as well as
industry standards established by Telcordia Technologies, Inc., formerly
Bellcore, and the American National Standards Institute. Internationally, our
communications equipment products must comply with standards established by the
9
European Committee for Electrotechnical Standardization, the European Committee
for Standardization, the European Telecommunications Standards Institute,
telecommunications authorities in various countries as well as with
recommendations of the International Telecommunications Union. The failure of
our products to comply, or delays in compliance, with the various existing and
evolving standards could negatively affect our ability to sell our products.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR
PRODUCTS FROM OUTSIDE SUPPLIERS.
The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications equipment products have been in short supply and are
frequently on allocation by semiconductor manufacturers. We have, from time to
time, experienced difficulty in obtaining some components. We do not have
guaranteed supply arrangements with any of our suppliers, and there can be no
assurance that our suppliers will continue to meet our requirements. Further,
disruption in transportation services as a result of enhanced security measures
in response to terrorism threats or attacks may cause some increases in costs
and timing for both our receipt of components and shipment of products to our
customers. If our existing suppliers are unable to meet our requirements, we
could be required to alter product designs to use alternative components or, if
alterations are not feasible, we could be required to eliminate products from
our product line.
Shortages of components could not only limit our product line and
production capacity but also could result in higher costs due to the higher
costs of components in short supply or the need to use higher cost substitute
components. Significant increases in the prices of components could adversely
affect our results of operations because our products compete on price and,
therefore, we may not be able to adjust product pricing to reflect the increases
in component costs. Also, an extended interruption in the supply of components
or a reduction in their quality or reliability would adversely affect our
financial condition and results of operations by impairing our ability to timely
deliver quality products to our customers. Delays in deliveries due to shortages
of components or other factors may result in cancellation by our customers of
all or part of their orders. Although customers who purchase from us products,
such as many of our digital switches and all of our custom power supplies, that
are not readily available from other sources would be less likely than other
customers of ours to cancel their orders due to production delays, we cannot
assure you that cancellations would not occur.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE
RELEVANT FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES
DOLLARS FOR INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A
RESULT, EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY AFFECT OUR REPORTED
RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could affect our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. Sales of
our products and services to customers located outside of the United States
accounted for approximately 57.3% and 51.8% of our net sales for 2004 and the
three months ended March 31, 2005. However, because historically the majority of
our currency exposure has related to financial statement translation rather than
10
to particular transactions, we do not intend to enter into, nor have we
historically entered into, forward currency contracts or hedging arrangements in
an effort to mitigate our currency exposure.
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION.
Our future success will be highly dependent on proprietary technology,
particularly in our communications equipment business. However, we do not hold
any patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness
and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology. Our financial condition would be adversely affected if we were to
lose our competitive position due to our inability to adequately protect our
proprietary rights as our technology evolves.
RISKS RELATED TO THIS OFFERING
OUR COMMON STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK AND
IN LITIGATION AGAINST US.
The market prices of securities of technology-based companies currently
are highly volatile. The market price of our common stock has fluctuated
significantly in the past. In fact, during 2004, the high and low closing sale
prices of a share of our common stock were $1.68 and $0.52, respectively.
Between January 1, 2005 and June 7, 2005, the high and low closing sale prices
of a share of our common stock were $1.83 and $1.09, respectively. The market
price of our common stock may continue to fluctuate in response to the following
factors, many of which are beyond our control:
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the electronic components or
communications equipment industries;
o announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or
capital commitments;
o delays in our introduction of new products or technological
innovations or problems in the functioning of these new
products or innovations;
o third parties' infringement of our intellectual property
rights;
o changes in our pricing policies or the pricing policies of our
competitors;
o foreign currency translations gains or losses;
11
o regulatory developments;
o fluctuations in our quarterly or annual operating results;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.
The price at which you purchase shares of common stock may not be
indicative of the price of our stock that will prevail in the trading market.
You may be unable to sell your shares of common stock at or above your purchase
price, which may result in substantial losses to you. Moreover, in the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may in
the future be the target of similar litigation. Securities litigation could
result in substantial costs and divert management's attention and resources.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE
PRICE OF OUR COMMON STOCK TO FLUCTUATE OR DECLINE.
Our quarterly operating results have varied significantly in the past
and will likely continue to do so in the future due to a variety of factors,
many of which are beyond our control. Fluctuations in our operating results may
result from a variety of factors. Our operating results from our communications
segment tend to be less stable and predictable than our operating results from
our electronic components segment.
For example, the general decline in telecommunications market activity
and other changes affecting the telecommunications industry, including
consolidations and restructuring of United States and foreign telephone
companies, cause our sales to decrease or increase. Our sales may increase if we
obtain new customers as a result of the consolidations or restructurings.
However, our sales may decrease, either temporarily or permanently to the extent
our customers are acquired by or combined with companies that are and choose to
remain customers of our competitors.
In addition, the cyclical nature of the telecommunications business due
to the budgetary cycle of Regional Bell Operating Companies, or RBOCs, has had
and will continue to have for the foreseeable future an effect on our quarterly
operating results. RBOCs generally obtain approval for their annual budgets
during the first quarter of each calendar year. If an RBOC's annual budget is
not approved early in the calendar year or is insufficient to cover its desired
purchases for the entire calendar year, we are unable to sell products to the
RBOC during the period of the delay or shortfall.
Quarter to quarter fluctuations may also result from the uneven pace of
technological innovation, the development of products responding to these
technological innovations by us and our competitors, our customers' acceptance
of these products and innovations, the varied degree of price, product and
technological competition and our customers' and competitors' responses to these
changes.
Due to these factors and other factors, including changes in general
economic conditions, we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful in predicting future
performance. If our operating results do not meet the expectations of investors,
our stock price may fluctuate or decline.
12
FUTURE SALES OF SHARES OF OUR COMMON STOCK BY OUR STOCKHOLDERS COULD CAUSE
OUR STOCK PRICE TO DECLINE.
We cannot predict the effect, if any, that market sales of shares of
our common stock or the availability of shares of common stock for sale will
have on the market price prevailing from time to time. As of June 7, 2005, we
had outstanding 37,384,708 shares of common stock. An aggregate of 13,782,092 of
these shares were included for resale under this prospectus. As of June 7, 2005,
we also had outstanding options and warrants to purchase up to 6,150,683 shares
of common stock. Of these, 4,606,685 shares of common stock underlying warrants
were included for resale under this prospectus and 1,458,998 shares underlying
options were covered on existing registration statements. Sales of shares of our
common stock in the public market after the registration statement of which this
prospectus is a part is declared effective, or the perception that those sales
may occur, could cause the trading price of our common stock to decrease or to
be lower than it might be in the absence of those shares or perceptions.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING
ACTIVITY IN OUR COMMON STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 per share that trade on
the OTC Bulletin Board or the Pink Sheets. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction, and, if the broker-dealer is the sole
market maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and monthly account statements showing the
market value of each penny stock held in the customer's account. In addition,
broker-dealers who sell these securities to persons other than established
customers and "accredited investors" must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These requirements may have
the effect of reducing the level of trading activity in a penny stock, such as
our common stock, and investors in our common stock may find it difficult to
sell their shares.
BECAUSE OUR COMMON STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE,
YOU MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR
COMMON STOCK.
Our common stock trades under the symbol "EMRI" on the OTC Bulletin
Board. Because our common stock trades on the OTC Bulletin Board rather than on
a national securities exchange, you may find it difficult to either dispose of,
or to obtain quotations as to the price of, our common stock.
13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including
statements concerning future conditions in the electronic components and
communications equipment industries, and concerning our future business,
financial condition, operating strategies, and operational and legal risks. We
use words like "believe," "expect," "may," "will," "could," "seek," "estimate,"
"continue," "anticipate," "intend," "goal," "future," "plan" or variations of
those terms and other similar expressions, including their use in the negative,
to identify forward-looking statements. You should not place undue reliance on
these forward-looking statements, which speak only as to our expectations as of
the date of this prospectus. These forward-looking statements are subject to a
number of risks and uncertainties, including those identified under "Risk
Factors" and elsewhere in this prospectus. Although we believe that the
expectations reflected in these forward-looking statements are reasonable,
actual conditions in the electronic components and communications equipment
industries, and actual conditions and results in our business, could differ
materially from those expressed in these forward-looking statements. In
addition, none of the events anticipated in the forward-looking statements may
actually occur. Any of these different outcomes could cause the price of our
common stock to decline substantially. Except as required by law, we undertake
no duty to update any forward-looking statement after the date of this
prospectus, either to conform any statement to reflect actual results or to
reflect the occurrence of unanticipated events.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of our
common stock in this offering. Rather, all proceeds will be received by selling
security holders.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock in
the past, and we do not anticipate declaring or paying cash dividends on our
common stock in the foreseeable future. In addition, our credit facility with
Wells Fargo Bank, N.A., described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," restricts the payment of dividends without the bank's consent.
We will pay dividends on our common stock only if and when declared by
our board of directors. Our board of directors' ability to declare a dividend is
subject to restrictions imposed by Delaware law. In determining whether to
declare dividends, the board of directors will consider these restrictions as
well as our financial condition, results of operations, working capital
requirements, future prospects and other factors it considers relevant.
14
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the OTC Bulletin Board under the
symbol "EMRI" since September 15, 2004. Throughout 2003 and until September 14,
2004, our common stock traded on the OTC Bulletin Board under the symbol "MCTL."
The table below shows, for each fiscal quarter indicated, the high and low
closing bid prices for shares of our common stock. This information has been
obtained from the OTC Bulletin Board. The prices shown reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
HIGH LOW
------- -------
YEAR ENDED DECEMBER 31, 2003
First Quarter........................................... $0.20 $0.15
Second Quarter.......................................... 0.37 0.20
Third Quarter........................................... 1.00 0.28
Fourth Quarter.......................................... 1.37 0.85
YEAR ENDED DECEMBER 31, 2004
First Quarter........................................... $1.18 $0.87
Second Quarter.......................................... 1.28 0.76
Third Quarter........................................... 0.82 0.52
Fourth Quarter.......................................... 1.68 0.60
YEAR ENDING DECEMBER 31, 2005
First Quarter........................................... $1.82 $1.46
As of June 7, 2005, we had 37,384,708 shares of common stock
outstanding held of record by approximately 2,900 stockholders. These holders of
record include depositories that hold shares of stock for brokerage firms which,
in turn, hold shares of stock for numerous beneficial owners. On June 7, 2005,
the closing sale price of our common stock on the OTC Bulletin Board was $1.22
per share.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2005.
The information in the table below should be read in conjunction with our
consolidated financial statements and related notes beginning on page F-1 of
this prospectus.
MARCH 31, 2005
-----------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
(UNAUDITED)
Long-term debt, less current portion ............................................ $ 377
------------
Notes payable to stockholders, less current portion ............................. 2,125
------------
Stockholders' equity:
Preferred Stock, $0.01 par value per share, 10,000,000 shares authorized;
no shares issued and outstanding ........................................... --
Common Stock, $0.0033 par value, 50,000,000 shares authorized;
37,384,708 shares issued and outstanding ................................... 123
Additional paid-in capital ................................................... 43,634
Accumulated deficit .......................................................... (16,756)
Accumulated other comprehensive income ....................................... 46
------------
Total stockholders' equity ................................................. 27,047
------------
Total capitalization ..................................................... $ 29,549
============
15
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The following financial data should be read in conjunction with the
consolidated financial statements and the notes to those statements beginning on
page F-1 of this prospectus, and the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The consolidated statements of operations and
comprehensive income data for the three months March 31, 2005 and 2004 and the
consolidated balance sheet data as of March 31, 2005 and 2004 are derived from
unaudited financial statements included in the prospectus that, in the opinion
of our management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial data for these periods.
The consolidated statements of operations and comprehensive income data
for the years ended December 31, 2004, 2003 and 2002 and the consolidated
balance sheet data at December 31, 2004 and 2003 are derived from the
consolidated audited financial statements included in this prospectus. The
consolidated statements of operations and comprehensive income data with respect
to the years ended December 31, 2001 and 2000 and the consolidated balance sheet
data at December 31, 2001 are derived from our audited financial statements not
included in this prospectus. The historical results that appear below are not
necessarily indicative of results to be expected for any future periods.
THREE THREE
MONTHS MONTHS
ENDED ENDED
MAR. 31, MAR. 31, YEAR ENDED DECEMBER 31,
-------- -------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA:
Net sales ............................... $ 7,299 $ 6,192 $ 29,861 $ 25,519 $ 22,664 $ 27,423 $ 28,050
Cost of sales ........................... 4,187 3,445 16,146 14,835 14,147 15,456 15,529
-------- -------- -------- -------- -------- -------- --------
Gross profit ............................ 3,112 2,747 13,715 10,684 8,517 11,967 12,521
Selling, general and administrative
expenses .............................. 2,831 2,217 10,226 7,812 7,731 10,129 9,827
Engineering and product development
expenses .............................. 532 283 1,521 951 1,015 1,076 1,167
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ........... (251) 247 1,968 1,921 (229) 762 1,527
Total other income (expense) ............ (33) (102) (439) (474) (361) (414) 207
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes ........ (284) 145 1,529 1,447 (590) 348 1,734
Income tax (benefit) expense ............ 66 75 49 286 (20) 77 31
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations ............................ (350) 70 1,480 1,161 (570) 271 1,703
Discontinued operations:
Loss from operations of
discontinued segment ................ -- -- -- -- -- 56 (212)
Gain (loss) on disposal of
discontinued segment including
provision for phase out period
of $122 in 2000 ..................... -- -- -- -- -- -- (487)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ....................... (350) 70 1,480 1,161 (570) 327 1,004
Foreign currency translation
adjustment ............................ (441) (2) 379 705 446 (312) (505)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income (loss) ....... $ (791) $ 68 $ 1,859 $ 1,866 $ (124) $ 15 $ 499
======== ======== ======== ======== ======== ======== ========
16
THREE THREE
MONTHS MONTHS
ENDED ENDED
MAR. 31, MAR. 31, YEAR ENDED DECEMBER 31,
-------- -------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA
(CONTINUED):
Basic earnings (loss) per share
from continuing operations ............ $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.01 $ 0.09
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
from continuing operations ............ $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.01 $ 0.07
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share
from discontinued operations .......... $ -- $ -- $ -- $ -- $ -- $ -- $ (0.04)
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
from discontinued operations .......... $ -- $ -- $ -- $ -- $ -- $ -- $ (0.03)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share ......... $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.02 $ 0.05
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share ....... $ (0.01) $ 0.00 $ 0.06 $ 0.05 $ (0.03) $ 0.01 $ 0.04
======== ======== ======== ======== ======== ======== ========
Weighted average shares
outstanding, basic .................... 36,788 23,480 24,063 22,567 21,208 20,594 19,504
Weighted average shares
outstanding, diluted .................. 36,788 24,395 24,839 23,811 21,208 23,782 23,027
AT AT
MAR. 31, MAR. 31, AT DECEMBER 31,
-------- -------- ------------------------------------------------------------
2005 2004 2004 2003 2002 2001 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents ............... $ 6,861 $ 1,057 $ 1,057 $ 1,174 $ 254 $ 604 $ 756
Working capital ......................... 14,932 5,540 5,540 5,696 3,961 3,686 2,780
Total assets ............................ 41,541 25,086 25,086 17,169 16,786 17,688 19,484
Long-term debt, net of current
portion ............................... 377 985 985 819 927 763 282
Stockholders' equity .................... 27,047 10,909 10,909 7,916 5,732 5,862 5,807
Convertible redeemable preferred
stock ................................. -- -- -- -- 282 270 259
No cash dividends on our common stock were declared during any of the
periods presented above. In October 2000, we decided to discontinue our circuits
segment's operations. Accordingly, all current and prior financial information
related to the circuits segment operations have been presented as discontinued
operations in historical financial data above.
Various factors materially affect the comparability of the information
presented in the above table. These factors relate primarily to the acquisition
of Larus Corporation in July 2004, changes in foreign currency conversion rates
and new accounting pronouncements that may affect the consistency in the
generally accepted accounting principles that we use. The year ended December
31, 2004 includes five months of Larus Corporation activity. The three months
ended March 31, 2005 includes 13 days of Pascall activity. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview."
17
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL DATA
The following tables present our unaudited condensed consolidated pro
forma financial data for the three months ended March 31, 2005 and the year
ended December 31, 2004. The unaudited condensed consolidated statements of
operations data for the periods ended March 31, 2005 and December 31, 2004 give
effect to our acquisition of PEHL and Pascall as if the acquisitions had been
consummated on January 1, 2004. A pro forma condensed consolidated balance sheet
is not presented because the balance sheets of PEHL and Pascall and related
purchase accounting adjustments were included in the financial statements
included in our quarterly report on Form 10-Q for the three months ended March
31, 2005.
We previously acquired, effective as of July 13, 2004, all of the
issued and outstanding common stock of Larus Corporation. The accompanying
unaudited condensed consolidated statements of operations data for the year
ended December 31, 2004 also give effect to the acquisition of Larus Corporation
and Larus Corporation's subsidiary as if that acquisition had been consummated
on January 1, 2004.
The acquisitions were accounted for under the purchase method of
accounting in accordance with accounting principles generally accepted in the
United States. Under this method, tangible and identifiable intangible assets
acquired and liabilities assumed are recorded at their estimated fair values.
The excess of the purchase price, plus estimated fees and expenses related to
the acquisitions, over the fair value of net assets acquired are recorded as
goodwill.
This information should be read together with our historical audited
and unaudited consolidated financial statements and the related notes thereto
and the historical audited financial statements of PEHL and subsidiary appearing
elsewhere in this prospectus. It should also be read together with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
The summary unaudited condensed consolidated pro forma financial data
are presented for illustrative purposes only and do not represent what our
results of operations actually would have been if the transactions referred to
above had occurred as of the dates indicated or what our results of operations
will be for future periods. The presented information does not include certain
cost savings and operational synergies that we expect to achieve upon fully
consolidating our acquisitions.
18
EMRISE CORPORATION AND PASCALL ELECTRONIC (HOLDINGS) LIMITED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005
(Dollars and Shares in Thousands, Except Per Share Data)
PRO FORMA
EMRISE PEHL ADJUSTMENT TOTALS
------------ ------------ ------------ ------------
Net sales ....................................... $ 7,299 $ 3,241 -- $ 10,540
Cost of sales ................................... 4,187 1,648 -- 5,835
------------ ------------ ------------ ------------
Gross profit .................................... 3,112 1,593 -- 4,705
Selling, general and administrative expenses .... 2,831 1,070 3 (a) 3,904
Engineering and product development expenses .... 532 359 -- 891
------------ ------------ ------------ ------------
Income (loss) from operations ................... (251) 164 (3) (90)
Total other expense ............................. (33) -- -- (33)
------------ ------------ ------------ ------------
Income (loss) before income taxes ............... (284) 164 (3) (123)
Income tax expense .............................. 66 -- -- 66
------------ ------------ ------------ ------------
Net income (loss) ............................... $ (350) $ 164 $ (3) $ (189)
============ ============ ============ ============
Loss per share, basic (b) ...................... $ (0.01) -- -- $ (0.01)
Loss per share, diluted (b) .................... $ (0.01) -- -- $ (0.01)
Shares outstanding, basic ...................... 36,788 -- 556 37,344
Shares outstanding, diluted .................... 36,788 -- 556 37,344
-------------------
(a) Amortization of intangible assets (technology and customer relationships) totaled $3 for the quarter
based on the following estimated values and service lives: trademarks - $50 and 5 years.
(b) The following table summarizes the combined pro forma basic and diluted loss per share as if Emrise
had acquired PEHL as of January 1, 2005:
19
EMRISE CORPORATION AND PASCALL ELECTRONIC (HOLDINGS) LIMITED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2005
(Dollars and Shares In Thousands, Except Per Share Data)
PRO FORMA
EMRISE PEHL ADJUSTMENT TOTALS
------------ ------------ ------------ ------------
Earnings (loss) per share
Numerator:
Net income (loss) attributable to
common stockholders ........................ $ (350) $ 164 $ (3) $ (189)
Denominator:
Weighted average number of
common shares outstanding during
the period, basic ......................... 36,788 -- -- 36,788
Additional weighted average common
shares if private placement occurred at
January 1, 2005 (considered necessary
to acquire PEHL) ........................... -- -- 556 556
Adjusted weighted average shares ............. 36,788 -- 556 37,344
Incremental shares from assumed
conversions of warrants, options
and preferred stock ........................ -- -- -- --
Adjusted weighted average shares ............. 36,788 -- 556 37,344
Loss per share, basic .......................... $ (0.01) -- -- $ (0.01)
Loss per share, diluted ........................ $ (0.01) -- -- $ (0.01)
20
EMRISE CORPORATION AND PASCALL ELECTRONIC (HOLDINGS) LIMITED AND LARUS CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 2004
(Dollars and Shares In Thousands, Except Per Share Data)
LARUS PRO FORMA
EMRISE CORPORATION PEHL ADJUSTMENT TOTALS
------------ ------------ ------------ ------------ ------------
Net sales ................................ $ 29,861 $ 2,625 $ 13,574 $ -- $ 46,060
Cost of sales ............................ 16,146 1,260 10,659 (60)(a) 28,005
------------ ------------ ------------ ------------ ------------
Gross profit ............................. 13,715 1,365 2,915 60 18,055
Selling, general and administrative
expenses ............................... 10,226 682 3,285 (15)(a) 14,228
40 (b)
10 (c)
Engineering and product development
expenses ............................... 1,521 220 359 -- 2,100
------------ ------------ ------------ ------------ ------------
Income (loss) from operations ............ 1,968 463 (729) 25 1,727
Interest expense ......................... (433) -- (110) (76)(d) (527)
(18)(e)
110 (f)
Other expense, net ....................... (6) 2 -- -- (4)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes ........ 1,529 465 (839) 41 1,196
Income tax (benefit) expense ............. 49 181 (355) (7)(g) (132)
------------ ------------ ------------ ------------ ------------
Net income (loss) ........................ $ 1,480 $ 284 $ (484) $ 48 $ 1,328
============ ============ ============ ============ ============
Earnings per share, basic (h) ........... $ 0.06 -- -- $ (0.02) $ 0.04
Earnings per share, diluted (h) ......... $ 0.06 -- -- $ (0.03) $ 0.03
Shares outstanding, basic (h) ........... 24,063 -- -- 13,718 37,781
Shares outstanding, diluted (h) ......... 24,839 -- -- 13,718 38,557
----------------
(a) Reduction of $60 rent allocated to manufacturing overhead and $15 allocated to selling and administration due to a
recording of a liability in purchase accounting for an unfavorable lease in the Larus Corporation acquisition.
(b) Amortization of Larus Corporation intangible assets (technology and customer relationships) totaled $40 for the year
based on the following estimated values and service lives: technology - $500 and 10 years; customer relationships -
$300 and 10 years.
(c) Amortization of Pascall intangible assets (trademarks) totaled $10 for the year based on the following estimated
values and service lives: trademarks - $50 and 5 years.
(d) Increase in interest cost of $76 for long-term notes. The long-term notes for $3,000 carry an interest rate of
30-day LIBOR plus 1.0% (average interest rate of 5.0% would have resulted in interest expense of $76 for the
additional six month period).
(e) Increase of $18 in working capital interest. Working capital interest is expected to be 5.0% of expected additional
capital needs of approximately $700 on an annual basis.
(f) Decrease in interest cost of $110 related to Pascall debt repaid as a result of acquisition.
(g) Income tax effect of additional income from the pro forma adjustments
(h) The following table summarizes the combined pro forma basic and diluted earnings per share as if Emrise had acquired
Larus Corporation and PEHL as of January 1, 2004:
21
EMRISE CORPORATION AND PASCALL ELECTRONIC (HOLDINGS) LIMITED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
(Dollars and Shares In Thousands, Except Per Share Data)
LARUS PRO FORMA
EMRISE CORPORATION PEHL ADJUSTMENT TOTALS
------------ ------------ ------------ ------------ ------------
Earnings per share
Numerator:
Net income (loss) attributable to
common stockholders ................... $ 1,480 $ 284 $ (484) $ 48 $ 1,328
Denominator:
Weighted average number of common
shares outstanding during the
period, basic ...................... 24,063 -- -- -- 24,063
Common shares issued to acquire
Larus Corporation ................... -- -- -- 1,214 1,214
Additional weighted average common
shares if private placement
occurred at January 1, 2004
(considered necessary to acquire
PEHL) ............................... -- -- -- 12,504 12,504
Adjusted weighted average shares,
basic ............................. 24,063 -- -- 13,718 37,781
Incremental shares from assumed
conversions of warrants, options
and preferred stock ................. 776 -- -- -- 776
Adjusted weighted average shares ...... 24,839 -- -- 13,718 38,557
Earnings per share, basic ............... $ 0.06 -- -- $ (0.02) $ 0.04
Earnings per share, diluted ............. $ 0.06 -- -- $ (0.03) $ 0.03
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES AND THE OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS AND THE
FOLLOWING DISCUSSION CONTAIN FORWARD-LOOKING STATEMENTS REGARDING THE ELECTRONIC
COMPONENTS AND COMMUNICATIONS EQUIPMENT INDUSTRIES AND OUR EXPECTATIONS
REGARDING OUR FUTURE PERFORMANCE, LIQUIDITY AND CAPITAL RESOURCES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS" AND UNDER OTHER CAPTIONS CONTAINED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
Through our three wholly-owned operating subsidiaries, Emrise
Electronics (formerly XET Corporation), CXR Larus (formerly, CXR Telcom
Corporation) and CXR-AJ, and through the divisions and subsidiaries of those
subsidiaries, we design, develop, manufacture, assemble, and market products and
services in the following two material business segments:
o Electronic Components
-- digital and rotary switches
-- electronic power supplies
-- RF components
-- subsystem assemblies
o Communications Equipment
-- network access and transmission products
-- communication timing and synchronization products
-- communications test instruments
Sales to customers in the electronic components segment, primarily to
aerospace customers, defense contractors and industrial customers, were 52.2%
and 63.1% of our total net sales during the three months ended March 31, 2005
and 2004, respectively, and 51.1%, 63.4% and 59.1% of our total net sales during
2004, 2003 and 2002, respectively. Sales of communications equipment and related
services, primarily to private customer premises and public carrier customers,
were 47.8% and 36.9% of our total net sales during the three months ended March
31, 2005 and 2004, respectively, and 48.9%, 36.6% and 40.9% of our total net
sales during 2004, 2003 and 2002, respectively.
Sales of our electronic components segment decreased $98,000 (2.5%) for
the three months ended March 31, 2005 as compared to the three months ended
March 31, 2004. Excluding sales of $722,000 from our new subsidiary, Pascall,
which we acquired March 18, 2005, our electronic components segment sales
declined $820,000 (21.0%) for the three months ended March 31, 2005 as compared
to the three months ended March 31, 2004, primarily due to the higher levels of
shipments of our digital switches to meet the military's demand for the Iraq war
not repeating in the three months ended March 31, 2005, and a $693,000 (29.0%)
23
decrease in net sales of power supplies manufactured by our XCEL Power Systems
Ltd. subsidiary that we believe was primarily because the second traunche of
power supply shipments on the Eurofighter Typhoon program had not yet begun
during the three months ended March 31, 2005.
We achieved a $1,205,000 (52.7%) sales increase in our communications
equipment segment for the three months ended March 31, 2005 as compared to the
three months ended March 31, 2004. Excluding $1,509,000 of sales by the Larus
division of CXR Larus, which are attributable to the business previously
conducted by Larus Corporation that we acquired in July 2004, our communications
equipment segment sales declined $304,000 (13.3%) for the three months ended
March 31, 2005 as compared to the three months ended March 31, 2004. This was
primarily due to a continued low demand for our test equipment by the major
United States telecommunications companies, a delay in continued shipments on a
long-term United States government infrastructure program due to customer
technical issues, and delays in French military program orders that had been
expected in early 2005.
We continue to reduce costs at CXR Larus by reducing its work force and
increasing our sourcing of test equipment components from offshore manufacturers
that produce components for lower prices than we previously paid to our former
suppliers. Outsourcing of manufacturing to Asia was a primary reason we were
able to increase our gross margin from 34% in 2002 to 67% in 2004 in our CXR
Larus test equipment business, which resulted in an annual cost reductions of
approximately $1,372,000 during 2004. During the three months ended March 31,
2005, we began working toward establishing a similar arrangement for the
manufacture of our communication timing and synchronization products, which we
anticipate will result in further improvements in our gross margin. We also
reduced costs elsewhere in our communications equipment segment and lowered the
breakeven point both in our United States and France operations through various
cost-cutting methods, such as using offshore contract manufacturers, reducing
facility rent expense by approximately $327,350 on an annual basis as compared
to the three months ended March 31, 2004, and downsizing our administrative
office in Paris, France.
During 2004, we achieved a 56.1% sales increase in our communications
equipment segment as compared to 2003. Excluding sales of $3,424,000 from the
business previously conducted by Larus Corporation, our communications equipment
sales increased 19.5% in 2004 as compared to 2003. Sales of our electronic
components segment during 2004 decreased 5.6% as compared to 2003. Improved
sales, cost reductions and offshore outsourcing reduced the breakeven point in
our communications equipment segment, which enabled us to produce an improved
operating profit in this segment for 2004 as compared to 2003 despite the
historically low sales volume that reflected a four-year downturn in the
telecommunications market. Of our subsidiaries, CXR Larus was the most affected
by the telecommunications downturn, because CXR Larus had the greatest
dependence on sales to RBOCs.
In 2004, our communications equipment segment sales increased
significantly from 2003 due to improved sales of test instruments and our
acquisition of Larus Corporation. We worked to improve the growth and
performance of our communications equipment business, particularly customer
premises network access and transmission products. These efforts included our
acquisition of Larus Corporation, which we merged with and into CXR Telcom
Corporation in December 2004. In connection with the merger, we changed the name
of CXR Telcom Corporation to CXR Larus Corporation.
During 2003, CXR-AJ reduced costs by approximately $393,000 annually
through compensation reductions due to terminations of employees and a $155,000
reduction in employee benefits, both mainly due to the retirement of the
Managing Director of CXR-AJ and the elimination of $45,000 in travel expenses
that previously were incurred annually by the retired Managing Director of
CXR-AJ and others in connection with marketing activities that are now being
handled by other employees.
24
In July 2004, we acquired Larus Corporation. Larus Corporation was a
San Jose, California-based manufacturer and seller of telecommunications
products that had one wholly-owned subsidiary, Vista Labs, Incorporated, or
Vista, which provided engineering services to Larus Corporation. The basic
purchase terms of the acquisition are described below. We consolidated the
results of operations of Larus Corporation beginning from the date of
acquisition, July 13, 2004. We are beginning to now benefit from increased sales
of our French subsidiary's products in the United States market as a result of
sales and marketing support for the French products by CXR Larus' United
States-based sales and marketing staff, which has resulted in the securing of
relationships with two new major United States-based distributors during the
three months ended March 31, 2005. We consolidated our CXR Larus subsidiary's
operations into Larus Corporation's facility, which resulted in annual savings
in rent and facilities expense of approximately $250,000 beginning in the third
quarter of 2004. Subsequent to March 31, 2005, we implemented further
administrative, engineering and sales cost savings through staffing reductions
of approximately $700,000 on an annual basis as compared to our costs in the
three months ended March 31, 2005. These staffing reductions related to
eliminating redundancies in our electronic components segment personnel
(including nine sales, marketing and administrative positions and one
engineering director) that occurred as a result of our acquisition of Larus
Corporation.
We paid $6,539,500 to acquire the outstanding common stock of Larus
Corporation. As a result, we acquired assets that included intellectual
property, cash, accounts receivable and inventories owned by each of Larus
Corporation and Vista. The purchase price for the acquisition consisted of
$1,000,000 in cash, the issuance of 1,213,592 shares of our common stock with a
fair value of $1,000,000, $887,500 in the form of two short-term, zero interest
promissory notes that were repaid in 2004, $3,000,000 in the form of two
subordinated secured promissory notes, warrants to purchase up to an aggregate
of 150,000 shares of our common stock at $1.30 per share and approximately
$580,000 of acquisition costs. The number of shares of our common stock issued
as part of the purchase price was calculated based on the $0.824 per share
average closing price of our common stock for the five trading days preceding
the transaction. The warrants to purchase 150,000 shares of common stock were
valued at $72,526 using a Black-Scholes formula that included a volatility of
107.19%, an interest rate of 3.25%, a life of three years and no assumed
dividend.
In addition, we assumed $245,000 in accounts payable and accrued
expenses and entered into an above-market real property lease with the sellers.
This lease represents an obligation that exceeds the fair market value by
approximately $756,000 and is part of the acquisition accounting. The cash
portion of the acquisition purchase price was funded with proceeds from our
credit facility with Wells Fargo Bank, N.A. and cash on-hand.
In determining the purchase price for Larus Corporation, we took into
account the historical and expected earnings and cash flow of Larus Corporation,
as well as the value of companies of a size and in an industry similar to Larus
Corporation, comparable transactions and the market for such companies
generally. The purchase price represented a significant premium over the
$1,800,000 recorded net worth of Larus Corporation's assets. In determining this
premium, we considered our potential ability to refine various Larus Corporation
products and to use our marketing resources and status as a qualified supplier
to qualify and market those products for sale to large telecommunications
companies. We believe that large telecommunications companies desired to have an
additional choice of suppliers for those products and would be willing to
purchase Larus Corporation's products following some refinements. We also
believe that if Larus Corporation had remained independent, it was unlikely that
it would have been able to qualify to sell its products to the large
telecommunications companies due to its small size and lack of history selling
to such companies. Therefore, Larus Corporation had a range of value separate
from the net worth it had recorded on its books.
25
On March 18, 2005, XCEL Corporation Ltd. ("XCEL") purchased all of the
outstanding capital stock of PEHL, the parent holding company of Pascall, using
funds loaned to XCEL by Emrise. The purchase price for the acquisition totaled
$9,669,000, subject to adjustments as described below, and included a $5,972,000
cash payment to PEHL's former parent, a $3,082,000 loan from XCEL to PEHL and
Pascall, and approximately $615,000 in acquisition costs.
The initial portion of the purchase price was 3,100,000 British pounds
sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on
March 18, 2005). The initial portion of the purchase price was paid in cash and
is subject to upward or downward adjustment on a pound for pound basis to the
extent that the value of the net assets of Pascall as of the closing date was
greater or less than 2,520,000 British pounds sterling. On May 6, 2005, we
submitted to Intelek Properties Limited (which is a subsidiary of Intelek plc, a
London Stock Exchange public limited company, and is the former parent of PEHL),
our calculation of the value of the net assets of Pascall as of the closing
date, which we believe slightly exceeded 2,520,000 British pounds sterling.
Intelek Properties Limited has indicated that its own calculation exceeds our
calculation by approximately 100,000 British pounds sterling (approximately
U.S. $193,000 based on the exchange rate in effect on March 18, 2005). We are
working to resolve this discrepancy. Any payment relating to the increase or
reduction of the purchase price based on the value of the net assets of Pascall
will be due from XCEL or Intelek Properties Limited, as the case may be, within
14 days of the acceptance of the calculation. A default rate of interest equal
to 3% above the base lending rate of Barclays Bank plc London will apply if the
adjustment payment is not timely made. However, we anticipate that any
adjustment payment based on this calculation will not be material to our
financial results and that it will be timely made. The purchase price is subject
to downward adjustments for any payments that may be made to XCEL under
indemnity, tax or warranty provisions of the purchase agreement.
XCEL loaned to Pascall and PEHL at the closing 1,600,000 British pounds
sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on
March 18, 2005) in accordance with the terms of a loan agreement entered into by
those entities at the closing. The loaned funds were used to immediately repay
outstanding intercompany debt owed by Pascall and PEHL to Intelek Properties
Limited.
We and Intelek plc have agreed to guarantee payment when due of all
amounts payable by XCEL and Intelek Properties Limited, respectively, under the
PEHL purchase agreement. Emrise and XCEL have agreed to seek to replace the
guaranty that Intelek Properties Limited has given to Pascall's landlord with a
guaranty from us, and XCEL has agreed to indemnify Intelek Properties Limited
and its affiliates for damages they suffer as a result of any failure to obtain
the release of the guarantee of the 17-year lease that commenced in May 1999.
The leased property is a 30,000 square-foot administration, engineering and
manufacturing facility located off the south coast of England.
Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, XCEL, Intelek plc and
we entered into a Supplemental Agreement dated March 18, 2005. The Supplemental
Agreement provides, among other things, that an interest-free bridge loan of
200,000 British pounds sterling (approximately U.S. $385,400 based on the
exchange rate in effect on March 17, 2005) that was made by Intelek Properties
Limited to Pascall on March 17, 2005 would be repaid by Pascall by March 31,
2005. XCEL agreed to ensure that Pascall has sufficient funds to repay the
bridge loan. The bridge loan was repaid in full by Pascall to the seller on the
March 31, 2005 due date.
We have consolidated the results of operations of Pascall beginning
from the date of acquisition, March 18, 2005. Based on current sales
projections, we anticipate that the Pascall acquisition will be accretive to our
earnings per share despite the associated expenses relating both to the payment
26
of the purchase price and the operation and integration of the Pascall business.
We expect to increase Pascall's sales to its existing customers in the United
States and to sell Pascall's products to Emrise's existing customers as a result
of our local presence and enhanced support from our United States-based sales
and marketing staff. We plan to consolidate a number of administrative functions
of our two United Kingdom-based subsidiary's operations into the Pascall
facility, which we anticipate will result in significant administrative and
facilities cost savings.
The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition, including $615,000 in
acquisition costs:
Dollars
in Thousands
------------
Current assets ............................. $ 6,196
Property, plant and equipment .............. 1,367
Intangibles, including goodwill ............ 4,721
-----------
Total assets acquired ...................... 12,284
Current liabilities ........................ 2,535
Other liabilities .......................... 80
-----------
Total liabilities assumed .................. 2,615
-----------
Net assets acquired ........................ $ 9,669
===========
The purchase price represented a significant premium over the recorded
net worth of Pascall's assets. In determining to pay this premium, we considered
various factors, including the opportunities that Pascall presented for us to
add RF components and RF subsystem assemblies to our product offerings, the
marketing resources of Pascall in the United States power supplies market, and
expected synergies between Pascall's business and our existing power supplies
business.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of Emrise, Larus Corporation and Pascall, as
though the acquisition occurred as of January 1, 2004. The pro forma amounts
give effect to appropriate adjustments for interest expense and income taxes.
The pro forma amounts presented are not necessarily indicative of future
operating results (in thousands, except per share amounts).
Three Months Ended
March 31,
----------------------------
2005 2004
---------- ----------
Revenues $ 10,540 $ 12,215
Net income $ (189) $ 644
Earnings per share of common stock
Basic $ (0.01) $ 0.02
=========== ==========
Diluted $ (0.01) $ 0.02
=========== ==========
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
27
the financial statements and the reported amount of net sales and expenses for
each period. The following represents a summary of our critical accounting
policies, defined as those policies that we believe are the most important to
the portrayal of our financial condition and results of operations and that
require management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain.
REVENUE RECOGNITION
We derive revenues from sales of electronic components and
communications equipment products and services. Our sales are based upon written
agreements or purchase orders that identify the type and quantity of the item
being purchased and the purchase price. We recognize revenues when delivery of
products has occurred or services have been rendered, no significant obligations
remain on our part, and collectibility is reasonably assured based on our credit
and collections practices and policies.
We recognize revenues from domestic sales of our electronic components
and communications equipment at the point of shipment of those products. Product
returns are infrequent and require prior authorization because our sales are
final and we quality test our products prior to shipment to ensure they meet the
specifications of the binding purchase orders under which they are shipped.
Normally, when a customer requests and receives authorization to return a
product, the request is accompanied by a purchase order for a replacement
product.
Revenue recognition for products and services provided by our United
Kingdom subsidiaries depends upon the type of contract involved.
Engineering/design services contracts generally entail design and production of
a prototype over a term of up to several years, with all revenue deferred until
all services under the contracts have been completed. Production contracts
provide for a specific quantity of products to be produced over a specific
period of time. Customers issue binding purchase orders for each suborder to be
produced. At the time each suborder is shipped to the customer, we recognize
revenue relating to the products included in that suborder. Returns are
infrequent and permitted only with prior authorization because these products
are custom made to order based on binding purchase orders and are quality tested
prior to shipment. Generally, these products carry a one-year limited parts and
labor warranty. We do not offer customer discounts, rebates or price protection
on these products.
We recognize revenues for products sold by our French subsidiary at the
point of shipment. Customer discounts are included in the product price list
provided to the customer. Returns are infrequent and permitted only with prior
authorization because these products are shipped based on binding purchase
orders and are quality tested prior to shipment. Generally, these products carry
a two-year limited parts and labor warranty.
Generally, our electronic components, network access and transmission
products and communication timing and synchronization products carry a one-year
limited parts and labor warranty and our communications test instruments and
European network access and transmission products carry a two-year limited parts
and labor warranty. Products returned under warranty are tested and repaired or
replaced at our option. Historically, warranty repairs have not been material.
Product returns during 2004 were less than $1,000. We do not offer customer
discounts, rebates or price protection on these products.
Revenues from services such as repairs and modifications are recognized
when the service has been completed and invoiced. For repairs that involve
shipment of a repaired product, we recognize repair revenues when the product is
shipped back to the customer. Service revenues represented 4.8% of net sales
during the three months ended March 31, 2005 and 5.7%, 3.1% and 2.5% of net
sales during 2004, 2003 and 2002, respectively.
28
INVENTORY VALUATION
Our finished goods electronic components inventories generally are
built to order. Our communications equipment inventories generally are built to
forecast, which requires us to produce a larger amount of finished goods in our
communications equipment business so that our customers can promptly be served.
Our products consist of numerous electronic and other parts, which necessitates
that we exercise detailed inventory management. We value our inventory at the
lower of the actual cost to purchase or manufacture the inventory (first-in,
first-out) or the current estimated market value of the inventory (net
realizable value). We perform physical inventories at least once a year. We
regularly review inventory quantities on hand and record a provision for excess
and obsolete inventory based primarily on our estimated forecast of product
demand and production requirements for the next twelve months. Additionally, to
determine inventory write-down provisions, we review product line inventory
levels and individual items as necessary and periodically review assumptions
about forecasted demand and market conditions. Any parts or finished goods that
we determine are obsolete, either in connection with the physical count or at
other times of observation, are reserved for and subsequently discarded and
written-off. Demand for our products can fluctuate significantly. A significant
increase in the demand for our products could result in a short-term increase in
the cost of inventory purchases, while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand.
In addition, the communications equipment industry is characterized by
rapid technological change, frequent new product development, and rapid product
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Also, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or overstated the
provision required for excess and obsolete inventory. In the future, if our
inventory is determined to be overvalued, we would be required to recognize such
costs in our cost of goods sold at the time of such determination. Likewise, if
our inventory is determined to be undervalued, we may have over-reported our
costs of goods sold in previous periods and would be required to recognize
additional operating income at the time of sale. Therefore, although we make
every effort to ensure the accuracy of our forecasts of future product demand,
any significant unanticipated changes in demand or technological developments
could have a significant impact on the value of our inventory and our reported
operating results.
FOREIGN CURRENCY TRANSLATION
We have foreign subsidiaries that together accounted for 55.0% of our
net revenues, 54.3% of our assets and 48.2% of our total liabilities as of and
for the three months ended March 31, 2005 and 57.3% of our net revenues, 46.0%
of our assets and 39.0% of our total liabilities as of and for the year ended
December 31, 2004. In preparing our consolidated financial statements, we are
required to translate the financial statements of our foreign subsidiaries from
the currencies in which they keep their accounting records into United States
dollars. This process results in exchange gains and losses which, under relevant
accounting guidance, are included either within our statement of operations or
as a separate part of our net equity under the caption "accumulated other
comprehensive income (loss)."
Under relevant accounting guidance, the treatment of these translation
gains or losses depends upon our management's determination of the functional
currency of each subsidiary. This determination involves consideration of
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures, would be
considered the functional currency. However, management must also consider any
dependency of the subsidiary upon the parent and the nature of the subsidiary's
operations.
29
If management deems any subsidiary's functional currency to be its
local currency, then any gain or loss associated with the translation of that
subsidiary's financial statements is included as a separate component of
stockholders' equity in accumulated other comprehensive income (loss). However,
if management deems the functional currency to be United States dollars, then
any gain or loss associated with the translation of these financial statements
would be included within our statement of operations.
If we dispose of any of our subsidiaries, any cumulative translation
gains or losses would be realized into our statement of operations. If we
determine that there has been a change in the functional currency of a
subsidiary to United States dollars, then any translation gains or losses
arising after the date of the change would be included within our statement of
operations.
Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries as each
subsidiary's local currency. Accordingly, we had cumulative translation gains of
$46,000 and $487,000 that were included as part of accumulated other
comprehensive income within our balance sheets at December 31, 2004 and March
31, 2005, respectively. During the three months ended March 31, 2005 and the
year ended December 31, 2004, we included translation adjustments of losses of
approximately $441,000 and $379,000, respectively, under accumulated other
comprehensive income (loss).
If we had determined that the functional currency of our subsidiaries
was United States dollars, these gains or losses would have decreased or
increased our gain or loss for 2004 and the three months ended March 31, 2005.
The magnitude of these gains or losses depends upon movements in the exchange
rates of the foreign currencies in which we transact business as compared to the
value of the United States dollar. These currencies include the euro, the
British pound sterling and the Japanese yen. Any future translation gains or
losses could be significantly higher or lower than those we recorded for these
periods.
INTANGIBLES, INCLUDING GOODWILL
We periodically evaluate our intangibles, including goodwill, for
potential impairment. Our judgments regarding the existence of impairment are
based on legal factors, market conditions and operational performance of our
acquired businesses.
In assessing potential impairment of goodwill, we consider these
factors as well as forecasted financial performance of the acquired businesses.
If forecasts are not met, we may have to record additional impairment charges
not previously recognized. In assessing the recoverability of our goodwill and
other intangibles, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of those respective assets.
If these estimates or their related assumptions change in the future, we may be
required to record impairment charges for these assets that were not previously
recorded. If that were the case, we would have to record an expense in order to
reduce the carrying value of our goodwill. On January 1, 2002, we adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets," and were required to analyze our goodwill for
impairment issues by June 30, 2002, and then at least annually after that date
or more frequently 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. At March 31, 2005 and December 31, 2004, the reported goodwill totaled
$10,552,000 and $5,881,000, respectively (net of accumulated amortization of
$1,084,000). During the quarter ended March 31, 2005 and the year ended December
31, 2004, we did not record any impairment losses related to goodwill and other
intangible assets.
In conjunction with our July 2004 acquisition of Larus Corporation, we
have 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, we have estimated that the Larus trade
30
name 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 trade name 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 during the quarter ending June 30, 2005 and
could result in changes to the value of these identified intangible assets and
corresponding changes to the value of goodwill. However, we do not believe these
changes will be material to our financial position or results of operations.
In conjunction with our March 2005 acquisition of Pascall, we have
selected a valuation firm to determine what portion of the purchase price should
be allocated to identifiable intangible assets. We have considered whether the
acquisition included various types of identifiable intangible assets, including
trade names, trademarks, covenants not to compete, patents, customers,
workforce, technology and software. We have estimated that the Pascall trade
name and trademark are valued at $50,000. We have estimated that the covenants
not to compete that were obtained from Pascall's former affiliates are valued at
$100,000 in light of public statements made by those affiliates indicating that
they were strategically exiting the power supply business, which we believe
results in a low probability that they would return to the power supply business
absent the covenants not to compete. We believe that no other identifiable
intangible assets of significant value were acquired. No patents were acquired.
We have not ascribed any value to Pascall's customer base because our United
Kingdom subsidiary, XCEL Power Systems, Ltd., already sells to Pascall's key
customers. Pascall's workforce does not hold any special skills that are not
readily available from other sources. We did not identify any valuable completed
technology that was acquired, because Pascall utilizes non-proprietary
technology to produce custom power supplies pursuant to customer specifications.
Pascall does not develop or design software and does not own software of any
material value.
Accordingly, we have estimated that the goodwill associated with the
Pascall acquisition totaled $4,571,000. The Pascall trade name and trademark
were determined to have indefinite lives and therefore are not being amortized
but rather are being periodically tested for impairment. The covenants not to
compete will be amortized over their three-year duration. The valuation of the
identified intangible assets is expected to be completed during the quarter
ending September 30, 2005 and could result in changes to the value of these
identified intangible assets and corresponding changes to the value of goodwill.
However, we do not believe these changes will be material to our financial
position or results of operations.
RESULTS OF OPERATIONS
The tables presented below, which compare our results of operations
from one period to another, present the results for each period, the change in
those results from one period to another in both dollars and percentage change,
and the results for each period as a percentage of net sales. The columns
present the following:
o The first two data columns in each table show the absolute
results for each period presented.
o The columns entitled "Dollar Variance" and "Percentage
Variance" show the change in results, both in dollars and
percentages. These two columns show favorable changes as a
positive and unfavorable changes as negative. For example,
when our net sales increase from one period to the next, that
change is shown as a positive number in both columns.
Conversely, when expenses increase from one period to the
next, that change is shown as a negative in both columns.
o The last two columns in each table show the results for each
period as a percentage of net sales.
31
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
RESULTS AS A PERCENTAGE
DOLLAR PERCENTAGE OF NET SALES FOR THE
THREE MONTHS ENDED VARIANCE VARIANCE THREE MONTHS ENDED
MARCH 31, ---------- ---------- MARCH 31,
---------------------------- FAVORABLE FAVORABLE --------------------
2005 2004 (UNFAVORABLE) (UNFAVORABLE) 2005 2004
----------- ----------- ------------- ------------- -------- -------
(DOLLARS IN THOUSANDS)
Net sales
Electronic components .............. $ 3,807 $ 3,905 $ (98) (2.5)% 52.2% 63.1%
Communications equipment ........... $ 3,492 $ 2,287 $ 1,205 52.7% 47.8% 36.9%
-----------------------------------------------------------------------------------
Total net sales .................... $ 7,299 $ 6,192 $ 1,107 17.9% 100.0% 100.0%
-----------------------------------------------------------------------------------
Cost of sales
Electronic components .............. $ 2,368 $ 2,264 $ (104) (4.6)% 62.2% 58.0%
Communications equipment ........... $ 1,819 $ 1,181 $ (638) 54.0% 52.1% 51.6%
-----------------------------------------------------------------------------------
Total cost of sales ................ $ 4,187 $ 3,445 $ (742) 21.5% 57.4% 55.6%
-----------------------------------------------------------------------------------
Gross profit
Electronic components .............. $ 1,439 $ 1,641 $ (202) (12.3)% 37.8% 42.0%
Communications equipment ........... $ 1,673 $ 1,106 $ 567 51.3% 47.9% 48.4%
-----------------------------------------------------------------------------------
Total gross profit ................. $ 3,112 $ 2,747 $ 365 13.3% 42.6% 44.4%
-----------------------------------------------------------------------------------
Selling, general and administrative .... $ 2,831 $ 2,217 $ 614 27.7% 38.8% 35.8%
expenses
Engineering and product development
expenses ............................. $ 532 $ 283 $ 249 88.0% 7.3% 4.6%
Operating income (loss) ................ $ (251) $ 247 $ (498) (201.6)% (3.4)% 4.0%
Interest expense, net .................. $ 30 $ 96 $ (66) (68.8)% (0.4)% (1.6)%
Other (income) expense ................. $ 3 $ 6 $ (3) (50.0)% (0.4)% (0.1)%
Income (loss) before income tax
expense .............................. $ (284) $ 145 $ (429) (295.9)% (3.9)% 2.3
Income tax expense ..................... $ 66 $ 75 $ (9) (12.0)% 0.9% 1.2
-----------------------------------------------------------------------------------
Net income (loss) ...................... $ (350) $ 70 $ (420) (600.0)% (4.8)% 1.1%
===================================================================================
NET SALES. The $1,107,000 (17.9%) increase in total net sales for the
three months ended March 31, 2005 as compared to the three months ended March
31, 2004 resulted from the combination of a $98,000 (2.5%) decrease in net sales
of our electronic components and a $1,205,000 (52.7%) increase in net sales of
our communications equipment products and services.
ELECTRONIC COMPONENTS. The decrease in net sales of our electronic
components segment resulted from a $177,000 (13.4%) decrease in net sales of
switches by Emrise Electronics' Digitran division that we believe was primarily
due to the higher levels of shipments of our digital switches to meet the
military's demand for the Iraq war not repeating in the three months ended March
31, 2005, and a $693,000 (29.0%) decrease in net sales of power supplies
manufactured by our XCEL Power Systems Ltd. subsidiary that we believe was
primarily because the second traunche of power supply shipments on the
Eurofighter Typhoon program had not yet begun during the three months ended
March 31, 2005.
These decreases were partially offset by the contribution of $722,000
in net sales of power supplies and RF components and subsystem assemblies by
Pascall, which subsidiary we acquired on March 18, 2005. The three months ended
March 31, 2005 is the first period in which we reported sales of RF components
and RF subsystem assemblies. Excluding these sales by Pascall, our electronic
components segment sales declined 21.0% in the three months ended March 31, 2005
as compared to the three months ended March 31, 2004. We currently anticipate
that our sales of electronic components will increase in subsequent quarters of
2005, with the greatest anticipated period of growth occurring in late 2005 and
throughout 2006 based upon informal indications we have received from various
customers.
32
COMMUNICATIONS EQUIPMENT. The $1,205,000 (52.7%) increase in net sales
of our communications equipment segment resulted primarily from the inclusion of
$1,509,000 of net sales of communication timing and synchronization products
attributable to our acquisition of Larus Corporation that occurred on July 13,
2004. This increase was partially offset by a $314,000 (18.4%) decline in net
sales of network access equipment and transmission products manufactured by
CXR-AJ, which we believe primarily was due to the delay in placement of key
military communication contracts in Europe. Communications test equipment net
sales remained flat at $583,000 for the three months ended March 31, 2005 as
compared to $573,000 for the three months ended March 31, 2004, primarily due to
a continued low demand by the major United States telecommunications companies
and a delay in continued shipments on a long -term government infrastructure
program due to customer technical issues. We anticipate that sales of our
communications test equipment will remain flat throughout the remainder of 2005.
However, we anticipate that sales of our network access products both in France
and more importantly in the United States will grow as new sales channels and
our stronger marketing presence becomes effective and we work to utilize our two
new United States-based distributors we established relationships with during
the three months ended March 31, 2005. We also anticipate that sales of our
communication timing and synchronization products will show further growth as we
build our business with telecommunications companies in 2005 and beyond.
GROSS PROFIT. The 1.8 percentage point decrease in gross profit as a
percentage of total net sales and the $365,000 (13.3%) increase in total gross
profit for the three months ended March 31, 2005 as compared to the three months
ended March 31, 2004 resulted from a gross profit decrease in our electronic
components segment that was offset by a gross profit increase in our
communications equipment segment.
ELECTRONIC COMPONENTS. The $202,000 (12.3%) decrease in gross profit
for our electronic components segment was primarily due to lower sales volumes
in both our digital switch and power supply businesses. The 4.2 percentage point
decrease in gross profit as a percentage of total net sales of electronic
components primarily resulted from the increased cost of sales in the
manufacture of our switch products due to higher material costs, which decreased
Digitran's gross profit for digital switches by $250,000 (28.0%). This decrease
was partially offset by a $73,000 (11.0%) increase in gross profit on power
supplies and RF components and subsystems primarily due to the contribution from
Pascall of $181,000 in the last 13 days of the three months ended March 31,
2005, which masked a $112,000 (18.0%) decrease in gross profit contributed by
XCEL Corporation Ltd. primarily due to lower sales volumes of power supplies as
discussed above. We expect overall sales of power supplies in 2005 to exceed
overall sales of power supplies in 2004 and to grow further in 2006 based upon
informal indications we have received from various customers.
COMMUNICATIONS EQUIPMENT. The $567,000 (51.3%) increase in gross profit
for our communications equipment segment was primarily due to the inclusion of
$675,000 in gross profit during the quarter ended March 31, 2005 attributable to
net sales of network access and communication timing and synchronization
products that we did not offer prior to our acquisition of Larus Corporation in
July 2004. Excluding the addition of these sales, gross profit for
communications equipment decreased approximately $108,000 (9.8%) primarily due
to a $130,000 (17.4%) decrease in gross profit at CXR-AJ due to lower sales
volume of its network access products as compared to the prior year period.
The 0.5 percentage point decrease in this segment's gross profit as a
percentage of total net sales was primarily the result of the larger
contribution of the lower margin CXR Larus communication timing and
synchronization products and CXR-AJ network access products as compared to the
higher margin test equipment.
33
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $614,000 (27.7%)
increase in selling, general and administrative expenses for the three months
ended March 31, 2005 as compared to the three months ended March 31, 2004 and
the 3.0 percentage point increase in selling, general and administrative
expenses as a percentage of total net sales were primarily due to:
o a $27,000 (20.0%) increase in sales commissions primarily due
to the inclusion of our Larus division's sales commission
expenses;
o a $361,000 (53.0%) increase in other selling and marketing
expenses primarily due to the inclusion of our Larus
division's selling expenses, attendance at tradeshows and
increased advertising and marketing of our electronic
components;
o a $225,000 (16.0%) increase in administrative expenses
primarily due to the inclusion of $166,000 and $30,000 of
administrative costs for our Larus division and for Pascall,
respectively; and
o $72,000 in administrative expenses relating to our review of
internal controls pursuant to Section 404 of the Sarbanes
Oxley Act of 2002.
We anticipate that selling, general and administrative expenses for the
remainder of 2005 will remain at levels higher than those we experienced last
year due to the Larus Corporation and Pascall acquisitions, increased
investments in new products, sales and marketing expenses for our new low
profile rotary and digital switches, increased activity in searching for and
analyzing potential acquisitions, expansion of our investor relations program
and increased corporate governance activities in response to the Sarbanes-Oxley
Act of 2002 and recently adopted rules and regulations of the Securities and
Exchange Commission. However we continue to seek efficiency and cost savings at
all operations and anticipate we will further reduce our selling, general and
administrative expenses by an estimated $625,000 on an annual basis over the
current levels as a result of sales, marketing and administrative staffing
reductions implemented in our communications equipment segment subsequent to
March 31, 2005.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. The $249,000 (88.0%) increase in these expenses resulted primarily
from the inclusion of $190,000 of expenses attributable to our Larus division
and a $37,000 increase in research and engineering expenses related to our new
low profile rotary switches. We expect this higher level of expense to continue
throughout 2005 as we continue to develop our new family of rotary switches and
pursue long-term opportunities in the communication timing and synchronization
market. Subsequent to March 31, 2005, we eliminated one of our two engineering
directors at CXR Larus, which we anticipate will offset approximately $75,000 of
our increased engineering expenses on an annual basis.
INTEREST EXPENSE, NET. Interest expense increased marginally by $6,000
(6.3%) to $102,000 for the three months ended March 31, 2005 as compared to
$96,000 for the three months ended March 31, 2004 due to the issuance of
$3,000,000 of notes for the acquisition of Larus Corporation. This increase was
partially offset by reduced interest expenses related to our new Wells Fargo
Bank loan and reduced loan balances of our United Kingdom operations. In
addition, we recorded $72,000 of interest income in the three months ended March
31, 2005, which was earned on the proceeds of the January 2005 private
placement. We did not have interest income during the three months ended March
31, 2004.
INCOME TAX EXPENSE. Income tax expense for the three months ended March
31, 2005 was $66,000, compared to $75,000 for the three months ended March 31,
2004. Although we are reporting a consolidated loss before income taxes of
34
$284,000 for the quarter, our foreign subsidiaries achieved combined income
before income taxes of $190,000, which at the rates effective in the respective
countries resulted in the reported current tax expense of $66,000.
NET INCOME (LOSS). The net income (loss) for the three months ended
March 31, 2005 decreased by $420,000 to a loss of $350,000 as compared to net
income of $70,000 for the three months ended March 31, 2004. The decrease was
primarily due to the impact of planned increased sales and marketing expenses to
launch new products and improve the marketing and sales efforts in promoting our
existing products and the addition of similar expenses of Larus Corporation
designed to increase future revenue and net income together with the substantial
increase in research and development associated primarily with our communication
timing products. Also contributing to the loss were delays in significant
telecommunications orders in France for network access products and in the
United States for test equipment, that had been expected during the three months
ended March 31, 2005. We continue to closely monitor costs throughout our
operations and have reduced costs through staffing reductions in our
communications equipment operations in the United States as detailed above.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
RESULTS AS A PERCENTAGE
DOLLAR PERCENTAGE OF NET SALES FOR THE
YEAR ENDED VARIANCE VARIANCE YEAR ENDED
DECEMBER 31, ---------- ---------- DECEMBER 31,
-------------------------- FAVORABLE FAVORABLE --------------------------
2004 2003 (UNFAVORABLE) (UNFAVORABLE) 2004 2003
----------- ----------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
Net sales
Electronic components .............. $ 15,262 $ 16,168 $ (906) (5.6)% 51.1% 63.4%
Communications equipment ........... $ 14,599 $ 9,351 $ 5,248 56.1% 48.9% 36.6%
----------- ----------- ----------- ----------- ----------- -----------
Total net sales .................... $ 29,861 $ 25,519 $ 4,342 17.0% 100.0% 100.0%
----------- ----------- ----------- ----------- ----------- -----------
Cost of sales
Electronic components .............. $ 9,024 $ 9,530 $ (506) (5.3)% 59.1% 58.9%
Communications equipment ........... $ 7,122 $ 5,305 $ 1,817 34.3% 48.8% 56.7%
----------- ----------- ----------- ----------- ----------- -----------
Total cost of sales ................ $ 16,146 $ 14,835 $ 1,311 8.8% 54.1% 58.1%
----------- ----------- ----------- ----------- ----------- -----------
Gross profit
Electronic components .............. $ 6,238 $ 6,638 $ (400) (6.0)% 40.9% 41.1%
Communications equipment ........... $ 7,477 $ 4,046 $ 3,431 84.8% 51.2% 43.3%
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit ................. $ 13,715 $ 10,684 $ 3,031 28.4% 45.9% 41.9%
----------- ----------- ----------- ----------- ----------- -----------
Selling, general and administrative
expenses ............................. $ 10,226 $ 7,812 $ (2,414) (30.9)% 34.1% 30.6%
Engineering and product development
expenses ............................. $ 1,521 $ 951 $ (570) (59.9)% 5.1% 3.7%
Operating income ....................... $ 1,968 $ 1,921 $ 47 2.4% 6.7% 7.5%
Interest expense ....................... $ 433 $ 416 $ (17) (4.1)% 1.5% 1.6%
Other expense .......................... $ (6) $ (58) $ 52 89.7% 0.0% 0.2%
Income before income tax expense ....... $ 1,529 $ 1,447 $ 82 5.5% 5.3% 5.7%
Income tax expense ..................... $ 49 $ 286 $ 237 82.9% 0.3% 1.1%
----------- ----------- ----------- ----------- ----------- -----------
Net income ............................. $ 1,480 $ 1,161 $ 319 27.5% 4.9% 4.5%
----------- ----------- ----------- ----------- ----------- -----------
NET SALES. The $4,342,000 (17.0%) increase in total net sales for 2004
as compared to 2003 resulted from the combination of a $906,000 (5.6%) decrease
in net sales of our electronic components and a $5,248,000 (56.1%) increase in
net sales of our communications equipment products and services.
35
ELECTRONIC COMPONENTS. The decrease in net sales of our electronic
components segment resulted from:
o a $2,012,000 (20.1%) decrease in net sales of power supplies
and subassemblies by XCEL Power Systems Ltd. ("XPS"), that we
believe was primarily due to deferral of orders; and
o a $67,000 (23.1%) decrease in sales of electronic subsystem
assemblies produced by Digitran that we believe was primarily
due to a delay in the United States government's transfer of a
contract from one prime contractor to another.
These decreases were only partially offset by the following:
o a $217,000 (4.1%) increase in net sales of switches
manufactured by Digitran, which was primarily a result of an
increase in the volume of orders for spare parts that we
believe was mainly due to increased military activities;
o an increase from $1,000 in 2003 to $28,000 in 2004 in net
sales of a new standard rotary switch and patent pending
VLP(TM) rotary switches that were introduced by Digitran in
2004 and that we expect will continue to be additive to switch
sales; and
o a $956,000 (164.3%) increase in net revenue from service and
miscellaneous other electronic component products primarily
due to increased service business volume at XPS.
COMMUNICATIONS EQUIPMENT. The increase in net sales of our
communications equipment products and services resulted from:
o a $2,112,000 (34.4%) increase in net sales of network access
and transmission equipment, which primarily consisted of
$1,952,000 in sales made by CXR Larus as a direct result of
our acquisition of Larus Corporation in July 2004;
o $1,298,000 of net sales of communication timing and
synchronization products by CXR Larus from July through
December 2004, prior to which time we did not have a similar
product line; and
o a $1,677,000 (71.3%) increase in net sales of our CXR HALCYON
704 series field test equipment, which was primarily due to a
$1,800,000 order we received and delivered in the fourth
quarter of 2004 for a project that had been under development
since 2002 and was only recently funded by the customer.
These increases were partially offset by the curtailment during 2004 of orders
for CXR Larus test equipment by another large customer who shifted its focus to
fiber and HDSL services. We do not expect 2005 sales of test equipment to equal
our exceptionally good 2004 sales level.
GROSS PROFIT. The four percentage point increase in gross profit as a
percentage of total net sales and the $3,031,000 (28.4%) increase in total gross
profit in 2004 as compared to 2003 resulted from gross profit decreases in our
electronic components segment that were more than offset by gross profit
increases in our communications equipment segment.
36
ELECTRONIC COMPONENTS. The $400,000 (6.0%) decrease in gross profit for
our electronic components segment was primarily due to the large reduction in
sales of power supplies described above.
COMMUNICATIONS EQUIPMENT. The $3,431,000 (84.8%) increase in gross
profit for our communications equipment segment and the 7.9 percentage point
increase in this segment's gross profit as a percentage of total net sales were
primarily the result of the addition of Larus Corporation's $1,782,000 gross
profit resulting from net sales of communication timing and synchronization
products for July through December 2004 and a $1,587,000 increase in gross
profit at CXR Larus as a result of a large increase in high gross margin sales
of CXR Halcyon communications test equipment. Excluding the addition of Larus
Corporation sales, gross profit for network access equipment increased
approximately $60,000 (2.1%).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $2,414,000 (30.9%)
increase in selling, general and administrative expenses in 2004 as compared to
2003 resulted primarily from:
o $994,000 in selling, general and administrative expenses
generated by Larus Corporation following its acquisition in
July 2004;
o a $73,000 (12.0%) increase in sales expense at CXR Larus
mostly related to the large orders they obtained during 2004;
o a $110,000 (53.9%) increase in selling expense at Digitran
related to our new line of rotary switches;
o a $56,000 (19.6%) increase in selling expense at XPS to
improve marketing of power supplies;
o a $99,000 (110.0%) increase in corporate legal fees and
$67,000 (35.9%) increase in auditing fees partially due to
Sarbanes-Oxley requirements;
o a $126,000 (91.3%) increase in deferred compensation;
o a $68,000 (42.5%) increase in stockholder relations and
investor relations expenses;
o a $180,000 (18.3%) increase in corporate salaries, bonus and
expenses partially due to foreign currency exchange rate
fluctuation.
Some of the reasons for higher administrative expenses were increased
acquisition activities, changing our name to Emrise Corporation, complying with
the requirements of the Sarbanes-Oxley Act of 2002 and related rules, and
increased investor relations activities.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. The $570,000 (59.9%) increase in these expenses resulted from:
o the inclusion of $200,000 of these expenses from Larus
Corporation;
o an $80,000 (65.6%) increase in these expenses at CXR Larus
relating to test instruments;
o a $53,000 (91.1%) increase in these expenses at CXR-AJ for
network access equipment; and
o a $237,000 (96.7%) increase in expenses at Digitran for the
new line of rotary switches.
37
INTEREST EXPENSE. Although our bank interest expense declined $58,000
(13.9%) due to our new credit line with Wells Fargo Bank, N.A., this benefit was
more than offset by the $75,000 interest we paid on the notes we issued to
acquire Larus Corporation.
INCOME TAX EXPENSE. Income tax expense for 2004 was $49,000 as compared
to $286,000 in 2003. The 2004 tax provision was composed of $177,000 net foreign
income taxes and $76,000 current federal and state taxes. These amounts were
offset with a $160,000 reduction of the valuation allowance applied against the
deferred tax asset. The release of the allowance was based on our recent and
expected U.S. based earnings and the probability that a portion of our tax net
operating loss carryforwards may be utilized.
NET INCOME. Net income increased by $319,000 (27.5%) to $1,480,000 in
2004 from $1,161,000 in 2003. Our 2004 net income was helped by the contribution
of $628,000 of operating earnings from Larus Corporation, a $1,414,000 increase
in operating earnings by CXR Larus due to improved test instrument sales and an
improvement of $319,000 in operating earnings at CXR-AJ due to increased network
access sales. These improvements were partially offset by lower operating
earnings at our electronics components segment due to higher operating expenses
at Digitran and lower gross margin at XPS due to a lower sales volume of power
supplies. These changes resulted in our net income before taxes in 2004 of
$1,529,000, $82,000 over 2003 net income before tax of $1,447,000. Our income
tax provision in 2004 was $49,000 as compared to $286,000 in 2003.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
RESULTS AS A PERCENTAGE
DOLLAR PERCENTAGE OF NET SALES FOR THE
YEAR ENDED VARIANCE VARIANCE YEAR ENDED
DECEMBER 31, ---------- ---------- DECEMBER 31,
-------------------------- FAVORABLE FAVORABLE --------------------------
2003 2002 (UNFAVORABLE) (UNFAVORABLE) 2003 2002
----------- ----------- ------------- ------------- ----------- -----------
(IN THOUSANDS)
Net sales
Electronic components ................ $ 16,168 $ 13,390 $ 2,778 20.7% 54.1% 52.5%
Communications equipment ............. $ 9,351 $ 9,274 $ 77 0.8% 31.3% 36.3%
----------- ----------- ----------- ----------- ----------- -----------
Total net sales ...................... $ 25,519 $ 22,664 $ 2,855 12.6% 85.5% 88.8%
----------- ----------- ----------- ----------- ----------- -----------
Cost of sales
Electronic components ................ $ 9,530 $ 8,187 $ (1,343) (16.4)% 58.9% 61.1%
Communications equipment ............. $ 5,305 $ 5,960 $ 655 11.0% 56.7% 64.3%
----------- ----------- ----------- ----------- ----------- -----------
Total cost of sales .................. $ 14,835 $ 14,147 $ (688) (4.9)% 58.1% 62.4%
----------- ----------- ----------- ----------- ----------- -----------
Gross profit
Electronic components ................ $ 6,638 $ 5,203 $ 1,435 27.6% 41.1% 38.9%
Communications equipment ............. $ 4,046 $ 3,314 $ 732 22.1% 43.3% 35.7%
----------- ----------- ----------- ----------- ----------- -----------
Total gross profit ................... $ 10,684 $ 8,517 $ 2,167 25.4% 41.9% 37.6%
----------- ----------- ----------- ----------- ----------- -----------
Selling, general and administrative
expenses ............................. $ 7,812 $ 7,731 $ (81) (1.0)% 26.2% 30.3%
Engineering and product development
expenses ............................. $ 951 $ 1,015 $ 64 6.3% 3.2% 4.0%
----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) ................ $ 1,921 $ (229) $ 2,150 938.9% 6.4% 0.9%
Interest expense ....................... $ (416) $ (441) $ 25 5.7% 1.4% 1.7%
Other (expense) income ................. $ (58) $ 80 $ (138) (172.5)% 0.2% 0.3%
----------- ----------- ----------- ----------- ----------- -----------
Income before income tax expense ....... $ 1,447 $ (590) $ 2,037 345.3% 4.8% 2.3%
Income tax expense (benefit) ........... $ 286 $ (20) $ (306) (1,530.0)% 1.0% 0.1%
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) ...................... $ 1,161 $ (570) $ 1,731 303.7% 3.9% 2.2%
=========== =========== =========== =========== =========== ===========
38
NET SALES. The $2,855,000 (12.6%) increase in total net sales for 2003
resulted primarily from the significant growth in overall net sales of our
electronic components and the slight increase in overall net sales of our
communications equipment products and services.
The $2,778,000 (20.7%) increase in net sales of our electronic
components included a $2,841,000 (39.7%) increase in net sales of power supplies
and related electronic subsystem assemblies due to an increase in the number of
products XPS shipped under long-term programs, and a $563,000 (11.9%) increase
in sales of digital switches manufactured by Digitran that primarily resulted
from an increase in orders for spare parts that we believe was mainly due to
increased military activities. These increases were partially offset by a
$835,000 (74.2%) reduction in subsystem assembly sales by Digitran due to the
completion of a major contract in 2002.
The $77,000 (0.8%) increase in net sales of our communications
equipment products and services included a $740,000 (13.7%) increase in sales of
network access and transmission products, which was partially offset by a
$528,000 (18.3%) decline in sales of test equipment by CXR Larus and CXR-AJ. We
decided to terminate the resale of test equipment by CXR-AJ in November 2000 and
now have only residual sales of these products in Europe. Test equipment sales
decreased primarily due to a reduction in orders from telecommunications
customers in the United States, which we believe was primarily due to the weak
telecommunications market and the continuing effect of CXR-AJ's discontinuation
of test equipment resales.
CXR-AJ produced all of our transmission products and network access
equipment before we acquired Larus Corporation in July 2004. Net sales by CXR-AJ
of such products, excluding test equipment, increased by $740,000 (13.7%) due to
increased sales volume.
Net sales of our CXR HALCYON 704 series field test equipment increased
slightly by $37,000 (1.9%). We aggressively marketed to non-telecommunications
customers, such as government agencies, electric utilities and transportation
agencies, which resulted in improved sales of our CXR HALCYON products to
non-telecommunications customers. Nevertheless, CXR Telecom's major customers
are the large United States telecommunications companies, and their capital
budget expenditures for CXR HALCYON equipment were still low in terms of our
historical experience.
We believe that many of the United States telecommunications customers
that CXR Larus serves built networks to handle an anticipated demand for voice
and data traffic that has not yet occurred. Consequently, many of these
customers reduced their purchasing budgets for 2002 and 2003, which had a
negative impact on CXR Larus' sales.
GROSS PROFIT. Improvements in gross profit of both of our operating
segments contributed to the $2,167,000 (25.4%) total gross profit increase and
to the 4.3 percentage point increase in total gross profit to 41.9% of total net
sales.
The gross profit increase for our electronic components segment
primarily resulted from increases in the profit margins of both digital switches
and power supplies due to changes in product mix for both switch and XPS's power
supply products. Also, increased volume helped increase gross margins of power
supplies by reducing per unit costs.
The increase in gross profit as a percentage of net sales for our
communications equipment segment primarily was due to reduced costs. CXR Larus
and CXR-AJ increased their gross margins as a percent of sales to 45.0% and
42.6% from 34.1% and 36.7%, respectively, due to cost reductions and higher
sales at CXR-AJ.
39
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The 3.5 percentage point
decrease in selling, general and administrative expenses to 30.6% of total net
sales resulted from maintaining relatively level expenses in combination with
increased sales. Selling expenses remained static in 2003 as compared to 2002.
General and administrative expenses increased modestly by $77,000 (1.5%).
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment and Digitran. The $64,000
(6.3%) decrease primarily resulted from cost reductions in the communications
equipment segment.
INTEREST EXPENSE. Interest expense decreased by $25,000 (5.7%)
generally due to lower average debt balances at XPS and CXR-AJ.
OTHER (EXPENSE) INCOME. Other expense was $58,000 for 2003 as compared
to other income of $80,000 for 2002, primarily due to foreign currency losses.
INCOME TAX EXPENSE (BENEFIT). The majority of the increase in income
tax expense related to the recording by XPS of a provision for United Kingdom
income tax that was required because XPS produced greater taxable income for
2003 than in 2002 and has consumed its net operating loss carryforwards.
NET INCOME (LOSS). The $1,731,000 improvement in net income (loss)
resulted from a number of factors. The largest contributors to this positive
change were $1,099,000 and $856,000 increases in operating income of XPS and
CXR-AJ, respectively, due to increased sales at XPS and increased sales and
reduced costs at CXR-AJ. In addition, CXR Larus improved its operating income by
$486,000 by reducing costs. We continued to closely monitor costs throughout our
operations and reduced costs through staffing reductions in our communications
equipment operations in the United States and France and through various other
cost-cutting methods, such as using contract manufacturers and reducing facility
rent expense. These actions substantially reduced the sales volume required to
produce profitability at both CXR Larus and CXR-AJ.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2004, we funded our operations
primarily through revenue generated from our operations and through our existing
and previous lines of credit with Wells Fargo Bank, N.A., Wells Fargo Business
Credit, Inc. and various foreign banks. During the three months ended March 31,
2005, we continued to rely on these sources and also raised approximately
$16,893,000 in net proceeds through a private placement of equity securities in
January 2005 as described below. As of March 31, 2005, we had working capital of
$14,932,000, which represented a $9,392,000 (169.5%) increase from working
capital of $5,540,000 at December 31, 2004, primarily due to the proceeds from
the private placement and the addition of the working capital of Pascall. As of
December 31, 2003, we had working capital of $5,696,000, which was $156,000 more
than our working capital at December 31, 2004 primarily because we used
$1,492,000 cash to acquire Larus Corporation in July 2004. At March 31, 2005 and
December 31, 2004, we had accumulated deficits of $16,756,000 and $16,406,000,
respectively, and cash and cash equivalents of $6,861,000 and $1,057,000,
respectively. At December 31, 2003, we had an accumulated deficit of $17,886,000
and cash and cash equivalents of $1,174,000.
Accounts receivable increased $1,849,000 (31.9%) during the three
months ended March 31, 2005 from $5,796,000 as of December 31, 2004 to
$7,645,000 as of March 31, 2005. Sales attributable to the Pascall acquisition
contributed $2,700,000 to accounts receivable at March 31, 2005. Without the
acquisition of Pascall, our receivables would have decreased $851,000 (14.7)%
during the three months ended March 31, 2005, primarily due to increased
collections.
40
Accounts receivable increased $403,000 (7.5%) to $5,796,000 as of
December 31, 2004 from $5,393,000 as of December 31, 2003. Sales attributable to
the Larus Corporation acquisition contributed $1,308,000 to the increase.
Without the acquisition of Larus Corporation, our receivables would have
decreased $1,025,000 to $4,368,000 at December 31, 2004, primarily due to a
$1,800,000 order for test instruments that we shipped, invoiced and collected in
the fourth quarter of 2004.
Days sales outstanding, which is a measure of our average accounts
receivable collection period, improved during 2004 from 72 to 69 days, but
increased to 83 days for the three months ended March 31, 2005. The days sales
outstanding calculation is skewed for the three months ended March 31, 2005
because $2,700,000 of Pascall receivables were included in our accounts
receivable balance at March 31, 2005 while only 13 days of Pascall's sales,
totaling $722,000, were included in our results for the quarter ended March 31,
2005. Excluding Pascall's sales, days sales outstanding was 68 for the three
months ended March 31, 2005, which represents a slight improvement for the
quarter as compared to fiscal 2004. Our customers include many Fortune 500
companies in the United States and similarly large companies in Europe and Asia.
Because of the financial strength of our customer base, we have virtually
eliminated our bad debt reserves.
Inventory balances increased $2,394,000 (36.9%) during the three months
ended March 31, 2005, from $6,491,000 at December 31, 2004 to $8,885,000 at
March 31, 2005. Inventory represented 21.4% and 25.9% of our total assets as of
March 31, 2005 and December 31, 2004, respectively. Included in the March 31,
2005 amount is $2,165,000 of inventory attributable to Pascall. Excluding the
effect of this inclusion, inventory would have increased by $229,000 (3.4%) and
would have represented 18.8% of total assets (excluding the $5,841,000 of total
assets related to Pascall) at March 31, 2005. Inventory turnover, which is a
ratio that indicates how many times our inventory is sold and replaced over a
specified period, declined to 2.2 times (excluding Pascall, turnover would have
decline to 1.8 times) for the three months ended March 31, 2005 as compared to
2.6 times for the year ended December 31, 2004 due to the decline in sales
revenues.
Inventory balances decreased 2.9% during 2004, from $6,683,000 at
December 31, 2003 to $6,491,000 at December 31, 2004. Inventory represented
27.4% and 39.0% of our total assets as of December 31, 2004 and 2003,
respectively. Included in the December 31, 2004 inventory amount is the
$1,411,000 of inventory of Larus Corporation. We acquired Larus Corporation in
July 2004. Excluding the effect of this inclusion, inventory would have
decreased by $1,683,000 (24.0%) and would have represented 33.4% of total assets
(excluding the $8,454,000 of total assets related to Larus Corporation) at
December 31, 2004. Inventory turnover improved to 2.6 times for 2004 as compared
to 2.4 times for 2003.
We took various actions to reduce costs in 2004. These actions were
intended to reduce the cash outlays of our communications equipment segment to
match its revenue rate. We also have contracted with offshore manufacturers for
production of test equipment components at lower prices than we previously paid
to our former suppliers and have received shipments of quality components from
these offshore suppliers. We continued with this method of operation throughout
the three months ended March 31, 2005 and anticipate implementing this method in
our communication timing and synchronization business.
Cash used in our operating activities totaled $1,365,000 for the three
months ended March 31, 2005 as compared to cash provided by operating activities
of $632,000 for the three months ended March 31, 2004. This $1,997,000 decrease
in operating cash flows primarily resulted from net losses in the three months
ended March 31, 2005 as compared to net income in the comparable period in the
prior year, as well as increased payment of accounts payable and accrued
expenses.
41
Cash provided by our operating activities totaled $3,884,000 for 2004,
an improvement of $2,737,000 as compared to cash provided by our operating
activities of $1,039,000 for 2003. This increase in cash provided by operations
during 2004 primarily resulted from improved net income, a reduction of our
inventory (excluding Larus Corporation inventory) due to outsourcing and
inventory management, and an increase in our trade payables balance.
Cash used in our investing activities totaled $9,374,000 for the three
months ended March 31, 2005 as compared to $96,000 for the three months ended
March 31, 2004. Included in the results for the three months ended March 31,
2005 are net cash of $9,341,000 used to acquire Pascall and $33,000 of property,
plant and equipment purchases for production facility upgrade,
telecommunications, management information systems and computer controlled
production machinery for our new low profile rotary and digital switches. The
investments for the three months ended March 31, 2004 were mostly property,
plant and equipment purchases.
Cash used in our investing activities totaled $2,208,000 for 2004 as
compared to $38,000 used in our investing activities for 2003. Included in the
results for 2004 are net cash of $1,492,000 to acquire Larus Corporation and
$724,000 of property, plant and equipment purchases for production facility
upgrade, telecommunications, management information systems and computer
controlled production machinery for our new low profile rotary and digital
switches. The investments for 2003 were mostly property, plant and equipment
purchases.
Cash provided by our financing activities totaled $16,993,000 for the
three months ended March 31, 2005 as compared to $569,000 of cash used in our
financing activities for the three months ended March 31, 2004. The change is
primarily due to the net proceeds of $16,893,000 from the issuance of common
stock in the January 2005 private placement.
Cash used in our financing activities totaled $2,164,000 for 2004 as
compared to $687,000 of cash used in our financing activities for 2003, due to
larger repayments of bank debt in 2004 than in 2003.
On June 1, 2004, Emrise Electronics and CXR Larus, together with Emrise
acting as guarantor, obtained a credit facility from Wells Fargo Bank, N.A. for
our domestic operations. This facility is effective through July 1, 2005 and
replaced the previous credit facility we had with Wells Fargo Business Credit,
Inc. No prepayment penalty was due because the prior loan contract excluded from
prepayment penalties loans replaced with new credit facilities from Wells Fargo
Bank, N.A. The new credit facility is subject to an unused commitment fee equal
to 0.25% per annum, payable quarterly based on the average daily unused amount
of the line of credit described in the following paragraph.
The new credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000
for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at March 31, 2005 was 5.50%.
42
The credit facility also provides for a term loan of $150,000 secured
by equipment, amortizable over 36 months at a variable rate equal to the prime
rate plus 1.5%. The term loan portion of the facility had a balance of $112,000
at March 31, 2005.
Wells Fargo Bank, N.A. has also provided us with $300,000 of credit
available for the purchase of new capital equipment when needed through July 1,
2005, of which a balance of $142,000 was outstanding at March 31, 2005. The
interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR")
rate (3.10% at March 31, 2005) plus 3.75% per annum. Amounts borrowed under this
arrangement are amortized over 60 months from the respective dates of borrowing.
The previous credit facility bore interest at the prime rate plus 1.0%
and was subject to a $13,500 minimum monthly interest fee plus an unused
commitment fee equal to 0.25% per annum. The average amounts outstanding on the
revolving portions of the previous and new credit facilities during the year
ended December 31, 2004 and the three months ended March 31, 2005 were
$1,035,000 and $400,000, respectively. The prime rate averaged approximately
4.25% in 2004 and approximately 5.5% during the three months ended March 31,
2005. Therefore, during 2004 the average annual interest cost on the new
revolving line of credit was approximately $49,162 while the average annual
interest cost on the prior revolving line of credit was approximately $162,000
due to the minimum interest rate charge of $13,500 per month. During the three
months ended March 31, 2005, interest on the new revolving line of credit
totaled approximately $7,000 and was not subject to the $13,500 per month
minimum interest charge that applied during the three months ended March 31,
2004.
At March 31, 2005, we had no outstanding balance owing under the
revolving credit line and we had $2,000,000 of availability on the non-formula
based portion of the credit line. The credit facility is subject to various
financial covenants. At March 31, 2005, we were in compliance with those
financial covenants. The minimum debt service coverage ratio of each of Emrise
Electronics and CXR Larus must be not less than 1.50:1.00 on a trailing
four-quarter basis. "Debt service coverage ratio" is defined as net income plus
depreciation plus amortization, minus non-financed capital expenditures, divided
by current portion of long-term debt measured quarterly. The current ratio of
each of Emrise Electronics and CXR Larus must be not less than 1.50:1.00,
determined as of each fiscal quarter end. "Current ratio" is defined as total
current assets divided by total current liabilities. Net income after taxes of
each of Emrise Electronics and CXR Larus must be not less than $1.00 on an
annual basis, determined as of the end of each quarter. Net profit after taxes
of each of Emrise Electronics and CXR Larus must be not less than $1.00 in each
fiscal quarter immediately following a fiscal quarter in which that entity
incurred a net loss after taxes. Total liabilities divided by tangible net worth
of our domestic operations on a consolidated basis must not at any time be
greater than 2.00:1.00, determined as of each fiscal quarter end. Tangible net
worth of us and all of our subsidiaries on a consolidated basis must not at any
time be less than $5,200,000, measured at the end of each quarter. "Total
liabilities" is defined as current liabilities plus non-current liabilities,
minus subordinated debt. "Tangible net worth" is defined as stockholders' equity
plus subordinated debt, minus intangible assets.
At March 31, 2005, there was no balance outstanding under the revolving
line of credit. The credit facility expires in July 2005. However, the bank has
informally extended the term of the revolving line by two months and has
indicated that it is amenable to renewing and expanding the credit facility.
However, if we are unable to obtain a renewal of the credit facility, we believe
we will have sufficient funds available to timely repay any additional amounts
we may borrow under the credit facility prior to its expiration.
On July 13, 2004, we issued two promissory notes to the former
stockholders of Larus Corporation totaling $3,000,000 in addition to paying cash
and issuing shares of common stock and two zero interest short-term notes
totaling $887,500 that we repaid in 2004, in exchange for 100% of the capital
stock of Larus Corporation. These notes are subordinated to our bank debt and
are payable in 72 equal monthly payments of principal totaling $41,667 per month
43
plus interest at the 30-day LIBOR rate plus 5% with a maximum interest rate of
7% during the first two years of the term of the notes, 8% during the third and
fourth years and 9% thereafter. As of March 31, 2005, the 30-day LIBOR rate was
2.86%. The total balance on these promissory notes as of March 31, 2005 was
$2,625,000.
As of March 31, 2005, our foreign subsidiaries had credit facilities,
including lines of credit and term loans, with Venture Finance plc, a subsidiary
of the global Dutch ABN AMRO Holdings, N.V. financial institution, in England,
IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris,
Societe Generale in France and Sogelease and Johnan Shinkin Bank in Japan. As of
March 31, 2005, the balances outstanding under our United Kingdom, France and
Japan credit facilities were $1,230,000, $692,000 and $52,000, respectively.
XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank. The loan is amortized over five years, carries an annual
fixed interest rate of 3.25% and is secured by the assets of XJL. The balance of
the loan as of March 31, 2005 was $52,000 using the exchange rate in effect at
that date for conversion of Japanese yen into United States dollars. There are
no financial performance covenants applicable to this loan.
XPS, one of our United Kingdom subsidiaries, obtained a credit facility
with Venture Finance plc in November 2002. This credit facility expires on
November 15, 2005. Using the exchange rate in effect at March 31, 2005 for the
conversion of British pounds sterling into United States dollars, the facility
is for a maximum of $2,685,000 and includes a $627,000 unsecured cash flow loan,
a $143,000 term loan secured by fixed assets, and the remainder is a loan
secured by accounts receivable and inventory. The interest rate is the base rate
of Venture Finance plc (4.75% at March 31, 2005) plus 2%, and is subject to a
minimum rate of 4% per annum. There are no financial performance covenants
applicable to this credit facility.
In April 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO N.V. This credit facility is for a maximum of $1,488,000,
based on the exchange rate in effect at March 31, 2005 for the conversion of
euros into United States dollars. CXR-AJ also had $74,000 of term loans with
several French banks outstanding as of March 31, 2005. The IFN Finance facility
is secured by accounts receivable and carries an annual interest rate of 1.6%
above the French "T4M" rate. At March 31, 2005, the French T4M rate was 2.05%
and this facility had a balance of $692,000. This facility has no financial
performance covenants.
Our backlog was $15,021,000 as of March 31, 2005 as compared to
$9,830,000 as of March 31, 2004. The increase in backlog was primarily due to
the addition of $4,925,000 of backlog for Pascall. Our backlog as of March 31,
2005 was 91.7% related to our electronic components business, which business
tends to provide us with long lead-times for our manufacturing processes due to
the custom nature of the products, and 8.3% related to our communications
equipment business, which business tends to deliver standard products from stock
as orders are received. The amount of backlog orders represents revenue that we
anticipate recognizing in the future, as evidenced by purchase orders and other
purchase commitments received from customers, but on which work has not yet been
initiated or with respect to which work is currently in progress. However, there
can be no assurance that we will be successful in fulfilling such orders and
commitments in a timely manner or that we will ultimately recognize as revenue
the amounts reflected as backlog.
As described above under the heading "Overview," we acquired Larus
Corporation and Vista in July 2004. As a result of the acquisition, we acquired
all of the assets and liabilities of Larus Corporation, including the
intellectual property, cash, accounts receivable and inventories owned by each
of Larus Corporation and Vista. The $6,539,500 purchase price consisted of
$1,000,000 in cash, the issuance of 1,213,592 shares of our common stock with a
44
fair value of $1,000,000, $887,500 in the form of two short-term, zero interest
promissory notes that were repaid in 2004, $3,000,000 in the form of two
subordinated secured promissory notes, warrants to purchase up to an aggregate
of 150,000 shares of our common stock at $1.30 per share, and approximately
$580,000 of acquisition costs. In addition, we assumed $245,000 worth of
accounts payable and accrued expenses and entered into an above-market
seven-year real property lease with the sellers. This lease represents an
obligation that exceeds the fair market value by approximately $756,000 and is
part of the acquisition accounting. We funded the cash portion of the purchase
price using proceeds from our credit facility with Wells Fargo Bank, N.A. and
our cash on-hand.
On January 5, 2005, we issued to 17 accredited record holders in a
private offering an aggregate of 12,503,500 shares of common stock at a purchase
price of $1.44 per share and five-year investor warrants to purchase up to an
additional 3,125,875 shares of our common stock at an exercise price of $1.73
per share, for a total purchase price of $18,005,000. We paid cash placement
agent fees and expenses of approximately $961,000, and issued five-year
placement warrants to purchase up to an aggregate of 650,310 shares of common
stock at an exercise price of $1.73 per share in connection with the offering.
Additional costs related to the financing include legal, accounting and
consulting fees that continue to be incurred in connection with the resale
registration described below.
We agreed to register for resale the shares of common stock issued to
investors and the shares of common stock issuable upon exercise of the investor
warrants and placement warrants. The registration obligations require, among
other things, that the registration statement of which this prospectus is a part
be declared effective no later than June 4, 2005. We were unable to meet this
obligation and therefore paid to each investor liquidated damages equal to 1% of
the amount paid by the investor to us in the offering, which damage payments
totaled an aggregate of approximately $180,000. We also paid or must pay to each
investor liquidated damages for the period from June 5, 2005 through the date
the registration statement of which this prospectus is a part was declared
effective, and for any future periods in which we are unable to maintain the
effectiveness of the registration in accordance with the requirements of the
registration rights agreement that we entered into with the investors. 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 our common stock. Accordingly, the
maximum aggregate penalty that we would be required to pay under this provision
is 10% of the approximate $18,005,000 initial purchase price of the shares of
common stock, which would be $1,801,000. Although we anticipate that we will be
able to meet our future registration obligations, we also anticipate that we
will have sufficient cash available to pay the maximum penalties if required.
We used a portion of the proceeds from the January 2005 private
placement to fund the acquisition of Pascall described above under the heading
"Overview." In connection with the Pascall acquisition, we loaned to XCEL
Corporation Ltd. approximately $10,100,000 in cash that was used to acquire
Pascall and to repay Pascall's existing intercompany debt. As described above,
the Pascall purchase price is subject to upward or downward adjustment, and we
have guaranteed obligations of XCEL Corporation Ltd. in connection with the
Pascall acquisition and have agreed to indemnify Pascall's former parent in
connection with obligations under Pascall's facilities lease.
The following table outlines payments due from us or our subsidiaries
under our lines of credit and other significant contractual obligations over the
next five years, exclusive of interest. All dollars are in thousands. The symbol
"P" represents the prime rate, the symbol "B" represents the lender's base rate
and the symbol "L" represents the 30-day LIBOR rate.
45
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------
CONTRACTUAL (IN THOUSANDS)
OBLIGATIONS AT THERE-
DECEMBER 31, 2004 2005 2006 2007 2008 2009 AFTER TOTAL
----------------------------- --------- --------- --------- --------- --------- --------- ---------
Line of Credit (Domestic) $ 118 $ -- $ -- $ -- $ -- $ -- $ 118
Average Interest Rate P+0.5%
Line of Credit (U.K.) $ 188 $ -- $ -- $ -- $ -- $ -- $ 188
Average Interest Rate B+2%
Overdraft (France) $ 572 $ -- $ -- $ -- $ -- $ -- $ 572
Average Interest Rate 3.74%
Term Loan From Stockholders
(Domestic) $ 500 $ 500 $ 500 $ 500 $ 500 $ 250 $ 2,750
P+1.52%,
Average Interest Rate L+5.0%
Capital Equipment Loan (U.S.) $ 13 $ 13 $ 13 $ 13 $ 6 $ -- $ 58
Term Loans (U.S.) $ 44 $ 44 $ 38 $ -- $ -- $ -- $ 126
Average Interest Rate P+1.5%
Term Loan (U.K.) $ 46 $ 669 $ -- $ -- $ -- $ -- $ 715
Average Interest Rate B+2%
Term Loans (France) $ 23 $ 23 $ 16 $ -- $ -- $ -- $ 62
Average Interest Rate 1.2%-5.6%
Term Loan (Japan) $ 19 $ 19 $ 18 $ -- $ -- $ -- $ 56
Average Interest Rate 3.25%
Capitalized Lease
Obligations $ 66 $ 60 $ 12 $ 12 $ 12 $ 17 $ 179
Operating Leases $ 1,040 $ 713 $ 725 $ 527 $ 420 $ 486 $ 3,911
--------- --------- --------- --------- --------- --------- ---------
$ 2,629 $ 2,041 $ 1,322 $ 1,032 $ 938 $ 753 $ 8,735
========= ========= ========= ========= ========= ========= =========
During the three months ended March 31, 2005, no material changes in
the information contained in the above table occurred outside the ordinary
course of business.
We intend to grow our business through both internal growth and through
further acquisitions that we identify as being potentially both synergistic and
accretive of our earnings. Any additional acquisitions would likely be funded
through the use of cash and/or a combination of cash, bank debt and our stock.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including the credit facilities we have and the remaining proceeds we have from
the January 2005 private placement, will be adequate to meet our anticipated
working capital and capital expenditure requirements for at least the next
twelve months. If, however, our capital requirements or cash flow vary
materially from our current projections, if unforeseen circumstances occur, or
if we require a significant amount of cash to fund future acquisitions, we may
require additional financing. Our failure to raise capital, if needed, could
restrict our growth, limit our development of new products or hinder our ability
to compete.
46
CONTROLS AND PROCEDURES
We disclosed in our Form 10-K for December 31, 2004 and our Form 10-Q
for March 31, 2005 that our principal executive officer and principal financial
officer concluded that the design and operation of our disclosure controls and
procedures were not effective as of December 31, 2004 or March 31, 2005 with
respect to two material weaknesses identified to us by our independent auditors
on April 5, 2005. The first matter related to our need for additional staff with
expertise in preparing required disclosures in the notes to our financial
statements, and our need to develop greater internal resources for researching
and evaluating the appropriateness of complex accounting principles and for
evaluating the effects of new accounting pronouncements on us. Our growth during
and since 2004 as a result of our acquisitions of Larus Corporation and Pascall
and the increased complexity surrounding our financing arrangements are major
contributors to the need for additional resources in financial reporting.
The second matter related to segregation of duties relating to cash
disbursements. Both our assistant controller and accounts payable clerk had
access to initiate the payment of invoices and print electronically signed
checks. Both individuals had the ability to record transactions in the
accounting system. The lack of segregation of these two functions -
check-writing ability and the recording of disbursement transactions in our
accounting system - represented a material weakness in the cash disbursements
cycle.
We considered these matters in connection with the preparation of the
December 31, 2004 consolidated financial statements included in our most recent
Form 10-K and also determined that no prior period financial statements were
materially affected by such matters. In response to the observations made by our
independent auditors, on April 7, 2005, we engaged financial consultants who are
certified public accountants with the requisite background and experience to
prepare required disclosures in the notes to our financial statements and to
provide greater internal resources for researching and evaluating the
appropriateness of complex accounting principles and for evaluating the effects
that new accounting pronouncements may have on us. In addition, we recognize
that the risk of an unauthorized disbursement exists without proper segregation
of duties between check-writing and record keeping. However, every month we
review the listing of checks produced and research any check number that is
missing or questionable. We believe this type of detective control would
identify unauthorized disbursements. Additionally, on May 6, 2005, we limited
the system access for those individuals performing this review such that there
are appropriate mitigating controls over the incompatible duties with regard to
our disbursements. We believe these steps will address the matters raised by our
independent auditors.
EFFECTS OF INFLATION
The effect of inflation and changing prices has not been significant on
the financial condition or results of operations of either our company or our
operating subsidiaries.
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-Based Payment," which addresses the
accounting for employee stock options. SFAS No. 123(R) eliminates the ability to
account for shared-based compensation transactions using APB Opinion No. 25 and
generally would require instead that such transactions be accounted for using a
fair value-based method. SFAS No. 123(R) also requires that tax benefits
associated with these share-based payments be classified as financing activities
in the statement of cash flow rather than operating activities as currently
permitted. SFAS No. 123(R) becomes effective for interim periods beginning
after December 15, 2005. Accordingly, we are required to apply SFAS No.
123(R) beginning in the quarter ending March 31, 2006. SFAS No. 123(R)
offers alternative methods of adopting this final rule. At the present time, we
have not yet determined which alternative method we will use.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," SFAS No. 151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period costs. The provisions of SFAS No. 151 are effective for our fiscal 2006.
We are currently evaluating the provisions of SFAS No. 151 and do not expect
that adoption will have a material effect on our financial position, results of
operations or cash flows.
SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected quarterly financial data for
each full quarter within the two most recent fiscal years and for the first
quarter of the current fiscal year. This quarterly information is unaudited, has
been prepared on the same basis as our annual and quarterly financial
statements, and, in our opinion, reflects all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the information
for periods presented. Operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTER ENDED
----------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
2005 2004 2004 2004 2004 2003 2003 2003 2003
-------- -------- -------- -------- -------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA:
Net sales.............................. $ 7,299 $ 9,768 $ 7,469 $ 6,432 $ 6,192 $ 6,597 $ 6,420 $ 6,834 $ 5,668
Cost of sales.......................... 4,187 4,929 4,239 3,533 3,445 3,598 3,705 4,005 3,527
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit........................... 3,112 4,839 3,230 2,899 2,747 2,999 2,715 2,829 2,141
Selling, general and administrative
expenses............................ 2,831 3,477 2,465 2,067 2,217 2,280 1,916 1,918 1,698
Engineering and product development
expenses............................ 532 488 438 312 283 254 230 246 221
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations.......... (251) 874 327 520 247 465 569 665 222
Other income (expenses), net........... (33) (70) (143) (124) (102) (161) (39) (164) (110)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... (284) 804 184 396 145 304 530 501 112
Income tax expense..................... 66 (79) 26 27 75 50 26 142 68
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...................... $ (350) $ 883 $ 158 $ 369 $ 70 $ 254 $ 504 $ 359 $ 44
Other comprehensive gain (loss), net... (441) 437 6 (62) (2) 344 109 224 28
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income (loss)...... $ (791) $ 1,320 $ 164 $ 307 $ 68 $ 598 $ 613 $ 583 $ 72
======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share ....... $ (0.01) $ 0.04 $ 0.01 $ 0.02 $ 0.00 $ 0.01 $ 0.02 $ 0.02 $ 0.00
======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share ..... $ (0.01) $ 0.03 $ 0.01 $ 0.02 $ 0.00 $ 0.01 $ 0.02 $ 0.02 $ 0.00
======== ======== ======== ======== ======== ======== ======== ======== ========
47
The following table sets forth a portion of the above unaudited
information as a percentage of net sales.
QUARTER ENDED
----------------------------------------------------------------------------------------
MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
2005 2004 2004 2004 2004 2003 2003 2003 2003
-------- -------- -------- -------- -------- -------- -------- -------- --------
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME DATA:
Net sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.......................... 55.6 50.5 56.8 54.9 55.6 54.5 57.7 58.6 62.2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit........................... 44.4 49.5 43.2 45.1 44.4 45.5 42.3 41.4 37.8
Selling, general and administrative
expenses............................ 35.8 35.6 33.0 32.1 35.8 34.6 29.8 28.1 30.0
Engineering and product development
expenses............................ 4.6 5.0 5.9 4.9 4.6 3.9 3.6 3.6 3.9
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations.......... 4.0 8.9 4.3 8.1 4.0 7.0 8.9 9.7 3.9
Other income (expenses), net........... (0.1) (0.7) (1.9) (2.0) (1.7) (2.4) (0.6) (2.4) (1.9)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes...... 2.3 8.2 2.4 6.1 2.3 4.6 8.3 7.3 2.0
Net income (loss)...................... 1.1 9.0 2.1 5.7 1.1 3.9 7.9 5.3 0.8
Other comprehensive gain (loss), net... 6.0 4.5 0.0 (1.0) 0.0 5.2 1.7 3.3 0.5
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income (loss)...... 10.8% 13.5% 2.1% 4.7% 1.1% 9.1% 9.6% 8.6% 1.2%
======== ======== ======== ======== ======== ======== ======== ======== ========
No cash dividends on our common stock were declared during any of the
periods presented above. Various factors materially affect the comparability of
the information presented in the above table. These factors relate primarily to
the acquisition of Larus Corporation in July 2004 and the acquisition of Pascall
in March 2005, changes in foreign currency conversion rates and new accounting
pronouncements that may affect the consistency in the generally accepted
accounting principles that we use. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the above table.
QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED DECEMBER 31, 2004
Net sales decreased by $2,469,000 (25%) to $7,299,000 from $9,768,000
in the fourth quarter of 2004 primarily due to lower sales of test instruments
and, to a lesser extent, lower sales of network access equipment, switches and
power supplies. Gross profit decreased by $1,727,000 (36%) to $3,112,000 from
$4,839,000 primarily because of the lower sales volume, especially the
$1,776,000 reduction in high margin test equipment due to a large order we
received and shipped in the fourth quarter of 2004. Selling and administration
costs decreased $646,000 (19%) to $2,831,000 from $3,477,000 due to lower
administration expenses and sales commissions. Engineering and product
development expenses increased $44,000 (9%) to $532,000 from $488,000 due to
increased expenses at CXR for communication timing and synchronization product
development. Pascall provided $722,000 of net sales and $181,000 of gross profit
for the 13-day period it was included in our operations.
QUARTER ENDED DECEMBER 31, 2004 COMPARED TO QUARTER ENDED SEPTEMBER 30,
2004
Net sales increased by $2,299,000 (31%) to $9,768,000 from $7,469,000
in the previous period. Communications test equipment sales increased by
$1,706,000 primarily because shipments that were planned to occur during the
third quarter were postponed until the fourth quarter due to slower release of
orders from an RBOC. Communication timing and synchronization product sales
increased by $278,000 (55%) to $788,000 as compared to $510,000 for the previous
quarter primarily because the prior period did not reflect a full quarter of
revenues from Larus Corporation, which subsidiary we acquired in July 2004.
Gross profit increased by $1,609,000 (50%) to $4,839,000 from $3,230,000 due to
changes in sales volume and product mix attributable to the postponed shipments
noted above, which related to higher margin items. Operating costs increased by
$1,062,000 (36%) to $3,965,000 from $2,903,000 due to higher commissions on
increased revenue, additional accruals for legal and audit fees, expenses
related to Sarbanes-Oxley compliance, bonus accruals, reclassification of
48
pension expense for CXR-AJ, addition of sales staff, and an increase in accrual
for payments under a previous acquisition. Net income increased to $883,000 from
$158,000 primarily because of the improved revenue and gross margin increase
discussed above.
QUARTER ENDED SEPTEMBER 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2004
Net sales increased by $1,037,000 (16%) to $7,469,000 from $6,432,000
in the previous period. In July 2004, we acquired Larus Corporation, which
contributed $1,468,000 in sales in the third quarter. The additional sales
provided by Larus Corporation were partially offset with a $197,000 decline in
test instruments sales and a $126,000 reduction in sales of our European network
access products. Our gross profit increased by $331,000 (11%) to $3,230,000 from
$2,899,000 in the prior period. Larus Corporation contributed $595,000 of gross
profit, which was partially offset with a reduction in gross profit of test
instruments of $153,000 primarily due to lower sales and switches of $111,000
due mainly to product mix. Gross margin was 43% as compared to 45% for the
previous quarter. Operating costs increased by $524,000 (22%) to $2,903,000 from
$2,379,000 primarily because of the addition of $534,000 of Larus Corporation's
operating expenses. Net income declined to $158,000 as compared to $369,000 for
the second quarter primarily because operating expenses increased more than the
increase in gross profit.
QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED MARCH 31, 2004
Net sales increased by $240,000 (4%) to $6,432,000 from $6,192,000 in
the prior quarter primarily due to increased test equipment sales of $735,000,
which was $253,000 above the prior period. Net sales in other product lines
remained relatively consistent. Gross profit increased by $152,000 (6%) to
$2,899,000 from $2,747,000 in the prior period mainly due to increased test
equipment sales. The gross margin increased to 45% from 44% in the previous
quarter. Operating costs decreased $121,000 (5%) to $2,379,000 from $2,500,000
in the prior quarter primarily mainly due to lower sales commission expense. Net
income rose to $369,000 from $70,000 in the first quarter primarily due to
higher sales, higher gross profit margin, lower income tax expense and lower
operating costs.
QUARTER ENDED MARCH 31, 2004 COMPARED TO QUARTER ENDED DECEMBER 31, 2003
Net sales decreased by $405,000 (6%) to $6,192,000 from $6,597,000 in
the prior quarter. The primary reason for the decrease was a $300,000 decrease
in test instrument sales mostly due to the budget cycles of our large test
instrument customers. Also, lower power supply product shipments were partially
offset with increased switch sales. Gross profit decreased by $252,000 (8%) to
$2,747,000 from $2,999,000 in the previous quarter primarily due to lower sales.
The gross margin declined to 44% from 46% mainly due to the decrease in test
equipment sales. Operating expenses stayed consistent. Net income declined to
$70,000 from $254,000 mainly because of the lower test instrument sales.
QUARTER ENDED DECEMBER 31, 2003 COMPARED TO QUARTER ENDED SEPTEMBER 30,
2003
Net sales increased by $177,000 (3%) to $6,597,000 from $6,420,000 in
the prior period. Communication equipment sales increased by $662,000 due to a
large increase in the sales of network access products in Europe and a modest
increase in test equipment sales. This increase was partially offset with a
$485,000 decrease in sales of electronic components of both power supplies and
switches. Despite a small decrease in total sales, gross profit increased
$284,000 (10%) to $2,999,000 from $2,715,000 in the prior quarter due mainly to
a higher gross margin on power supplies. Gross margin increased to 46% as
compared to 42% in the prior quarter. Operating expenses increased $388,000
(18%) to $2,534,000 from $2,146,000 due to increases in sales and administrative
expenses. Net income was $254,000 as compared to $504,000 in the third quarter.
49
QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2003
For the third quarter of 2003, net sales decreased $414,000 (6%) to
$6,420,000 from $6,834,000 in the prior quarter. This decrease was primarily due
to reduced network access equipment sales in Europe. Sales of electronic
components increased slightly despite a 6% decrease in sales of power supplies.
Gross profit was $2,715,000, which was $114,000 (4%) less than the prior quarter
gross profit of $2,829,000. Despite lower sales, we increased our gross profit
margin in both of our business segments by reducing costs. Our gross margin
improved to 42% from 41% in the prior period. Operating costs were relatively
unchanged with administrative costs declining slightly and sales and marketing
increasing slightly. Net income was $504,000 as compared to $359,000 in the
prior period. The difference in net income was primarily caused by income tax
expense that was $116,000 less in the third quarter as compared to the second
quarter related to changes in United Kingdom tax liability.
QUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED MARCH 31, 2003
Net sales increased by $1,166,000 (21%) to $6,834,000 from $5,668,000
in the prior quarter. Communications equipment sales increased $259,000 due to
increased sales of test instruments, and electronic components sales increased
$907,000 due to stronger switch and power supply sales. Gross profit increased
by $688,000 (32%) to $2,829,000 from $2,141,000 in the prior quarter due to
higher gross margins across our product lines. Gross margins improved to 41%
from 38%. Operating expenses increased by $245,000 (13%) to $2,164,000 from
$1,919,000 in the prior quarter primarily due to higher administrative costs
because of increased staffing at our electronic components segment. The higher
sales of the second quarter and improved margins resulted in net income of
$359,000 in the second quarter as compared to net income of $44,000 in the first
quarter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate Sensitivity
-------------------------
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar affect our consolidated financial
statements. Our exposure to fluctuations in currency exchange rates has
increased as a result of the growth of our international subsidiaries. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure. For further information regarding our exchange rate sensitivity, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Foreign Currency Translation."
Interest Rate Sensitivity
-------------------------
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates.
50
The following table provides information about our debt obligations
that are sensitive to changes in interest rates. All dollars are in thousands.
The symbol "P" represents the prime rate. The symbol "B" represents the lender's
base rate and the symbol "L" represents the 30-day LIBOR. Balances are as of
December 31, 2004.
FAIR
THERE- VALUE
LIABILITIES 2005 2006 2007 2008 2009 AFTER TOTAL 12/31/04
----------- -------- -------- -------- -------- -------- -------- -------- --------
Line of Credit (Domestic) $ 118 $ -- $ -- $ -- $ -- $ -- $ 118 $ 118
Average Interest Rate P+ 0.5%
Line of Credit (U.K.) $ 188 $ -- $ -- $ -- $ -- $ -- $ 188 $ 188
Average Interest Rate B+2.0%
Overdraft (France) $ 572 $ -- $ -- $ -- $ -- $ -- $ 572 $ 572
Average Interest Rate 3.74%
Term Loan From Stockholders
(Domestic) $ 500 $ 500 $ 500 $ 500 $ 500 $ 250 $ 2,750 $ 2,750
Average Interest Rate P+1.52%,
L+5.0%
Term Loan (U.K.) $ 46 $ 669 $ -- $ -- $ -- $ -- $ 715 $ 715
Average Interest Rate B+2.0%
Term Loans (France) $ 23 $ 23 $ 16 $ -- $ -- $ -- $ 62 $ 62
Average Interest Rate 5.2%-5.6%
Term Loan (Japan) $ 19 $ 19 $ 18 $ -- $ -- $ -- $ 56 $ 56
Average Interest Rate 3.25%
Capital Equipment Loan
(U.S.) $ 13 $ 13 $ 13 $ 13 $ 13 $ 6 $ 58 $ 58
Average Interest Rate L+4%
Term Loans (U.S.) $ 44 $ 44 $ 38 $ -- $ -- $ -- $ 126 $ 126
Average Interest Rate P+1.5%
51
BUSINESS
CORPORATE OVERVIEW
We are a Delaware corporation that was formed July 14, 1989. We have
three wholly-owned operating subsidiaries, Emrise Electronics , a New Jersey
corporation that was formed in 1983, CXR Larus Corporation, a Delaware
corporation that was formed in 1984 ("CXR Larus"), and CXR-Anderson Jacobson, a
French company that was formed in 1973 ("CXR-AJ"). Emrise Electronics and its
subsidiaries design, develop, manufacture and market electronic components for
defense, aerospace and industrial markets. CXR Larus and CXR-AJ design, develop,
manufacture and market network access and transmission products and
communications test equipment. CXR Larus also manufactures and sells
communication timing and synchronization products.
In December 2004, CXR Larus changed its name from CXR Telcom
Corporation when it succeeded by merger to the assets and liabilities of Larus
Corporation, a San Jose, California-based manufacturer and seller of
telecommunications products, and Vista Labs, Incorporated, a subsidiary of Larus
Corporation that provided engineering services to Larus Corporation. As
described in more detail elsewhere in the prospectus, we acquired Larus
Corporation and Vista Labs, Incorporated in July 2004.
In March 2005, XCEL Corporation Ltd., a United Kingdom-based subsidiary
of Emrise Electronics, acquired Pascall Electronic (Holdings) Limited and its
wholly-owned subsidiary, Pascall Electronics Limited ("Pascall"). Pascall is
based in the United Kingdom and manufactures a range of proprietary power
systems and radio frequency ("RF") components and subsystems.
Through our operating subsidiaries, CXR Larus, CXR-AJ and Emrise
Electronics, and through the divisions and subsidiaries of those subsidiaries,
we design, develop, manufacture, assemble, and market products and services in
the following two material business segments:
o Electronic Components
-- digital and rotary switches
-- electronic power supplies
-- RF components
-- subsystem assemblies
o Communications Equipment
-- network access and transmission products
-- communication timing and synchronization products
-- communications test instruments
Our sales are primarily in North America, Europe and Asia. Sales to
customers in the electronic components segment, primarily to defense and
aerospace customers, defense contractors and industrial customers, were 52.2%
and 63.1% of our total net sales during the three months ended March 31, 2005
and 2004, respectively, and 51.1%, 63.4% and 59.1% of our total net sales during
2004, 2003 and 2002, respectively. Sales of communications equipment and related
services, primarily to private customers premises and public carrier customers,
52
were 47.8% and 36.9% of our total net sales during the three months ended March
31, 2005 and 2004, respectively, and 48.9%, 36.6% and 40.9% of our total net
sales during 2004, 2003 and 2002, respectively.
Our objective in our electronic components business is to become the
supplier of choice for harsh environment digital and rotary switches, custom
power supplies and RF and microwave products. Our objective in our
communications equipment business is to become a leader in quality, cost
effective solutions to meet the requirements of communications equipment
customers. We believe that we can achieve these objectives through
customer-oriented product development, superior product solutions, and
excellence in local market service and support.
INDUSTRY OVERVIEW
ELECTRONIC COMPONENTS
The electronic components industry comprises three basic segments,
which are active components, passive components and electromechanical
components. We compete in the active and electromechanical segments of this
industry. These segments can be further segmented by industry into
telecommunications, aerospace, defense, commercial, industrial and other
environments, each of which places constraints that define performance and
permitted use of differing grades of components.
We are active only in the industry segments that are characterized by
low volume, high margin and long lead-times, namely the aerospace, defense and
industrial segments. To support the myriad customers that rely on digital and
rotary switches and electronic power supplies, we believe that our electronic
components must offer high levels of reliability and in many cases must be
tailored to the size, appearance, functionality and pricing needs of each
particular customer.
The defense market, which is a predominant market for our electronic
components, makes use of sophisticated electronic assemblies in diverse
applications that involve both original equipment and retrofit of existing
equipment.
The Digitran division of Emrise Electronics ("Digitran"), which
division was acquired by Emrise Electronics from Becton Dickinson in 1985, has
been manufacturing digital switches since the division was formed in the 1960s.
XCEL Power Systems Ltd. ("XPS"), a second-tier subsidiary of Emrise Electronics,
has been manufacturing electronic power supplies since 1989. Pascall was formed
in 1977.
COMMUNICATIONS EQUIPMENT
Over the past decade, telecommunications and data communications
infrastructures have undergone major growth and have become a critical part of
the global business and economic infrastructure that has been driven by:
o a surge in demand for broadband access used to conduct
e-commerce activities and transmit growing volumes of data,
voice and video information;
o the adoption of Internet protocol, or IP, which is a protocol
developed to enable the transmission of information as packets
of data from a source to a recipient using dynamically
changing routes, with the data being reassembled at the
recipient's location into the original information format; and
53
o an apparent worldwide trend toward deregulation of the
communications industry, which has enabled a large number of
new communications service providers to enter the market.
This rapid growth has been succeeded by a period of consolidation.
Private and corporate communications providers and other businesses that rely
heavily on information technology continue to devote significant resources to
the purchase of network access and transmission equipment, such as high-speed
DSL and fiber optic modems, through which data and voice information may be
transmitted. DSL, or digital subscriber line, technology transmits data up to 50
times faster than a conventional dial-up modem using existing copper telephone
wires. We believe that the demand for test equipment with which to test, deploy,
manage and optimize communications networks, equipment and services remains
depressed for public carrier markets.
To support the rapidly changing needs of telecommunications companies
and information technology dependent businesses, we believe that network access
and transmission products and communications test instruments must offer high
levels of functional integration, automation and flexibility to operate across a
variety of network protocols, technologies and architectures. Because the
competition for subscribers for high-speed bandwidth access is intense, the
quality and reliability of network service has become critical to
telecommunications companies due to the expense, loss of customers and negative
publicity resulting from poor service. Quality and reliability of network
service are also important to information technology dependent businesses that
rely on broadband high-speed data links for a variety of purposes.
Technicians who use service verification equipment in the field or in
central or branch offices assist businesses in verifying and repairing service
problems effectively and, thus, increase the quality and reliability of their
networks. We believe that as broadband services are deployed further and as
competition for telecommunications subscribers and e-commerce customers
proliferates, telecommunications companies and other information
technology-reliant businesses will increasingly depend on new and improved
integrated access transmission devices and advanced field and central or branch
office testing and monitoring solutions.
OUR SOLUTION
We have developed a range of electronic components, such as digital and
rotary switches, custom electronic power supplies and RF components and
subsystems, used primarily by aerospace, defense and industrial customers. We
have developed and we manufacture and market various network access and
transmission devices used by businesses and other users to efficiently transmit
data, voice and video information to destinations within and outside of their
respective networks.
We have developed and we manufacture and market a broad range of test
instruments used by operators of public and private telecommunications networks
for the installation, maintenance and optimization of advanced communications
networks.
We have also developed and we manufacture and market an extensive range
of communication timing and synchronization products used by operators of public
and private telecommunications networks to provide a consistent source of timing
alignment, or synchronization, for digital networks when the principal network
timing source is lost.
Our extensive knowledge and understanding of our customers' needs,
together with the broad capabilities of our network access and transmission
products, test instrumentation products and our sophisticated electronic
components, enable us to provide the following features and benefits to our
customers:
54
DEVELOPMENT OF NEW SWITCH TECHNOLOGY. We have complemented our
long-established range of products with a new range of patent-pending
space-saving rotary switches we refer to as VLP(TM), which are very low profile
switches. These products have been specifically designed to target harsh
environment and aerospace applications where space is at a premium, providing a
substantial advantage over larger switches offered by our competitors.
PROVISION OF RF COMPONENTS AND SUBASSEMBLIES. We have developed and
provide a range of RF components and subassemblies that meet the requirements of
defense, aerospace and industrial applications.
DEVELOPMENT OF COMMUNICATION TIMING AND SYNCHRONIZATION EQUIPMENT. We
have extended the existing range of communication timing and synchronization
products with a new range of equipment designed specifically to target the more
extensive RBOC market.
PROVISION OF MORE EFFICIENT AND COST-EFFECTIVE POWER SYSTEMS. We have
developed and we provide high and low voltage power systems that are highly
integrated within the application hardware, which minimizes cost, space and
complexity and maximizes overall system reliability and efficiency. We believe
that our ability to partner with major international defense contractors and to
provide power systems solutions based on both standard modules and custom
designs provides us with an important competitive advantage.
BROAD RANGE OF NETWORK ACCESS AND TRANSMISSION PRODUCTS FOR A WIDE
RANGE OF APPLICATIONS. We have developed a broad range of professional network
access and transmission products that are capable of connecting to a wide range
of remote monitoring devices and equipment. Many of these products are designed
to operate in extended temperatures and harsh environments and generally exceed
the surge protection standards of the industry and are adaptive to wide ranges
of AC or DC power inputs. The design of many of our data transmission products
enables them to either interface with or complement one another. The versatility
of this concept has enabled us to offer numerous different product combinations
to our customers. These variations include customized selection of data speeds,
data interfaces, power inputs, operating temperatures, data formats and power
consumption. In addition, our desktop and rack mount transmission product lines
allow us to serve both central site data communications needs and remote access
and transmission sites on both the enterprise-wide and single location level.
HANDHELD DESIGN OF FIELD TEST EQUIPMENT. We design many of our test
equipment products to be used in the field. Most of our digital and analog
products weigh less than four pounds and offer handheld convenience. The
compact, lightweight design of these products enables field technicians to
access problems and verify line operation quickly.
RAPID AND EFFICIENT DIGITAL SERVICES DEPLOYMENT. Our test equipment
products allow field and office technicians to test lines rapidly and
efficiently to ensure that they are properly connected to the central office and
that they can support a specific type and speed of service. In a single device,
our products can be used to pre-qualify facilities for services, identify the
source of problems and verify the proper operation of newly installed service
before handing service over to customers.
COMPREHENSIVE CONNECTIVITY. Our network access and transmission
products and communications test instruments are the result of significant
product research and engineering and are designed to connect to a broad range of
operation configurations and to connect over a wide range of prevailing
transmission conditions. Our products incorporate a wide range of standard
international connectivity protocols as well as proprietary protocols.
55
CUSTOMER-DRIVEN FEATURES. Most of our digital and rotary switches and
each of our power supplies are highly tailored to our customers' needs. We
manufacture digital and rotary switches for insertion into new equipment as well
as for retrofit into existing equipment. Our engineers continually interact with
our customers during the design process to ensure that our electronic components
are the best available solution for them. For example, based on conversations
with our customers, we delivered a compact multiple output power supply to allow
BAE Systems to produce a single-heads up display suitable for fitting on a large
range of commercial and military aircraft.
CUSTOMER RELATIONS. Our electronic components business currently enjoys
a preferred supplier status with several key accounts, which means that we work
in close association with the customer to develop custom products specifically
addressing their needs. Our electronic components also are considered qualified
products with many key accounts, which means that our products are designed into
equipment specifications of some of our customers for the duration of their
production of their equipment.
LONG-TERM RELATIONSHIPS. Market procurement methods encourage long-term
relationships between electronic components suppliers and customers, with
customers committing to a single source of supply because of the high cost
involved in qualifying a product or its alternative for use. For example, a
large proportion of XPS' products are qualified products that have been involved
in many hours of flight trials.
OUR STRATEGY
Our objectives are to become the supplier of choice for harsh
environment switches and custom power supplies in the aerospace, defense and
industrial markets, in addition to becoming a leading provider of network access
and transmission products and communications test instruments for a broad range
of applications within the global communications industry. The following are the
key elements of our strategy to achieve these objectives:
FOCUS ON OUR ELECTRONIC COMPONENTS BUSINESS. We plan to continue to
grow our electronic components business by marketing our electronic components
products in their established market niches, identifying opportunities to
broaden our customer base for our power supply products and introducing RF
components and subsystems offered by our newly acquired Pascall subsidiary.
RAMP UP OUR NEW COMMUNICATION TIMING AND SYNCHRONIZATION PRODUCTS AND
CONTINUE TO FOCUS ON NETWORK ACCESS AND TRANSMISSION PRODUCTS. We plan to build
upon our existing strong base businesses in the communications equipment market
introducing additional new customer premises products, especially new carrier
class communication timing and synchronization products, utilizing our broader
reach with CXR Larus to address new markets.
PURSUE STRATEGIC ACQUISITIONS. The communication timing and
synchronization products market and network access and transmission market are
large and highly fragmented. We plan to extend our market position by acquiring
or investing in complementary businesses or technologies on a selected basis. We
also intend to expand our United Kingdom-based electronic power supplies
division's United States presence through acquisition of businesses that offer
complementary products or technology for manufacture in the United States.
CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO ADDRESS HIGH GROWTH
MARKET OPPORTUNITIES. We plan to continue investing in markets and technologies
that we believe offer substantial growth prospects. We believe that the
expertise we have developed in creating our existing products will permit us to
enhance these products, develop new products and respond to emerging
technologies in a cost-effective and timely manner.
56
LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing
customers will continue to purchase network access and transmission products and
test instrument products and services. We intend to aggressively market new and
enhanced products and services to our existing customers. We also believe that
our existing customer base represents an important source of references and
referrals for new customers in new markets.
PURSUE FOLLOW-ON SALES OPPORTUNITIES. We plan to continue to increase
the functionality of our communications equipment products, enabling products to
be upgraded by the downloading of software or the addition of hardware to an
existing unit, allowing customers to protect their investment in test equipment
and generating follow-on sales opportunities as we develop new modules in the
future. We plan to continue to approach our existing digital switch customers to
determine whether they need rotary switches that we do not currently manufacture
for them.
SEEK COMPETITIVE WORLD-CLASS MANUFACTURING IN ASIA FOR SELECTED
PRODUCTS. Toward the end of 2002, we cut costs by using Asian manufacturing
sources for selected communications equipment products and subassemblies. We
intend to build on this strategy to increase our competitiveness in the
marketplace.
SEEK ALTERNATIVE MARKET OPPORTUNITIES. We plan to expand our focus and
efforts to identify and capture more new customers, such as private network
utilities and transit customers, for our test equipment.
DEVELOP AND ExPAND STRATEGIC RELATIONSHIPS. We plan to continue to
develop our strategic relationships with network access and transmission and
test instrument manufacturers in order to enhance our product development
activities and leverage shared technologies and marketing efforts to build
recognition of our brands. In particular, in Europe, we intend to continue to
expand our relationships with offshore vendors as a reseller of their products
to enhance our position and reputation as a provider of a comprehensive line of
test equipment products.
PURSUE TECHNOLOGY TRANSFER AND LICENSING. We plan to continue our
established practice of purchasing or licensing core technologies where this
reduces time and cost to market, as we did with the base platform for our remote
access server products purchased from Hayes Corporation.
DEVELOP CUSTOMER-FOCUSED SOLUTIONS. We design, develop, and manufacture
many products and provide services that are tailored to the specific needs of
our customers with an emphasis on ease of use. We intend to continue to adapt
our core communications technologies to deliver focused products that improve
our customers' ability to test and manage increasingly large and complex
networks and that are easily used by field technicians and central office
personnel.
EXTEND OUR GLOBAL PRESENCE. Our customers' needs evolve through
industry expansion and consolidation as well as with the deployment of new
technologies and services. To support our customers more effectively, we intend
to augment our sales, marketing and customer support organizations.
57
PRODUCTS AND SERVICES
Our products and services currently are divided into the following two
main business segments:
o Electronic Components
-- digital and rotary switches
-- electronic power supplies
-- RF components
-- subsystem assemblies
o Communications Equipment
-- network access and transmission products
-- communication timing and synchronization products
-- communications test instruments
During the three months ended March 31, 2005 and the years 2004, 2003
and 2002, our total net sales were $7,299,000, $29,861,000, $25,519,000 and
$22,664,000, respectively, and the percentages of total net sales contributed by
each product group within our two main business segments were as follows:
Three Months
Ended Year Ended December 31,
March 31, -------------------------------------
Segment and Product Type 2005 2004 2003 2002
------------------------ --------- --------- --------- ---------
Electronic Components
Digital and Rotary Switches 20.2% 18.5% 20.9% 20.9%
Electronic Power Supplies 22.1% 26.7% 34.3% 31.3%
RF Components 3.2% -- -- --
Subsystem Assemblies 1.0% 0.7% 5.9% 5.0%
Other Products and Services 5.6% 5.2% 2.3% 1.9%
--------- --------- --------- ---------
52.1% 51.1% 63.4% 59.1%
Communications Equipment
Network Access and Transmission Products 30.5% 27.6% 24.0% 23.8%
Communication Test Instruments 6.8% 13.6% 9.2% 12.7%
Communication Timing and
Synchronization Products 4.8% 4.3% -- --
Other Products and Services 5.8% 3.4% 3.4% 4.4%
--------- --------- --------- ---------
47.9% 48.9% 36.6% 40.9%
Totals 100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
58
BACKLOG
Our business is not generally seasonal, with the exception that
purchases of our communications equipment by telecommunications customers tend
to be lower than average during the first quarter of each year because capital
equipment budgets typically are not approved until late in the first quarter. At
March 31, 2005, our backlog of firm, unshipped orders was approximately
$15,021,000. Our backlog was related approximately 91.7% to our electronic
components business, which tends to provide us with long lead-times for our
manufacturing processes due to the custom nature of the products, and 8.3% to
our communications equipment business, the majority of which portion relates to
our network access and transmission products. Of these backlog orders, we
anticipate fulfilling approximately 100% of our electronic components orders and
100% of our communications equipment orders within the current fiscal year.
However, we cannot assure you that we will be successful in fulfilling these
orders in a timely manner or that we will ultimately recognize as revenue the
amounts reflected as backlog.
WARRANTIES
Generally, our electronic components, network access and transmission
products and communication timing and synchronization products carry a one-year
limited parts and labor warranty and our communications test instruments and
European network access and transmission products carry a two-year limited parts
and labor warranty. Products returned under warranty typically are tested and
repaired or replaced at our option. Historically, product returns have not had a
material effect on our operations or financial condition. However, we cannot
assure you that this will continue to be the case or that disputes over
components or other materials or workmanship will not arise in the future.
OUR ELECTRONIC COMPONENTS BUSINESS
Our electronic components segment includes digital and rotary switches,
electronic power supplies, RF components and subsystem assemblies. During the
three months ended March 31, 2005 and the years ended December 31, 2004, 2003
and 2002, this segment accounted for 52.1%, 51.1%, 63.4% and 59.1%,
respectively, of our total net sales.
DIGITAL AND ROTARY SWITCHES
Digitran manufactures, assembles and sells digital and rotary switch
products serving aerospace, defense and industrial applications. Digital and
rotary switches are manually operated electromechanical devices used for routing
electronic signals. Thumbwheel, push button, lever-actuated and rotary modules,
together with assemblies comprised of multiple modules, are manufactured in many
different model families. Digitran also offers a wide variety of custom keypads
and digital and rotary switches for unique applications.
Our switches may be ordered with different combinations of a variety of
features and options, including:
o 8, 10, 11, 12, 16 or a special number of dial positions; o
special markings and dial characters;
o fully sealed, dust sealed or panel (gasket) sealed switch
chambers to increase resistance to the elements in hostile
environments, such as dust, sand, oils, salt spray, high
humidity and temperature and explosive atmospheres;
59
o available with radio frequency interference shielding;
o rear mount (flush) or front mount switches that are sold with
the needed installation hardware, or snap in mount switches
that do not require installation hardware;
o provision for mounting components on output terminals on
special personal computer boards;
o wire wrap terminals, pin terminals or special terminations;
o night vision compatibility;
o rotary; and
o VLP(TM) rotary.
ELECTRONIC POWER SUPPLIES
XPS and Pascall, based in England, manufacture a range of high and low
voltage, high specification, high reliability custom power conversion products
and RF components and subsystems designed for hostile environments and supplied
to an international customer base, predominantly in the military and civil
aerospace, military vehicle and telecommunications markets.
Power conversion units supplied by XPS and Pascall range from 10VA to
1.5 KVA power ratings, low voltage (1V) to high voltage (20KV+), and convert
alternating current, or AC, to direct current, or DC, convert DC to AC and
convert DC to AC. Units can be manufactured to satisfy input requirements
determined by military, civil aerospace, telecommunications or industrial
businesses, and sophisticated built-in test equipment, or BITE, and control
circuitry often is included. Operating environments for our units are diverse
and range from fighter aircraft to roadside cabinets.
RF COMPONENTS
Pascall designs, develops, manufactures and markets a range of RF and
microwave amplifiers, components, subsystems and systems to 18GHz for
applications that include defense, aerospace, communications, air traffic
control and weather radar.
SUBSYSTEM ASSEMBLIES
Subsystem assemblies incorporate various input and display devices and
are manufactured for integration with various aerospace, defense, industrial and
transportation industry systems.
OUR COMMUNICATIONS EQUIPMENT BUSINESS
Our communications equipment business comprises network access and
transmission products, communication timing and synchronization products, and
communications test equipment. During the three months ended March 31, 2005 and
the years ended December 31, 2004, 2003 and 2002, the sale of communications
equipment products and related services accounted for 47.9%, 48.9%, 36.6% and
40.9%, respectively, of our total net sales. These products, many of which are
described below, are configured in a variety of models designed to perform
analog and digital measurements or to transmit data at speeds varying from
low-speed voice grade transmission to high-speed broadband access.
60
Some of the acronyms and terms used most frequently in the product
discussions on the following pages include:
o Time division multiplexing, or TDM, which is a technique for
consolidating multiple data sources into a single data stream
by allocating time slots to each data source
o Traditional telephone services, such as modems and plain old
telephone service, or POTS
o Competitive local exchange carriers, or CLECs
o Independent local exchange carriers, or ILECs
o Bit error rate test, or BERT
o Dial tone multi-frequency, or DTMF
o Transmission impairment measurement, or TIMS
o Central office and private business exchange, or CO/PBX,
services, where the central office houses the local exchange
equipment that routes calls to and from customers and to
Internet service providers and long-distance carriers
o Synchronous - in digital telephone transmission, synchronous
means that the bits from one call are carried within one
transmission frame
o Digital data services, or DDS, including the USA and worldwide
standards described below:
I. USA standards, including:
-- ISDN, which is an enhanced digital network that
offers more bandwidth and faster speed than the
traditional telephone network
-- Caller identification or caller-ID services
-- Digital subscriber line technology, or DSL,
technology which transmits data up to 50 times faster
than a conventional dial-up modem using existing
copper telephone wires
-- Multi-rate symmetric DSL, or MSDSL, which allows the
transmission of data over longer distances than
single-rate technologies by adjusting automatically
or manually the transmission speed
-- T-1, which is a standard for digital transmission in
North America used by large businesses for broadband
access
-- FT-1, or fractional T-1, which uses only a selected
number of channels from a T-1
-- T-3, which is the transmission rate of 44 megabits,
or millions of bits, per second, or 44 Mbps, with 672
channels
-- Digital signal level 0, or DS0, which is 64 kilobits,
or thousands of bits, per second, or 64 kbps, with
one channel of a T-1, E-1, E-3 or T-3
-- Digital signal level 1, or DS1, which is the T-1
transmission rate of 1.54 Mbps, with 24 channels
-- Digital signal level 3, or DS3, which is the T-3
transmission rate of 44 Mbps, with 672 channels
61
-- Router, which is an intelligent device used to
connect local and remote networks
-- Terminal adapter, which is situated between
telephones or other devices and an ISDN line and
allows multiple voice/data to share an ISDN line
-- Transmission control protocol/Internet protocol, or
TCP/IP
-- STS/SONET, which is an acronym for synchronous
transport signal/synchronous optical networks or
fiber optic networks
-- SDH is an acronym for synchronous digital hierarchy
-- STM1 (SDH) is a standard technology for synchronous
data transmission on optical media and is the
international equivalent of synchronous optical
network; SDH uses the following synchronous transport
modules, or STMs, and rates: STM1- 155 Mbps, STM-4 -
622 Mbps, STM-16 - 2.5 gigabits per second (Gpbs),
and STM-64 - 10 Gbps
-- G703/G704 is a standard for transmitting voice over
digital carriers such as T-1 and E-1; G703 provides
the specifications for pulse code modulation at data
rates from 64 Kbps to 2.048 Mbps and is typically
used for interconnecting data communications
equipment such as bridges, routers and multiplexers
-- V11/V35/X21 are types of serial interfaces; serial
interfaces work best for short (perhaps less than 20
meters), low-speed applications
-- X.25 is a protocol that allows computers on different
public networks or a TCP/IP network to communicate
through an intermediary computer at the network layer
level
II. International standards, including:
-- E-1, which is the European standard for international
digital transmission used by large businesses for
broadband access, with 2.108 Mbps, with 30 channels
-- FE-1, or fractional E-1, which uses only a selected
number of channels from an E-1
-- E-3, which is the European standard for T-3, with
34.368 Mbps and 480 channels
NETWORK ACCESS AND TRANSMISSION PRODUCTS
CXR Larus and CXR-AJ design, develop, manufacture and market a broad
range of network access and transmission products. These products include
high-quality network access devices such as fiber optic, DSL and voice
frequency, or VF, modems, ISDN terminal adapters, ISDN concentrators,
multiplexers, terminal servers, interface converters and remote access servers,
which combine to provide users with a complete solution for voice and data
transmission.
MODEMS
------
Our modem product range includes professional grade traditional VF
modems covering the performance spectrum, a range of fiber optic modems and a
range of DSL modems. Our modems are sold as standalone devices for remote sites
or as rack-mountable versions for central sites. Our customers use our
high-quality professional grade modems worldwide for networking and for central
office telecommunications applications such as voicemail and billing systems and
secure communications. Our modems are feature rich and we believe generally
offer more capabilities and better performance than competing products,
especially when operating over poor quality lines. This characteristic alone has
made our modems the modems of choice for voicemail applications throughout the
United States. Our modems are also available in more rugged versions for
industrial applications such as telemetry and remote monitoring in harsh
environments.
62
ISDN Terminal Adapters
----------------------
Together with modems, we offer a line of ISDN terminal adapters, which
are the popular digital equivalent of analog modems used primarily in Europe.
These terminal adapters are used in a broad range of applications, including
point-of-sale and videoconferencing, and are available in standalone as well as
rack-mountable versions.
TERMINAL SERVERS
----------------
Terminal servers include a range of products that enable the connection
of asynchronous applications to the Ethernet Network. These products were
designed to meet the requirements of our customers to interface equipment to the
corporate local area network, commonly called the LAN, and therefore to the
outside world, via our range of network access products.
DROP AND INSERT MULTIPLEXERS
----------------------------
Our broad range of drop and insert multiplexers covers E-1, T-1, FE-1,
E-3, T-3 and STM1 (SDH) over both copper wires and fiber optic networks. The
units enable users to manage the consolidation of their information from a
variety of voice or data sources (G703, G704, X21, V11 and V35) through an
easy-to-use menu-driven and Microsoft Windows-based user interface.
MODULAR ROUTERS
---------------
Our commercial/industrial router product range is modular, which
provides users the flexibility to configure or have configured a unit that meets
their specific requirements. Our routers provide access to the Internet or
remote sites via ISDN, leased line, X.25, frame relay and DSL connections. The
router creates or maintains a table of available routes and their conditions and
uses this information, along with distance and cost algorithms, to determine the
best route for a given packet of data.
INTERFACE CONVERTERS
--------------------
Our range of interface converters provides users the ability to
interface data from LAN, V11 or V35 to E-1, T-1, E-3, T-3 and STM1. A channel
service unit/data service unit, or CSU/DSU, converts a digital data frame from a
LAN into a frame appropriate to a wide area network, or WAN.
ISDN CONCENTRATORS
------------------
We also manufacture and offer a line of ISDN intelligent concentrators
called CB2000. These products, which were designed primarily for the European
market, allow for better use of ISDN resources.
TDMoIP VOICE AND DATA TRANSMISSION
----------------------------------
Our IP-Jet TDMoIP products facilitate the use of TDM services and
equipment over the Packet Switched Network bringing simplicity with lower cost
without the costly need to replace existing TDM hardware for both carrier and
enterprise users. TDM over IP, or TDMoIP, takes advantage of the internet
protocol, or IP, infrastructure and changing economics of data services delivery
to deliver high revenue leased line services such as E1 and T1. TDMoIP is also
ideal for the enterprise looking to reduce network expenses without compromising
features of their existing PBX and TDM equipment allowing all TDM traffic to be
carried transparently over Ethernet and IP networks irrespective of protocols or
signaling. Typical TDMoIP applications include: transmission of E1/T1, voice,
video and TDM data and IP, centralized voice services over Ethernet or IP,
secure data transmission E1/T1, and transmission of HDLC over IP.
63
The following are descriptions of a few of our more prominent network
access and transmission products:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
------------ --------------------------------
POWER MODEMS A family of products that allow asynchronous and
synchronous transmission over dial-up or leased
lines; asynchronous transmission is a very high-speed
transfer mode that allows telephone companies to mix
formerly incompatible signals, such as voice, video
and data.
-- in dial-up applications, a unique line
qualification mechanism assesses the quality
of the line and automatically redials before
entering the transmission mode when a poor
line is detected, which avoids having to
transmit in a degraded mode and leads to
money savings in long transmission sessions
-- available in standalone units or as rack
mountable cards to be inserted into our
Smart Rack
-- industrial versions designed for harsh
environments are available with features
such as extra line protection, metallic
enclosures, extended temperature ranges and
high humidity protection
MD 2000 RANGE A multi-rate MSDSL modem that has the ability to
manually or automatically adjust line transmission
speed to provide the optimum performance for a
particular pair of copper wires.
-- operates over a single twisted pair of
copper wires, which allows
telecommunications companies to take
advantage of the large installed base of
copper twisted pairs that has been deployed
around the world over many years and upon
private copper wire infrastructures that
exist for networking purposes in locations
such as universities, hospitals, military
bases, power plants and industrial complexes
-- allows data transmission over a single
copper pair at E-1 speed over a distance of
up to 8.0 miles
-- available as both a standalone unit and as a
rack-mountable card
64
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
------------ --------------------------------
CB 2000 RANGE The primary function of this unit is to split one or
two primary rate interface links, or PRIs, into
multiple basic rate interfaces, or BRIs.
-- this allows substantial cost savings by
allowing more effective use of available
ISDN resources without the limitations of
conventional voice PBX
-- this allows for migration from BRI to PRI
when the number of ports needs to be
increased while preserving the user's
investment in existing BRI-based terminal
equipment
-- this unit can be used in a wide variety of
situations where multiple BRI and PRI access
is required, such as: - videoconferencing,
where the unit can be used to aggregate
bandwidth of multiple BRI lines to provide
the necessary bandwidth, and to connect the
videoconferencing system to the ISDN network
through a PRI access while still providing
connectivity to other ISDN devices, or to
connect two or more videoconferencing
systems together within the same building or
campus without going through the ISDN public
network
- ISDN network simulation, which can
be used in places such as
showrooms, exhibition and technical
training centers to eliminate the
need to have access to, and pay for
access to, the ISDN public network
for telephone or data calls
- remote access servers, which
usually use multiple BRIs, often
need a method for migration from
multiple BRIs to a single PRI as
traffic and the number of users
expands
ISDN TERMINAL ADAPTERS These devices are the ISDN equivalent of a modem.
-- these devices connect non-ISDN devices to
the ISDN via a network termination unit, or
NT1, which converts the "U" interface from
the telephone company into a 4-wire S/T
interface
-- allow users to access the data rates of the
digital network
-- available as both a standalone unit and as a
rack-mountable card
TERMINAL SERVERS This range of products is used to provide the
connection of asynchronous applications to the TCP/IP
Ethernet network. These can include point-of-sale
terminals, industrial machines, point-to-point RS232
connections and the visual display units/keyboards.
DROP AND INSERT These products provide users the ability to manage
MULTIPLEXERS the consolidation of data and/or voice information
over a variety of TDM networks such as E-1, T-1, E-3,
T-3 and STM (SDH).
-- easily configured via management software
-- remotely manageable over IP or dedicated
time slot
ROUTERS A router provides connection between the primary rate
ISDN and local area networks.
-- dynamically route incoming and outgoing data
packets to the appropriate destination
-- available as both a standalone unit and as a
rack-mountable card to supplement the
functions of our Smart Rack system
Smart Rack
----------
Our modem cards and our ISDN terminal adapter cards generally are
available in standalone versions or in versions that can be mounted in our Smart
Rack, our universal card cage that provides remote management through a
menu-driven user interface. Each part of the framework, or chassis, of the Smart
Rack has slots to house up to 16 cards (or up to 4 cards in a smaller
65
installation) plus one optional management card. Each slot can be used to insert
any member of our transmission products family, such as analog modems, ISDN
terminal adapters, ISDN digital modems and high-speed MSDSL modems. The optional
Simple Network Management Protocol/Internet Protocol, or SNMP/IP, management
card that can be inserted into each chassis can be used to configure any card in
the chassis and can provide additional features, including alarm reporting,
tracking of configurations, running of diagnostic routines and generation of
statistics. Up to eight chassis can be linked together to form a fully-managed
node with 128 slots. Our Smart Rack arrangement allows each chassis to be used
to its full capacity while reducing floor space needed to house complex systems.
COMMUNICATION TIMING AND SYNCHRONIZATION PRODUCTS
CXR Larus designs, develops, manufactures and markets a series of
communication timing and synchronization products that provide a consistent
source of timing alignment, or synchronization, for digital communication
networks. When the principal network timing source is lost, a CXR Larus
communication timing system can provide an alternative source of reference
synchronization until the principal source can be restored. This is called
operating in the "holdover" state. The various levels of accuracy in holdover
mode are referred to as "stratum levels." Stratum 1 is the most precise,
followed by Stratum 2, Stratum 3E, Stratum 3, and finally Stratum 4. Stratum 4
has no holdover mode and is the least precise. All CXR Larus communication
timing products offer Stratum 3E stability, or better, and all are available
with options that meet or exceed Stratum 1.
Some of the key communication timing and synchronization products we
offer are described below:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
------------ --------------------------------
Star SyncTM 5850 The Larus StarSync(TM) Model STS 5850 is an
Primary Reference source economical GPS timing clock designed for
retrofits of existing BITS clocks and for
remote sites that require timing. The
StarSync(TM) provides GPS Stratum 2 clock
with Stratum 2 or 3E holdover performance.
The STS 5850 features two accurate T1 timing
references that are synthesized from GPS for
use by BITS clocks, SONET NEs, intelligent
multiplexers, and PCS systems as well as
other systems requiring synchronization.
Options permit the STS 5850 to be configured
for Stratum 1 Input Track and either Stratum
2 or Stratum 3E Hold. Superior performance
is achieved by Kalman filtering, patented
digital frequency synthesis technology, and
use of GPS UTC information to measure a
rubidium oscillator (Stratum 2) or an ultra
stable ovenized reference oscillator
(Stratum 3E). StarClockTM STS 5800 Timing
System The Larus StarClock(TM) STS 5800
Timing System provides GPS Stratum 1 clock
and/or network tracking with Stratum 2 or
Stratum 3E holdover performance. The Larus
StarClock(TM) represents the optimal local
synchronization solution for the new
distributed network. The STS 5800 is an
economical extended temperature timing
system that is designed for small
installations and remote sites requiring
timing (cell sites, PCS networks, customer
premises, etc.). The output MTIE of the STS
66
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
------------ --------------------------------
5800 meets the mask performance specified by
GR-2830 for Stratum 1 clocks, resulting in
an improvement of ten to twenty times over
other GPS solutions. StarClockTM 100 and
StarClockTM 200 T1/E1 The StarClockTM 100
and 200 Synchronization Timing
Synchronization Timing Systems Systems
offers flexible and cost-effective solutions
for Stratum 1, Stratum 2E, and Stratum 3E
timing for digital transmission and
synchronization applications. The systems
provide a redundant and jitter-free source
of framed ones and composite clock and are
synchronized to an equal or higher stratum
framed reference source. The StarClockTM 100
and 200 systems can be employed in either
DS1 or E1 digital transmission environments
simply by selecting the appropriate modules.
The StarClockTM 100 and 200 systems are the
next generation of Larus'
industry-performance-standard STS 5400
Synchronization System and features backward
compatibility with the STS 5400. StarClockTM
100 and 200 circuit card switch settings and
operating functions are software generated,
affording both speed and flexibility for
system application changes, testing, and
monitoring.
The StarClockTM 100 system supplies up to
100 timing outputs for use in the
synchronization of transmultiplexers,
digital cross-connect systems, and SONET
equipment as well as other equipment
requiring network synchronization. Hundreds
of these systems have been deployed into
major local exchange carriers, and
international central offices worldwide.
The StarClockTM 200, designed specifically
for the RBOC and large central office
environment, offers up to 200 timing outputs
unprotected, or 100 timing outputs with 1:1
protection. Expansion shelves can be added
to the StarClockTM 200 system that will
boost the number of timing outputs into the
thousands, enough for the largest central
office.
Optional modules for both systems include a
GPS Stratum 1 track and Stratum 2E hold or
Stratum 1 track and Stratum 3E hold card,
with integral GPS receiver, a Composite
Input Signal module, a module that uses 5 or
10 MHz inputs, and the Model 54580 Network
Time Server.
COMMUNICATIONS TEST INSTRUMENTS
Our primary field test instruments, built by CXR Larus, are our CXR
HALCYON 700 series of products, which we believe provide performance and value
in integrated installation, maintenance and testing of communications services.
These test instruments are modular, rugged, lightweight, hand-held products used
predominantly by telephone and Internet companies to pre-qualify facilities for
services, verify proper operation of newly installed services and diagnose
problems. Original equipment manufacturers, or OEMs, also use service
verification equipment to test simulated networks during equipment development
and to verify the successful production of equipment.
67
The unique modular nature of our CXR HALCYON 700 series test equipment
provides an easy configuration and upgrade path for testing of the specific
services offered by the various national and international service providers.
Key performance enhancements to this product family address the trend toward
conversion of analog service installations to high-speed digital access lines.
Some of these key features include:
o ability to conduct the 23-tone test, which is an automated
single key-stroke test that performs the equivalent of over 12
individual test sequences;
o load-coil analysis, which identifies the presence of voice
coils that prevent high-speed digital access; and
o voice analysis and testing of individual T-1 channels.
We believe that these enhancements will allow further penetration of
CXR HALCYON 700 series test equipment into the telecommunications services
market. Some of the key test equipment products we offer are described below:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
------------ --------------------------------
TYPICAL BASE UNIT
-----------------
HALCYON 756A -- handheld integrated test set for
installation and maintenance of digital data
circuits, including DDS, Switched 56K,
2-wire Datapath, ISDN, T-1 and FT-1
-- provides users with intuitive user interface
allowing quick circuit diagnosis and repair
without extensive training
TYPICAL OPTIONAL CONFIGURATIONS
-------------------------------
HALCYON 704A-NTS1 -- 704A universal data test set with 1.5 MHz
TIMS, full signaling, caller ID and full
4-wire loop DDS test functions, as well as
DDS/DS0 test functions and T-1, DS1, DS0 and
FT-1 test package
-- T-1 test package includes reference receiver
for T-1 level, frequency and slip
measurements
HALCYON 704A-NTS2 -- universal data test set
-- handheld wideband test set for installation
and maintenance of analog voice and data and
digital data circuits including Switched 56K
-- expands upon the features of the 704A-400 to
add DDS BRI/ISDN and DS1/T-1/FT-1 test
functions
HALCYON 704A-PKG2 -- 704A universal data test set with 1.5 MHz
TIMS, full signaling, full 4-wire loop DDS
test functions, as well as DDS/DS0 test
functions for DS0-DP and OCU-DP DS0 and
sub-rate testing
HALCYON 756A-PG -- handheld integrated test set designed for
the testing and performance monitoring of
digital data communication links for
"protective relaying backbone
communications" for power utility companies
-- provides users with a test set which closely
emulates the live operating conditions of
the data links while providing an intuitive
user interface allowing quick circuit
diagnosis and repair without extensive
training
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PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS
------------ --------------------------------
CENTRAL OFFICE TEST EQUIPMENT
-----------------------------
T-COM 440B T-ACE This is a high-performance integrated
digital communications test instrument.
-- used to monitor and assure service
reliability of high-density digital test
nodes and switch centers
-- provides comprehensive digital test
measurements ranging from STS/SONET, DS3,
through T-1, FT-1, DSO and DDS services
CUSTOMERS
ELECTRONIC COMPONENTS
We sell our components primarily to OEMs in the electronics industry,
including manufacturers of aerospace and defense systems and industrial
instruments. During 2004, our top five electronic components customers in terms
of revenues were the BAE Systems companies, MBDA (U.K.) Ltd., Teldix, Raytheon
Corporation and L3 Communications. Sales to various BAE Systems companies in the
Europe and the United States, as a group, represented approximately 14.6% of our
total net sales revenues during the year ended December 31, 2004. No other
customer represented 10% or more of our total net sales for either of those
respective periods.
COMMUNICATIONS EQUIPMENT
We market our network access and transmission products, communication
timing and synchronization products and communications test instruments
primarily to public, private and corporate telecommunications service providers
and end users. Typically, communications service providers use a variety of
network equipment and software to originate, transport and terminate
communications sessions. Communications service providers rely on our products
and services as elements of the communications infrastructure and to configure,
test and manage network elements and the traffic that runs across them. Also,
our products help to ensure smooth operation of the network and increase the
reliability of services to customers.
The major communications service providers to whom we market our
telecommunications test instruments, network access and transmission products
and services and communication timing and synchronization products include
RBOCs, inter-exchange carriers, incumbent local exchange carriers, competitive
local exchange carriers, Internet service providers, integrated communications
providers, cable service providers, international post, telephone and telegraph
companies, banks, brokerage firms, government agencies and other service
providers. During 2004, our top five communications test instruments, network
access and transmission products and communication timing and synchronization
products customers in terms of our net sales were Verizon, Siemens, SBC, Coris
and Carte, SA. None of our communications equipment customers represented 10% or
more of our revenues during 2004.
Because we currently derive a significant portion of our revenues from
sales to RBOCs and other telecommunications service providers, we have
experienced and will continue to experience for the foreseeable future an effect
on our quarterly operating results due to the budgeting cycles of the RBOCs.
RBOCs generally obtain approval for their annual budgets during the first
quarter of each calendar year. If an RBOC's annual budget is not approved early
in the calendar year or is insufficient to cover its desired purchases for the
entire calendar year, we are unable to sell products to the RBOC during the
period of the delay or shortfall.
69
Due to a general downturn in business activity in the public carrier
telecommunications capital equipment market from 2000 to 2004, RBOCs reduced
their capital expenditures, which negatively affected our 2002 and 2003 sales of
test instruments. Our observance was that capital expenditure levels of RBOCs
and other telecommunications carriers remained at reduced levels in 2003.
However, we reduced costs and improved our business operations so that our
current monthly break-even sales requirement is approximately 50% of our
requirement in 2002. This, coupled with an increase in the sales of test
equipment in the fourth quarter of 2004, resulted in improved sales of test
instruments in 2004 as compared to 2003. However, sales of test instruments were
disappointing in the three months ended March 31, 2005.
Communications equipment manufacturers design, develop, install and
maintain voice, data and video communications equipment. Network equipment
manufacturers such as Cisco and Nortel rely on our test equipment products to
verify the proper functioning of their products during final assembly and
testing. Increasingly, because communications service providers are choosing to
outsource installation and maintenance functions to the equipment manufacturers
themselves, equipment manufacturers are using our instruments, systems and
software to assess the performance of their products during installation and
maintenance of a customer's network.
In July 2004, we acquired Larus Corporation, a manufacturer of
communication timing and synchronization products. The business formerly
conducted by Larus Corporation contributed $3,424,000 in net sales from July
through December 2004 and $1,509,000 in the three months ended March 31, 2005.
SALES, MARKETING AND CUSTOMER SUPPORT
ELECTRONIC COMPONENTS
We market and sell our electronic components through Digitran, XCEL
Corporation Ltd., XPS, Pascall, and XCEL Japan, Ltd., a wholly-owned subsidiary
of Emrise Electronics based in Japan. In some European countries and the Pacific
Rim, these products are sold through a combination of direct sales and through
third-party distributors.
We sell our electronic components primarily to OEMs in the electronics
industry, including manufacturers of aerospace and military systems and
industrial instruments. Our efforts to market our electronic components
generally are limited in scope since we rely on sales to a broad base of
historical customers with whom we have long-term business dealings.
XCEL Japan, Ltd. resells Digitran's digital and rotary switch and
keypad products and some third-party-sourced components primarily into Japan and
also into other highly industrialized Asian countries. Marketing of our
electronic components is primarily through referrals from our existing
customers, with sales either direct or via a small number of selected
representatives.
We rely on long-term orders and repeat business from our existing
customers. We also approach our existing customers and their competitors to
discuss opportunities for us to provide them with subsystem assemblies that
typically incorporate our own products. Also, Digitran's history spans over 40
years in the electronic components industry, and major OEMs have designed many
of our switches, subsystem assemblies, power supplies and RF components into
their product specifications. These factors have frequently resulted in
customers seeking us out to manufacture for them unique subsystem assemblies as
well as special variations of our standard digital switches.
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COMMUNICATIONS EQUIPMENT
Our sales and marketing staff consist primarily of engineers and
technical professionals. Our staff undergo extensive training and ongoing
professional development and education. We believe that the skill level of our
sales and marketing staff has been instrumental in building longstanding
customer relationships. In addition, our frequent dialogue with our customers
provides us with valuable input on systems and features they desire in future
products. We believe that our consultative sales approach and our product and
market knowledge differentiate our sales forces from those of our competitors.
Our local sales forces are highly knowledgeable about their respective
markets, customer operations and strategies and regulatory environments. In
addition, our representatives' familiarity with local languages and customs
enables them to build close relationships with our customers.
We provide repair and training services to enable our customers to
improve performance of their networks. We also offer on-line support services to
supplement our on-site application engineering support. Customers can also
access information regarding our products remotely through our domestic,
European and Japanese technical assistance centers.
We sell many of our communications equipment products to large
telecommunications service providers as well as through distributors, resellers
and value added resellers. Telecommunications service providers generally commit
significant resources to an evaluation of our and our competitors' products and
require each vendor to expend substantial time, effort and money educating them
about the value of the vendor's solutions. Consequently, sales to this type of
customer generally require an extensive sales effort throughout the prospective
customer's organization and final approval by an executive officer or other
senior level employee. The result is lengthy sales and approval cycles, which
make sales forecasting difficult. In addition, even after a large
telecommunications service provider has approved our product for purchase, their
future purchases are uncertain because while we generally enter into long-term
supply agreements with those parties, these agreements do not require specific
levels of purchases.
Delays associated with potential customers' internal approval and
contracting procedures, procurement practices, testing and acceptance processes
are common and may cause potential sales of communications test equipment to be
delayed or foregone. As a result of these and related factors, the sales cycle
of new products for large customers typically ranges from six to twelve months
or more. In addition to the latter case, we also have some the distribution
channels that generally are box stocking distributors with significant
independent sales forces selling our products to final customers, integrators
and other resellers on a regional and nationwide basis. We perform product
applications training for the distributor and reseller workforce and funnel many
of the leads we generate to the distribution channels for their follow-up and
closure.
COMPETITION
ELECTRONIC COMPONENTS
The market for our components is highly fragmented and composed of a
diverse group of OEMs, including Power One, Interpoint/Grenson, Martek and Celab
Ltd. for power supplies and Esterline (Janco), Greyhill, Inc., Omron
Electronics, Transico Inc. and C&K Components Inc. for digital switches. We
believe that the principal competitive factors affecting our components business
include:
o capability and quality of product offerings;
o status as qualified products; and
o compliance with government and industry standards.
71
We have made substantial investments in machinery and equipment in our
digital and rotary switch and power supply operations. In addition, Digitran's
long history in the electronic components industry and the fact that major OEMs
have designed many of our digital switches into their product specifications
have acted as barriers to entry for other potential competitors and aided us in
establishing and maintaining both distribution channels and customers for our
products by making us a sole source supplier for approximately 30% to 50% of the
digital switches that we sell and have caused some customers to seek us out to
manufacture for them unique as well as our standard digital and rotary switches.
Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.
COMMUNICATIONS EQUIPMENT
The markets for our communications equipment and services are
fragmented and intensely competitive, both inside and outside the United States,
and are subject to rapid technological change, evolving industry standards and
regulatory developments. We believe that the principal competitive factors
affecting our communications equipment business include:
o quality of product offerings;
o adaptability to evolving technologies and standards;
o ability to address and adapt to individual customer
requirements;
o price and financing terms;
o strength of distribution channels;
o ease of installation, integration and use of products;
o system reliability and performance; and
o compliance with government and industry standards.
Our principal competitors for our communications equipment include
Symmetricom and Oscilloquartz, for communication timing and synchronization
products, RAD, Paradyne, Patton Electronics Corporation, Digital Engineering,
Ltd. and GDC, for network access and transmission products, and TTC Corporation
(a subsidiary of Dynatech Corporation), Ameritech Corporation, Fluke, Sunrise
Telecom, Inc. and Electrodata, Inc., for communications test instruments.
The design of many of our data transmission products enables us to
offer numerous different product combinations to our customers and to serve both
central site data communications needs and remote access and transmission sites
on both the enterprise-wide and single location level. We believe that this
design flexibility helps us to excel at many of the above competitive factors by
enabling us to offer quality products that meet and are adaptable to evolving
customer requirements, technologies and government and industry standards.
72
We currently derive a significant portion of our revenues from sales to
RBOCs. We believe we derive a competitive advantage from efforts we expended to
establish many of our communications equipment products as approved products for
all of the RBOCs and for other key customers in the United States and abroad.
Our products' approved status facilitates the ability of our customers to order
additional products from us as their needs arise without the long delays that
might otherwise be needed to obtain the approval of our customers' upper
management or governing body prior to each purchase.
Some of our competitors have greater sales, marketing, technological,
research and financial resources than we do. Our competitors' advantage with
regard to these resources may reduce our ability to obtain or maintain market
share for our products in cases where our competitors are better able than us to
satisfy the above competitive factors.
MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE
Our network access and transmission products, communication timing and
synchronization products and communications test instruments generally are
assembled from outsourced components, with final assembly, configuration and
quality testing performed in house.
Manufacturing of our electronic components, including injection
molding, fabrication, machining, printed circuit board manufacturing and
assembly, and quality testing is done in house due to the specialized nature and
small and varied batch sizes involved. Although many of our electronic
components incorporate standard designs and specifications, products are built
to customer order. This approach, which avoids the need to maintain a finished
goods inventory, is possible because long lead-times for delivery often are
available. Typically, our electronic components segment produces products in
one- to 300-piece batches, with a ten- to thirty-week lead-time. The lead-time
is predominantly to source sub-component piece parts such as electronic
components, mechanical components and services. Typical build time is six to
eight weeks from receipt of external components.
We operate five manufacturing and assembly facilities worldwide. All of
these facilities are certified as ISO 9001- or 9002-compliant. We manufacture
our network access and transmission products at CXR-AJ's facility in France and
at CXR Larus' facility in San Jose, California. We manufacture RF components and
subsystems at Pascall's facility in Ryde, Isle of Wight, England. We manufacture
all of our test equipment and communication timing and synchronization products
at the San Jose facility. We manufacture all of our digital and rotary switches
in our Rancho Cucamonga, California facility. We manufacture our electronic
power supplies in Ashford, Kent, England.
The purchased components we use to build our products are generally
available from a number of suppliers. We rely on a number of limited-source
suppliers for specific components and parts. We do not have long-term supply
agreements with these vendors. In general, we make advance purchases of some
components to ensure an adequate supply, particularly for products that require
lead-times of up to nine months to manufacture. If we were required to locate
new suppliers or additional sources of supply, we could experience a disruption
in our operations or incur additional costs in procuring required materials.
We intend to increase the use of outsource manufacturing for our
communications equipment products. We believe that outsourcing will lower our
manufacturing costs, in particular our labor costs, provide us with more
flexibility to scale our operations to meet changing demand, and allow us to
focus our engineering resources on new product development and product
enhancements.
73
PRODUCT DEVELOPMENT AND ENGINEERING
We believe that our continued success depends on our ability to
anticipate and respond to changes in the electronics hardware industry and
anticipate and satisfy our customers' preferences and requirements. We
continually review and evaluate technological and regulatory changes affecting
the electronics hardware industry and seek to offer products and capabilities
that solve customers' operational challenges and improve their efficiency.
For the three months ended March 31, 2005 and the years ended December
31, 2004, 2003 and 2002, our engineering and product development costs were
approximately $532,000, $1,521,000, $951,000 and $1,015,000, respectively.
Our product development costs during the past three years were related
to development of new communications test equipment and voice, data and video
transmission equipment and development of a new line of rotary switches at our
Digitran facility. We have continued incurring engineering costs applicable to
the development of new digital and rotary switches since 2001. Current research
expenditures in the communications equipment segment are directed principally
toward enhancements to the current test instrument product line, the expansion
of our range of network access and transmission products and the development and
expansion of our range of Network Equipment Building System ("NEBS") qualified
communication timing and synchronization systems. These expenditures are
intended to improve market share and gross profit margins, although we cannot
assure you that we will achieve these improvements.
We strive to take advantage of the latest computer-aided engineering
and engineering design automation workstation tools to design, simulate and test
advanced product features or product enhancements. Our use of these tools helps
us to speed product development while maintaining high standards of quality and
reliability for our products. Our use of these tools also allows us to
efficiently offer custom designs for OEM customers whose needs require the
integration of our electronic components with their own products.
INTELLECTUAL PROPERTY
We regard our software, hardware and manufacturing processes as
proprietary and rely on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our proprietary rights. We have filed patent applications, and intend to file
additional patent applications in the future, for various products with the
United States Patent and Trademark Office and in the European Union, Japan,
Canada and Brazil. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, which afford some
limited protection. The laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States. Our
research and development and manufacturing process typically involves the use
and development of a variety of forms of intellectual property and proprietary
technology. In addition, we incorporate technology and software that we license
from third party sources into our products. These licenses generally involve a
one-time fee and no time limit. We believe that alternative technologies for
this licensed technology are available both domestically and internationally.
We may receive in the future notices from holders of patents that raise
issues as to possible infringement by our products. As the number of test
equipment products and transmission instruments increases and the functionality
of these products further overlaps, we believe that we may become subject to
allegations of infringement given the nature of the telecommunications and
information technology industries and the high incidence of these kinds of
claims. Questions of infringement and the validity of patents in the fields of
74
telecommunications and information technology involve highly technical and
subjective analyses. These kinds of proceedings are time consuming and expensive
to defend or resolve, result in substantial diversion of management resources,
cause product shipment delays or could force us to enter into royalty or license
agreements rather than dispute the merits of the proceeding initiated against
us.
GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS
We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our products must comply with various
regulations defined by the United States Federal Communications Commission, or
FCC, and Underwriters Laboratories as well as industry standards such as NEBS
established by Telcordia Technologies, Inc., formerly Bellcore, and those
developed by the American National Standards Institute. Internationally, our
products must comply with standards established by the European Committee for
Electrotechnical Standardization, the European Committee for Standardization,
the European Telecommunications Standards Institute and telecommunications
authorities in various countries, as well as with recommendations of the
International Telecommunications Union. The failure of our products to comply,
or delays in compliance, with the various existing and evolving standards could
negatively affect our ability to sell our products.
Our product lines are subject to statutes governing safety and
environmental protection. We believe that we are in substantial compliance with
these statutes and are not aware of any proposed or pending safety or
environmental rule or regulation that, if adopted, would have a material affect
on our business or financial condition.
EMPLOYEES
As of June 7, 2005, we employed approximately 332 persons in our
various divisions and subsidiaries. None of our employees are represented by
labor unions, and there have not been any work stoppages at any of our
facilities. We believe that our relationship with our employees is good.
75
PROPERTIES
As of June 7, 2005, we leased or owned approximately 138,000 square
feet of administrative, engineering, production, storage and shipping space. All
of this space was leased other than the Abondant, France facility.
FUNCTION /
BUSINESS UNIT LOCATION LEASE EXPIRATION DATE
------------------------------------------------------------------------------------------------------------------
Emrise Corporation Rancho Cucamonga, California Administration;
(corporate headquarters) Expires October 2005
Emrise Electronics/Digitran Rancho Cucamonga, California Administration, Engineering and
(electronic components) Manufacturing;
Expires November 2005
Monrovia, California Expires February 2006
XCEL Power Systems, Ltd. Ashford, Kent, England Administration, Engineering and
and XCEL Corporation Ltd. Manufacturing; Expires March 2013
(electronic components)
XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales;
(electronic components) Expires December 2005
CXR-AJ Paris, France Administration;
(network access and transmission products) Expires April 2007
CXR-AJ Abondant, France Administration, Engineering,
(network access and transmission products) Manufacturing;
Facility is owned
CXR Larus San Jose, California Administration, Engineering,
(network access and transmission Manufacturing;
products, communications test Expires June 2011 and is
instruments, communication timing and renewable
synchronization products)
Pascall Electronics Limited Ryde, Isle of Wight, England Administration, Engineering,
Manufacturing;
Expires May 2016
On November 1, 2004, CXR Larus relocated from its Fremont facility to
the facility in San Jose occupied by Larus Corporation at the time it was
acquired in July 2004. Our lease on that facility expires June 30, 2011, with an
option to renew.
Our lease for the Ashford, Kent, England facility is a fifteen-year
lease that expires in March 2013, subject to the rights of the landlord or us to
terminate the lease after ten years.
We believe the listed facilities are adequate for our current business
operations.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions held by our directors and executive
officers as of June 7, 2005 are as follows:
NAME AGE POSITIONS HELD
---- --- --------------
Carmine T. Oliva (*)................... 62 Chairman of the Board, President, Chief Executive Officer,
Acting Chief Financial Officer and Director
Graham Jefferies....................... 48 Executive Vice President, Chief Operating Officer and
Managing Director of various subsidiaries
Randolph D. Foote (*).................. 56 Senior Vice President, Chief Financial Officer and Secretary
Robert B. Runyon (1)(2)(3)............. 79 Director
Laurence P. Finnegan, Jr. (1)(3)....... 67 Director
Otis W. Baskin (3)..................... 59 Director
-----------
(*) Mr. Oliva is temporarily serving as Acting Chief Financial Officer
until Mr. Foote again becomes available to serve as Chief Financial
Officer on a full-time basis on or about July 3, 2005.
(1) Member of the compensation committee.
(2) Member of the nominating committee.
(3) Member of the audit committee.
CARMINE T. OLIVA has been Chairman of the Board, President and Chief
Executive Officer and a Class III director of Emrise since March 26, 1997 and of
our subsidiary, Emrise Electronics, since he founded Emrise Electronics in 1983.
Mr. Oliva has served as our Acting Chief Financial Officer since April 5, 2005.
Mr. Oliva has been Chairman of the Board of XCEL Corporation, Ltd. since 1985,
and Chairman and Chief Executive Officer of CXR Larus since March 1997. In 2002,
Mr. Oliva obtained a French government working permit and assumed responsibility
as President of our CXR-AJ subsidiary. From January 1999 to January 2000, Mr.
Oliva served as a director of Digital Transmission Systems Inc. (DTSX), a
publicly held company based in Norcross, Georgia. From 1980 to 1983, Mr. Oliva
was Senior Vice President and General Manager, ITT Asia Pacific Inc. Prior to
holding that position, Mr. Oliva held a number of executive positions with ITT
Corporation and its subsidiaries over an eleven-year period. Mr. Oliva attained
the rank of Captain in the United States Army and is a veteran of the Vietnam
War. Mr. Oliva earned a B.A. degree in Social Studies/Business from Seton Hall
University and an M.B.A. degree in Business from The Ohio State University.
GRAHAM JEFFERIES was appointed as Executive Vice President on October
21, 1999. Mr. Jefferies was also appointed as our Chief Operating Officer on
January 3, 2005, after having served as Chief Operating Officer of our
Telecommunications Group since October 21, 1999. Mr. Jefferies served as
Executive Vice President of Emrise from April 1999 through October 1999. Mr.
Jefferies has served CXR-AJ as a director since March 1997 and as General
Manager since July 2002, has served as Managing Director of Belix Power
Conversions Ltd., Belix Wound Components Ltd. and Belix Company Ltd. since our
acquisition of those companies in April 2000, as Managing Director of XCEL Power
Systems, Ltd. since September 1996 and as Managing Director of XCEL Corporation,
Ltd. since March 1992. Prior to joining us in 1992, he was Sales and Marketing
Director of Jasmin Electronics plc, a major United Kingdom software and systems
provider, from 1987 to 1992. Mr. Jefferies held a variety of project management
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positions at GEC Marconi from 1978 to 1987. Mr. Jefferies earned a B.S. degree
in Engineering from Leicester University, and has experience in mergers and
acquisitions. Mr. Jefferies is a citizen and resident of the United Kingdom.
RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief
Financial Officer on October 4, 1999 and as our Assistant Secretary on February
12, 2001. Mr. Foote has been our Secretary since September 2004 and the Vice
President and Chief Financial Officer of CXR Larus and Emrise Electronics since
March 2000. Mr. Foote was the Corporate Controller of Unit Instruments, Inc., a
publicly-traded semiconductor equipment manufacturer, from October 1995 to May
1999. From March 1985 to October 1995, Mr. Foote was the Director of Tax and
Financial Reporting at Optical Radiation Corporation, a publicly traded company
that designed and manufactured products using advanced optical technology. Prior
to 1985, Mr. Foote held positions with Western Gear Corporation and Bucyrus Erie
Company, which were both publicly traded companies. Mr. Foote earned a B.S.
degree in Business Management from California State Polytechnic University,
Pomona and an M.B.A. degree in Tax/Business from Golden Gate University.
ROBERT B. RUNYON has served as a Class III director since March 26,
1997 and also served as our Secretary from that date through August 2004. He has
been the owner and principal of Runyon and Associates, a human resources and
business advisory firm, since 1987. He has acted as Senior Vice President of Sub
Hydro Dynamics Inc., a privately held marine services company based in Hilton
Head, South Carolina, since September 1995. Prior to our merger with Emrise
Electronics, Mr. Runyon served Emrise Electronics both as a director since
August 1983 and as a consultant in the areas of strategy development and
business planning, organization, human resources and administrative systems. He
also consults for companies in environmental products, marine propulsion systems
and architectural services sectors in these same areas. From 1970 to 1978, Mr.
Runyon held various executive positions with ITT Corporation, including Vice
President, Administration of ITT Grinnell, a manufacturing subsidiary of ITT.
>From 1963 to 1970, Mr. Runyon held executive positions at BP Oil including Vice
President, Corporate Planning and Administration of BP Oil Corporation, and
Director, Organization and Personnel for its predecessor, Sinclair Oil
Corporation. Mr. Runyon was Executive Vice President, Human Resources at the
Great Atlantic & Pacific Tea Company from 1978 to 1980. Mr. Runyon earned a B.S.
degree in Economics/Industrial Management from University of Pennsylvania.
LAURENCE P. FINNEGAN, JR. has served as a Class II director since March
26, 1997. In addition to being a director of Emrise Electronics from 1985 to
March 1997, Mr. Finnegan was Emrise Electronics' Chief Financial Officer from
1994 to 1997. Mr. Finnegan has held positions with ITT (1970-1974) as controller
of several divisions, Narco Scientific (1974-1983) as Vice President Finance,
Chief Financial Officer, Executive Vice President and Chief Operating Officer,
and Fischer & Porter (1986-1994) as Senior Vice President, Chief Financial
Officer and Treasurer. Since August 1995, he has been a principal of GwynnAllen
Partners, Bethlehem, Pennsylvania, an executive management consulting firm.
Since December 1996, Mr. Finnegan has been a director and the President of GA
Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. From
September 1997 to January 2001, Mr. Finnegan served as Vice President Finance
and Chief Financial Officer of QuestOne Decision Sciences, an efficiency
consulting firm based in Pennsylvania. Since August 2001, Mr. Finnegan has
served as a director and the Vice President and Chief Financial Officer of
VerdaSee Solutions, Inc., a consulting and software company based in
Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St. Joseph's
University.
78
OTIS W. BASKIN has served as a Class I director since February 6, 2004.
He has been a Professor of Management at The George L. Graziadio School of
Business and Management at Pepperdine University in Malibu, California since
June 1995 and also served as dean from 1995 to 2001. He has been a member of the
full-time faculty of the University of Houston - Clear Lake (1975-87) where he
served as Coordinator of the Management Faculty and Director of the Center for
Advanced Management Programs. He has also been Professor of Management at
Arizona State University, West Campus (1987-91) and The University of Memphis
(1991-95), in addition to serving as dean at both universities. Dr. Baskin
worked with AACSB International (Association for the Advancement of Collegiate
Schools of Business) as Special Advisor to the President and as Chief Executive
Officer from July 2002 to June 2004. He is an Associate with the Family Business
Consulting Group, where he advises family owned and closely held businesses. He
has served as an advisor to Exxon/Mobile Research and Engineering Corporation,
NASA and the United States Air Force. He earned a Ph.D. in Management, Public
Relations and Communication Theory from The University of Texas at Austin, an
M.A. degree in Speech Communication by the University of Houston, and a B.A.
degree in Religion from Oklahoma Christian University.
Our business, property and affairs are managed under the direction of
our board. Directors are kept informed of our business through discussions with
our executive officers, by reviewing materials provided to them and by
participating in meetings of our board and its committees.
Our bylaws provide that our board of directors shall consist of at
least four directors. Our board is divided into three classes of directors:
Class I, Class II and Class III. The term of office of each class of directors
is three years, with one class expiring each year at our annual meeting of
stockholders. We currently have four directors on our board, with no vacancies.
Our current board consists of one Class I director whose term expires at our
2006 annual meeting, one Class II director whose term expires at our 2007 annual
meeting, and two Class III directors whose term expires at our 2005 annual
meeting.
Our officers are appointed by and serve at the discretion of our board
of directors. There are no family relationships among our executive officers and
directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), requires our executive officers and directors, and persons who
beneficially own more than 10% of a registered class of our common stock, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission ("Commission"). These officers, directors and
stockholders are required by the Commission regulations to furnish us with
copies of all reports that they file.
Based solely upon a review of copies of the reports furnished to us
during the year ended December 31, 2004 and thereafter, or any written
representations received by us from directors, officers and beneficial owners of
more than 10% of our common stock ("reporting persons") that no other reports
were required, we believe that, during 2004, all Section 16(a) filing
requirements applicable to our reporting persons were met, except that Otis
Baskin filed a late Form 3 to report his becoming a reporting person.
CODE OF ETHICS
Our board of directors has adopted a Code of Business Conduct and
Ethics that applies to all of our directors, officers and employees and an
additional Code of Business Ethics that applies to our Chief Executive Officer
and senior financial officers.
79
We intend to satisfy the disclosure requirement under Item 5.05 of Form
8-K relating to amendments to or waivers from provisions of these codes that
relate to one or more of the items set forth in Item 406(b) of Regulation S-K,
by describing on our Internet website, located at http://www.emrise.com, within
four business days following the date of a waiver or a substantive amendment,
the date of the waiver or amendment, the nature of the amendment or waiver, and
the name of the person to whom the waiver was granted.
Information on our Internet website is not, and shall not be deemed to
be, a part of this prospectus or incorporated into any other filings we make
with the Commission.
COMPENSATION OF EXECUTIVE OFFICERS
The following table provides information concerning the annual and
long-term compensation for the years ended December 31, 2004, 2003 and 2002
earned for services in all capacities as an employee by our Chief Executive
Officer and each of our other executive officers who received an annual salary
and bonus of more than $100,000 for services rendered to us during 2004
(collectively, the "named executive officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARD
------------------
NAME AND PRINCIPAL POSITION ------------------- SECURITIES ALL OTHER
YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
---- ------ ----- ------------------ ------------
Carmine T. Oliva ........................ 2004 $309,000 $94,000 26,000 $ 4,821(1)
President and Chief Executive Officer 2003 $271,510 $70,000 53,000 $ 4,821(1)
2002 $257,010 -- -- $ 4,821(1)
Graham Jefferies ........................ 2004 $237,017 $71,000 40,000 $ 10,924(3)
Executive Vice President and Chief 2003 $210,295 $55,000 54,000 $ 10,320(3)
Operating Officer (2) 2002 $156,923 -- -- $ 9,000(3)
Randolph D. Foote........................ 2004 $173,867 $40,000 25,000 $ 1,965(4)
Senior Vice President, Chief Financial 2003 $157,230 $30,000 35,000 $ 1,886(4)
Officer and Assistant Secretary(4) 2002 $151,368 -- -- $ 1,604(4)
---------------
(1) Represents the dollar value of insurance premiums we paid with respect
to a $1,000,000 term life insurance policy for the benefit of Mr.
Oliva's spouse.
(2) Mr. Jefferies is based in the United Kingdom and receives his
remuneration in British pounds sterling. The compensation amounts
listed for Mr. Jefferies are shown in United States dollars, converted
from British pounds sterling using the average conversion rates in
effect during the time periods of compensation. Mr. Jefferies served as
Chief Operating Officer of our Telecommunications Group until he was
appointed Chief Operating Officer of Emrise in January 2005.
(3) Represents company contributions to Mr. Jefferies' retirement account.
(4) Represents company contributions to Mr. Foote's 401(k) retirement
account.
RETIREMENT ACCOUNT MATCHING CONTRIBUTIONS
We match up to the lesser of $2,000 and 20% of Mr. Foote's
contributions to his 401(k) account. During 2004, our matching contribution
amounted to $1,965. This matching arrangement was generally made available to
all employees of Emrise and provides for the same method of allocation of
benefits between management and non-management participants.
Also, XPS makes matching contributions of up to 6% of Mr. Jefferies'
salary to an executives' defined contribution plan. Other employees of XPS may
receive matching contributions to a defined contribution plan of up to 4% of
their salary. Amounts contributed to the defined contribution plans are intended
to used to purchase annuities upon retirement. During 2004, 2003 and 2002, Mr.
Jefferies received matching contributions of $10,924, $10,320 and $9,000,
respectively.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding options granted in
the year ended December 31, 2004 to the executive officers named in the summary
compensation table. We did not grant any stock appreciation rights during 2004.
This information includes hypothetical potential gains from stock options
granted in 2004. These hypothetical gains are based entirely on assumed annual
growth rates of 5% and 10% in the value of our common stock price over the
ten-year life of the stock options granted in 2004. These assumed rates of
growth were selected by the Commission for illustrative purposes only and are
not intended to predict future stock prices, which will depend upon market
conditions and our future performance and prospects.
POTENTIAL
REALIZABLE VALUE
AT ASSUMED RATES
NUMBER OF PERCENTAGE OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
GRANT UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAMED OFFICER DATE GRANTED(1) FISCAL YEAR(2) PER SHARE DATE 5% 10%
----------------------- ------- ---------- -------------- --------- ---------- ------- -------
Carmine T. Oliva....... 2/24/04 26,000 8.3% $1.00 2/24/14 $16,351 $41,437
Graham Jefferies....... 2/24/04 40,000 12.7% $1.00 2/24/14 $25,156 $63,750
Randolph D. Foote...... 2/24/04 25,000 7.9% $1.00 2/24/14 $15,722 $39,844
--------------
(1) Options vest in two equal annual installments commencing February 24,
2005.
(2) Based on options to purchase 314,698 shares granted to our employees
during 2004.
(3) Calculated using the potential realizable value of each grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table provides information regarding the value of
unexercised options held by the named executive officers as of December 31,
2004. None of the named executives officers acquired shares through the exercise
of options during 2004.
NUMBER OF
SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 2004 DECEMBER 31, 2004 (1)
--------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------------- ----------- ------------- ----------- -------------
Carmine T. Oliva................... 283,663 26,000 179,360 16,120
Graham Jefferies................... 180,287 40,000 168,480 24,800
Randolph D. Foote.................. 85,000 25,000 115,450 15,500
--------------
(1) Based on the last reported sale price of our common stock of $1.62 on
December 30, 2004 (the last trading day during 2004) as reported on the
OTC Bulletin Board, less the exercise price of the options.
81
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL ARRANGEMENTS
CARMINE T. OLIVA
As of January 1, 2001, we entered into an employment agreement with
Carmine T. Oliva, our Chairman of the Board, President and Chief Executive
Officer. The agreement is subject to automatic renewal for two consecutive
two-year terms beginning on January 1, 2006, unless, during the required notice
periods (which run from September 1 to November 1 of the second year preceding
the year in which a two-year renewal period is to begin), either party gives
written notice of its desire not to renew. The agreement provides for an initial
base salary of $250,000 per year and states that Mr. Oliva is eligible to
receive merit or promotional increases and to participate in other benefit and
incentive programs we may offer. For 2004, Mr. Oliva's salary and car allowance
totaled $309,000 and his bonus was $94,000.
If the board of directors makes a substantial addition to or reduction
of Mr. Oliva's duties, Mr. Oliva may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Oliva
the value of three years of his annual salary or the value of his annual salary
that would have been due through January 1, 2006, whichever is greater.
If we terminate Mr. Oliva for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Oliva without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. If the termination without cause occurs prior to
the expiration of the initial term of the agreement on December 31, 2005, Mr.
Oliva will be entitled to be paid his annual salary for three years following
the termination or until December 31, 2005, whichever is the longer period. If
the termination occurs during a renewal period, Mr. Oliva will be entitled to be
paid his annual salary through the expiration of the particular renewal period
or for two years, whichever is the longer period, and to be paid all other
amounts payable under the agreement.
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated
without cause within two years following a change of control, then:
o if the termination occurs prior to the expiration of the
initial term of the agreement on December 31, 2005, Mr. Oliva
will be entitled to be paid his annual salary and all other
amounts payable under the agreement for three years following
the termination or until December 31, 2005, whichever is the
longer period, which amounts shall be payable at his election
in a lump sum within 30 days after the termination or in
installments;
o if the termination occurs during a renewal period, Mr. Oliva
will be entitled to be paid his annual salary through the
period ending two years after the expiration of the particular
renewal period, and to be paid all other amounts payable under
the agreement;
o Mr. Oliva will be entitled to receive the average of his
annual executive bonuses awarded to him in the three years
preceding his termination, over the same time span and under
the same conditions as his annual salary;
82
o Mr. Oliva will be entitled to receive any executive bonus
awarded but not yet paid;
o Mr. Oliva will be entitled to receive a gross up of all
compensatory payments listed above so that he receives those
payments substantially free of federal and state income taxes;
and
o Mr. Oliva will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial term
or renewal term in which the termination occurred and the date
he receives equivalent coverage and benefits under plans and
programs of a subsequent employer.
If Mr. Oliva dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Oliva will continue to be
payable to Mr. Oliva's designee or legal representatives for two years following
his death. If Mr. Oliva is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability. However, we must continue to pay amounts payable under the
agreement to or for the benefit of Mr. Oliva for two years following the
effective date of the termination.
If the agreement is terminated for any reason and unless otherwise
agreed to by Mr. Oliva and us, then in addition to any other severance payments
to which Mr. Oliva is entitled, we must continue to pay Mr. Oliva's annual
salary until:
o all obligations incurred by Mr. Oliva on our behalf, including
any lease obligations signed by Mr. Oliva related to the
performance of his duties under the agreement, have been
voided or fully assumed by us or our successor;
o all loan collateral pledged by Mr. Oliva has been returned to
Mr. Oliva; and
o all personal guarantees given by Mr. Oliva or his family on
our behalf are voided.
The agreement provides that we will furnish a life insurance policy on
Mr. Oliva's life, in the amount of $1 million, payable to Mr. Oliva's estate in
the event of his death during the term of the agreement and any renewals of the
agreement. This benefit is in return for, and is intended to protect Mr. Oliva's
estate from financial loss arising from any and all personal guarantees that Mr.
Oliva provided in favor of us, as required by various corporate lenders. This
benefit is also intended to enable Mr. Oliva's estate to exercise all warrants
and options to purchase shares of our common stock.
The agreement contains non-competition provisions that prohibit Mr.
Oliva from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for two
years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Oliva of our
confidential information and assign ownership to us of inventions created by Mr.
Oliva in connection with his employment.
RANDOLPH D. FOOTE
On July 2, 2001, we entered into an employment agreement with Randolph
D. Foote at an initial annual salary of $130,000 and with an initial term of
three years. For 2004, Mr. Foote's salary and car allowance totaled $174,000,
and his bonus was $40,000. The agreement automatically renewed for a one-year
term on July 2, 2004 and is scheduled to automatically renew for one additional
one-year term on July 2, 2005. Mr. Foote is to act as Senior Vice President and
Chief Financial Officer and is to perform additional services as may be approved
by our board of directors.
83
If the board of directors makes a substantial addition to or reduction
of Mr. Foote's duties, Mr. Foote may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Foote
the value of one year of his annual salary within 30 days after the effective
date of the resignation.
If we terminate Mr. Foote for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Foote without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. Mr. Foote will be entitled to be paid his annual
salary through the expiration of the then current renewal period, and to be paid
all other amounts payable under the agreement.
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Foote is terminated
without cause within two years following a change of control, then:
o Mr. Foote will be entitled to be paid in installments or, at
his election in a lump sum within 30 days after termination,
his annual salary and other amounts payable under the
agreement through the expiration of the then current renewal
period plus one additional year;
o Mr. Foote will be entitled to receive the average of his
annual executive bonuses awarded to him in the three years
preceding his termination, over the same time span and under
the same conditions as his annual salary;
o Mr. Foote will be entitled to receive any executive bonus
awarded but not yet paid; and
o Mr. Foote will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial or
current renewal term and the date he receives equivalent
coverage and benefits under plans and programs of a subsequent
employer.
If Mr. Foote dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Foote will continue to be
payable to Mr. Foote's designee or legal representatives for one year following
his death. If Mr. Foote is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Foote following the 180th
day of disability; provided, however, that we must continue to pay amounts
payable under the agreement to or for the benefit of Mr. Foote for one year
following the effective date of the termination.
The agreement contains non-competition provisions that prohibit Mr.
Foote from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for one
year afterward. The agreement also contains provisions that restrict disclosure
by Mr. Foote of our confidential information and assign ownership to us of
inventions created by Mr. Foote in connection with his employment.
84
GRAHAM JEFFERIES
On July 2, 2001, we entered into an employment agreement with Graham
Jefferies at an initial annual salary of 100,000 British pounds sterling
(approximately $141,000 at the then current exchange rates) and with an initial
term of three years. For 2004, Mr. Jefferies' salary and car allowance totaled
approximately 130,000 British pounds sterling (approximately $237,000 at the
exchange rates applicable during 2004) and his bonus was 37,000 British pounds
sterling (approximately $71,000 at the exchange rate in effect at December 31,
2004). The agreement automatically renewed for a one-year term on July 2, 2004
and is scheduled to automatically renew for one additional one-year term on July
2, 2005. Mr. Jefferies is to act as Managing Director of XCEL Corporation, Ltd.
and as Executive Vice President and Chief Operating Officer of our Telecom Group
and is to perform additional services as may be approved by our board of
directors. He was appointed as Chief Operating Officer of Emrise in January
2005. This agreement replaced a substantially similar agreement that had been
effective since May 1, 1998.
If the board of directors makes a substantial addition to or reduction
of Mr. Jefferies' duties, Mr. Jefferies may resign upon written notice given
within 30 days of the change in duties. Within 30 days after the effective date
of a resignation under these circumstances, we will be obligated to pay to Mr.
Jefferies the value of one year of his annual salary within 30 days after the
effective date of the resignation.
If we terminate Mr. Jefferies for cause, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement terminates on the date of termination. If we terminate Mr. Jefferies
without cause (including by ceasing our operations due to bankruptcy or by our
general inability to meet our obligations as they become due), we must provide
him with 60 days' prior written notice. Mr. Jefferies will be entitled to be
paid his annual salary through the expiration of the then current renewal period
plus one additional year, and to be paid all other amounts payable under the
agreement.
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Jefferies is
terminated without cause within two years following a change of control, then:
o Mr. Jefferies will be entitled to be paid in installments or,
at his election in a lump sum within 30 days after
termination, his annual salary and other amounts payable under
the agreement through the expiration of the current renewal
period plus one additional year;
o Mr. Jefferies will be entitled to receive the average of his
annual executive bonuses awarded to him in the three years
preceding his termination, over the same time span and under
the same conditions as his annual salary;
o Mr. Jefferies will be entitled to receive any executive bonus
awarded but not yet paid; and
o Mr. Jefferies will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial or
current renewal term and the date he receives equivalent
coverage and benefits under plans and programs of a subsequent
employer.
85
If Mr. Jefferies dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Jefferies will continue to be
payable to Mr. Jefferies' designee or legal representatives for one year
following his death. If Mr. Jefferies is unable to substantially perform his
duties under the agreement for an aggregate of 180 days in any 18-month period,
we may terminate the agreement by ten days' prior written notice to Mr.
Jefferies following the 180th day of disability; provided, however, that we must
continue to pay amounts payable under the agreement to or for the benefit of Mr.
Jefferies for one year following the effective date of the termination.
The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customers or employees during the initial term and any renewal terms and for
two years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Jefferies of our
confidential information and assign ownership to us of inventions created by Mr.
Jefferies in connection with his employment.
BOARD COMMITTEES
Our board of directors currently has an audit committee, a compensation
committee and a nominating committee. Our board of directors has determined that
Robert Runyon, Otis Baskin and Laurence Finnegan, each of whom is a member of
one or more of these committees, are "independent" as defined in NASD
Marketplace Rule 4200(a)(15) and that Messrs. Finnegan and Baskin meet the other
criteria contained in NASD Marketplace Rule 4350 relating to audit committee
members.
The audit committee selects our independent auditors, reviews the
results and scope of the audit and other services provided by our independent
auditors, and reviews our financial statements for each interim period and for
our year end. From June 26, 1999 to March 21, 2004, this committee consisted of
Laurence Finnegan. From March 22, 2004 to May 24, 2005, this committee consisted
of Messrs. Finnegan and Baskin. Since May 25, 2005, this committee has consisted
of Mr. Finnegan, who serves as chairman, and Messrs. Baskin and Runyon. The
audit committee operates pursuant to a charter approved by our board of
directors and audit committee. Our board of directors has determined that Mr.
Finnegan is an "audit committee financial expert."
The compensation committee is responsible for establishing and
administering our policies involving the compensation of all of our executive
officers and establishing and recommending to our board of directors the terms
and conditions of all employee and consultant compensation and benefit plans.
Our entire board of directors also may perform these functions with respect to
our employee stock option plans. Since June 26, 1999, this committee has
consisted of Messrs. Runyon and Finnegan. The compensation committee operates
pursuant to a charter approved by our board of directors and compensation
committee.
The nominating committee selects nominees for the board of directors.
Beginning in and since 2000, the nominating committee has consisted of Mr.
Runyon. There is one vacancy on the nominating committee. The nominating
committee utilizes a variety of methods for identifying and evaluating nominees
for director, including candidates that may be referred by stockholders.
Stockholders that desire to recommend candidates for the board for evaluation
may do so by contacting Emrise in writing, identifying the potential candidate
and providing background information. Candidates may also come to the attention
of the nominating committee through current board members, professional search
firms and other persons. The nominating committee operates pursuant to a charter
approved by our board of directors and Nominating Committee.
86
COMPENSATION OF DIRECTORS
During 2004, each non-employee director was entitled to receive $1,000
per month as compensation for his services. In addition, since November 1, 2002,
each board member chairing a standing committee has been entitled to receive
$500 per month as compensation for his services. We reimburse all directors for
out-of-pocket expenses incurred in connection with attendance at board and
committee meetings. We may periodically award options or warrants to our
directors under our existing option and incentive plans. On February 24, 2004,
we granted to each of Messrs. Runyon and Finnegan an option to purchase up to
30,000 shares of our common stock at an exercise price of $1.00 per share. The
options vest in two equal installments on February 24, 2005 and February 24,
2006. In addition, we granted to Mr. Baskin, our newly-appointed non-employee
director, an option to purchase up to 50,000 shares of our common stock upon the
same terms as the options granted to the other two non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the board of directors has a relationship that would
constitute an interlocking relationship with executive officers and directors of
another entity. During 2004, Mr. Oliva made salary recommendations to our
compensation committee regarding salary increases for key executives.
STOCK OPTION PLANS
We currently have four stock option plans: the 1993 Stock Option Plan,
the Employee Stock and Stock Option Plan, the 1997 Stock Incentive Plan and the
Amended and Restated 2000 Stock Option Plan ("2000 Stock Option Plan"). These
plans are administered by our compensation committee, which currently consists
of Messrs. Runyon and Finnegan.
The 1993 Stock Option Plan authorizes the issuance of incentive stock
options, commonly known as ISOs, and non-qualified stock options, commonly known
as NQOs, to our employees and independent contractors for the purchase of up to
300,000 shares of our common stock. The 1993 Stock Option Plan terminated on
August 31, 2003.
The Employee Stock and Stock Option Plan authorizes the issuance of
NQOs and restricted and unrestricted stock grants to our employees (including
officers and directors who are employees) and consultants for up to an aggregate
of 520,000 shares of common stock. The Employee Stock and Stock Option Plan
terminated on July 1, 2004.
The 1997 Stock Incentive Plan authorizes the issuance of ISOs, stock
appreciation rights or stock awards to our employees and directors for up to an
aggregate of 1,600,000 shares of common stock, except that ISOs may not be
granted to non-employee directors. Our board of directors' adoption of the 1997
Stock Incentive Plan was ratified by our stockholders at our 1998 annual meeting
of stockholders. The 1997 Stock Incentive Plan terminates on June 15, 2007. Our
board does not intend to issue any additional options under the 1997 Stock
Incentive Plan.
Our 2000 Stock Option Plan was adopted by our board of directors in
November 2000, approved by our stockholders on January 16, 2001, and amended and
restated by our board of directors in August 2001. The 2000 Stock Option Plan
authorizes the issuance of ISOs and NQOs to our employees, officers, directors
and consultants and to employees of companies that do business with us for the
purchase of up to 2,000,000 shares of common stock. As of June 7, 2005, we had
approximately 332 employees and officers and three non-employee directors
eligible to receive options under the 2000 Stock Option Plan, options to
purchase up to 797,698 shares were outstanding under this plan and 1,098,552
shares remained available for grants under this plan. The following is a
description of some of the key terms of the 2000 Stock Option Plan.
87
SHARES SUBJECT TO THE 2000 STOCK OPTION PLAN
A total of 2,000,000 shares of our common stock were authorized for
issuance under the 2000 Stock Option Plan. Any shares of common stock that are
subject to an award but are not used because the terms and conditions of the
award are not met, or any shares that are used by participants to pay all or
part of the purchase price of any option, may again be used for awards under the
2000 Stock Option Plan.
ADMINISTRATION
It is the intent of the 2000 Stock Option Plan that it be administered
in a manner such that option grants and exercises would be "exempt" under Rule
16b-3 of the Exchange Act. The compensation committee is empowered to select
those eligible persons to whom options shall be granted under the 2000 Stock
Option Plan; to determine the time or times at which each option shall be
granted, whether options will be ISOs or NQOs and the number of shares to be
subject to each option; and to fix the time and manner in which each option may
be exercised, including the exercise price and option period, and other terms
and conditions of options, all subject to the terms and conditions of the 2000
Stock Option Plan. The compensation committee has sole discretion to interpret
and administer the 2000 Stock Option Plan, and its decisions regarding the 2000
Stock Option Plan are final, except that our board of directors can act in place
of the compensation committee as the administrator of the 2000 Stock Option Plan
at any time or from time to time, in its discretion.
OPTION TERMS
ISOs granted under the 2000 Stock Option Plan must have an exercise
price of not less than 100% of the fair market value of a share of common stock
on the date the ISO is granted and must be exercised, if at all, within ten
years from the date of grant. In the case of an ISO granted to an optionee who
owns more than 10% of the total voting securities of Emrise on the date of
grant, the exercise price may be not less than 110% of fair market value on the
date of grant, and the option period may not exceed five years. NQOs granted
under the 2000 Stock Option Plan must have an exercise price of not less than
85% of the fair market value of a share of common stock on the date the NQO is
granted.
Options may be exercised during a period of time fixed by the committee
except that no option may be exercised more than ten years after the date of
grant. In the discretion of the committee, payment of the purchase price for the
shares of stock acquired through the exercise of an option may be made in cash,
shares of our common stock or a combination of cash and shares of our common
stock.
AMENDMENT AND TERMINATION
The 2000 Stock Option Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time and from time to time by
our board of directors. However, our board of directors may not materially
impair any outstanding options without the express consent of the optionee or
materially increase the number of shares subject to the 2000 Stock Option Plan,
materially increase the benefits to optionees under the 2000 Stock Option Plan,
materially modify the requirements as to eligibility to participate in the 2000
Stock Option Plan or alter the method of determining the option exercise price
without stockholder approval. No option may be granted under the 2000 Stock
Option Plan after November 14, 2010.
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FEDERAL INCOME TAX CONSEQUENCES
NQOs. Holders of NQOs do not realize income as a result of a grant of
the option, but normally realize compensation income upon exercise of an NQO to
the extent that the fair market value of the shares of common stock on the date
of exercise of the NQO exceeds the exercise price paid. We will be required to
withhold taxes on ordinary income realized by an optionee upon the exercise of a
NQO.
In the case of an optionee subject to the "short-swing" profit
recapture provisions of Section 16(b) of the Exchange Act, the optionee realizes
income only upon the lapse of the six-month period under Section 16(b), unless
the optionee elects to recognize income immediately upon exercise of his or her
option.
ISOs. Holders of ISOs will not be considered to have received taxable
income upon either the grant of the option or its exercise. Upon the sale or
other taxable disposition of the shares, long-term capital gain will normally be
recognized on the full amount of the difference between the amount realized and
the option exercise price paid if no disposition of the shares has taken place
within either two years from the date of grant of the option or one year from
the date of transfer of the shares to the optionee upon exercise. If the shares
are sold or otherwise disposed of before the end of the one-year or two-year
periods, the holder of the ISO must include the gain realized as ordinary income
to the extent of the lesser of the fair market value of the option stock minus
the option price, or the amount realized minus the option price. Any gain in
excess of these amounts, presumably, will be treated as capital gain. We will be
entitled to a tax deduction in regard to an ISO only to the extent the optionee
has ordinary income upon the sale or other disposition of the option shares.
Upon the exercise of an ISO, the amount by which the fair market value
of the purchased shares at the time of exercise exceeds the option price will be
an "item of tax preference" for purposes of computing the optionee's alternative
minimum tax for the year of exercise. If the shares so acquired are disposed of
prior to the expiration of the one-year or two-year periods described above,
there should be no "item of tax preference" arising from the option exercise.
POSSIBLE ANTI-TAKEOVER EFFECTS
Although not intended as an anti-takeover measure by our board of
directors, one of the possible effects of the 2000 Stock Option Plan could be to
place additional shares, and to increase the percentage of the total number of
shares outstanding, in the hands of the directors and officers of Emrise. Those
persons may be viewed as part of, or friendly to, incumbent management and may,
therefore, under some circumstances be expected to make investment and voting
decisions in response to a hostile takeover attempt that may serve to discourage
or render more difficult the accomplishment of the attempt.
In addition, options may, in the discretion of the committee, contain a
provision providing for the acceleration of the exercisability of outstanding,
but unexercisable, installments upon the first public announcement of a tender
offer, merger, consolidation, sale of all or substantially all of our assets, or
other attempted changes in the control of Emrise. In the opinion of our board of
directors, this acceleration provision merely ensures that optionees under the
2000 Stock Option Plan will be able to exercise their options as intended by the
board of directors and stockholders prior to any extraordinary corporate
transaction which might serve to limit or restrict that right. Our board of
directors is, however, presently unaware of any threat of hostile takeover
involving Emrise.
89
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with a pending or completed action, suit or proceeding if the officer
or director acted in good faith and in a manner the officer or director
reasonably believed to be in the best interests of the corporation.
Our certificate of incorporation provides that, except in certain
specified instances, our directors shall not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duty as
directors, except liability for the following:
o Any breach of their duty of loyalty to our company or our
stockholders.
o Acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law.
o Unlawful payments of dividends or unlawful stock repurchases
or redemptions as provided in Section 174 of the Delaware
General Corporation Law.
o Any transaction from which the director derived an improper
personal benefit.
In addition, our certificate of incorporation and bylaws obligate us to
indemnify our directors and officers against expenses and other amounts
reasonably incurred in connection with any proceeding arising from the fact that
such person is or was an agent of ours. Our bylaws also authorize us to purchase
and maintain insurance on behalf of any of our directors or officers against any
liability asserted against that person in that capacity, whether or not we would
have the power to indemnify that person under the provisions of the Delaware
General Corporation Law. We have entered and expect to continue to enter into
agreements to indemnify our directors and officers as determined by our board of
directors. These agreements provide for indemnification of related expenses
including attorneys' fees, judgments, fines and settlement amounts incurred by
any of these individuals in any action or proceeding. We believe that these
bylaw provisions and indemnification agreements are necessary to attract any
retain qualified persons as directors and officers. We also maintain directors'
and officers' liability insurance.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing and lawsuit against our directors for breach of their fiduciary duty.
They may also reduce the likelihood of derivative litigation against our
directors and officers, even though an action, if successful, might benefit us
and other stockholders. Furthermore, a stockholder's investment may be adversely
affected to the extent that we pay the costs of settlement and damage awards
against directors and officers as required by these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of our
directors, officers or employees regarding which indemnification is sought, and
we are not aware of any threatened litigation that may result in claims for
indemnification.
We have entered into an indemnification agreement with each of our
directors and executive officers. The indemnification agreements require us to
indemnify our directors and officers to the fullest extent permitted by Delaware
law.
90
Insofar as the provisions of our certificate of incorporation or bylaws
provide for indemnification of directors or officers for liabilities arising
under the Securities Act of 1933, as amended ("Securities Act"), we have been
informed that in the opinion of the Commission this indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are or have been a party to employment and compensation arrangements
with related parties, as more particularly described above under the headings
"Compensation of Executive Officers," "Employment Contracts and Termination of
Employment and Change-in-Control Arrangements" and "Compensation of Directors."
We have entered into an indemnification agreement with each of our
directors and executive officers. The indemnification agreements and our
certificate of incorporation and bylaws require us to indemnify our directors
and officers to the fullest extent permitted by Delaware law.
As described below under the heading "Private Placements Through Which
the Selling Security Holders Obtained Beneficial Ownership of the Offered
Shares," we issued in a January 2005 private placement common stock and warrants
to investors who thereby became beneficial owners of more than 5% of our then
outstanding shares of common stock.
91
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our common stock as of June 7, 2005, the date of the
table, by:
o each person known by us to beneficially own more than 5% of
the outstanding shares of our common stock;
o each of our directors;
o each of the executive officers named in the summary
compensation table contained in the "Management" section of
this prospectus; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
securities. To our knowledge, except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table below
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Shares of common stock underlying
derivative securities, if any, that currently are exercisable or convertible or
are scheduled to become exercisable or convertible for or into shares of common
stock within 60 days after the date of the table are deemed to be outstanding in
calculating the percentage ownership of each listed person or group but are not
deemed to be outstanding as to any other person or group. Percentage of
beneficial ownership is based on 37,384,708 shares of common stock outstanding
as of the date of the table.
The address of each of the following stockholders, unless otherwise
indicated in the footnotes to the table, is c/o Emrise Corporation, 9485 Haven
Avenue, Suite 100, Rancho Cucamonga, California 91730. Messrs. Oliva, Runyon,
Finnegan and Baskin are directors of Emrise. Messrs. Oliva, Jefferies and Foote
are executive officers of Emrise.
92
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER TITLE OF CLASS OF BENEFICIAL OWNERSHIP OF CLASS
--------------------------------------------------- -------------- ----------------------- --------
Carmine T. Oliva................................... Common 1,320,305(1) 3.52%
Robert B. Runyon................................... Common 346,146(2) *
Laurence P. Finnegan, Jr........................... Common 210,171(2) *
Otis W. Baskin..................................... Common 25,000(3) *
Graham T. Jefferies................................ Common 167,276(4) *
Randolph D. Foote.................................. Common 102,500(5) *
The Pinnacle Fund, L.P............................. Common 3,125,000(6) 8.22%
JLF Asset Management, LLC and Jeffrey L. Feinberg.. Common 4,328,200(7) 11.36%
JLF Offshore Fund, Ltd............................. Common 2,536,654(8) 6.71%
Marathon Capital Management, LLC Common 2,057,100(9) 5.50%
All executive officers and directors as a group (6
persons)........................................ Common 2,171,398(10) 5.69%
------------------
* Less than 1.00%
(1) Includes 81,889 shares held individually by Mr. Oliva's spouse, and
166,000 shares underlying options.
(2) Includes 166,000 shares underlying options.
(3) Represents shares underlying options.
(4) Includes 164,000 shares underlying options.
(5) Includes 97,500 shares underlying options.
(6) Includes 625,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by Barry M. Kitt, as sole member of Pinnacle Fund
Management, LLC, which entity is the general partner of Pinnacle
Advisers, L.P., which entity is the general partner of The Pinnacle
Fund, L.P. The address for Mr. Kitt is c/o The Pinnacle Fund, L.P.,
4965 Preston Park, Blvd., Suite 240, Plano, TX 75093.
(7) Includes an aggregate of 3,628,200 outstanding shares held by JLF
Offshore Fund, Ltd., JLF Partners I, L.P. and JLF Partners II, L.P.,
and an aggregate of 122,106 shares underlying warrants held by those
three entities. Also includes an aggregate of 577,894 shares underlying
warrants held by those three entities, which shares exceed the
contractual 9.999% beneficial ownership limitation that applied as of
the date of the table and therefore are not considered by JLF Asset
Management, LLC and Jeffrey L. Feinberg to be beneficially owned by
them as of the date of the table. Power to vote or dispose of the
shares beneficially owned is held by Mr. Feinberg, as managing member
of JLF Asset Management, LLC, which entity is investment manager of the
four entities named in the first sentence of this footnote. The address
for Mr. Feinberg is c/o JLF Asset Management, LLC, 2775 Via de la
Valle, Suite 204, Del Mar, CA 92014.
(8) Includes 413,675 shares underlying warrants. Power to vote or dispose
of the shares is held by Jeffrey L. Feinberg, as managing member of JLF
Asset Management, LLC, which entity is investment manager of JLF
Offshore Fund, Ltd. See footnote (7) above for information regarding
JLF Asset Management, LLC.
(9) Based on information included by Marathon Capital Management, LLC
("Marathon") in a Schedule 13G for January 13, 2005. Marathon reported
that it holds sole voting power over 125,000 shares and sole disposal
power over 2,057,100 shares. The Schedule 13G was executed by James G.
Kennedy, as President of Marathon. The address for Marathon is P.O. Box
771, Hunt Valley, MD 21030.
(10) Includes 784,500 shares underlying options and 81,889 outstanding
shares held individually by Mr. Oliva's wife.
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SELLING SECURITY HOLDERS
SELLING SECURITY HOLDER TABLE
This prospectus covers the offer and sale by the selling security
holders of up to an aggregate of 18,388,777 shares of common stock, including an
aggregate of 13,782,092 issued and outstanding shares of our common stock and an
aggregate of 4,606,685 shares of our common stock underlying warrants. The
following table sets forth, to our knowledge, certain information about the
selling security holders as of June 7, 2005, the date of the table, based on
information furnished to us by the selling security holders. Except as indicated
in the private placement descriptions or footnotes following the table, each
selling security holder has indicated to us that it is acting individually, not
as a member of a group, and none of the selling security holders or their
affiliates has held any position or office or had any other material
relationship with us in the past three years.
Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
securities. To our knowledge, except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table below
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Shares of common stock underlying
derivative securities, if any, that currently are exercisable or convertible or
are scheduled to become exercisable or convertible for or into shares of common
stock within 60 days after the date of the table are deemed to be outstanding in
calculating the percentage ownership of each listed person or group but are not
deemed to be outstanding as to any other person or group. Percentage of
beneficial ownership is based on 37,384,708 shares of common stock outstanding
as of the date of the table. Shares shown as beneficially owned after the
offering assume that all shares being offered are sold.
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders described below. Roth Capital Partners, LLC ("Roth
Capital") is an NASD-registered broker-dealer that received warrants as
compensation for services rendered as placement agent in the January 2005
private placement described below. Roth Capital has represented to us that it is
not acting as an underwriter in this offering, it received the warrants whose
underlying shares are offered under this prospectus in the ordinary course of
business, and at the time of such receipt, it had no agreements or
understandings, directly or indirectly, with any person to distribute the
warrants or underlying shares.
94
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES OF AFTER OFFERING
NAME OF -------------------------- COMMON STOCK --------------------
BENEFICIAL OWNER NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
----------------------------------------- ------------- ---------- ------------- ------- ----------
JLF Offshore Fund, Ltd................... 2,536,654 (1) 6.71% 2,062,175 (1) 474,479 1.27%
JLF Partners I, LP....................... 1,666,814 (2) 4.43% 1,336,225 (2) 330,589 *
JLF Partners II, LP...................... 124,732 (3) * 101,600 (3) 23,132 *
The Pinnacle Fund, L.P................... 3,125,000 (4) 8.22% 3,125,000 (4) -- --
Bonanza Master Fund Ltd.................. 1,750,000 (5) 4.64% 1,750,000 (5) -- --
Roaring Fork Capital SBIC, L.P........... 1,706,250 (6) 4.52% 1,706,250 (6) -- --
Lagunitas Partners LP.................... 1,125,000 (7) 2.99% 1,125,000 (7) -- --
Gruber & McBaine International........... 250,000 (8) * 250,000 (8) -- --
Jon D. Gruber & Linda W. Gruber JTWROS... 1,581,250 (9) 4.19% 206,250 (10) -- --
J. Patterson McBaine..................... 1,481,250 (11) 3.93% 106,250 (12) -- --
MicroCapital Fund LP..................... 1,080,000 (13) 2.87% 1,080,000 (13) -- --
MicroCapital Fund Ltd.................... 607,500 (14) 1.62% 607,500 (14) -- --
Omicron Master Trust..................... 1,085,625 (15) 2.89% 1,085,625 (15) -- --
Stratford Partners, L.P.................. 431,250 (16) 1.15% 431,250 (16) -- --
Select Contrarian Value Partners, L.P.... 829,107 (17) 2.21% 375,000 (17) 454,107 1.21%
Precept Capital Master Fund, G.P......... 281,250 (18) * 281,250 (18) -- --
Roth Capital Partners, LLC............... 650,310 (19) 1.71% 650,310 (19) -- --
Noel C. McDermott, Trustee of the
Noel C. McDermott Revocable
Living Trust dated
December 18, 1995..................... 764,211 (20) 2.04% 764,211 (20) -- --
Warren P. Yost and Gail A. Yost,
Co-Trustees Under Declaration
of Trust dated March 9, 1988.......... 599,381 (21) 1.60% 599,381 (21) -- --
Hayden Communications, Inc............... 125,000 (22) * 125,000 (22) -- --
Coffin Partners LLC...................... 35,000 (23) * 35,000 (23) -- --
George Farndell.......................... 314,748 (24) * 150,000 (24) 164,748 *
Steven Jacobus........................... 50,000 (25) * 50,000 (25) -- --
Jacques Moisset.......................... 120,000 (26) * 120,000 (26) -- --
Jason Oliva.............................. 401,708 (27) 1.07% 200,500 (27) 201,208 *
Joseph Mirabella......................... 50,000 (28) * 50,000 (28) -- --
Placido Albanese......................... 15,000 (29) * 15,000 (29) -- --
-------------
* Less than 1.00%
(1) Includes 413,675 shares underlying warrants. Power to vote or dispose
of the shares is held by Jeffrey L. Feinberg, as managing member of JLF
Asset Management, LLC. JLF Asset Management, LLC is investment manager
of JLF Offshore Fund, Ltd. and of JLF Partners I, LP and JLF Partners
II, LP, two other selling security holders. The address for Mr.
Feinberg is c/o JLF Asset Management, LLC, 2775 Via de la Valle, Suite
204, Del Mar, CA 92014.
(2) Includes 265,925 shares underlying warrants. Power to vote or dispose
of the shares is held by Jeffrey L. Feinberg, as managing member of JLF
Asset Management, LLC. See footnote (1) above for information regarding
JLF Asset Management, LLC.
95
(3) Includes 20,400 shares underlying warrants. Power to vote or dispose
of the shares is held by Jeffrey L Feinberg, as managing member of JLF
Asset Management, LLC. See footnote (1) above for information regarding
JLF Asset Management, LLC.
(4) Includes 625,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by Barry M. Kitt, as sole member of Pinnacle Fund
Management, LLC, which entity is the general partner of Pinnacle
Advisers, L.P., which entity is the general partner of The Pinnacle
Fund, L.P. The address for Mr. Kitt is c/o The Pinnacle Fund, L.P.,
4965 Preston Park, Blvd., Suite 240, Plano, TX 75093.
(5) Includes 350,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by Bernay Box, as president of Bernay Box & Co.,
which entity is the general partner of Bonanza Master Fund Ltd.
(6) Includes 341,250 shares underlying a warrant. Sole power to vote or
dispose of the shares is held by Eugene McColley as manager of Roaring
Fork Management, LLC, which entity is the general partner of Roaring
Fork Capital SBIC, L.P.
(7) Includes 225,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by Jon D. Gruber and J. Patterson McBaine, as
managers of Gruber & McBaine Capital Management, which entity is the
general partner of Lagunitas Partners LP.
(8) Includes 50,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by Jon D. Gruber and J. Patterson McBaine, as
managers of Gruber & McBaine Capital Management, which entity is the
investment advisor to Gruber & McBaine International.
(9) Includes 165,000 outstanding shares and 41,250 shares underlying a
warrant held by Jon D. Gruber and Linda W. Gruber JTWROS. Also includes
aggregates of 1,100,000 outstanding shares and 275,000 shares
underlying warrants held by Lagunitas Partners, LP and Gruber & McBaine
International, two other selling security holders.
(10) Represents 165,000 outstanding shares and 41,250 shares underlying a
warrant held by Jon D. Gruber and Linda W. Gruber JTWROS.
(11) Includes 85,000 outstanding shares and 21,250 shares underlying a
warrant held by Mr. McBaine. Also includes aggregates of 1,100,000
outstanding shares and 275,000 shares underlying warrants held by
Lagunitas Partners, LP and Gruber & McBaine International, two other
selling security holders.
(12) Represents 85,000 outstanding shares and 21,250 shares underlying a
warrant held by Mr. McBaine.
(13) Includes 216,000 shares underlying a warrant. MicroCapital LLC is the
general partner and investment advisor to MicroCapital Fund LP and
MicroCapital Fund Ltd. Ian P. Ellis is the principal owner of
MicroCapital LLC and has sole responsibility for the selection,
acquisition and disposition of the portfolio securities by MicroCapital
LLC on behalf of its funds.
(14) Includes 121,500 shares underlying a warrant. MicroCapital LLC is the
general partner and investment advisor to MicroCapital Fund LP and
MicroCapital Fund Ltd. Ian P. Ellis is the principal owner of
MicroCapital LLC and has sole responsibility for the selection,
acquisition and disposition of the portfolio securities by MicroCapital
LLC on behalf of its funds.
(15) Includes 217,125 shares underlying a warrant. Omicron Capital, L.P., a
Delaware limited partnership (Omicron Capital), serves as investment
manager to Omicron Master Trust, a trust formed under the laws of
Bermuda (Omicron). Bruce Bernstein is the managing member of Omicron
Capital. Omicron Capital, Inc., a Delaware corporation (OCI), serves as
96
general partner of Omicron Capital, and Winchester Global Trust Company
Limited (Winchester) serves as the trustee of Omicron. By reason of
such relationships, Omicron Capital and OCI may be deemed to share
dispositive power over the shares of our common stock owned by Omicron,
and Winchester may be deemed to share voting and dispositive power over
the shares of our common stock owned by Omicron. Omicron Capital, OCI
and Winchester disclaim beneficial ownership of such shares of our
common stock. No other person has sole or shared voting or dispositive
power with respect to the shares of our common stock being offered by
Omicron, as those terms are used for purposes of Regulation 13D-G under
the Exchange Act. Omicron and Winchester are not "affiliates" of one
another, as that term is used for purposes of the Exchange Act, or of
any other person named in this prospectus as a selling security holder.
No person or "group" (as that term is used in Section 13(d) of the
Exchange Act or Regulation 13D-G) controls Omicron and Winchester.
(16) Includes 86,250 shares underlying a warrant. Power to vote or dispose
of the shares is shared by Mark Fain and Chad Comiteau, as managing
directors of Stratford Advisors LLC, which entity is the general
partner of Stratford Partners, L.P.
(17) Includes 75,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by David W. Berry as principal of Kaizen Capital,
LLC, which entity is the general partner of Select Contrarian Value
Partners, L.P.
(18) Includes 56,250 shares underlying a warrant. Power to vote or dispose
of the shares is held by D. Blair Baker, as president of Precept
Management, LLC, which entity is the general partner of Precept Capital
Management, L.P., which entity is the agent of Precept Capital Master
Fund, G.P.
(19) Represents 650,310 shares underlying a warrant. Power to vote or
dispose of the shares is held by Byron Roth, as Chief Executive
Officer, and Gordon J. Roth, as Chief Financial Officer, of Roth
Capital.
(20) Includes 84,066 shares underlying a warrant. Sole power to vote or
dispose of the shares is held by Mr. McDermott as trustee. Mr.
McDermott was an officer and shareholder of Larus Corporation until its
acquisition by Emrise in July 2004.
(21) Includes 65,934 shares underlying a warrant. Mr. Yost was an officer
and shareholder of Larus Corporation until its acquisition by Emrise in
July 2004.
(22) Represents 125,000 shares underlying warrants. Power to vote or dispose
of the shares is held by Matthew Hayden as president of Hayden
Communications, Inc. Hayden Communications, Inc. acts as an investor
relations consultant to Emrise.
(23) Represents 35,000 shares underlying a warrant. Power to vote or dispose
of the shares is held by William F. Coffin as Chief Executive Officer
of Coffin Communications Group, an affiliate of Coffin Partners LLC.
Coffin Communications Group is a former investor relations consultant
to Emrise.
(24) Includes 150,000 shares underlying a warrant and 103,181 shares held by
Mr. Farndell's spouse. Mr. Farndell is a former human resources
consultant to Emrise and is the brother-in-law of Carmine T. Oliva, who
is an executive officer and director of Emrise.
(25) Includes 50,000 shares underlying a warrant. Mr. Jacobus is a former
financial advisor to Emrise.
(26) Includes 120,000 shares underlying a warrant. Mr. Moisset is a former
employee of and former consultant to Emrise.
(27) Includes 200,500 shares underlying warrants. Jason Oliva is a former
financial advisor to Emrise and is the son of Carmine T. Oliva, who is
an executive officer and director of Emrise.
(28) Mr. Mirabella is a former consultant to Emrise.
(29) Mr. Albanese is a former financial advisor to Emrise.
97
PRIVATE PLACEMENTS THROUGH WHICH THE SELLING SECURITY HOLDERS OBTAINED
BENEFICIAL OWNERSHIP OF THE OFFERED SHARES
All of the shares of common stock being offered under this prospectus
were issued, or are issuable upon exercise of warrants that were issued, in the
below-described private placement transactions.
JANUARY 2005 PRIVATE PLACEMENT OF COMMON STOCK AND WARRANTS
On January 5, 2005, we issued to 17 accredited record holders in a
private offering an aggregate of 12,503,500 shares of our common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share.
Roth Capital, an NASD-registered broker-dealer, acted as placement
agent in connection with the offering. We paid to Roth Capital cash placement
agent fees and expenses of approximately $961,000 and issued five-year placement
warrants to purchase up to an aggregate of 650,310 shares of our common stock at
an exercise price of $1.72 per share in connection with the offering.
We agreed to register for resale the shares of common stock issued to
investors and the shares of common stock issuable upon exercise of the investor
warrants and placement warrants. The registration obligations require, among
other things, that the registration statement of which this prospectus is a part
be declared effective no later than June 4, 2005. We were unable to meet this
obligation and therefore paid to each investor liquidated damages equal to 1% of
the amount paid by the investor to us in the offering, which damage payments
totaled an aggregate of approximately $180,000. We also paid or must pay to each
investor liquidated damages for the period from June 5, 2005 through the date
the registration of which this prospectus is a part was declared effective, and
for any future periods in which we are unable to maintain the effectiveness of
the registration in accordance with the requirements of the registration rights
agreement that we entered into with the investors. 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 common stock. Accordingly, the maximum
aggregate penalty that we would be required to pay under this provision is 10%
of the approximate $18,005,000 initial purchase price of the shares of common
stock, which would be $1,801,000.
The investor warrants and the placement warrants contain customary
anti-dilution provisions for stock splits, stock dividends and the like and
contain a net exercise cashless exercise feature that will permit the warrants
to be exercised for a net number of shares using the spread between the warrant
exercise price and the average of the closing sale prices for the five trading
days immediately prior to the exercise of the warrant as payment for a reduced
number of common shares. Use of the cashless exercise feature by the investors
is limited to times when a valid resale prospectus is not then available for use
by the investors.
The investor warrants and the placement warrants also contain a call
provision. The call provision generally provides that if, at any time after the
first anniversary of the issuance of the warrants, the volume weighted average
trading price of our common stock for each of 30 consecutive trading days
exceeds $3.46, a valid resale prospectus is available for the shares of common
stock underlying the warrants or the shares are eligible for resale without
volume restrictions pursuant to Rule 144(k) under the Securities Act, and we
have complied with our obligations under the warrant and related agreements,
then we may require the warrant holder to exercise the warrant in full (subject
to the 9.999% limitation described below) on the 30th day following written
notice to the warrant holder if the call eligibility criteria described above
continue to be met until that date.
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In addition, the investor warrants and the placement warrants contain
provisions limiting the exercise or call of the warrants to the extent necessary
to insure that following the exercise or call, the total number of shares of
common stock then beneficially owned by the warrant holder and its affiliates
and others whose beneficial ownership would be aggregated with the holder's for
purposes of Section 13(d) of the Exchange Act does not exceed 9.999% of the
total number of then issued and outstanding shares of our common stock
(including for such purpose the shares of common stock issuable upon such
exercise or call). The 9.999% beneficial ownership limitation may not be waived.
However, the beneficial ownership limitation does not preclude a holder from
exercising a warrant and selling the shares underlying the warrant in stages
over time where each stage does not cause the holder and its affiliates to
beneficially own shares in excess of the limitation amount.
We have registered for resale under this prospectus the shares of
common stock issued to investors in the offering and the shares of common stock
underlying the investor warrants and the placement warrants. The securities
purchase agreement, registration rights agreement and placement agent
arrangements contain various indemnification provisions in connection with the
offering and registration of the shares and warrants. There are no material
relationships between us or our affiliates and any of the investors or placement
agents, except that each of The Pinnacle Fund, L.P., JLF Offshore Fund, Ltd.,
JLF Asset Management, LLC (which entity is investment manager of three of the
selling security holders, including JLF Offshore Fund, Ltd.) and Jeffrey L.
Feinberg (the managing member of JLF Asset Management, LLC), became a beneficial
owner of more than 5% of our outstanding common stock at the closing of the
offering.
LARUS CORPORATION ACQUISITION
As described elsewhere in this prospectus, we acquired the outstanding
capital stock of Larus Corporation in July 2004 from Noel C. McDermott, Trustee
of the Noel C. McDermott Revocable Living Trust dated December 18, 1995, and
Warren P. Yost and Gail A. Yost, Co-Trustees Under Declaration of Trust dated
March 9, 1988. The purchase price for the acquisition consisted of $1,000,000 in
cash, the issuance of 1,213,592 shares of our common stock with a fair value of
$1,000,000, $887,500 in the form of two short-term, zero interest promissory
notes that have since been repaid, $3,000,000 in the form of two subordinated
secured promissory notes, warrants to purchase up to an aggregate of 150,000
shares of our stock at $1.30 per share and approximately $580,000 of acquisition
costs. In addition, we assumed $245,000 in accounts payable and accrued expenses
and entered into an above-market real property lease with the sellers. The
warrants contain a net exercise cashless exercise feature that will permit the
warrants to be exercised for a net number of shares using the spread between the
warrant exercise price and the average of the last reported sale prices for a
share of our common stock on the OTC Bulletin Board for the five trading days
immediately prior to the exercise of the warrant as payment for a reduced number
of common shares. We granted the sellers piggyback and demand registration
rights for the shares we issued to them in the acquisition and for the shares
that are issuable upon exercise of the warrants issued in the acquisition and
have registered all of those shares for resale under this prospectus.
HAYDEN COMMUNICATIONS, INC. INVESTOR RELATIONS WARRANTS
In November 2004, we issued to Hayden Communications, Inc. warrants to
purchase up to 100,000 shares of common stock as partial consideration for
investor relations services. The warrants vested and become exercisable in three
installments. The warrants vested on November 3, 2004 as to 25,000 underlying
shares with an exercise price of $0.85 per share and on March 3, 2005 as to
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25,000 underlying shares with an exercise price of $1.00 per share. The warrants
vested on June 3, 2005 as to the remaining 50,000 underlying shares with an
exercise price of $1.15 per share. The warrants are exercisable for a period of
three years commencing on their respective vesting dates.
On January 24, 2005, we issued to Hayden Communications, Inc. a
fully-vested three-year warrant to purchase up to 25,000 shares of common stock
as additional consideration for investor relations services. The exercise price
of the warrant is $2.00 per share. All of the warrants issued to Hayden
Communications, Inc. contain a net exercise cashless exercise feature that will
permit the warrants to be exercised for a net number of shares using the spread
between the warrant exercise price and the average of the last bid and asked
prices reported on the last business day immediately prior to the exercise of
the warrant as payment for a reduced number of common shares. We have agreed to
register for resale and have included in this prospectus the 125,000 shares of
common stock underlying the warrants issued to Hayden Communications, Inc.
OTHER PRIVATE PLACEMENT TRANSACTIONS
In April 2001, we issued to Coffin Partners LLC a five-year warrant to
purchase up to 35,000 shares of common stock at a per share exercise price of
$0.39 in consideration for investor relations services to be rendered by its
affiliate, Coffin Communications Group. We have included these underlying shares
for resale under this prospectus.
In October 2001, we issued to Placido Albanese a three-year warrant to
purchase up to 15,000 shares of common stock at a per share exercise price of
$0.25 in consideration for financial advisory services rendered. Mr. Albanese
exercised this warrant, and we have included the 15,000 outstanding shares of
common stock for resale under this prospectus.
In October 2001, we issued to Joseph Mirabella a three-year warrant to
purchase up to 50,000 shares of common stock at a per share exercise price of
$0.31 in consideration for consulting services rendered. Mr. Mirabella exercised
this warrant, and we have included the 50,000 outstanding shares of common stock
for resale under this prospectus.
In September 2002, we issued to Jacques Moisset a three-year warrant to
purchase up to 120,000 shares of common stock at a per share exercise price of
$0.50 in consideration for post-retirement business services rendered. We have
included these underlying shares for resale under this prospectus.
In April 2003, we issued to George Farndell a three-year warrant to
purchase up to 150,000 shares of common stock at a per share exercise price of
$0.75 in consideration for human resources consulting services rendered. We have
included these underlying shares for resale under this prospectus.
In April 2003, we issued to Steven Jacobus a three-year warrant to
purchase up to 50,000 shares of common stock at a per share exercise price of
$0.75 in consideration for financial advisory services rendered. We have
included these underlying shares for resale under this prospectus.
In April 2003, we issued to Jason Oliva three-year warrants to purchase
up to 100,000 shares of common stock at a per share exercise price of $0.75 and
up to 100,500 shares of common stock at a per share exercise price of $1.00 in
consideration for financial advisory services rendered. We have included these
underlying shares for resale under this prospectus.
100
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock being offered under this prospectus on any
stock exchange, market or trading facility on which the shares are traded, or in
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when disposing of shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o through the distribution of the shares by any selling security
holder to its partners, members or stockholders;
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
o one or more underwritten offerings on a firm commitment or
best efforts basis;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law; provided,
however, that the selling security holders have agreed not to
engage in short sales involving the shares offered under this
prospectus.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling security holders may pledge their shares to their brokers
under the margin provisions of customer agreements. If a selling security holder
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer
may be in excess of customary commissions to the extent permitted by applicable
law.
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If sales of shares offered under this prospectus are made to
broker-dealers as principals, we would be required to file a post-effective
amendment to the registration statement of which this prospectus is a part. In
the post-effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.
The selling security holders may sell all or any part of the shares
offered under this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has entered into
such an agreement or agreements, any material details will be set forth in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act, and the rules and regulations
under that act, including Regulation M. These provisions may restrict activities
of, and limit the timing of purchases and sales of any of the shares by, the
selling security holders or any other person. Furthermore, under Regulation M,
persons engaged in a distribution of securities are prohibited from
simultaneously engaging in market making and other activities with respect to
those securities for a specified period of time prior to the commencement of
such distributions, subject to specified exceptions or exemptions. All of these
limitations may affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of any of the
derivative securities whose underlying shares of common stock are being offered
for sale pursuant to this prospectus. If a selling security holder transfers
those derivative securities prior to conversion or exercise, then the transferee
of those derivative securities may not sell the underlying shares of common
stock under this prospectus unless we amend or supplement this prospectus to
cover such sales.
In addition, if any of the shares of common stock offered for sale
pursuant to this prospectus are transferred other than pursuant to a sale under
this prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such holders.
We offer no assurance as to whether any of the selling security holders will
sell all or any portion of the shares offered under this prospectus.
For the period a selling security holder holds a derivative security
whose underlying shares of common stock are being offered for sale pursuant to
this prospectus, the selling security holder has the opportunity to profit from
a rise in the market price of our common stock without assuming the risk of
ownership of the underlying shares of common stock. The terms on which we could
obtain additional capital during the period in which those derivative securities
remain outstanding may be adversely affected. The holders of derivative
securities are most likely to voluntarily convert or exercise their derivative
securities when the conversion or exercise price is less than the market price
for our common stock. However, we offer no assurance as to whether any of those
derivative securities will be converted or exercised.
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We have agreed to pay all fees and expenses incident to the
registration of the shares being offered under this prospectus. However, each
selling security holder and purchaser is responsible for paying any discounts,
concessions and similar selling expenses they incur.
We and certain of the selling security holders have agreed to indemnify
one another against certain losses, claims, damages and liabilities arising in
connection with this prospectus, including liabilities under the Securities Act.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common
stock, $0.0033 par value per share, and 10,000,000 shares of preferred stock,
$0.01 par value per share. As of June 7, 2005, there were 37,384,708 shares of
common stock issued and outstanding and no shares of preferred stock issued and
outstanding. The following description of our capital stock does not purport to
be complete and should be reviewed in conjunction with our certificate of
incorporation and our bylaws.
COMMON STOCK
All outstanding shares of common stock are, and the common stock to be
issued upon exercise of warrants and resold by the selling security holders in
this offering will be, fully paid and nonassessable. The following summarizes
the rights of holders of our common stock:
o each holder of common stock is entitled to one vote per share
on all matters to be voted upon generally by the stockholders;
o subject to preferences that may apply to shares of preferred
stock outstanding, the holders of common stock are entitled to
receive lawful dividends as may be declared by our board of
directors, see "Dividend Policy";
o upon our liquidation, dissolution or winding up, the holders
of shares of common stock are entitled to receive a pro rata
portion of all our assets remaining for distribution after
satisfaction of all our liabilities and the payment of any
liquidation preference of any outstanding preferred stock;
o there are no redemption or sinking fund provisions applicable
to our common stock; and
o there are no preemptive or conversion rights applicable to our
common stock.
PREFERRED STOCK
Our board of directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or all
of our authorized but unissued shares of preferred stock with any dividend,
redemption, conversion and exchange provision as may be provided in that
particular series.
The rights of the holders of our common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. Issuance of a new series of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
103
and other corporate purposes, could have the effect of entrenching our board of
directors and making it more difficult for a third-party to acquire, or
discourage a third-party from acquiring, a majority of our outstanding voting
stock. We have no present plans to issue any shares of or to designate any
series of preferred stock.
WARRANTS
At June 7, 2005, we had outstanding warrants to purchase 4,691,685
shares of our common stock at exercise prices ranging from $0.39 to $2.00.
OPTIONS
At June 7, 2005, we had outstanding options to purchase 1,458,998
shares of our common stock at exercise prices ranging from $0.20 to $3.44.
REGISTRATION RIGHTS
The holders of various shares of our common stock and warrants are
entitled to rights with respect to the registration of their shares under the
Securities Act. These registration rights are described in "Selling Security
Holders."
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Certain provisions of Delaware law, our certificate of incorporation
and our bylaws contain provisions that could have the effect of delaying,
deferring and discouraging another party from acquiring control of us. These
provisions, which are summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of increased
protection of our potential ability to negotiate with an unfriendly or
unsolicited acquiror outweigh the disadvantages of discouraging a proposal to
acquire us because negotiation of these proposals could result in an improvement
of their terms.
CLASSIFIED BOARD
We have classified our board of directors into three classes of
staggered terms. Each class has a term of three years. At each annual meeting,
only those directors in one class are the subject of nomination and election. A
classified board of directors makes it more difficult for dissident stockholders
to wage a proxy fight to elect a majority of the directors.
UNDESIGNATED PREFERRED STOCK
The ability to authorize undesignated preferred stock makes it possible
for our board of directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to acquire us. These
and other provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of Emrise.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS
Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board of directors. The bylaws do not give the
board of directors the power to approve or disapprove stockholder nominations of
104
candidates or proposals regarding business to be conducted at a special or
annual meeting of the stockholders. However, our bylaws may have the effect of
precluding the conduct of certain business at a meeting if the proper procedures
are not followed. These provisions may also discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect the acquirer's own
slate of directors or otherwise attempting to obtain control of our company.
DELAWARE ANTI-TAKEOVER STATUTE
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging, under certain
circumstances, in a business combination with an interested stockholder for a
period of three years following the date the person became an interested
stockholder unless:
o Prior to the date of the transaction, the board of directors
of the corporation approved either the business combination or
the transaction which resulted in the stockholder becoming an
interested stockholder.
o Upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares of
voting stock outstanding (but not the outstanding voting stock
owned by the stockholder) (1) shares owned by persons who are
directors and also officers and (2) shares owned by employee
stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer; or
o On or subsequent to the date of the transaction, the business
combination is approved by the board and authorized at an
annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested
stockholder.
Generally, a business combination includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates
and associates, owns or, within three years prior to the determination of
interested stockholder status, did own 15% or more of a corporation's
outstanding voting securities. We expect the existence of its provision to have
an anti-takeover effect with respect to transactions our board of directors does
not approve in advance. We also anticipate that Section 203 may also discourage
attempts that might result in a premium over the market price for the shares of
common stock held by stockholders.
The provisions of Delaware law, our certificate of incorporation and
our bylaws could have the effect of discouraging others from attempting hostile
takeovers and, as a consequence, they may also inhibit temporary fluctuations in
the market price of our common stock that often result from actual or rumored
hostile takeover attempts. These provisions may also have the effect of
preventing changes in our management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is
Computershare Investor Services. Its telephone number is (303) 986-5400.
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LEGAL MATTERS
The validity of the shares of common stock offered in this offering
will be passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
Grant Thornton LLP, independent registered public accounting firm, has
audited Emrise Corporation's consolidated balance sheets as of December 31, 2004
and 2003, and related consolidated statements of operations, comprehensive
income (loss), stockholders' equity and cash flows for the years ended December
31, 2004, 2003 and 2002, as set forth in their report. Grant Thornton LLP has
also audited Emrise Corporation's Schedule II for the years ended December 31,
2004, 2003 and 2002. We have included those consolidated financial statements
and Schedule II in the prospectus and elsewhere in the registration statement in
reliance on Grant Thornton LLP's report, given on their authority as experts in
accounting and auditing.
Grant Thornton UK LLP, independent auditor, has audited the
consolidated balance sheets and the company balance sheets of Pascall Electronic
(Holdings) Limited as of March 18, 2005 and March 31, 2004, and the consolidated
profit and loss accounts and consolidated cash flows for the periods from April
1, 2004 to March 18, 2005 and for the year ended March 31, 2004. We have
included those consolidated financial statements in the prospectus and elsewhere
in the registration statement in reliance on Grant Thornton UK LLP's report,
given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with respect to the
common stock offered in this prospectus with the Commission in accordance with
the Securities Act, and the rules and regulations enacted under its authority.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information included in the registration statement and
its exhibits and schedules. Statements contained in this prospectus regarding
the contents of any document referred to in this prospectus are not necessarily
complete, and in each instance, we refer you to the full text of the document
which is filed as an exhibit to the registration statement. Each statement
concerning a document which is filed as an exhibit should be read along with the
entire document. For further information regarding us and the common stock
offered in this prospectus, we refer you to this registration statement and its
exhibits and schedules, which may be inspected without charge at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
Public Reference Room.
The Commission also maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, such as us, that file electronically with the Commission. The
Commission's website address is http://www.sec.gov.
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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
Emrise Corporation and Subsidiaries
-----------------------------------
Report of Independent Registered Public Accounting Firm..................................................... F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002.................. F-4
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31,
2004, 2003 and 2002..................................................................................... F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004,
2003 and 2002........................................................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003
and 2002................................................................................................ F-7
Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2003
and 2002................................................................................................ F-9
Consolidated Schedule II Valuation and Qualifying Accounts for the Years Ended
December 31, 2004, 2003 and 2002........................................................................ F-41
Condensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004................ F-42
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2005
and 2004 (unaudited)..................................................................................... F-43
Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended
March 31, 2005 and 2004 (unaudited)...................................................................... F-44
Condensed Consolidated Statements of Stockholders' Equity for the Three Months Ended
March 31, 2005 (unaudited)............................................................................... F-45
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 (unaudited)...................................................................... F-46
Notes to Condensed Consolidated Financial Statements (unaudited)............................................ F-47
Pascall Electronic (Holdings) Limited and Subsidiary
----------------------------------------------------
Report of Independent Auditors.............................................................................. F-61
Consolidated Profit and Loss Account for the Period Ended 18 March 2005 and for the
Twelve Months Ended 31 March 2004....................................................................... F-62
Consolidated Balance Sheet at 18 March 2005 and 31 March 2004............................................... F-63
Balance Sheet at 18 March 2005 and 31 March 2004............................................................ F-64
Consolidated Cash Flow Statement for the Period Ended 18 March 2005 and for the
Twelve Months Ended 31 March 2004....................................................................... F-65
Notes to Consolidated Financial Statements for the Period from 1 April 2004 to
18 March 2005 and for the Twelve Months Ended 31 March 2004............................................. F-66
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
and Stockholders of Emrise Corporation
We have audited the accompanying consolidated balance sheets of Emrise
Corporation, a Delaware corporation, as of December 31, 2004 and 2003, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emrise Corporation
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited Schedule II of Emrise Corporation for each of the three
years in the period ended December 31, 2004. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
/S/ GRANT THORNTON LLP
Los Angeles, California
March 11, 2005, except for Note 17,
as to which the date is March 18, 2005
F-2
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2004 2003
------------ ------------
ASSETS (Notes 5 and 6)
Current assets:
Cash and cash equivalents $ 1,057 $ 1,174
Accounts receivable, net of allowance for doubtful accounts
of $153 and $161, respectively 5,796 5,393
Inventories (Note 2) 6,491 6,683
Deferred tax assets (Note 9) 352 146
Prepaid and other current assets 417 409
------------ ------------
Total current assets 14,113 13,805
Property, plant and equipment, net (Note 3) 909 322
Goodwill, net of accumulated amortization of $1,084 and $1,070 in
2004 and 2003, respectively (Notes 4 and 15) 5,881 2,447
Intangible assets other than goodwill, net of accumulated
amortization of $40 3,560 --
Other assets 623 595
------------ ------------
$ 25,086 $ 17,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit (Note 5) $ 878 $ 2,882
Current portion of long-term debt (Note 6) 211 316
Notes payable to stockholders, current portion (Note 16) 500 --
Accounts payable 3,398 1,637
Income taxes payable 572 413
Accrued expenses (Note 7) 3,014 2,861
------------ ------------
Total current liabilities 8,573 8,109
Long-term debt, less current portion (Note 6) 985 819
Notes payable to stockholders, less current portion (Note 16) 2,250 --
Deferred income taxes 1,400 --
Other liabilities 969 325
------------ ------------
Total liabilities 14,177 9,253
Commitments and contingencies (Notes 11 and 17)
Stockholders' equity (Note 8):
Preferred stock, authorized 10,000,000 shares;
Convertible Series B Preferred Stock, $0.01 par value,
issued and outstanding zero shares and 1,000 shares at
December 31, 2004 and 2003, respectively (aggregate
liquidation preference of $0 and $4 at December 31, 2004
and 2003, respectively) -- 4
Common stock, $0.0033 par value. Authorized 50,000,000 shares;
issued and outstanding 24,777,000 shares and 23,476,000
shares in 2004 and 2003, respectively 82 77
Additional paid-in capital 26,746 25,613
Accumulated deficit (16,406) (17,886)
Accumulated other comprehensive income 487 108
------------ ------------
Total stockholders' equity 10,909 7,916
------------ ------------
$ 25,086 $ 17,169
============ ============
See accompanying notes to financial statements.
F-3
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002
------------ ------------ ------------
Net sales (Note 12) $ 29,861 $ 25,519 $ 22,664
Cost of sales 16,146 14,835 14,147
------------ ------------ ------------
Gross profit 13,715 10,684 8,517
Operating expenses:
Selling, general and administrative 10,226 7,812 7,731
Engineering and product development 1,521 951 1,015
------------ ------------ ------------
Income (loss) from operations 1,968 1,921 (229)
Other income (expense):
Interest expense (433) (416) (441)
Other income (expense), net (6) (58) 80
------------ ------------ ------------
Income (loss) before income taxes 1,529 1,447 (590)
Income tax expense (benefit) (Note 9) 49 286 (20)
------------ ------------ ------------
Net income (loss) $ 1,480 $ 1,161 $ (570)
============ ============ ============
Basic earnings (loss) per share $ 0.06 $ 0.05 $ (0.03)
============ ============ ============
Diluted earnings (loss) per share $ 0.06 $ 0.05 $ (0.03)
============ ============ ============
See accompanying notes to financial statements.
F-4
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
2004 2003 2002
----------- ----------- -----------
Net income (loss) $ 1,480 $ 1,161 $ (570)
Other comprehensive income:
Foreign currency translation adjustment 379 705 446
----------- ----------- -----------
Comprehensive Income (loss) $ 1,859 $ 1,866 $ (124)
=========== =========== ===========
See accompanying notes to financial statements.
F-5
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
Series B
Convertible Accumulated
Preferred Stock Common Stock Additional Other
--------------------- ----------------- Paid-in Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
-------- --------- ------- ------- ------- ------------ ------------ ---------
Balance at December 31, 2001 150 $ 938 20,671 $ 68 $24,358 $ (18,459) $ (1,043) $ 5,862
Preferred Series B conversions (86) (538) 864 3 535 -- -- --
Accretion of redeemable
preferred stock -- -- -- -- -- (13) -- (13)
Warrants issued for services -- -- -- -- 6 -- -- 6
Common stock issued for
services -- -- -- -- 1 -- -- 1
Foreign currency translation
adjustment -- -- -- -- -- -- 446 446,000
Net loss -- -- -- -- -- (570) -- (570)
-------- --------- ------- ------- ------- ------------ ------------ ---------
Balance at December 31, 2002 64 400 21,535 71 24,900 (19,042) (597) 5,732
Preferred Series A conversions -- -- 1,263 4 283 -- -- 287
Preferred Series B conversions (63) (396) 635 2 395 (1) -- --
Foreign currency translation
adjustment -- -- -- -- -- -- 705 705
Accretion of redeemable
preferred stock -- -- -- -- -- (4) -- (4)
Warrants issued for services -- -- -- -- 19 -- -- 19
Exercise of warrants and
options -- -- 43 -- 16 -- -- 16
Net income -- -- -- -- -- 1,161 -- 1,161
-------- --------- ------- ------- ------- ------------ ------------ ---------
Balance at December 31, 2003 1 4 23,476 77 25,613 (17,886) 108 7,916
Preferred Series B conversions (1) (3) 3 -- 3 -- -- --
Preferred Series B redemption -- (1) -- -- -- -- -- (1)
Stock options exercised -- -- 19 -- 5 -- -- 5
Foreign currency translation
adjustment -- -- -- -- -- -- 379 379
Stock issued for Larus
acquisition -- -- 1,214 4 996 -- -- 1,000
Warrants exercised -- -- 65 1 19 -- -- 20
Warrants issued for services -- -- -- -- 38 -- -- 38
Value of warrants issued to
acquire Larus -- -- -- -- 72 -- -- 72
Net income -- -- -- -- -- 1,480 -- 1,480
Balance at December 31, 2004 -- -- 24,777 $ 82 $26,746 $ (16,406) $ 487 $ 10,909
======== ========= ======= ======= ======= ============ ============ =========
See accompanying notes to financial statements.
F-6
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,480 $ 1,161 $ (570)
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Depreciation and amortization 287 249 349
Deferred taxes (206) 146 --
Provision for doubtful accounts -- 61 118
Provision for inventory obsolescence 1,116 924 438
Gain on sale of property, plant and equipment -- 1 (9)
Stock and warrants issued for services 38 19 7
Changes in operating assets and liabilities net of businesses
acquired:
Accounts receivable 289 (106) 22
Inventories (394) (113) (657)
Prepaid and other assets 23 (487) 219
Accounts payable 1,414 (802) 114
Accrued expenses and other liabilities (163) (14) (688)
----------- ----------- -----------
Cash provided by (used in) operating activities 3,884 1,039 (657)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (724) (63) (193)
Cash received from sale of property, plant and equipment 8 13 --
Cash collected on notes receivable -- 12 17
Cash paid for acquisition of Larus net of cash acquired (1,492) -- --
----------- ----------- -----------
Cash used in investing activities (2,208) (38) (176)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of current notes payable (2,004) (593) (138)
Repayments of long-term debt (250) (110) (68)
Proceeds from long-term debt 65 -- --
Cash from warrant/option exercise 25 16 --
----------- ----------- -----------
Cash used in financing activities (2,164) (687) (206)
----------- ----------- -----------
Effect of exchange rate changes on cash 371 606 689
Net increase (decrease) in cash and cash equivalents (117) 920 (350)
Cash and cash equivalents at beginning of year 1,174 254 604
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,057 $ 1,174 $ 254
=========== =========== ===========
See accompanying notes to financial statements.
F-7
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(IN THOUSANDS)
2004 2003 2002
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 367 $ 382 $ 361
======== ======== ========
Income taxes $ 428 $ 81 $ 95
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
======== ======== ========
Issuance of subordinated notes for Larus acquisition $ 3,000 $ -- $ --
======== ======== ========
Equipment acquired under capitalized lease $ -- $ -- $ 143
======== ======== ========
Common stock issued upon conversion of redeemable preferred stock $ 3 $ 287 $ --
======== ======== ========
Accretion of redeemable preferred stock $ -- $ 4 $ 13
======== ======== ========
Common stock issued to acquire Larus $ 1,000 $ -- $ --
======== ======== ========
See accompanying notes to financial statements.
F-8
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Emrise Corporation (the "Company"), operates through three wholly-owned
subsidiaries: XET Corporation ("XET"), CXR Larus Corporation ("CXR Larus"), and
CXR-Anderson Jacobson, formerly CXR, S.A. ("CXR-AJ"). XET Corporation and its
subsidiaries design, develop, manufacture and market electronic components for
defense, aerospace and industrial markets. CXR Larus and CXR-AJ design, develop,
manufacture and market network access and transmission products and
communications test equipment. CXR Larus also engages in the manufacture and
sale of communication timing and synchronization products. The Company conducts
its operations out of various facilities in the United States, France, the
United Kingdom and Japan and organizes itself in two product line segments:
electronic components and communications equipment.
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of the Company and each of its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company derives revenues from sales of electronic components and
communications equipment products and services. The Company's sales are based
upon written agreements or purchase orders that identify the type and quantity
of the item being purchased and the purchase price. The Company recognizes
revenue when delivery of products has occurred or services have been rendered,
no significant obligations remain on the Company's part, and collectibility is
reasonably assured based on the Company's credit and collections practices and
policies.
The Company recognizes revenue from domestic sales of our electronic
components and communications equipment at the point of shipment of those
products. Product returns are infrequent and require prior authorization because
the Company's sales are final and the Company quality tests its products prior
to shipment to ensure they meet the specifications of the binding purchase
orders under which they are shipped. Normally, when a customer requests and
receives authorization to return a product, the request is accompanied by a
purchase order for a replacement product.
Revenue recognition for products and services provided by the Company's
United Kingdom subsidiaries depends upon the type of contract involved.
Engineering/design services contracts generally entail design and production of
a prototype over a term of up to several years, with all revenue deferred until
all services under the contracts have been completed. Engineering/design
services were not significant in 2004, 2003 and 2002. Production contracts
provide for a specific quantity of products to be produced over a specific
period of time. Customers issue binding purchase orders for each suborder to be
produced. At the time each suborder is shipped to the customer, the Company
recognizes revenue relating to the products included in that suborder. Returns
are infrequent and permitted only with prior authorization because these
products are custom made to order based on binding purchase orders and are
F-9
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
quality tested prior to shipment. Generally, these products carry a one-year
limited parts and labor warranty. The Company does not offer customer discounts,
rebates or price protection on these products.
The Company recognizes revenue for products sold by its French
subsidiary at the point of shipment. Customer discounts are included in the
product price list provided to the customer. Returns are infrequent and
permitted only with prior authorization because these products are shipped based
on binding purchase orders and are quality tested prior to shipment. Generally,
these products carry a two-year limited parts and labor warranty.
Generally, the Company's electronic components, network access and
transmission products and communication timing and synchronization products
carry a one-year limited parts and labor warranty and our communications test
instruments and the Company's European network access and transmission products
carry a two-year limited parts and labor warranty. Products returned under
warranty are tested and repaired or replaced at the Company's option.
Historically, warranty repairs have not been material. The Company does not
offer customer discounts, rebates or price protection on these products.
Revenues from services such as repairs and modifications are recognized
when the service has been completed and invoiced. For repairs that involve
shipment of a repaired product, the Company recognizes repair revenues when the
product is shipped back to the customer. Service revenues represented 5.7%, 3.1%
and 2.5% of net sales in 2004, 2003 and 2002, respectively.
Shipping and handling fees billed to customers totaled $18,000 for
domestic operations for the year ended December 31, 2004. Such amounts were not
significant for the years ended December 31, 2003 and 2002. Shipping and
handling fees billed to international customers are included in net sales and
totaled less than 1.0% of net sales for the years ended December 31, 2004, 2003
and 2002. Depending on the operating division, shipping and handling costs are
included in cost of sales or selling, general and administrative expenses.
Shipping costs included in selling, general and administrative expenses
approximated $100,000 in each of the years ended December 31, 2004, 2003 and
2002.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
an original maturity of three months or less when purchased. As of December 31,
2004 and 2003, cash in foreign accounts was $1,035,000 and $535,000,
respectively.
INVENTORIES
The Company's finished goods electronic components inventories
generally are built to order. The Company's communications equipment inventories
generally are built to forecast, which requires us to produce a larger amount of
finished goods in our communications equipment business so that the Company's
customers can promptly be served. The Company's products consist of numerous
electronic and other parts, which necessitates that we exercise detailed
inventory management. The Company values its inventory at the lower of the
actual cost to purchase or manufacture the inventory (first-in, first-out) or
the current estimated market value of the inventory (net realizable value). The
Company performs physical inventories at least once a year. The Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on its estimated forecast of
F-10
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
product demand and production requirements for the next twelve months.
Additionally, to determine inventory write-down provisions, the Company reviews
product line inventory levels and individual items as necessary and periodically
review assumptions about forecasted demand and market conditions. Any parts or
finished goods that we determine are obsolete, either in connection with the
physical count or at other times of observation, are reserved for and
subsequently discarded and written-off. Demand for the Company's products can
fluctuate significantly. A significant increase in the demand for the Company's
products could result in a short-term increase in the cost of inventory
purchases, while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on hand.
In addition, the communications equipment industry is characterized by
rapid technological change, frequent new product development, and rapid product
obsolescence that could result in an increase in the amount of obsolete
inventory quantities on hand. Also, the Company's estimates of future product
demand may prove to be inaccurate, in which case the Company may have
understated or overstated the provision required for excess and obsolete
inventory. In the future, if the Company's inventory is determined to be
overvalued, the Company would be required to recognize such costs in its cost of
goods sold at the time of such determination. Likewise, if the Company's
inventory is determined to be undervalued, the Company may have over-reported
its costs of goods sold in previous periods and would be required to recognize
additional operating income at the time of sale. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of the Company's
inventory and its reported operating results.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally using the straight-line method over the useful lives of the assets
(or lease term, if shorter) as follows:
Buildings 50 years
Machinery, equipment and fixtures 3-7 years
Leasehold improvements 5 years
Maintenance and repairs are expensed as incurred, while renewals and
betterments are capitalized. Research and development costs are expensed as
incurred.
LONG-LIVED ASSETS
The Company reviews the carrying amount of its long-lived assets for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
F-11
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
PRODUCT WARRANTY LIABILITIES
Generally, the Company's electronic components, network access and
transmission products and communication timing and synchronization products
carry a one-year limited parts and labor warranty and the Company's
communications test instruments and European network access and transmission
products carry a two-year limited parts and labor warranty. Products returned
under warranty typically are tested and repaired or replaced at the Company's
option. Historically, the Company has not experienced significant warranty costs
or returns.
The Company records in accrued expenses a liability for estimated costs
that it expects to incur under its basic limited warranties when product revenue
is recognized. Factors affecting the Company's warranty liability include the
number of units sold, historical and anticipated rates of claim, and costs per
claim. The Company periodically assesses the adequacy of its warranty liability
accrual based on changes in these factors.
The changes in the Company's product warranty liability during 2004 and
2003 were as follows:
Year Ended December 31,
2004 2003
------------ ------------
Liability, beginning of year $ 79,000 $ 32,000
Expense for new warranties issued 64,000 79,000
Expense related to accrual revision for prior year warranties -- --
Warranty claims (79,000) (32,000)
------------ ------------
Liability, end of year $ 64,000 $ 79,000
============ ============
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Deferred income taxes are recognized based on the
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
The provision for income taxes represents the tax payable for the year and the
change during the year in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Bulletin ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost is recognized for its employee stock option plans unless the
exercise price of options granted is less than fair market value on the date of
grant. The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148
"Accounting for Stock-Based Compensation - Presentation and Disclosure."
F-12
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The following table sets forth the net income (loss), net income (loss)
available for common stockholders and earnings (loss) per share amounts for the
periods presented as if the Company had elected the fair value method of
accounting for stock options:
2004 2003 2002
------------- ------------- ------------
Net income (loss):
As reported $ 1,480,000 $ 1,161,000 $ (570,000)
Add: Stock-based compensation expense included in
reported net income, net of related tax effect -- -- --
Deduct: Stock-based compensation expense determined
under the fair value-based method (127,000) (45,000) (20,000)
Pro forma $ 1,353,000 $ 1,116,000 $ (590,000)
============= ============= ============
Basic earnings (loss) per share:
As reported $ 0.06 $ 0.05 $ (0.03)
Add: Stock-based compensation expense included in
reported net income, net of related tax effect -- -- --
Deduct: Stock-based compensation expense determined
under the fair value-based method -- -- --
------------- ------------- ------------
Pro forma $ 0.06 $ 0.05 $ (0.03)
============= ============= ============
Diluted earnings (loss) per share:
As reported $ 0.06 $ 0.05 $ (0.03)
Add: Stock-based compensation expense included in
reported net income, net of related tax effect -- -- --
Deduct: Stock-based compensation expensed determined
under the fair value-based method (0.01) -- --
------------- ------------- -----------
Pro forma $ 0.05 $ 0.05 $ (0.03)
============= ============= ===========
The above calculations include the effects of all grants in the periods
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income or loss in future periods. The calculations were based on
a Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 92% to 107%; risk-free interest rate of 3%-4.25%;
expected lives of 7 years.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated according to SFAS No. 128,
"Earnings Per Share." Basic earnings (loss) per share includes no dilution and
is computed by dividing net income (loss) available to common stockholders by
the weighted average number of shares outstanding during the year. Diluted
earnings (loss) per share reflects the potential dilution of securities that
could share in the earnings of the Company.
F-13
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. This statement defines fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of December 31,
2004 and 2003, the fair value of all financial instruments approximated carrying
value.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value because of the short maturity of these items. The Company believes the
carrying amounts of its notes payable and long-term debt approximate fair value
because the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and accounts receivable.
The Company places its cash with high quality financial institutions. At times,
cash balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation.
The Company's accounts receivable result from sales to a broad customer
base. The Company extends credit to its customers based upon an evaluation of
the customer's financial condition and credit history and generally does not
require collateral. Accounts receivable are generally due within 30 days in the
Company's U.S. operations and are stated net of allowance for doubtful accounts.
Accounts outstanding for longer than the contractual payment terms are
considered past due. Provisions for uncollectible accounts are made based on the
Company's specific assessment of the collectibility of all past due accounts.
Credit losses are provided for in the financial statements and consistently have
been within management's expectations. Sales to various BAE Systems companies in
the U.S. and Europe represented approximately 15%, 13% and 14% of the Company's
total net revenues during 2004, 2003 and 2002, respectively.
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries have been translated using the
local currency as the functional currency. Accordingly, foreign currency
denominated assets and liabilities have been translated to U.S. dollars at the
current rate of exchange on the balance sheet date. The effects of translation
F-14
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
are recorded as a separate component of stockholders' equity in accumulated
other comprehensive income (loss). Exchange gains and losses arising from
transactions denominated in foreign currencies are translated at average
exchange rates and included in operations. Such amounts are not material to the
accompanying consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to be consistent with the 2004 presentation.
(2) INVENTORIES
Inventories are summarized as follows as of December 31:
2004 2003
----------- -----------
Raw materials $ 3,222,000 $ 3,230,000
Work-in-process 1,280,000 1,963,000
Finished goods 1,989,000 1,490,000
----------- -----------
$ 6,491,000 $ 6,683,000
=========== ===========
Included in the amounts above are allowances for inventory obsolescence
of $2,251,000 and $1,692,000 at December 31, 2004 and 2003, respectively.
Allowances for inventory obsolescence are recorded as necessary to reduce
obsolete inventory to estimated net realizable value or to specifically reserve
for obsolete inventory that the Company intends to dispose of. The inventory
items identified for disposal at each year end are generally discarded during
the following year.
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following as of December
31:
2004 2003
----------- -----------
Land and buildings $ 390,000 $ 365,000
Machinery, equipment and fixtures 3,999,000 3,591,000
Leasehold improvements 482,000 435,000
----------- -----------
4,871,000 4,391,000
Accumulated depreciation (3,962,000) (4,069,000)
----------- -----------
$ 909,000 $ 322,000
=========== ===========
(4) GOODWILL AMORTIZATION AND IMPAIRMENT TESTING
The Company initially applied SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002. SFAS No. 142 disallows the amortization
of goodwill and provides for impairment testing of goodwill carrying values on
an annual basis or more frequently 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. In applying SFAS No. 142, the Company performed the
transitional reassessment and impairment tests required as of January 1, 2002.
F-15
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
At the time of adoption, the Company had $1,084,000 of accumulated amortization
of goodwill. The Company performed its annual required tests of impairment as of
December 31, 2004 for goodwill in the XCEL Corporation Ltd. and CXR Telcom
division reporting units and as of June 30, 2004 for the goodwill within the
Larus division reporting unit. No events or changes in circumstances occurred
between annual tests that would have required an interim goodwill impairment
test.
(5) LINES OF CREDIT
A summary of notes payable is as follows as of December 31:
2004 2003
---------- ----------
Line of credit with a U.S. commercial lender $ 118,000 $1,077,000
Lines of credit with foreign banks 760,000 1,805,000
---------- ----------
$ 878,000 $2,882,000
========== ==========
The Company had a credit facility with Wells Fargo Business Credit,
Inc. through June 2004. The facility provided for a revolving loan of up to
$3,000,000 secured by the Company's inventory and accounts receivable and a term
loan in the amount of $687,000 secured by the Company's machinery and equipment.
On December 31, 2003, the interest rate was the prime rate (then 4.0%) plus 1%
subject to a minimum interest charge of $13,500 per month. Due to the minimum
interest charge, the effective interest rate the Company paid for this credit
facility during 2003 was 20.3%. The balance outstanding at December 31, 2003 was
$1,077,000 on the revolving loan and $114,000 on the term loan, and $238,000 of
additional borrowings were available under the revolving loan. The credit
facility contained restrictive financial covenants that were set by mutual
agreement each year.
On June 1, 2004, XET and CXR Larus, together with the Company acting as
guarantor, obtained a credit facility from Wells Fargo Bank, N.A. for the
Company's domestic operations. This facility is effective through July 1, 2005
and replaced the previous credit facility with Wells Fargo Business Credit, Inc.
No prepayment penalty was due because the prior loan contract excluded from
prepayment penalties loans replaced with new credit facilities from Wells Fargo
Bank, N.A. Also, the new credit facility has no minimum interest but is subject
to an unused commitment fee equal to 0.25% per annum, payable quarterly based on
the average daily unused amount of the line of credit described in the following
paragraph.
The new credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000
for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at December 31, 2004 was 5.0%.
F-16
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The previous credit facility bore interest at the prime rate plus 1.0%
and was subject to a $13,500 minimum monthly interest fee plus an unused
commitment fee equal to 0.25% per annum. The average amount outstanding on the
revolving portions of the previous and new credit facilities during 2004 was
$1,035,000. The prime rate averaged approximately 4.25% in 2004. Therefore, the
average annual interest cost on the new revolving line of credit was
approximately $49,162 while the average annual interest cost on the prior
revolving line of credit was approximately $162,000 due to the minimum interest
rate charge of $13,500 per month.
At December 31, 2004, the Company had a balance owing under the
revolving credit line of $118,000, and had $1,882,000 of availability on the
non-formula based portion of the credit line. The credit facility is subject to
various financial covenants. Minimum debt service coverage ratio of each of XET
and CXR Larus must be not less than 1.50:1.00 on a trailing four-quarter basis.
"Debt service coverage ratio" equals net income plus depreciation plus
amortization, minus non-financed capital expenditures, divided by current
portion of long-term debt measured quarterly. Current ratio of each of XET and
CXR Larus must be not less than 1.50:1.00, determined as of each fiscal quarter
end. "Current ratio" is equal to total current assets divided by total current
liabilities. Net income after taxes of each of XET and CXR Larus must be not
less than $1.00 on an annual basis, determined as of the end of each quarter.
Net profit after taxes of each of XET and CXR Larus must be not less than $1.00
in each fiscal quarter immediately following a fiscal quarter in which that
entity incurred a net loss after taxes. Total liabilities divided by tangible
net worth of the Company's domestic operations on a consolidated basis must not
at any time be greater than 2.00:1.00, determined as of each fiscal quarter end.
Tangible net worth of the Company and all of its subsidiaries on a consolidated
basis must not at any time be less than $5,200,000, measured quarterly. "Total
liabilities" equals current liabilities plus non-current liabilities, minus
subordinated debt. "Tangible net worth" equals stockholders' equity plus
subordinated debt, minus intangible assets.
At December 31, 2004, the Company was in compliance with the covenants
other than the debt-to-tangible net worth covenant for its domestic operations.
The Company obtained a waiver of non-compliance as of December 31, 2004. The
Company is currently engaged in discussions with Wells Fargo Bank, N.A. to amend
the existing financial covenants effective as of the next measurement date of
April 30, 2005. If the Company is unable to comply with the existing or revised
covenants and is unable to obtain a waiver or amendment on reasonable terms, the
amount outstanding on the line of credit would become due and payable and a
default interest rate of prime plus 4.5% would apply. The facility expires in
July 2005. The Company currently intends to seek renewal of the facility and
believes that the bank will be amenable to renewing it. However, the Company
believes it has sufficient funds available to repay the facility if it is unable
to obtain a renewal of the facility.
XPS, one of the Company's United Kingdom subsidiaries, has a credit
facility with Venture Finance PLC, a subsidiary of the global Dutch ABN AMRO
Holdings, N.V., that expires on November 12, 2005. Using the exchange rate in
effect at December 31, 2004 for the conversion of British pounds sterling into
United States dollars, the new facility is for a maximum of $2,865,000 and
includes a $669,000 unsecured cash flow loan, a $153,000 term loan secured by
XPS' fixed assets and the remainder of the loan is secured by XPS' accounts
receivable and inventory. The interest rate is the base rate of Venture Finance
PLC (4.75% at December 31, 2004) plus 2%, and is subject to a minimum rate of 4%
per annum. There are no financial performance covenants applicable to this
F-17
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
credit facility. At December 31, 2004 and 2003, the Company had balances owing
under the United Kingdom revolving credit facility of $188,000 and $1,227,000,
respectively.
On April 8, 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO Holdings N.V. The credit line is for a maximum of
$1,488,000, based on the exchange rate in effect at December 31, 2004 for the
conversion of euros into United States dollars. The IFN Finance facility
replaced several smaller credit lines. The IFN Finance facility is secured by
CXR-AJ's accounts receivable and carries an annual interest rate of 1.6
percentage points above the French "T4M" rate. The French T4M rate was 2.04% as
of December 31, 2004. Funds that become available under the new IFN Finance
credit line as new accounts receivables develop have been used to retire the
prior existing CXR-AJ credit facilities. At December 31, 2004 and 2003, the
balances outstanding under the French credit line were $572,000 and $578,000,
respectively. There are no financial performance covenants applicable to this
credit facility.
(6) LONG-TERM DEBT
A summary of long-term debt follows as of December 31:
2004 2003
----------- -----------
Term notes payable to commercial lender (a) $ 184,000 $ 114,000
Term notes payable to foreign banks (b) 833,000 871,000
Capitalized lease obligations (c) 179,000 150,000
----------- -----------
1,196,000 1,135,000
Current portion (211,000) (316,000)
----------- -----------
$ 985,000 $ 819,000
=========== ===========
---------------
(a) The Company's domestic credit facility with Wells Fargo Bank,
N.A. provides for a term loan of $150,000 secured by
equipment, amortizable over 36 months at a variable rate equal
to the prime rate plus 1.5%. The term loan portion of the
facility had a balance of $126,000 at December 31, 2004. Wells
Fargo Bank, N.A. has also provided $300,000 of credit for the
purchase of new capital equipment when needed, of which a
balance of $58,000 was outstanding at December 31, 2004. The
capital equipment loans are amortized over five years and bear
interest at the bank's 30-day LIBOR rate plus 4%. As of
December 31, 2003, the term notes totaling $114,000 were with
the bank's financing subsidiary at the prime rate plus 1%,
subject to a minimum interest charge of $13,500 included with
the revolving loan.
(b) The Company has agreements with several foreign banks that
include term borrowings that mature at various dates through
2007. Interest rates on the borrowings bear interest at rates
ranging from 3.25% to 6.75% and are payable in monthly
installments. The balances by country of origination at
December 31, 2004 were: United Kingdom - $715,000; France -
$62,000; and Japan - $56,000. At December 31, 2003, the
balances by country of origination were: United Kingdom -
$719,000; France - $79,000; and Japan - $73,000.
F-18
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The United Kingdom term loan requires payments of $13,440 per
quarter, is due and payable in total in 2006, carries an
interest rate equal to the lender's base rate (4.75% at
December 31, 2004 plus 2% (subject to a minimum rate of 4% per
annum), is secured by $316,000 of fixed assets of XCEL Power
Systems, Ltd. and is not subject to financial performance
covenants.
The term loans in France had aggregate balances of $62,000 and
$79,000 at December 31, 2004 and 2003, respectively, and are
composed of several small loans payable over 36 to 60 months
that are secured by the assets of the local subsidiary, bear
annual interest rates ranging from 5.2% to 7.0% and are not
subject to financial performance covenants.
The term loan in Japan is a five-year amortizable loan that
commenced in November 2002 and had balances of $56,000 and
$73,000 as of December 31, 2004 and 2003, respectively,
carries an annual fixed interest rate of 3.25%, is secured by
the Japanese subsidiary's assets and is not subject to
financial performance covenants.
(c) Capitalized lease obligations are calculated using interest
rates appropriate at the inception of the lease and range from
6% to 18%. Leases are amortized over the lease term using the
effective interest method. The leases all contain bargain
purchase options and expire at various dates through December
31, 2017.
Principal maturities related to long-term debt as of December 31, 2004
are as follows:
Year Ending December 31, Amount
------------------------ ------------
2005 $ 211,000
2006 828,000
2007 97,000
2008 25,000
2009 18,000
2010 and thereafter 17,000
------------
Total $ 1,196,000
============
CXR-AJ has term loans with Banc National de Paris and Sogelease with
aggregate balances that totaled $62,000 and $128,000 as of December 31, 2004 and
2003, respectively.
(7) ACCRUED EXPENSES
Accrued expenses as of December 31 consisted of the following (in
thousands):
2004 2003
---------- ----------
Accrued salaries $ 805 $ 593
Accrued payroll taxes and benefits 491 388
Advance payments from customers 77 656
Other accrued expenses 1,641 1,224
---------- ----------
Total accrued expenses $ 3,014 $ 2,861
========== ==========
F-19
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
No other individual item represented more than 5% of total current
liabilities.
(8) STOCKHOLDERS' EQUITY
STOCK OPTIONS AND WARRANTS
The Company has four stock option plans:
o Employee Stock and Stock Option Plan, effective July 1, 1994,
providing for non-qualified stock options as well as
restricted and non-restricted stock awards to both employees
and outside consultants. Up to 520,000 shares were authorized
for issuance under this plan. Terms of related grants under
the plan are at the discretion of the board of directors. The
board of directors does not intend to issue any additional
options or make any additional stock grants under this plan.
o 1993 Stock Option Plan, providing for the grant of up to
300,000 incentive and non-qualified stock options to purchase
stock at not less than the current market value on the date of
grant. Options granted under this plan vest ratably over three
years and expire 10 years after date of grant. The board of
directors does not intend to issue any additional options
under this plan.
o The MicroTel International Inc. 1997 Stock Incentive Plan (the
"1997 Plan") provides that options granted may be either
qualified or nonqualified stock options and are required to be
granted at fair market value on the date of grant. Subject to
termination of employment, options may expire up to ten years
from the date of grant and are nontransferable other than in
the event of death, disability or certain other transfers that
the committee of the board of directors administering the 1997
Plan may permit. Up to 1,600,000 stock options were authorized
to be granted under the 1997 Plan. All outstanding options of
former optionholders under the XET 1987 Employee Stock Option
Plan were converted to options under the 1997 Plan as of the
date of the merger between the Company and XET at the exchange
rate of 1.451478. The board of directors does not intend to
issue any additional options under this plan.
o The 2000 Stock Option Plan was adopted by the board of
directors in November 2000 and approved by the stockholders on
January 16, 2001. The board of directors adopted the Amended
and Restated 2000 Stock Option Plan ("2000 Plan") effective as
of August 3, 2001. Under the 2000 Plan, options granted may be
either incentive or nonqualified options. Incentive options
must have an exercise price of not less than the fair market
value of a share of common stock on the date of grant.
Nonqualified options must have an exercise price of not less
than 85% of the fair market value of a share of common stock
on the date of grant. Up to 2,000,000 options may be granted
under the 2000 Plan. No option may be exercised more than ten
years after the date of grant.
The Company accounts for stock-based compensation under the "intrinsic
value" method. Under this method, no compensation expense is recorded for these
plans and arrangements for current employees whose grants provide for exercise
prices at or above the market price on the date of grant. Compensation or other
F-20
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
expense is recorded based on intrinsic value (excess of market price over
exercise price on date of grant) for employees, and fair value of the option
awards for others.
The following table shows activity in the outstanding options for the
years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
2004 Exercise 2003 Exercise 2002 Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ------------ ------------ ------------
Outstanding at beginning of year 1,729,000 $0.96 1,432,000 $1.11 1,718,000 $1.34
Granted 424,000 $0.96 344,000 $0.35 50,000 $0.32
Exercised (19,000) $0.33 (28,000) $0.24 -- --
Forfeited (1,000) $3.44 (19,000) $2.21 (336,000) $1.37
-------------------------------- ----------- ----------- ----------- -----------
Outstanding at end of year 2,133,000 $0.97 1,729,000 $0.96 1,432,000 $1.11
=========== =========== =========== ===========
The following table summarizes information with respect to stock
options at December 31, 2004:
Options Options Exercisable
--------------------------------------- -------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise December 31, Contractual Life Exercise December 31, Exercise
Price 2004 (Years) Price 2004 Price
------------------ --------------- --------------------- ----------------- ---------------- ------------
$0.20 to $1.00 1,441,000 7.11 $0.54 1,017,000 $0.36
$1.01 to $2.00 676,000 0.42 1.83 676,000 1.83
$3.01 to $4.00 16,000 1.40 3.22 16,000 3.22
--------------- --------------------- ----------------- ---------------- ------------
2,133,000 4.95 $0.97 1,709,000 $0.97
=============== ===================== ================= ================ ============
The fair value of options granted during 2004 was $337,000, at a
weighted average value of $0.97 per share. The fair value of options granted
during 2003 was $42,000, at a weighted average value of $0.12 per share. The
fair values of options granted during 2002 was $13,000 at a weighted average
value of $0.26 respectively.
If the Company had instead elected the fair value method of accounting
for stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The fair value
at date of grant for options granted in 2004, 2003 and 2002 has been estimated
based on a Black-Scholes pricing model with the following assumptions: no
dividend yield; expected volatility of 92% to 107% in 2004, 92% in 2003 and 92%
in 2002; risk-free interest rate of 3.0% to 4.25%; and average expected lives of
seven years.
F-21
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The board of directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key employees
and other parties as follows:
Warrant Price
Number -------------------------------
of Shares Per Share Total
------------ -------------- ------------
Balance outstanding at December 31, 2001 1,972,000 $0.25 to $2.50 $ 1,374,000
Warrants issued 120,000 $0.50 60,000
Warrants expired/forfeited (1,688,000) $0.25 to $1.73 (1,161,000)
------------ -------------- ------------
Balance outstanding at December 31, 2002 404,000 $0.25 to $2.50 273,000
Warrants issued 401,000 $.75 to $1.00 325,000
Warrants expired/forfeited (138,000) $0.66 (91,000)
Warrants exercised (14,000) $0.66 (9,000)
------------ -------------- ------------
Balance outstanding at December 31, 2003 653,000 $0.25 to $2.50 498,000
------------ -------------- ------------
Warrants issued 250,000 $0.85 to $1.30 299,000
Warrants expired/forfeited (32,000) $2.50 (80,000)
Warrants exercised (65,000) $0.25 to $0.31 (17,000)
------------ -------------- ------------
Balance outstanding at December 31, 2004 806,000 $0.31 to $1.30 $ 698,000
============ ============== ============
During 2004, the Company issued warrants to purchase up to 250,000
shares of common stock at exercise prices ranging from of $0.85 to $1.30 per
share in consideration for services rendered or to be rendered and in connection
with the acquisition of Larus Corporation. The estimated value of the warrants
issued for services rendered was $38,000 and was calculated using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 2.5% to 3.25%, expected life of 3 years, no dividend yield, and an
expected volatility of 107%. The estimated value of the warrants issued in
connection with the acquisition of Larus Corporation was $72,526 and was
calculated using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 3.25%, expected life of three years, no dividend
yield, and an expected volatility of 107.19%.
During 2003, the Company issued warrants to purchase up to 300,000
shares of common stock at the exercise price of $0.75 and 101,000 shares at the
exercise price of $1.00. The Company issued the warrants for services rendered
or to be rendered. The estimated value of the warrants was $19,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
risk-free interest rate of 1.6%, expected lives of 3 years, no dividend yield
and an expected volatility of 84.8%.
During 2002, the Company issued warrants to purchase up to 120,000
shares of common stock at an exercise price of $0.50 per share. The Company
issued the warrants to a former executive of the Company as compensation for
services rendered. The estimated value of the warrants was $6,000 and was
calculated using the Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 92%; a risk-free interest rate of
3.75%; and a contractual life of 3 years. Also, during 2002 the Company issued
5,000 shares of common stock in consideration for services rendered. The stock
was valued at $1,000 on the date of issuance and, accordingly, the Company
recorded a $1,000 expense.
As of December 31, 2004, the Company was authorized to issue 50,000,000
shares of common stock. As of that date, the Company had 24,777,000 shares of
common stock outstanding and 2,938,756 shares of common stock that could become
issuable pursuant to the exercise of outstanding stock options and warrants.
F-22
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
As described in Note 17, the Company issued shares of common stock and
warrants to purchase shares of common stock in a private offering on January 5,
2005.
DIVIDENDS
No dividends on the Company's common stock have been paid to date. The
Company's line of credit with Wells Fargo Bank, N.A. prohibits the payment of
cash dividends on the Company's common stock. The Company currently intends to
retain future earnings to fund the development and growth of its business and,
therefore, does not anticipate paying cash dividends on its common stock within
the foreseeable future. Any future payment of dividends on the Company's common
stock will be determined by the Company's board of directors and will depend on
the Company's financial condition, results of operations, contractual
obligations and other factors deemed relevant by the Company's board of
directors.
(9) INCOME TAXES
The Company files a consolidated U.S. federal income tax return. This
return includes all domestic companies 80% or more owned by the Company. State
tax returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to the Company and its domestic subsidiaries.
Income (loss) from continuing operations before income taxes was taxed
under the following jurisdictions:
2004 2003 2002
----------- ----------- -----------
Domestic $ 1,858,000 $ 961,000 $ 497,000
Foreign (329,000) 486,000 (1,087,000)
----------- ----------- -----------
Total $ 1,529,000 $ 1,447,000 $ (590,000)
=========== =========== ===========
Income tax expense (benefit) consists of the following:
2004 2003 2002
------------ ------------ ------------
Current
Federal $ 34,000 $ 26,000 $ --
State 41,000 55,000 18,000
Foreign 180,000 351,000 (38,000)
------------ ------------ ------------
Total Current $ 255,000 $ 432,000 $ (20,000)
============ ============ ============
Deferred
Federal $ (193,000) $ (132,000) $ --
State (11,000) (14,000) --
Foreign (2,000) -- --
------------ ------------ ------------
Total Deferred $ (206,000) $ (146,000) $ --
============ ============ ============
F-23
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
2004 2003 2002
------------ ------------ ------------
Total
Federal $ (159,000) $ (106,000) $ --
State 30,000 41,000 18,000
Foreign 178,000 351,000 (38,000)
------------ ------------ ------------
Total $ 49,000 $ 286,000 $ (20,000)
============ ============ ============
Income tax expense (benefit) differs from the amount obtained by
applying the statutory federal income tax rate of 34% to income (loss) from
continuing operations before income taxes as follows:
2004 2003 2002
------------- ------------- -------------
Tax (tax benefit) at U.S. federal statutory rate $ 520,000 $ 492,000 $ (200,000)
State taxes, net of federal income tax benefit 41,000 43,000 (34,000)
Foreign income taxes 248,000 (63,000) (38,000)
Change in valuation allowances (179,000) (182,000) 258,000
Permanent differences (6,000) 12,000 11,000
Utilization of net operating losses (575,000) -- --
Other -- (16,000) (17,000)
------------- ------------- -------------
$ 49,000 $ 286,000 $ (20,000)
============= ============= =============
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
2004 2003
------------ ------------
Deferred tax assets:
Fixed assets depreciation $ 282,000 $ 269,000
Allowance for doubtful accounts 12,000 10,000
Inventory reserves and uniform capitalization 393,000 206,000
Other accrued liabilities 179,000 112,000
Deferred compensation 122,000 110,000
Alternative minimum tax credit carryforwards 142,000 142,000
Capital loss carryforwards 136,000 136,000
Net operating loss carryforwards 11,740,000 12,315,000
------------ ------------
Total deferred tax assets 13,006,000 13,300,000
Valuation allowance for deferred tax assets (12,654,000) (13,154,000)
------------ ------------
Net deferred tax assets $ 352,000 $ 146,000
============ ============
Deferred tax liability:
Intangible assets other than goodwill $ 1,400,000 $ --
============ ============
As of December 31, 2004, the Company had recorded $352,000 of net
deferred tax assets and $1,400,000 of deferred tax liabilities. The Company had
federal and state net operating loss carryforwards of approximately $36,056,000
and $3,400,000 as of December 31, 2004 and 2003, respectively, that expire at
F-24
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
various dates through 2022. As of December 31, 2004 and 2003, the Company
recorded a valuation allowance on the net deferred tax asset. Management
considers projected future taxable income and tax planning strategies in making
this assessment. For the year ended December 31, 2004, management recorded a
reduction in its valuation allowance of $179,000 based on the domestic income in
2004 and projections for future taxable income over periods that the deferred
assets are deductible. Management believes that it is more likely than not that
the Company will realize the benefits of these deductible differences. The
amount of the deferred tax assets considered realizable, however, could
materially change in the near future if estimates of future taxable income
during the carryforward period are changed.
As a result of the merger in 1997 of the privately held XET with a
wholly-owned, newly formed subsidiary of the Company, with XET as the surviving
subsidiary, the Company experienced a more than 50% ownership change for federal
income tax purposes. As a result, an annual limitation will be placed upon the
Company's ability to realize the benefit of most of its federal net operating
loss and credit carryforwards. The amount of this annual limitation, as well as
the impact of the application of other possible limitations under the
consolidated return regulations, has not been definitively determined at this
time. However, management believes approximately 80% of the federal and
California net operating losses will not be available to offset future taxable
income as a result of the limitations. Management believes sufficient
uncertainty exists regarding the realizability of the deferred tax asset items
and that a valuation allowance is required.
(10) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
2004 2003 2002
------------ ------------ ------------
NUMERATOR:
Net income (loss) $ 1,480,000 $ 1,161,000 $ (570,000)
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock -- (4,000) (13,000)
------------ ------------ ------------
Income (loss) attributable to common stockholders $ 1,480,000 $ 1,157,000 $ (583,000)
============ ============ ============
DENOMINATOR:
Weighted average number of common shares outstanding
during the period - basic 24,063,000 22,567,000 21,208,000
Incremental shares from assumed conversions of
warrants, options and preferred stock 776,000 1,244,000 --
Adjusted weighted average shares - diluted 24,839,000 23,811,000 21,208,000
Basic earnings (loss) per share $ 0.06 $ 0.05 $ (0.03)
============ ============ ============
Diluted earnings (loss) per share $ 0.06 $ 0.05 $ (0.03)
============ ============ ============
The following table shows the common stock equivalents that were
outstanding as of December 31, 2004 and 2003 but were not included in the
computation of diluted earnings (loss) per share because the options' or
warrants' exercise price was greater than the average market price of the common
shares and, therefore, the effect would be anti-dilutive:
F-25
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
Number Exercise Price
of Shares Per Share
----------- ---------------
Anti-dilutive common stock options:
As of December 31, 2004 1,027,000 $1.00 to $3.44
As of December 31, 2003 693,000 $1.13 to $3.44
Anti-dilutive common stock warrants:
As of December 31, 2004 326,000 $1.00 to $1.30
As of December 31, 2003 32,000 $2.50
The computation of diluted loss per share for 2002 excludes the effect
of incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was anti-dilutive due to losses
incurred by the Company. See summary of outstanding stock options and warrants
in Note 8.
(11) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities
under operating leases that expire at various dates through 2013. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense, net of
sublease income, for 2004, 2003 and 2002 was approximately $1,070,000, $909,000
and $1,097,000, respectively.
The future minimum rental payments required under operating leases that
have initial or remaining noncancelable lease terms in excess of one year
(including the related party lease discussed in Note 16) are as follows:
Year Ending December 31, Amount
------------------------ -----------
2005 $ 1,040,000
2006 713,000
2007 725,000
2008 527,000
2009 420,000
2010 and thereafter 486,000
-----------
Total $ 3,911,000
===========
LITIGATION
The Company is not currently a party to any material legal proceedings.
However, the Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
F-26
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
currently available, management believes such matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
EMPLOYEE BENEFIT PLANS
Effective October 1, 1998, the Company instituted a defined
contribution plan ("401(k) Plan") covering the majority of its U.S. domestic
employees. Participants may make voluntary pretax contributions to such plans up
to the limit as permitted by law. Annual contributions to any plan by the
Company is discretionary. The Company made contributions of $25,000, $20,000 and
$22,000 to the 401(k) Plan for the years ended December 31, 2004, 2003 and 2002,
respectively.
The Company's subsidiary in France has a defined benefit pension plan.
The plan is an unfunded plan. As of the December 31, 2004 measurement date, the
status of the defined benefit pension plan was as follows:
Projected benefit obligation $178,000
Fair value of plan assets $ 12,000
Unfunded accumulated benefit $166,000
Accumulated benefit obligation $122,000
Employer contributions $ 19,000
Participant contributions $ --
Benefits paid $ 19,000
Contributions to be paid to the plan during the year ended December 31,
2005 are estimated to be $20,000.
Weighted average assumptions used to determine pension benefit
obligations at December 31, 2004 were as follows:
Discount rate 4.5%
Expected return on plan assets --%
Rate of compensation increase 4.5%
The components of the net periodic pension costs for the year ended
December 31, 2004 were as follows:
Service cost $ 11,000
Interest cost 7,000
Expected return on plan assets --
Amortization of transition asset, prior service cost and actuarial loss --
---------
Net periodic benefit cost $ 18,000
=========
F-27
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The following table sets forth the changes in benefit obligation for
the year ended December 31, 2004:
Change in benefit obligations:
Benefit obligation at beginning of year $ 96,000
Service cost 11,000
Interest cost 7,000
Benefits paid (19,000)
Contributions 19,000
Effect of foreign currency translation 8,000
---------
Benefit obligation at end of year $ 122,000
=========
EXECUTIVE MANAGEMENT
Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief
Executive Officer, entered into a new employment agreement that provides for an
annual base salary of $250,000, with annual merit increases, an initial term of
five years, two renewal periods of two years each, and severance pay of at least
three years' salary during the initial period or at least two years' salary
during a renewal period.
Effective July 2, 2001, the Company and Randolph D. Foote, its Senior
Vice President and Chief Financial Officer, entered into an employment agreement
that provides for an initial annual salary of $130,000, an initial term of three
years, two renewal periods of one year each, and severance pay of at least one
years' salary.
Effective July 2, 2001, the Company and Graham Jefferies, Managing
Director of XCEL Corporation Ltd. and Executive Vice President and Chief
Operating Officer of the Company's Telecommunications Group, entered into an
employment agreement that provides for an initial annual salary of 100,000
British pounds sterling (approximately $141,000 at the then current exchange
rates), an initial term of three years, two renewal periods of one year each,
and severance pay of at least one years' salary.
(12) SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company has two reportable segments: electronic components and
communications equipment. The electronic components segment operates in the
U.S., European and Asian markets and designs, manufactures and markets digital
switches and power supplies. The communications equipment segment operates
principally in the U.S. and European markets and designs, manufactures and
distributes voice and data transmission and networking equipment and
communications test instruments.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before income taxes
exclusive of nonrecurring gains and losses. The Company accounts for
intersegment sales at prices negotiated between the individual segments.
F-28
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers and different
design and manufacturing and marketing strategies.
Each segment has business units or components as described in paragraph
30 of SFAS No. 142. Each component has discrete financial information and a
management structure. Following is a description of the Company's segment and
component structure as of December 31, 2004:
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
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., and The
Belix Company Ltd.
Reporting Units Within Communications Equipment Segment:
--------------------------------------------------------
o CXR Telcom division of CXR Larus Corporation - San Jose,
California: Telecommunications test equipment for the field
and central office applications
o Larus division of CXR Larus Corporation - San Jose,
California: Telecommunications synchronous timing devices and
network access equipment
o CXR-Anderson Jacobson - Abondant, France: network access and
modem equipment
As described in Note 17, the Company acquired PEHL and Pascall in March
2005. These two entities are being included in XCEL Corporation Ltd. reporting
unit of the electronic components segment.
F-29
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
Selected financial data for each of the Company's operating segments is
shown below.
2004 2003 2002
------------ ------------ ------------
SALES TO EXTERNAL CUSTOMERS:
Electronic Components $ 15,262,000 $ 16,168,000 $ 13,390,000
Communications Equipment 14,599,000 9,351,000 9,274,000
------------ ------------ ------------
$ 29,861,000 $ 25,519,000 $ 22,664,000
============ ============ ============
INTEREST EXPENSE:
Electronic Components $ 180,000 $ 247,000 $ 259,000
Communications Equipment 250,000 162,000 168,000
------------ ------------ ------------
$ 430,000 $ 409,000 $ 427,000
============ ============ ============
DEPRECIATION AND AMORTIZATION:
Electronic Components $ 91,000 $ 72,000 $ 93,000
Communications Equipment 126,000 65,000 177,000
------------ ------------ ------------
$ 217,000 $ 137,000 $ 270,000
============ ============ ============
SEGMENT PROFITS (LOSSES):
Electronic Components $ 2,612,000 $ 3,590,000 $ 2,452,000
Communications Equipment 1,733,000 74,000 (1,257,000)
------------ ------------ ------------
$ 4,345,000 $ 3,664,000 $ 1,195,000
============ ============ ============
SEGMENT ASSETS:
Electronic Components $ 8,435,000 $ 9,466,000 $ 9,445,000
Communications Equipment 16,313,000 6,969,000 6,773,000
------------ ------------ ------------
$ 24,748,000 $ 16,435,000 $ 16,218,000
============ ============ ============
F-30
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS BY SEGMENT
Trademarks Technology Customer
Goodwill -- and Trade Names -- Acquired -- Relationships --
Not Amortizable Not Amortizable 10-Year Life 10-Year Life
Gross cost Since 2002 Since 2002 Amortizable Amortizable
---------- --------------- ---------------- ------------ --------------
Electronic components $ 1,297,000 $ -- $ -- $ --
Communications equipment 5,668,000 2,800,000 500,000 300,000
------------ ------------ ------------ ------------
Total $ 6,965,000 $ 2,800,000 $ 500,000 $ 300,000
Accumulated amortization
------------------------
Electronic components $ 212,000 $ -- $ -- $ --
Communications equipment 872,000 -- 25,000 15,000
------------ ------------ ------------ ------------
Total $ 1,084,000 $ -- $ 25,000 $ 15,000
Carrying value
--------------
Electronic components $ 1,085,000 $ -- $ -- $ --
Communications equipment 4,796,000 2,800,000 475,000 285,000
------------ ------------ ------------ ------------
Total $ 5,881,000 $ 2,800,000 $ 475,000 $ 285,000
============ ============ ============ ============
CHANGES IN GOODWILL BY SEGMENT
Electronic Communications
Components Equipment Total
----------- ----------- -----------
Balance at January 1, 2002 $ 957,000 $ 1,432,000 $ 2,389,000
Goodwill acquired -- -- --
Impairment -- -- --
Foreign currency translation (43,000) -- (43,000)
----------- ----------- -----------
Balance December 31, 2002 $ 914,000 $ 1,432,000 $ 2,346,000
=========== =========== ===========
Balance at January 1, 2003 $ 914,000 $ 1,432,000 $ 2,346,000
Goodwill acquired -- -- --
Impairment -- -- --
Foreign currency translation 101,000 -- 101,000
----------- ----------- -----------
Balance December 31, 2003 $ 1,015,000 $ 1,432,000 $ 2,447,000
=========== =========== ===========
Balance at January 1, 2004 $ 1,015,000 $ 1,432,000 $ 2,447,000
Goodwill acquired -- 3,363,000 3,363,000
Impairment -- -- --
Foreign currency translation 70,000 1,000 71,000
----------- ----------- -----------
Balance December 31, 2004 $ 1,085,000 $ 4,796,000 $ 5,881,000
=========== =========== ===========
F-31
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The following is a reconciliation of the reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.
2004 2003 2002
------------ ------------ ------------
Net sales
---------
Total sales for reportable segments $ 29,861,000 $ 25,519,000 $ 22,664,000
Elimination of intersegment sales -- -- --
Total consolidated net sales $ 29,861,000 $ 25,519,000 $ 22,664,000
Profit (loss) from continuing operations
----------------------------------------
before income taxes
-------------------
Total profit (loss) for reportable segments $ 4,345,000 $ 3,656,000 $ 1,195,000
Unallocated amounts:
General corporate expenses (2,816,000) (2,209,000) (1,785,000)
Consolidated income (loss) from continuing operations
before income taxes $ 1,529,000 $ 1,447,000 $ (590,000)
Assets
------
Total assets for reportable segments $ 24,748,000 $ 16,437,000 $ 16,218,000
Other assets 338,000 732,000 568,000
Total consolidated assets $ 25,086,000 $ 17,169,000 $ 16,786,000
Interest expense
----------------
Interest expense for reportable segments $ 430,000 $ 409,000 $ 427,000
Other interest expense 3,000 7,000 14,000
Total interest expense $ 433,000 $ 416,000 $ 441,000
Depreciation and amortization
-----------------------------
Depreciation and amortization expense
for reportable segments $ 217,000 $ 185,000 $ 270,000
Other depreciation and amortization expense 70,000 64,000 79,000
Total depreciation and amortization $ 287,000 $ 249,000 $ 349,000
F-32
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
A summary of the Company's net sales and identifiable assets by
geographical area follows:
2004 2003 2002
----------- ----------- -----------
Net sales:
----------
United States $12,745,000 $ 7,971,000 $ 8,598,000
Japan 935,000 838,000 768,000
France 7,016,000 6,627,000 5,854,000
United Kingdom 9,165,000 10,083,000 7,444,000
----------- ----------- -----------
$29,861,000 $25,519,000 $22,664,000
=========== =========== ===========
Long-lived assets:
------------------
United States $ 440,000 $ 117,000 $ 399,000
Japan 11,000 16,000 15,000
France 142,000 107,000 177,000
United Kingdom 316,000 82,000 97,000
----------- ----------- -----------
$ 909,000 $ 322,000 $ 688,000
=========== =========== ===========
Sales and purchases between geographic areas have been accounted for on
the basis of prices set between the geographic areas, generally at cost plus 5%.
Identifiable assets by geographic area are those assets that are used in the
Company's operations in each location. Net sales by geographic area have been
determined based upon the country from which the product was shipped.
One customer in the electronic components segment accounted for 10% or
more of net sales during 2004, 2003 and 2002.
(13) NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits," an amendment of SFAS No. 87, 88 and 106, and a
revision of SFAS No. 132. The statement is effective for fiscal years and
interim periods ending after December 15, 2003. This Statement revises
employers' disclosures about pension plans and other postretirement benefit
plans. It does not change the measurement or recognition of those plans required
by SFAS No. 87, 88 and 106. The new rules require additional disclosures about
the assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. The adoption of
this statement did not have a material effect on the Company's financial
condition or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment," which addresses the accounting for employee stock
options. SFAS No. 123(R) eliminates the ability to account for shared-based
compensation transactions using APB Opinion No. 25 and generally would require
instead that such transactions be accounted for using a fair value-based method.
SFAS No. 123(R) also requires that tax benefits associated with these
share-based payments be classified as financing activities in the statement of
cash flow rather than operating activities as currently permitted. SFAS No.
123(R) becomes effective for interim or annual periods beginning after June 15,
2005. Accordingly, we are required to apply SFAS No. 123(R) beginning in the
quarter ending September 30, 2005. SFAS No. 123(R) offers alternative methods of
adopting this final rule. The Company has not yet determined which alternative
method it will use.
F-33
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," SFAS No. 151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period costs. The provisions of SFAS No. 151 are effective for the Company's
fiscal 2006. The Company is currently evaluating the provisions of SFAS No. 151
and does not expect that adoption will have a material effect on the Company's
financial position, results of operations or cash flows.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly operations for the years
ended December 31, 2004 and 2003 (in thousands, except for per share data).
2004 Mar. 31 June 30 Sept. 30 Dec. 31
---- ---------- ---------- ---------- ----------
Net sales $ 6,192 $ 6,432 $ 7,469 $ 9,768
Gross profit $ 2,747 $ 2,899 $ 3,230 $ 4,839
Net income $ 70 $ 369 $ 158 $ 883
Income available to common stockholders $ 70 $ 369 $ 158 $ 883
Earnings per share:
Basic $ -- $ 0.02 $ 0.01 $ 0.04
========== ========== ========== ==========
Diluted $ -- $ 0.02 $ 0.01 $ 0.03
========== ========== ========== ==========
2003 Mar. 31 June 30 Sept. 30 Dec. 31
---- ---------- ---------- ---------- ----------
Net sales $ 5,668 $ 6,834 $ 6,420 $ 6,597
Gross profit $ 2,141 $ 2,829 $ 2,715 $ 2,999
Net income $ 44 $ 359 $ 504 $ 254
Income available to common stockholders $ 42 $ 357 $ 504 $ 254
Earnings per share:
Basic $ -- $ 0.02 $ 0.02 $ 0.01
========== ========== ========== ==========
Diluted $ -- $ 0.02 $ 0.02 $ 0.01
========== ========== ========== ==========
(15) LARUS CORPORATION ACQUISITION
Pursuant to the terms of a Stock Purchase Agreement executed on July
13, 2004, the Company acquired all of the issued and outstanding common stock of
Larus Corporation. Larus Corporation was based in San Jose, California and
engaged in the manufacturing and sale of telecommunications products. Larus
Corporation had one wholly-owned subsidiary, Vista Labs, Incorporated ("Vista"),
which provided engineering services to Larus Corporation. Assets held by Larus
Corporation included intellectual property, cash, accounts receivable and
inventories owned by each of Larus Corporation and Vista.
F-34
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The purchase price for the acquisition totaled $6,539,500 and consisted
of $1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common
stock with a fair value of $1,000,000, $887,500 in the form of two short-term,
zero interest promissory notes that were repaid in 2004, $3,000,000 in the form
of two subordinated secured promissory notes, warrants to purchase up to an
aggregate of 150,000 shares of the Company's common stock at $1.30 per share,
and approximately $580,000 of acquisition costs. The number of shares of our
common stock issued as part of the purchase price was calculated based on the
$0.824 per share average closing price of our common stock for the five trading
days preceding the transaction. The warrants to purchase 150,000 shares of
common stock were valued at $72,000 using a Black-Scholes formula that included
a volatility of 107.19%, an interest rate of 3.25%, a life of three years and no
assumed dividend.
In addition, the Company assumed $245,000 in accounts payable and
accrued expenses and entered into an above-market real property lease with the
sellers. This lease represents an obligation that exceeds the fair market value
by approximately $756,000 and is part of the acquisition accounting. The cash
portion of the acquisition purchase price was funded with proceeds from the
Company's credit facility with Wells Fargo Bank, N.A. and cash on-hand.
In determining the purchase price for Larus Corporation , the Company
took into account the historical and expected earnings and cash flow of Larus
Corporation, as well as the value of companies of a size and in an industry
similar to Larus Corporation, comparable transactions and the market for such
companies generally. The purchase price represented a significant premium over
the $1,800,000 recorded net worth of Larus Corporation's assets. In determining
this premium, the Company considered the Company's potential ability to refine
various Larus Corporation products and to use the Company's marketing resources
and status as a qualified supplier to qualify and market those products for sale
to large telecommunications companies. The Company believes that large
telecommunications companies desired to have an additional choice of suppliers
for those products and would be willing to purchase Larus Corporation's products
following some refinements. The Company also believes that if Larus Corporation
had remained independent, it was unlikely that it would have been able to
qualify to sell its products to the large telecommunications companies due to
its small size and lack of history selling to such companies. Therefore, Larus
Corporation had a range of value separate from the net worth it had recorded on
its books.
In conjunction with the Company's July 2004 acquisition of Larus
Corporation, 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 trade name 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 and is not
deductible for tax purposes. The Larus trade name 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.
However, the Company does not believe these changes will be material to its
financial position or results of operations.
F-35
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition:
Amount
in Thousands
------------
Current assets $ 2,460
Property, plant and equipment 90
Intangible assets other than goodwill 3,600
Goodwill 3,363
Total assets acquired 9,513
Current liabilities (685)
Deferred income taxes (1,400)
Unfavorable lease obligation and other
liabilities (888)
Total liabilities assumed (2,973)
------------
Net assets acquired $ 6,540
============
The intangible assets other than goodwill consist of non-amortizable
trade names with a carrying value of $2,800,000, and technology and customer
relationships with carrying values of $500,000 and $300,000, respectively, that
are amortizable over ten years.
Amortization for the intangibles subject to amortization as of December
31, 2004 is anticipated to be approximately $80,000 per year for each of the
next five years.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Larus Corporation, as though
the acquisition occurred as of January 1, 2003. The pro forma amounts give
effect to appropriate adjustments for interest expense and income taxes. The pro
forma amounts presented are not necessarily indicative of future operating
results (in thousands, except per share amounts):
Year Ended December 31,
----------------------------
2004 2003
----------- -----------
Revenues $ 32,486 $ 31,376
Net income $ 1,720 $ 1,264
Earnings per share of common stock:
Basic $ 0.07 $ 0.06
Diluted $ 0.07 $ 0.05
F-36
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
(16) RELATED PARTY TRANSACTIONS
On July 13, 2004, the Company issued two promissory notes to the former
stockholders of Larus Corporation totaling $3,000,000 in addition to paying cash
and issuing shares of common stock and two zero interest short-term notes
totaling $887,500 that were repaid in 2004, in exchange for 100% of the common
stock of Larus Corporation (see Note 15). These notes are subordinated to the
Company's bank debt and are payable in 72 equal monthly payments of principal
totaling $41,667 per month plus interest at the 30-day LIBOR rate plus 5% with a
maximum interest rate of 7% during the first two years of the term of the notes,
8% during the third and fourth years, and 9% thereafter. During December 2004,
the 30-day LIBOR rate was 2.42%.
Future maturities of notes payable to stockholders are as follows:
Year Ending December 31,
------------------------
2005 $ 500,000
2006 $ 500,000
2007 $ 500,000
2008 $ 500,000
2009 $ 500,000
Thereafter $ 250,000
-----------
$ 2,750,000
===========
Total interest paid on these notes in 2004 was $75,000.
The Company entered into an above-market real property lease with the
sellers. This lease represents an obligation that exceeds the fair market value
by approximately $756,000. The lease term is for 7 years and expires on June 30,
2011. It is renewable for a 5-year term priced under market conditions. The base
rent is based on a minimum rent of $.90 per square foot per month, which is
$27,000 monthly or $324,000 per year, subject to monthly adjustments of the
interest rate based on the Federal Reserve Discount Rate that match the lessor's
variable interest rate mortgage payments on the building. The maximum increase
in any year is 1.5%, with a cumulative maximum increase of 8% over the life of
the lease. The increases apply to that portion of the rent that corresponds to
the interest portion of the lessor's mortgage. Lease payments paid to the
related parties during 2004 totaled $171,000. Future minimum lease payments
under the operating lease payable to the stockholders are included in Note 11.
There are no guarantees by officers or fees paid to officers or loans
to or from officers. In 2004, the Company paid $10,000 to Jason Oliva, the son
of Carmine T. Oliva, for specific financial analysis services. In 2003, the
Company issued to Jason Oliva three-year warrants to purchase up to 100,000
shares of common stock at a per share exercise price of $0.75 and up to 100,500
shares of common stock at a per share exercise price of $1.00 in consideration
for financial advisory services rendered.
F-37
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
(17) SUBSEQUENT EVENTS
JANUARY 2005 FINANCING
On January 5, 2005, the Company issued to 17 accredited record holders
in a private offering an aggregate of 12,503,500 shares of common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share, for total proceeds of approximately $18,005,000. The Company
paid cash placement agent fees and expenses of approximately $961,000, and
issued five-year placement warrants to purchase up to an aggregate of 650,310
shares of common stock at an exercise price of $1.73 per share in connection
with the offering. The total warrants issued, representing 3,775,875 shares of
the Company's common stock, have an estimated value of $4,400,000. Additional
costs related to the financing include legal, accounting and consulting fees
that continue to be incurred in connection with the resale registration
described below. The Company used a portion of the proceeds from this financing
to fund the acquisition of Pascall described below. The Company intends to use
the remaining proceeds from this financing for additional acquisitions and for
investments in new products and enhancements to existing products.
The Company agreed to register for resale the shares of common stock
issued to investors and the shares of common stock issuable upon exercise of the
investor warrants and placement warrants. The registration obligations require,
among other things, that a registration statement be declared effective no later
than the 150th day following the closing date. If the Company is unable to meet
this obligation or unable to maintain the effectiveness of the registration in
accordance with the requirements contained in the registration rights agreement
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 common shares still owned by the investor on the date of the
default and 2% of the amount paid by the 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. 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 approximately $1,801,000. Although the Company anticipates
that it will be able to meet its registration obligations, it also anticipates
that it will have sufficient cash available to pay these penalties if required.
PASCALL ACQUISITION
On March 1, 2005, the Company and XCEL Corporation Limited, a
second-tier wholly-owned subsidiary of the Company ("XCEL"), entered into an
agreement ("Purchase Agreement") relating to the acquisition of Pascall
Electronic (Holdings) Limited ("PEHL") by XCEL. The closing of the purchase
occurred on March 18, 2005. The Company loaned to XCEL the funds that XCEL used
to purchase PEHL.
PEHL was a wholly-owned subsidiary of Intelek Properties Limited, which
itself is an operating subsidiary of Intelek PLC, a London Stock Exchange public
limited company. PEHL and its subsidiary, Pascall Electronics Limited
("Pascall"), produce, design, develop, manufacture and sell power supplies and
radio frequency products for a broad range of applications, including in-flight
entertainment systems and military programs.
F-38
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
Under the Purchase Agreement, XCEL purchased all of the outstanding
capital stock of PEHL. The initial purchase price was 3,100,000 British pounds
sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on
March 18, 2005). The purchase price was paid in cash and is subject to upward or
downward adjustment on a pound for pound basis to the extent that the value of
the net assets of Pascall as of the closing date is greater or less than
2,520,000 British pounds sterling. The calculation of the value of the net
assets of Pascall is to occur within six weeks after the closing, and Intelek
Properties Limited will have 25 business days after receipt of the calculation
to accept or dispute the calculation. Any payment relating to the increase or
reduction of the purchase price based on the value of the net assets of Pascall
will be due from XCEL or Intelek Properties Limited, as the case may be, within
14 days of the acceptance of the calculation. A default rate of interest equal
to 3% above the base lending rate of Barclays Bank plc London will apply if the
adjustment payment is not timely made. The purchase price is also subject to
downward adjustments for any payments that may be made to XCEL under indemnity,
tax or warranty provisions of the Purchase Agreement.
XCEL loaned to PEHL and Pascall at the closing 1,600,000 British pounds
sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on
March 18, 2005) in accordance with the terms of a Loan Agreement entered into by
those entities at the closing. The loaned funds were used to immediately repay
outstanding intercompany debt owed by PEHL and Pascall to Intelek Properties
Limited.
The Company and Intelek PLC have agreed to guarantee payment when due
of all amounts payable by XCEL and Intelek Properties Limited, respectively,
under the Purchase Agreement. The Company and XCEL agreed to seek to replace the
guaranty that Intelek Properties Limited has given to Pascall's landlord with a
guaranty by the Company, and XCEL has agreed to indemnify Intelek Properties
Limited and its affiliates for damages they suffer as a result of any failure to
obtain the release of the guarantee of the 17-year lease that commenced in May
1999. The leased property is a 30,000 square foot administration, engineering
and manufacturing facility located off the south coast of England.
Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, XCEL, Intelek PLC and
the Company entered into a Supplemental Agreement dated March 18, 2005. The
Supplemental Agreement provides, among other things, that an interest free
bridge loan of 200,000 British pounds sterling (approximately U.S. $385,000
based on the exchange rate in effect on March 17, 2005) that was made by Intelek
Properties Limited to Pascall on March 17, 2005 would be repaid by Pascall by
March 31, 2005. XCEL agreed to ensure that Pascall has sufficient funds to repay
the bridge loan. A default rate of interest equal to 3% above the base lending
rate of Barclays Bank plc London will apply if the loan is not timely repaid.
F-39
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (CONTINUED)
The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition, based on Pascall's
balance sheet data at February 28, 2005:
Dollars
in Thousands
------------
Current assets ............................. $ 5,543
Property, plant and equipment .............. 1,398
Intangibles, including goodwill ............ 3,577
Other assets ............................... 152
----------
Total assets acquired ...................... 10,669
Current liabilities ........................ 1,528
Other liabilities .......................... 117
----------
Total liabilities assumed .................. 1,645
----------
Net assets acquired ........................ $ 9,024
==========
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company and Pascall, as though the Pascall
acquisition occurred as of January 1, 2003. The pro forma amounts give effect to
appropriate adjustments for interest expense and income taxes. The pro forma
amounts presented are not necessarily indicative of future operating results (in
thousands, except per share amounts).
Year Ended December 31,
---------------------------
2004 2003
---------- ----------
Revenues ................................ $ 41,697 $ 38,540
Net income .............................. 1,655 1,308
Earnings per share of common stock:
Basic .............................. $ 0.07 $ 0.06
---------- ----------
Diluted ............................ $ 0.07 $ 0.05
========== ==========
F-40
EMRISE CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Additions Reserve
Balance at Charged to Deductions Acquired
Beginning of Costs and Write-offs of with Balance at
Description Year Expenses Accounts Acquisition End of Year
------------------------------------- ------------ ----------- ------------- ----------- ------------
Allowance for doubtful accounts:
--------------------------------
Year ended December 31, 2004 $ 161,000 $ -- $ (32,000) $ 24,000 $ 153,000
Year ended December 31, 2003 $ 130,000 $ 61,000 $ (30,000) $ -- $ 161,000
Year ended December 31, 2002 $ 226,000 $ 118,000 $ (214,000) $ -- $ 130,000
Allowance for inventory obsolescence:
-------------------------------------
Year ended December 31, 2004 $1,692,000 $1,116,000 $ (557,000) $ -- $2,251,000
Year ended December 31, 2003 $1,497,000 $ 924,000 $ (729,000) $ -- $1,692,000
Year ended December 31, 2002 $1,152,000 $ 438,000 $ (93,000) $ -- $1,497,000
F-41
EMRISE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31,
2005 2004
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,861 $ 1,057
Accounts receivable, net of allowance for doubtful accounts
of $150 and $153, respectively 7,645 5,796
Inventories 8,885 6,491
Deferred tax assets 352 352
Prepaid and other current assets 840 417
------------ ------------
Total current assets 24,583 14,113
Property, plant and equipment, net 2,236 909
Goodwill, net of accumulated amortization of $1,084 10,552 5,881
Intangible assets, net of accumulated amortization of $60 and
$40, respectively 3,590 3,560
Other assets 580 623
------------ ------------
$ 41,541 $ 25,086
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under lines of credit $ 946 $ 878
Current portion of longterm debt 940 211
Notes payable to stockholders, current portion 500 500
Accounts payable 3,393 3,398
Income taxes payable 568 572
Accrued expenses 3,304 3,014
------------ ------------
Total current liabilities 9,651 8,573
Longterm debt, less current portion 377 985
Notes payable to stockholders, less current portion 2,125 2,250
Deferred income taxes 1,400 1,400
Other liabilities 941 969
------------ ------------
Total liabilities 14,494 14,177
Stockholders' equity:
Preferred stock, authorized 10,000,000 shares;
issued and outstanding zero shares
Common stock, $0.0033 par value. Authorized 50,000,000 shares;
issued and outstanding 37,385,000 and 24,777,000, respectively 123 82
Additional paidin capital 43,634 26,746
Accumulated deficit (16,756) (16,406)
Accumulated other comprehensive income 46 487
------------ ------------
Total stockholders' equity 27,047 10,909
------------ ------------
$ 41,541 $ 25,086
============ ============
See accompanying notes to condensed consolidated financial statements.
F-42
EMRISE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31,
------------------------------
2005 2004
------------ ------------
Net sales $ 7,299 $ 6,192
Cost of sales 4,187 3,445
------------ ------------
Gross profit 3,112 2,747
Operating expenses:
Selling, general and administrative 2,831 2,217
Engineering and product development 532 283
------------ ------------
Income (loss) from operations (251) 247
Other expense:
Interest income 72 --
Interest expense (102) (96)
Other expense, net (3) (6)
------------ ------------
Income (loss) before income taxes (284) 145
Income tax expense 66 75
------------ ------------
Net income (loss) $ (350) $ 70
============ ============
Basic earnings (loss) per share $ (0.01) $ 0.00
============ ============
Diluted earnings (loss) per share $ (0.01) $ 0.00
============ ============
See accompanying notes to condensed consolidated financial statements.
F-43
EMRISE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(IN THOUSANDS)
Three Months
Ended March 31,
------------------------------
2005 2004
------------ ------------
Net income (loss) $ (350) $ 70
Other comprehensive income (loss):
Foreign currency translation adjustment (441) (2)
------------ ------------
Comprehensive income (loss) $ (791) $ 68
============ ============
See accompanying notes to condensed consolidated financial statements.
F-44
EMRISE CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2005
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Accumulated
Common Stock Additional Other
--------------------------- Paid-In Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss) Total
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 24,777 $ 82 $ 26,746 $ (16,406) $ 487 $ 10,909
Stock option exercises 104 -- 36 -- -- 36
Issuance of common stock and warrants 12,504 41 16,852 -- -- 16,893
Foreign currency translation adjustment -- -- -- -- (441) (441)
Net loss -- -- -- (350) -- (350)
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 2005 37,385 $ 123 $ 43,634 $ (16,756) $ 46 $ 27,047
============ ============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
F-45
EMRISE CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Three Months
Ended March 31,
----------------------------
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (350) $ 70
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Depreciation and amortization 97 59
Provision for inventory obsolescence 640 173
Changes in operating assets and liabilities net of businesses acquired:
Accounts receivable 1,597 681
Inventories (607) (62)
Prepaid and other assets (380) 39
Accounts payable and accrued expenses (2,362) (328)
----------- -----------
Cash provided by (used in) operating activities (1,365) 632
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (33) (96)
Cash paid for acquisition of Pascall, net of cash acquired (9,341) --
----------- -----------
Cash used in investing activities (9,374) (96)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of current notes payable 68 (562)
Repayments of long-term debt (202) (8)
Proceeds from long-term debt 198 --
Proceeds from issuance of common stock in offering 16,893 --
Proceeds from exercise of stock options 36 1
----------- -----------
Cash provided by (used in) financing activities 16,993 (569)
----------- -----------
Effect of exchange rate changes on cash (450) (65)
Net increase (decrease) in cash and cash equivalents 5,804 (98)
Cash and cash equivalents at beginning of period 1,057 1,174
----------- -----------
Cash and cash equivalents at end of period $ 6,861 $ 1,076
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 96 $ 70
=========== ===========
Income taxes $ 71 $ 5
=========== ===========
See accompanying notes to condensed consolidated financial statements.
F-46
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Emrise Corporation (the "Company"), operates through three wholly-owned
subsidiaries: Emrise Electronics Corporation (formerly XET Corporation ("Emrise
Electronics")), CXR Larus Corporation ("CXR Larus"), and CXR-Anderson Jacobson
("CXR-AJ"). Emrise Electronics and its subsidiaries design, develop, manufacture
and market digital and rotary switches, power supplies, radio frequency ("RF")
and microwave components and subsystems, and subsystem assemblies. CXR Larus
designs, develops, manufactures and markets network access and transmission
products, communications test equipment, and communication timing and
synchronization products. CXR-AJ designs, develops, manufactures and markets
network access and transmission products. The Company conducts its operations
out of various facilities in the United States, England, France and Japan and
organizes itself in two product line segments: electronic components and
communications equipment.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America.
The unaudited condensed consolidated financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of March 31, 2005 and December 31, 2004 and the results of
operations and cash flows for the related interim periods ended March 31, 2005
and 2004. However, these results are not necessarily indicative of results for
any other interim period or for the year. It is suggested that the accompanying
condensed consolidated financial statements be read in conjunction with the
Company's audited consolidated financial statements included in its 2004 annual
report on Form 10-K.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Bulletin ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost is recognized for its employee stock option plans unless the
exercise price of options granted is less than fair market value on the date of
grant. The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure."
The following table sets forth the net income, net income available for
common stockholders and earnings per share amounts for the periods presented as
if the Company had elected the fair value method of accounting for stock options
for all periods presented (in thousands, except per share amounts):
F-47
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months
Ended March 31,
---------------------------
2005 2004
----------- ----------
Net income (loss):
As reported $ (350) $ 70
Add: Stock-based compensation expense included in reported net
income, net of related tax effect -- --
Deduct: Stock-based compensation expense determined under the (47) (15)
fair value-based method
----------- ----------
Pro forma $ (397) $ 55
=========== ==========
Basic earnings (loss) per share:
As reported $ (0.01) $ 0.00
Add: Stock based compensation expense included in reported net -- --
income, net of related tax effect
Deduct: Stock-based compensation expense determined under the -- --
fair value-based method
----------- ----------
Pro forma $ (0.01) $ 0.00
=========== ==========
Diluted earnings (loss) per share:
As reported $ 0.00 $ (0.01)
Add: Stock based compensation expense included in reported net -- --
income, net of related tax effect
Deduct: Stock-based compensation expensed determined under the -- --
fair value-based method
----------- ----------
Pro forma $ (0.01) $ 0.00
=========== ==========
The above calculations include the effects of all grants in the periods
presented. Because options often vest over several years and additional awards
are made each year, the results shown above may not be representative of the
effects on net income or loss in future periods. The calculations were based on
a Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 87% to 92%; risk-free interest rate of 3%; expected lives
of 7 years.
F-48
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months
Ended March 31,
----------------------
2005 2004
-------- --------
NUMERATOR:
Net income $ (350) $ 70
Less: accretion of the excess of the redemption value over the carrying value
of redeemable preferred stock -- --
-------- --------
Income attributable to common stockholders $ (350) $ 70
======== ========
DENOMINATOR:
Weighted average number of common shares outstanding during the period-basic 36,788 23,480
Incremental shares from assumed conversions of warrants and options -- 915
-------- --------
Adjusted weighted average number of outstanding shares-diluted 36,788 24,395
-------- --------
Basic earnings per share $ (0.01) $ 0.00
======== ========
Diluted earnings per share $ (0.01) $ 0.00
======== ========
The computation of diluted loss per share for the three months ended
March 31, 2005 excludes the effect of incremental common shares attributable to
the exercise of outstanding common stock options and warrants because their
effect was antidilutive due to losses incurred by the Company. The computation
of diluted loss per share for the three months ended March 31, 2004 excludes the
effect of incremental common shares attributable to the exercise of outstanding
common stock options and warrants because their effect was antidilutive as a
result of the exercise prices exceeding the average market prices of the
underlying shares of common stock.
The following options and warrants were excluded from the computation
of diluted earnings per share (in thousands, except per share amounts):
Three Months
Ended March 31,
---------------------------------
2005 2004
-------------- ---------------
Options and warrants to purchase shares of common stock 6,065 693
-------------- ---------------
Exercise prices $0.20 - $3.44 $1.89 - $3.44
-------------- ---------------
F-49
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
(3) INVENTORIES
Inventories consist of the following (in thousands):
March 31, 2005 December 31, 2004
-------------- -----------------
Raw materials $ 3,912 $ 3,222
Work-in-process 2,548 1,280
Finished goods 2,425 1,989
$ 8,885 $ 6,491
(4) REPORTABLE SEGMENTS
The Company has two reportable segments: electronic components and
communications equipment. The electronic components segment operates in the
United States, European and Asian markets and designs, manufactures and markets
digital and rotary switches, electronic power supplies , RF and microwave
components and subsystems and subsystem assemblies. The communications equipment
segment also operates in the United States, European and Asian markets and
designs, manufactures and distributes network access and transmission products,
communications test instruments and network timing and synchronization products.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
performance based upon profit or loss from operations before income taxes
exclusive of nonrecurring gains and losses. The Company accounts for
intersegment sales at prices negotiated between the individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers and different
design and manufacturing and marketing strategies.
Each segment has business units or components as described in paragraph
30 of SFAS No. 142. Each component has discrete financial information and a
management structure. Following is a description of the Company's segment and
component structure as of March 31, 2005:
Reporting Units Within Electronic Components Segment:
-----------------------------------------------------
o Emrise Electronics - Rancho Cucamonga, California: Digitran
Division- digital and rotary switches, and electronic
subsystem assemblies for defense, aerospace and industrial
applications
o Emrise Electronics - Monrovia, California: XCEL Circuits
Division - printed circuit boards mostly for intercompany use
but with a small base of outside customers
o XCEL Japan Ltd. - Tokyo, Japan: Reseller of Digitran switches
and other third party electronic components
F-50
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
o XCEL Corporation Ltd. - Ashford, Kent, England/Isle of Wight,
England: Power supplies and radio frequency products for
defense and aerospace applications and for a broad range of
applications, including in-flight entertainment systems; this
reporting unit also includes XCEL Power Systems, Ltd., Belix
Wound Components Ltd., Pascall Electronic (Holdings) Limited
and Pascall Electronics Limited
Reporting Units Within Communications Equipment Segment:
--------------------------------------------------------
o Larus division of CXR Larus - San Jose, California:
Communication timing and synchronization devices and network
access equipment
o CXR Telcom division of CXR Larus - San Jose, California:
Communications test equipment for the field and central office
applications
o CXR-AJ - Abondant, France: network access equipment.
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's audited consolidated financial statements included in its 2004 annual
report on Form 10-K except for the inclusion of Pascall sales in the electronic
components segment for the last 13 days of the three months ended March 31,
2005. Selected financial data for each of the Company's operating segments is
shown below (in thousands):
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
--------------- ----------------
Sales to external customers:
----------------------------
Electronic Components $ 3,807 $ 3,905
Communications Equipment 3,492 2,287
--------------- ----------------
$ 7,299 $ 6,192
=============== ================
Segment pretax profit (losses):
-------------------------------
Electronic Components $ 505 $ 783
Communications Equipment (187) (11)
--------------- ----------------
$ 318 $ 772
=============== ================
March 31, 2005 December 31, 2004
--------------- ----------------
Segment assets:
---------------
Electronic Components $ 20,137 $ 8,435
Communications Equipment 15,603 16,313
--------------- ----------------
$ 35,740 $ 24,748
=============== ================
F-51
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
The following is a reconciliation of the reportable segment sales,
income or loss and assets to the Company's consolidated totals (in thousands):
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------ ------------------
Income (loss) before income taxes
---------------------------------
Total income (loss) for reportable segments $ 318 $ 772
Unallocated amounts:
General corporate expenses (602) (627)
--------------- ----------------
Consolidated income (loss) before income taxes $ (284) $ 145
=============== ================
March 31, 2005 December 31, 2004
------------------ ------------------
Assets
------
Total assets for reportable segments $ 35,740 $ 24,748
Other assets 5,801 338
--------------- ----------------
Total consolidated assets $ 41,541 $ 25,086
=============== ================
(5) NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed under the heading "Impacts
of New Accounting Pronouncements" in Part I, Item 2 of this report.
(6) INCOME TAXES
The effective tax rate for the three-month period ended March 31, 2005
is different than the 34% U.S. statutory rate primarily because of foreign taxes
on foreign source income that cannot be offset by domestic tax loss
carryforwards.
(7) CREDIT FACILITIES
On June 1, 2004, two of the Company's subsidiaries, Emrise Electronics
and CXR Larus, together with the Company acting as guarantor, obtained a credit
facility from Wells Fargo Bank, N.A. for the Company's domestic operations. This
facility is effective through July 1, 2005 and replaced the previous credit
facility the Company had with Wells Fargo Business Credit, Inc. No prepayment
penalty was due because the prior loan contract excluded from prepayment
penalties loans replaced with new credit facilities from Wells Fargo Bank, N.A.
The new credit facility is subject to an unused commitment fee equal to 0.25%
per annum, payable quarterly based on the average daily unused amount of the
line of credit described in the following paragraph.
The credit facility provides a $3,000,000 revolving line of credit
secured by accounts receivable, other rights to payment and general intangibles,
inventories and equipment. Borrowings do not need to be supported by specific
receivables or inventory balances unless aggregate borrowings under the line of
credit and the term loan described in the following paragraph exceed $2,000,000
for 30 consecutive days (a "conversion event"). If a conversion event occurs,
the line of credit will convert into a formula-based line of credit until the
F-52
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
borrowings are equal to or less than $2,000,000 for 30 consecutive days. The
formula generally provides that outstanding borrowings under the line of credit
may not exceed an aggregate of 80% of eligible accounts receivable, plus 15% of
the value of eligible raw material inventory, plus 30% of the value of eligible
finished goods inventory. The interest rate is variable and is adjusted monthly
based on the prime rate plus 0.5%. The prime rate at March 31, 2005 was 5.50%.
The credit facility also provides for a term loan of $150,000 secured
by equipment, amortizable over 36 months at a variable rate equal to the prime
rate plus 1.5%. The term loan portion of the facility had a balance of $112,000
at March 31, 2005.
Wells Fargo Bank, N.A. has also provided the Company with $300,000 of
credit available for the purchase of new capital equipment when needed through
July 1, 2005, of which a balance of $142,000 was outstanding at March 31, 2005.
The interest rate is equal to the 90-day London InterBank Offered Rate ("LIBOR")
rate (3.10% at March 31, 2005) plus 3.75% per annum. Amounts borrowed under this
arrangement are amortized over 60 months from the respective dates of borrowing.
As of March 31, 2005, the Company had no outstanding balance owing
under the revolving credit line, and the Company had $2,000,000 of availability
on the non-formula based portion of the credit line. The credit facility is
subject to various financial covenants. As of March 31, 2005, the Company was in
compliance with each of those covenants. The minimum debt service coverage ratio
of each of Emrise Electronics and CXR Larus must be not less than 1.50:1.00 on a
trailing four-quarter basis. "Debt service coverage ratio" is defined as net
income plus depreciation plus amortization, minus non-financed capital
expenditures, divided by current portion of long-term debt measured quarterly.
The current ratio of each of Emrise Electronics and CXR Larus must be not less
than 1.50:1.00, determined as of each fiscal quarter end. "Current ratio" is
defined as total current assets divided by total current liabilities. Net income
after taxes of each of Emrise Electronics and CXR Larus must be not less than
$1.00 on an annual basis, determined as of the end of each quarter. Net profit
after taxes of each of Emrise Electronics and CXR Larus must be not less than
$1.00 in each fiscal quarter immediately following a fiscal quarter in which
that entity incurred a net loss after taxes. Total liabilities divided by
tangible net worth of our domestic operations on a consolidated basis must not
at any time be greater than 2.00:1.00, determined as of each fiscal quarter end.
Tangible net worth of us and all of our subsidiaries on a consolidated basis
must not at any time be less than $5,200,000, measured at the end of each
quarter. "Total liabilities" is defined as current liabilities plus non-current
liabilities, minus subordinated debt. "Tangible net worth" is defined as
stockholders' equity plus subordinated debt, minus intangible assets.
The credit facility expires in July 2005. However, the bank has
informally extended the term of the revolving line by two months and has
indicated that it is amenable to renewing and expanding the credit facility.
However, if the Company is unable to obtain a renewal of the credit facility,
the Company believes that it will have sufficient funds available to timely
repay any additional amounts it may borrow under the credit facility prior to
its expiration.
As of March 31, 2005, the Company's foreign subsidiaries had credit
facilities, including lines of credit and term loans, with Venture Finance PLC,
a subsidiary of the global Dutch ABN AMRO Holdings, N.V. financial institution,
in England, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National
de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in
Japan. At March 31, 2005, the balances outstanding under the Company's United
Kingdom, France and Japan credit facilities were $1,230,000, $692,000 and
$52,000, respectively.
F-53
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
On July 13, 2004, the Company issued two promissory notes to the former
stockholders of Larus totaling $3,000,000 in addition to paying cash and issuing
shares of common stock (see Note 8), in exchange for 100% of the outstanding
capital stock of Larus. These notes are subordinated to the Company's bank debt
and are payable in 72 monthly equal payments of principal totaling $41,667 per
month plus interest at the 30-day LIBOR rate plus 5% with a maximum interest
rate of 7% during the first two years of the term of the notes, 8% during the
third and fourth years and 9% thereafter. As of March 31, 2005, the 30-day LIBOR
rate was 2.86%. The total balance of these promissory notes as of March 31, 2005
was $2,625,000.
Future maturities of notes payable to stockholders are as follows:
Year Ending Dollars in
December 31, Thousands
------------ ---------
2005 $ 375
2006 500
2007 500
2008 500
2009 500
Thereafter 250
--------
$ 2,625
========
Total interest paid on these notes for the quarter ended March 31, 2005
was $53,000.
F-54
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
(8) RELATED PARTY TRANSACTIONS
On July 13, 2004, the Company issued two promissory notes to the former
stockholders of Larus Corporation totaling $3,000,000 in addition to paying cash
and issuing shares of common stock and two zero interest short-term notes
totaling $887,500 that were repaid in 2004, in exchange for 100% of the common
stock of Larus Corporation (see Note 7).
The Company entered into an above-market real property lease with the
former stockholders of Larus Corporation. This lease represents an obligation
that exceeds the fair market value by approximately $756,000. The lease term is
for 7 years and expires on June 30, 2011. It is renewable for a 5-year term
priced under market conditions. The base rent is based on a minimum rent of
$0.90 per square foot per month, which is $27,000 monthly or $324,000 per year,
subject to monthly adjustments of the interest rate based on the Federal Reserve
Discount Rate that match the lessor's variable interest rate mortgage payments
on the building. The maximum increase in any year is 1.5%, with a cumulative
maximum increase of 8% over the life of the lease. The increases apply to that
portion of the rent that corresponds to the interest portion of the lessor's
mortgage. Lease payments paid to the related parties during the three months
ended March 31, 2005 totaled $92,000.
(9) JANUARY 2005 PRIVATE PLACEMENT
On January 5, 2005, the Company issued to 17 accredited record holders
in a private offering an aggregate of 12,503,500 shares of common stock at a
purchase price of $1.44 per share and five-year investor warrants to purchase up
to an additional 3,125,875 shares of our common stock at an exercise price of
$1.73 per share, for total proceeds of approximately $18,005,000. The Company
paid cash placement agent fees and expenses of approximately $961,000, and
issued five-year placement warrants to purchase up to an aggregate of 650,310
shares of common stock at an exercise price of $1.73 per share in connection
with the offering. The total warrants issued, representing 3,776,185 shares of
the Company's common stock, have an estimated value of $4,400,000. Additional
costs related to the financing include legal, accounting and consulting fees
that totaled approximately $192,000 through March 31, 2005 and continue to be
incurred in connection with the resale registration described below. The Company
used a portion of the proceeds from this financing to fund the acquisition of
Pascall described below. The Company intends to use the remaining proceeds from
this financing for additional acquisitions and for investments in new products
and enhancements to existing products.
The Company agreed to register for resale the shares of common stock
issued to investors and the shares of common stock issuable upon exercise of the
investor warrants and placement warrants. The registration obligations require,
among other things, that a registration statement be declared effective no later
than June 4, 2005. The Company was unable to meet this obligation and therefore
paid to each investor liquidated damages equal to 1% of the amount paid by the
investor to the Company in the offering, which damage payments totaled an
aggregate of approximately $180,000. The Company also paid or must pay to each
investor liquidated damages for the period from June 5, 2005 through the date
the registration was 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
the Company entered into with the investors. 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
F-55
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
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 approximately $1,801,000.
Although the Company anticipates that it will be able to meet its future
registration obligations, it also anticipates that it will have sufficient cash
available to pay the maximum penalties if required.
(10) LARUS CORPORATION AND PASCALL ACQUISITIONS
LARUS CORPORATION ACQUISITION
Pursuant to the terms of a Stock Purchase Agreement executed on July
13, 2004, the Company acquired all of the issued and outstanding common stock of
Larus Corporation. Larus Corporation was based in San Jose, California and
engaged in the manufacturing and sale of telecommunications products. Larus
Corporation had one wholly-owned subsidiary, Vista Labs, Incorporated ("Vista"),
which provided engineering services to Larus Corporation. Assets held by Larus
Corporation included intellectual property, cash, accounts receivable and
inventories owned by each of Larus Corporation and Vista.
The purchase price for the acquisition totaled $6,539,500 and consisted
of $1,000,000 in cash, the issuance of 1,213,592 shares of the Company's common
stock with a fair value of $1,000,000, $887,500 in the form of two short-term,
zero interest promissory notes that were repaid in 2004, $3,000,000 in the form
of two subordinated secured promissory notes, warrants to purchase up to an
aggregate of 150,000 shares of the Company's common stock at $1.30 per share,
and approximately $580,000 of acquisition costs. The number of shares of the
Company's common stock issued as part of the purchase price was calculated based
on the $0.824 per share average closing price of the Company's common stock for
the five trading days preceding the transaction. The warrants to purchase
150,000 shares of common stock were valued at $72,000 using a Black-Scholes
formula that included a volatility of 107.19%, an interest rate of 3.25%, a life
of three years and no assumed dividend.
In addition, the Company assumed $245,000 in accounts payable and
accrued expenses and entered into an above-market real property lease with the
sellers. This lease represents an obligation that exceeds the fair market value
by approximately $756,000 and is part of the acquisition accounting. The cash
portion of the acquisition purchase price was funded with proceeds from the
Company's credit facility with Wells Fargo Bank, N.A. and cash on-hand.
In determining the purchase price for Larus Corporation, the Company
took into account the historical and expected earnings and cash flow of Larus
Corporation, as well as the value of companies of a size and in an industry
similar to Larus Corporation, comparable transactions and the market for such
companies generally. The purchase price represented a significant premium over
the $1,800,000 recorded net worth of Larus Corporation's assets. In determining
this premium, the Company considered the Company's potential ability to refine
various Larus Corporation products and to use the Company's marketing resources
and status as a qualified supplier to qualify and market those products for sale
to large telecommunications companies. The Company believes that large
telecommunications companies desired to have an additional choice of suppliers
for those products and would be willing to purchase Larus Corporation's products
following some refinements. The Company also believes that if Larus Corporation
had remained independent, it was unlikely that it would have been able to
qualify to sell its products to the large telecommunications companies due to
its small size and lack of history selling to such companies. Therefore, Larus
Corporation had a range of value separate from the net worth it had recorded on
its books.
F-56
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
In conjunction with the acquisition of Larus Corporation, the Company
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
Corporation trade name 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
Corporation trade name 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 during the quarter
ending June 30, 2005 and could result in changes to the value of these
identified intangible assets and corresponding changes to the value of goodwill.
However, the Company does not believe these changes will be material to its
financial position or results of operations.
The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition:
Dollars
in Thousands
------------
Current assets $ 2,460
Property, plant and equipment 90
Intangible assets other than goodwill 3,600
Goodwill 3,363
------------
Total assets acquired 9,513
Current liabilities (685)
Deferred income taxes (1,400)
Unfavorable lease obligation and other liabilities (888)
------------
Total liabilities assumed (2,973)
------------
Net assets acquired $ 6,540
============
The intangible assets other than goodwill consist of non-amortizable
trade names with a carrying value of $2,800,000, and technology and customer
relationships with carrying values of $500,000 and $300,000, respectively, that
are amortizable over ten years. Amortization for the intangibles subject to
amortization as of March 31, 2005 is anticipated to be approximately $80,000 per
year for each of the next five years.
PASCALL ACQUISITION
On March 1, 2005, the Company and XCEL Corporation Limited, a
second-tier wholly-owned subsidiary of the Company ("XCEL"), entered into an
agreement ("Purchase Agreement") to acquire all of the issued and outstanding
capital stock of Pascall Electronic (Holdings) Limited ("PEHL") by XCEL. The
closing of the purchase occurred on March 18, 2005. The Company loaned to XCEL
the funds that XCEL used to purchase PEHL. PEHL has one wholly-owned subsidiary,
Pascall Electronics Limited ("Pascall"), which produces, designs, develops,
manufactures and sells power supplies and radio frequency products for a broad
range of applications, including in-flight entertainment systems and military
programs.
F-57
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
Under the Purchase Agreement, XCEL purchased all of the outstanding
capital stock of PEHL, using funds loaned to XCEL by the Company. The purchase
price for the acquisition totaled $9,669,000, subject to adjustments as
described below, and included a $5,972,000 cash payment to PEHL's former parent,
a $3,082,000 loan to PEHL and Pascall and approximately $615,000 in acquisition
costs, as described below.
The initial portion of the purchase price was 3,100,000 British pounds
sterling (approximately U.S. $5,972,000 based on the exchange rate in effect on
March 18, 2005). The initial portion of the purchase price was paid in cash at
the closing and is subject to upward or downward adjustment on a pound for pound
basis to the extent that the value of the net assets of Pascall as of the
closing date was greater or less than 2,520,000 British pounds sterling.
On May 6, 2005, the Company submitted to Intelek Properties Limited
(which is a subsidiary of Intelek PLC, a London Stock Exchange public limited
company, and is the former parent of PEHL), the Company's calculation of the
value of the net assets of Pascall as of the closing date, which the Company
believes slightly exceeded 2,520,000 British pounds sterling. Intelek Properties
Limited has indicated that its own calculation exceeds the Company's calculation
by approximately 100,000 British pounds sterling (approximately U.S. $193,000
based on the exchange rate in effect on March 18, 2005). The Company is working
to resolve this discrepancy. Any payment relating to the increase or reduction
of the purchase price based on the value of the net assets of Pascall will be
due from XCEL or Intelek Properties Limited, as the case may be, within 14 days
of the acceptance of the calculation. A default rate of interest equal to 3%
above the base lending rate of Barclays Bank plc London will apply if the
adjustment payment is not timely made. However, the Company anticipates that any
adjustment payment based on this calculation will not be material to the
Company's financial results and that it will be timely made. The purchase price
is also subject to downward adjustments for any payments that may be made to
XCEL under indemnity, tax or warranty provisions of the Purchase Agreement.
XCEL loaned to PEHL and Pascall at the closing 1,600,000 British pounds
sterling (approximately U.S. $3,082,000 based on the exchange rate in effect on
March 18, 2005) in accordance with the terms of a Loan Agreement entered into by
those entities at the closing. The loaned funds were used to immediately repay
outstanding intercompany debt owed by PEHL and Pascall to the seller.
The Company and Intelek PLC have agreed to guarantee payment when due
of all amounts payable by XCEL and Intelek Properties Limited, respectively,
under the Purchase Agreement. The Company and XCEL agreed to seek to replace the
guaranty that Intelek Properties Limited has given to Pascall's landlord with a
guaranty by the Company, and XCEL has agreed to indemnify Intelek Properties
Limited and its affiliates for damages they suffer as a result of any failure to
obtain the release of the guarantee of the 17-year lease that commenced in May
1999. The leased property is a 30,000 square foot administration, engineering
and manufacturing facility located off the south coast of England.
Intelek Properties Limited has agreed to various restrictive covenants
that apply for various periods following the closing. The covenants include
non-competition with Pascall's business, non-interference with Pascall's
customers and suppliers, and non-solicitation of Pascall's employees. In
conjunction with the closing, Intelek Properties Limited, Intelek PLC, XCEL, and
the Company entered into a Supplemental Agreement dated March 18, 2005. The
Supplemental Agreement provides, among other things, that an interest -free
bridge loan of 200,000 British pounds sterling (approximately U.S. $385,000
F-58
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
based on the exchange rate in effect on March 17, 2005) that was made by the
seller to Pascall on March 17, 2005 would be repaid by Pascall by March 31,
2005. XCEL agreed to ensure that Pascall had sufficient funds to repay the
bridge loan. The bridge loan was repaid in full by Pascall on the March 31, 2005
due date.
The following table summarizes the unaudited assets acquired and
liabilities assumed in connection with this acquisition, including $615,000 in
acquisition costs:
Dollars
in Thousands
------------
Current assets............................... $ 6,196
Property, plant and equipment................ 1,367
Intangibles, including goodwill.............. 4,721
------------
Total assets acquired........................ 12,284
Current liabilities.......................... 2,535
------------
Other liabilities............................ 80
------------
Total liabilities assumed.................... 2,615
------------
Net assets acquired.......................... $ 9,669
============
The purchase price represented a significant premium over the recorded
net worth of Pascall's assets. In determining to pay this premium, we considered
various factors, including the opportunities that Pascall presented for us to
add RF components and RF subsystem assemblies to our product offerings, the
marketing resources of Pascall in the United States power supplies market, and
expected synergies between Pascall's business and our existing power supplies
business.
In conjunction with the acquisition of Pascall, the Company has
selected a valuation firm to determine what portion of the purchase price should
be allocated to identifiable intangible assets. The Company has considered
whether the acquisition included various types of identifiable intangible
assets, including trade names, trademarks, patents, covenants not to compete,
customers, workforce, technology and software. The Company has estimated that
the Pascall trade name and trademark are valued at $50,000. The Company has
estimated that the covenants not to compete that were obtained from Pascall's
former affiliates are valued at $100,000 in light of public statements made by
those affiliates indicating that they were strategically exiting the power
supply business, which the Company believes result in a low probability that
they would return to the power supply business absent the covenants not to
compete. The Company believes that no other identifiable intangible assets of
significant value were acquired. No patents were acquired. The Company has not
ascribed any value to Pascall's customer base because the Company's United
Kingdom subsidiary, XCEL Power Systems, Ltd., already sells to Pascall's key
customers. Pascall's workforce does not hold any special skills that are not
readily available from other sources. The Company did not identify any valuable
completed technology that was acquired, because Pascall utilizes non-proprietary
technology to produce custom power supplies pursuant to customer specifications.
Pascall does not develop or design software and does not own software of any
material value.
Accordingly, the Company has estimated that the goodwill associated
with the Pascall acquisition totaled $4,571,000. The Pascall trade name and
trademark were determined to have indefinite lives and therefore are not being
amortized but rather are being periodically tested for impairment. The covenants
not to compete will be amortized over their three-year duration. The valuation
of the identified intangible assets is expected to be completed during the
quarter ending September 30, 2005 and could result in changes to the value of
these identified intangible assets and corresponding changes to the value of
goodwill. However, the Company does not believe these changes will be material
to its financial position or results of operations.
PRO FORMA RESULTS OF OPERATIONS
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company, Larus Corporation and Pascall, as
though the Larus Corporation and Pascall acquisitions occurred as of January 1,
2004. The pro forma amounts give effect to appropriate adjustments for interest
expense and income taxes. The pro forma amounts presented are not necessarily
indicative of future operating results (in thousands, except per share amounts).
F-59
EMRISE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months
Ended March 31,
---------------------------
2005 2004
---------- ----------
Revenues $ 10,540 $ 12,215
Net income (loss) $ (189) $ 644
Earnings (loss) per share of common stock
Basic $ (0.01) $ 0.02
========== ==========
Diluted $ (0.01) $ 0.02
========== ==========
(11) ACCRUED EXPENSES
Accrued expenses were as follows (in thousands):
March 31, 2005 December 31, 2004
-------------- -----------------
Accrued salaries $ 879 $ 805
Accrued payroll taxes and benefits 642 491
Advance payments from customers 398 77
Other accrued expenses 1,385 1,641
-------------- -----------------
Total accrued expenses $ 3,304 $ 3,014
============== =================
F-60
REPORT OF THE INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PASCALL ELECTRONIC (HOLDINGS)
LIMITED
We have audited the consolidated balance sheets and the company balance sheets
of Pascall Electronic (Holdings) Limited as at 18 March 2005 and 31 March 2004
and the consolidated profit and loss accounts and consolidated cash flows for
the period from 1 April 2004 to 18 March 2005 and for the year ended 31 March
2004. These financial statements are the responsibility of Pascall Electronic
(Holdings) Limited's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Pascall Electronic (Holdings)
Limited as at 18 March 2005 and 31 March 2004 and the results of its operations
and its cash flows for the period from 1 April 2004 to 18 March 2005 and for the
year ended 31 March 2004 in conformity with generally accepted accounting
principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the United
States of America. Information relating to the nature and effect of such
differences is presented in Note 29 to the financial statements.
GRANT THORNTON UK LLP
REGISTERED AUDITORS
CHARTERED ACCOUNTANTS
Northampton, England
27 June 2005
F-61
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
CONSOLIDATED PROFIT AND LOSS ACCOUNT
PERIOD YEAR
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
NOTE (POUNDS) (POUNDS)
TURNOVER 2 5,577,648 6,650,278
Cost of sales (4,864,212) (5,642,113)
---------- ----------
GROSS PROFIT 713,436 1,008,165
---------- ----------
Administrative expenses (including an
exceptional charge of
(POUNDS)241,976 - see Note 4) (712,958) (707,735)
Distribution costs (591,262) (454,760)
Other operating income 3 108,880 120,972
---------- ----------
(1,195,340) (1,041,523)
---------- ----------
OPERATING LOSS 4 (481,904) (33,358)
Exceptional item-gain on disposal of
dormant subsidiaries 5 315,686 --
LOSS ON ORDINARY ACTIVITIES BEFORE
---------- ----------
INTEREST AND TAXATION (166,218) (33,358)
Bank interest (59,344) (37,369)
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (225,562) (70,727)
Tax on loss on ordinary activities 7 191,623 44,944
---------- ----------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (33,939) (25,783)
Equity dividends 9 -- (39,000)
---------- ----------
RETAINED LOSS FOR THE PERIOD 19 (33,939) (64,783)
========== ==========
All of the activities of the group are classed as continuing.
There were no recognised gains or losses other than the loss for the financial
period.
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-62
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
CONSOLIDATED BALANCE SHEET
18 MARCH 31 MARCH
2005 2004
NOTE (POUNDS) (POUNDS)
FIXED ASSETS
Tangible assets 10 709,719 810,007
---------- ----------
CURRENT ASSETS
Stocks 12 1,451,595 1,013,377
Debtors 13 1,871,930 1,782,160
Cash at bank and in hand 170,150 475,767
---------- ----------
3,493,675 3,271,304
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 (3,395,842) (3,220,309)
---------- ----------
NET CURRENT ASSETS 97,833 50,995
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 807,552 861,002
CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 15 (20,219) (39,730)
---------- ----------
NET ASSETS 787,333 821,272
========== ==========
CAPITAL AND RESERVES
Called up share capital 17 364,711 364,711
Share premium account 18 68,856 68,856
Capital redemption reserve 18 312,714 312,714
Profit and loss account 18 41,052 74,991
SHAREHOLDERS' FUNDS 19 787,333 821,272
---------- ----------
Equity 647,013 680,952
Non-equity 140,320 140,320
787,333 821,272
========== ==========
The financial statements were approved by the Board of Directors on 27 June 2005.
Director: Carmine T. Oliva.
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-63
PASCALL ELECTRONIC (HOLDINGS) LIMITED (PARENT COMPANY ONLY)
BALANCE SHEET
18 MARCH 31 MARCH
2005 2004
NOTE (POUNDS) (POUNDS)
FIXED ASSETS
Investments 11 746,499 585,548
---------- ----------
CURRENT ASSETS
Debtors 13 -- 759,703
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR 14 -- (598,970)
---------- ----------
NET CURRENT ASSETS -- 160,733
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 746,499 746,281
========== ==========
CAPITAL AND RESERVES
Called up share capital 17 364,711 364,711
Share premium account 18 68,856 68,856
Capital redemption reserve 18 312,714 312,714
Profit and loss account 18 218 --
---------- ----------
SHAREHOLDERS' FUNDS 746,499 746,281
========== ==========
Equity 606,179 605,961
Non-equity 140,320 140,320
---------- ----------
746,499 746,281
========== ==========
The financial statements were approved by the Board of Directors on 27 June 2005.
Director: Carmine T. Oliva.
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-64
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
CONSOLIDATED CASH FLOW STATEMENT
18 MARCH 31 MARCH
2005 2004
NOTE (POUNDS) (POUNDS)
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 20 360,759 (233,832)
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (61,868) (35,613)
-------- --------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE (61,868) (35,613)
-------- --------
TAXATION 20 149,858
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Purchase of tangible fixed assets (183,488) (84,542)
Sale of tangible fixed assets 39,657 62,433
-------- --------
NET CASH OUTFLOW FROM CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
(143,831) (22,109)
-------- --------
ACQUISITIONS AND DISPOSALS
Sale of subsidiary undertakings 76,000 --
-------- --------
NET CASH INFLOW FROM ACQUISITIONS AND DISPOSALS 76,000 --
-------- --------
EQUITY DIVIDENDS PAID (39,000) --
FINANCING
Capital elements of finance lease rentals (41,544) (36,073)
-------- --------
NET CASH OUTFLOW FROM FINANCING (41,544) (36,073)
-------- --------
INCREASE/(DECREASE) IN CASH 21 150,536 (177,769)
======== ========
The accompanying accounting policies and notes form an integral part
of these financial statements.
F-65
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
1. PRINCIPAL ACCOUNTING POLICIES
BASIS OF PREPARATION
The financial statements are prepared in accordance with applicable
United Kingdom accounting standards and under the historical cost
convention. During the latest period presented, the company changed its
fiscal year end to 18 March from 31 March.
The principal accounting policies of the group are set out below. The
policies have remained unchanged from the previous year.
BASIS OF CONSOLIDATION
The "group" financial statements consolidated those of the company,
being Pascall Electronic (Holdings) Limited, and its subsidiary
undertaking (see Note 11) drawn up to 18 March 2005. Acquisitions of
subsidiaries are dealt with by the acquisition method of accounting.
GOODWILL
Goodwill arising on consolidation representing the excess of the fair
value of the consideration given over the fair values of the
identifiable net assets acquired, is capitalised and is amortised on a
straight line basis over its estimated useful economic life. Negative
goodwill is written back to the profit and loss account to match the
recovery of the non-monetary assets acquired.
As a matter of accounting policy, purchased goodwill first accounted
for in accounting periods ending before 23 December 1998, the
implementation date of Financial Reporting Standard No 10, was
eliminated from the financial statements by immediate write-off on
acquisition against reserves. Such goodwill will be charged or credited
to the profit and loss account on the subsequent disposal of the
business to which it relates.
TURNOVER
Turnover consists of the invoiced value (excluding VAT) for goods and
services supplied in the period.
RESEARCH AND DEVELOPMENT
Research and development expenditure is written off in the period in
which it is incurred.
F-66
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
TANGIBLE FIXED ASSETS AND DEPRECIATION
Tangible fixed assets are stated at cost or valuation, net of
depreciation and any provision for impairment.
Depreciation is calculated to write down the cost less estimated
residual value of all tangible fixed assets over their useful economic
lives. Where there is evidence of impairment, fixed assets are written
down to their recoverable amount. The principal annual rates used are
as follows:
Short leasehold property life of lease
Plant and machinery 10%-25% Straight line
Motor vehicles 25% Reducing balance
STOCKS AND WORK IN PROGRESS
Stocks and work in progress are stated at the lower of cost and net
realisable value. Cost is determined on a first-in first-out basis. The
cost of work in progress and finished goods comprises materials, direct
labour and attributable production overheads. Net realisable value is
based on estimated sales price after allowing for all further costs of
completion and disposal.
DEFERRED TAXATION
Deferred tax is provided, except as noted below, on timing differences
that have arisen but not reversed by the balance sheet date, where the
timing differences result in an obligation to pay more tax, or a right
to pay less tax, in the future. Timing differences arise because of
differences between the treatment of certain items for accounting and
taxation purposes.
In accordance with FRS 19 deferred tax is not provided on timing
differences arising from:
a) revaluation gains on land and buildings, unless there is a
binding agreement to sell them at the balance sheet date; and
b) gains on the sale of non-monetary assets, where on the basis of
all available evidence it is more likely than not that the
taxable gain will be rolled over into replacement assets.
Deferred tax assets are recognised to the extent that it is regarded as
more likely than not that they will be recovered.
Deferred tax is measured at the tax rates that are expected to apply in
the periods when the timing differences are expected to reverse, based
on tax rates and law enacted or substantively enacted at the balance
sheet date. Deferred tax assets and liabilities are not discounted.
F-67
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded at the rate of exchange
at the date of the transaction, or if hedged at the forward contract
rate. Monetary assets and liabilities denominated in foreign currency
are translated into sterling at the rate of exchange ruling at the
balance sheet date, or if hedged the forward contract rate. All
exchange differences are recognised in the profit and loss account.
GOVERNMENT GRANTS
Grants in respect of fixed assets are credited to the profit and loss
account in equal annual instalments over the useful lives of the assets
concerned.
Other grants are credited to the profit and loss account in the same
year as the expenditure to which they contribute.
LEASED ASSETS
Fixed assets subject to finance leases are capitalised and depreciated
in accordance with the depreciation policy stated above. The
corresponding liability for the capital element is included in
creditors, and the interest, calculated on a straight line basis, is
charged against profits over the period of the lease. The rental and
operating lease costs of all other assets are charged against profit
before interest, as incurred.
RETIREMENT BENEFITS
DEFINED CONTRIBUTION PENSION SCHEME
The pension costs charged against operating profits are the
contributions payable to the scheme in respect of the accounting
period.
DEFINED BENEFIT PENSION SCHEME
Pascall Electronics Limited, the trading subsidiary of Pascall
Electronic (Holdings) Limited, participated in the Intelek plc Group
Defined Benefit Pension Scheme.
Prior to the cessation of Pascall Electronics Limited's participation
in the Intelek plc Group Defined Benefit Pension Scheme on 18 March
2005, in accordance with SSAP 24, contributions to the scheme were
charged to profits on the recommendation of a qualified actuary using
the defined accrued benefit method so as to spread the cost of pensions
over the anticipated service lives of scheme members. Deferred tax is
fully accounted for on any difference between accumulated pension costs
charged against profits and accumulated contributions paid.
F-68
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
2. TURNOVER BY GEOGRAPHICAL MARKET
Turnover is wholly attributable to the principal activity of the group.
An analysis of turnover by geographical market is given below:
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
European Community (excluding UK) 153,147 157,703
Rest of Europe - 5,964
North America 3,405,990 4,797,849
South America 235 21,620
Asia 716,695 846,371
Africa 27,486 13,249
Export sales 4,303,553 5,842,756
United Kingdom 1,274,095 807,522
--------- -------
5,577,648 6,650,278
========= =========
3. OTHER OPERATING INCOME
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Rental income 87,662 99,972
DTI Grant 21,000 21,000
Other 218 -
--------- -------
108,880 120,972
========= =========
F-69
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
4. OPERATING LOSS
The operating loss is arrived at after charging/(crediting):
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Depreciation of tangible fixed assets 283,131 287,038
Auditors' remuneration - audit services 23,669 9,500
Research and development 645,125 641,000
Operating lease rentals
- plant and machinery 9,231 9,662
- land and buildings 331,557 313,625
Loss on sale of fixed assets 2,628 20,044
Deferred income from Government Grants (21,000) (21,000)
Exceptional item - write-off of pension prepayment 241,976 -
========= ========
On 18 March 2005 the company ceased its participation in the Intelek
plc group pension scheme. As a result the company no longer
participates in a defined benefit pension scheme.
Accordingly, the SSAP 24 prepayment amounting to (POUNDS)241,976
recognised in the prior year accounts has been charged to the profit
and loss account through administrative expenses as an exceptional item
for the period ended 18 March 2005. The related deferred tax liability
of (POUNDS)72,593 has been released to the profit and loss account.
5. EXCEPTIONAL ITEMS
On 22 February 2005 the subsidiary undertaking, Pascall Microwave
Limited, was sold for consideration of (POUNDS)1 to the ultimate parent
undertaking at that time, being Intelek plc. The gain arising on
disposal amounted to (POUNDS)315,685.
F-70
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
6. DIRECTORS AND EMPLOYEES
The average number of staff employed by the group during the period,
including directors was:
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
Production and ancillary 92 93
Administration and sales 16 15
--------- ---------
108 108
========= =========
Staff costs during the period were as follows:
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Wages and salaries 2,277,533 2,264,745
Social security costs 212,066 212,786
Other pension costs 338,082 154,007
--------- ---------
2,827,681 2,631,538
========= =========
F-71
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
6. DIRECTORS AND EMPLOYEES (CONTINUED)
Remuneration in respect of directors was as follows:
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Emoluments 211,010 221,186
Pension contributions to money purchase schemes 12,667 11,795
--------- ---------
223,677 232,981
========= =========
The emoluments of the highest paid director excluding pension
contributions were (POUNDS)76,122 (2004: (POUNDS)96,502).
Pension contributions for the highest paid director were (POUNDS)4,106
(2004: (POUNDS)5,055).
There were two directors accruing benefits under a money purchase
scheme (2004: 6).
F-72
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
7. TAXATION ON LOSS ON ORDINARY ACTIVITIES
(a) Analysis of charge in the period
PERIOD TWELVE
ENDED MONTHS
18 MARCH ENDED
2005 31 MARCH
(POUNDS) 2004
(POUNDS)
CURRENT TAX:
UK corporation tax based at 30% (2004: 30%) - -
Adjustment in respect of prior year - (66,808)
Group relief
Adjustment in respect of prior year - 32,055
--------- --------
Total current tax - (34,753)
DEFERRED TAXATION:
Origination and reversal of timing differences (191,623) (10,191)
--------- --------
Taxation on loss on ordinary activities (191,623) (44,944)
========= ========
Unrelieved tax losses of (POUNDS)240,000 remain available to offset against future
taxable trading profits.
F-73
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
7. TAXATION ON LOSS ON ORDINARY ACTIVITIES (CONTINUED)
(b) Factors affecting current tax charge
The tax assessed on the loss on ordinary activities for the period is
higher than the standard rate of corporation tax in the UK of 30%
(2004: 30%). The differences are explained as follows:
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Loss on ordinary activities before taxation (225,562) (70,727)
========= ========
Loss on ordinary activities multiplied by standard rate of
corporation tax in the UK of 30% (2004: 30%) (67,669) (21,218)
Effects of:
Research and development tax credit (33,856) (22,780)
Expenses not deductible for tax purposes 76,525 5,081
Non taxable gains on disposal of dormant subsidiaries (94,706) -
Capital allowances in excess of depreciation 14,881 14,858
Creation of tax losses 72,167 -
Other timing differences 32,658 18,739
Group losses not paid for - 5,320
Adjustments in respect of prior years - (34,753)
--------- --------
Total current tax (note 7(a)) - (34,753)
========= ========
8. PROFIT FOR THE FINANCIAL YEAR
The parent company has taken advantage of section 230 of the Companies
Act 1985 and has not included its own profit and loss account in these
financial statements. The parent company's profit for the year was
(POUNDS)218 (2004: (POUNDS)Nil).
F-74
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
9. DIVIDENDS
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Equity dividends:
Ordinary shares - proposed final dividend of Nil per share
(2004: 17.38p) - 39,000
========= ========
10. TANGIBLE FIXED ASSETS
SHORT
LEASEHOLD
LAND AND PLANT AND MOTOR
BUILDINGS MACHINERY VEHICLES TOTAL
THE GROUP (POUNDS) (POUNDS) (POUNDS) (POUNDS)
COST
At 1 April 2004 251,477 3,278,730 85,949 3,616,156
Additions - 196,170 28,958 225,128
Disposals - (9,457) (55,913) (65,370)
-------- ---------- -------- ----------
At 18 March 2005 251,477 3,465,443 58,994 3,775,914
-------- ---------- -------- ----------
DEPRECIATION
At 1 April 2004 94,473 2,683,423 28,253 2,806,149
Charge for the period 12,296 254,902 15,933 283,131
Disposals - - (23,085) (23,085)
-------- ---------- -------- ----------
At 18 March 2005 106,769 2,938,325 21,101 3,066,195
-------- ---------- -------- ----------
NET BOOK VALUE
At 18 March 2005 144,708 527,118 37,893 709,719
======== ========== ======== ==========
At 31 March 2004 157,004 595,307 57,696 810,007
======== ========== ======== ==========
F-75
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
10. TANGIBLE FIXED ASSETS (CONTINUED)
The figures stated above include assets held under finance leases and
similar hire purchase contract as follows:
(POUNDS)
Net book value at 18 March 2005 81,409
=======
Net book value at 31 March 2004 84,666
=======
Depreciation provided in the period 31,257
=======
THE COMPANY
The company held no fixed assets at 18 March 2005 or 31 March 2004.
F-76
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
11. FIXED ASSET INVESTMENTS
SHARES IN
SUBSIDIARY
UNDERTAKINGS
(POUNDS)
THE COMPANY
Cost
At 1 April 2004 585,548
Additions 236,951
Disposals (76,000)
--------
At 18 March 2005 746,499
========
NET BOOK VALUE
At 18 March 2005 746,499
========
At 31 March 2004 585,548
========
At 18 March 2005 the company held more than 20% of the allotted share
capital of the following subsidiary undertaking:
CLASS OF SHARE PROPORTION HELD BY
SUBSIDIARY UNDERTAKING CAPITAL HELD COMPANY NATURE OF BUSINESS
Pascall Electronics Ordinary 100% Design, development and
Limited manufacture of electronic
instruments, components and
sub systems
The subsidiary undertaking is consolidated within these financial
statements under the acquisition method of accounting.
F-77
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
12. STOCKS
THE GROUP
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Raw materials and consumables 401,273 399,019
Work in progress 743,872 339,989
Finished goods and goods for resale 306,450 274,369
--------- ---------
1,451,595 1,013,377
========= =========
THE COMPANY
The company had no stocks at 18 March 2005 or 31 March 2004.
13. DEBTORS
THE GROUP
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Trade debtors 1,525,256 1,391,867
Amounts owed by group undertakings - -
Other debtors 21,421 14,142
Prepayments and accrued income 102,886 345,387
Taxation recoverable 26,153 26,173
Deferred tax asset (Note 16) 196,214 4,591
--------- ---------
1,871,930 1,782,160
========= =========
Included in prepayments is a SSAP 24 pension prepayment of (POUNDS)Nil
(2004: (POUNDS)241,976).
THE COMPANY
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Amounts owed by group undertakings - 759,703
========= =========
F-78
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
14. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
THE GROUP 18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Bank overdrafts 140,657 596,810
Obligations under finance leases 50,194 30,587
Trade creditors 846,251 789,836
Amounts owed to group undertakings 1,600,000 1,178,877
Other taxation and social security 129,809 128,054
Other creditors 7,848 2,983
Proposed dividend - 39,000
Accruals and other deferred income 621,083 454,162
--------- ---------
3,395,842 3,220,309
========= =========
Amounts payable under finance leases and hire purchase contracts are
secured upon the assets to which they relate.
THE COMPANY
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Amounts owed to group undertakings - 598,970
========= =========
15. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
THE GROUP 18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Obligations under finance leases
- one to two years 20,219 39,730
========= =========
THE COMPANY
The company had no liabilities due in greater than one year at 18 March
2005 or 31 March 2004.
F-79
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
16. DEFERRED TAXATION
THE GROUP DEFERRED
TAX ASSET
(POUNDS)
At 1 April 2004 4,591
Reversed during period 191,623
-------
At 18 March 2005 196,214
=======
The deferred tax asset recognised in the financial statements is set
out below:
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Accelerated capital allowances 42,805 28,824
Other timing differences 81,243 (26,263)
Losses 72,166 2,030
------- --------
196,214 4,591
======= ========
THE COMPANY
The company had no deferred tax assets or liabilities at 18 March 2005
or 31 March 2004.
F-80
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
17. SHARE CAPITAL
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
AUTHORISED
307,190 ordinary shares of (POUNDS)1 each 307,190 307,190
215,250 9 1/2% redeemable convertible cumulative preference shares
of (POUNDS)1 each 215,250 215,250
300,640 10% non-cumulative preference shares of (POUNDS)1 each 300,640 300,640
------- -------
823,080 823,080
======= =======
ALLOTTED, CALLED UP AND FULLY PAID
224,391 ordinary shares of (POUNDS)1 each 224,391 224,391
140,320 10% non-cumulative preference shares of (POUNDS)1 each 140,320 140,320
------- -------
364,711 364,711
======= =======
Rights of non-equity shareholders:
The holders of the 10% non-cumulative preference shares are entitled to
be paid a fixed non-cumulative preferential dividend at the rate of 10%
per annum out of the profits of the company resolved to be distributed
in respect of that period.
On a winding up the holders of the 10% non-cumulative preference shares
would have a right to receive out of the assets available for
distribution, repayment in full of the nominal amount paid up on these
preference shares in priority to all other shares of the company. There
is no other right to participate in the profits or assets of the
company under such circumstances.
The preference shares do not confer on the holders the right to receive
notices of, or to attend or vote at, general meetings of the company
unless a resolution for the winding up of the company shall be proposed
and then only on such resolution.
F-81
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
18. SHARE PREMIUM ACCOUNT AND RESERVES
SHARE CAPITAL PROFIT
PREMIUM REDEMPTION AND LOSS
ACCOUNT RESERVE ACCOUNT
THE GROUP (POUNDS) (POUNDS) (POUNDS)
At 1 April 2004 68,856 312,714 74,991
Loss for the period - - (33,939)
------ ------- --------
At 18 March 2005 68,856 312,714 41,052
====== ======= ========
SHARE CAPITAL PROFIT
PREMIUM REDEMPTION AND LOSS
ACCOUNT RESERVE ACCOUNT
THE COMPANY (POUNDS) (POUNDS) (POUNDS)
At 1 April 2004 68,856 312,714 -
Profit for the period - - 218
------ ------- --------
At 18 March 2005 68,856 312,714 218
====== ======= ========
The cumulative amount of goodwill arising from acquisitions accounted
for in years ending before 23 December 1998 which has been written off
to group reserves, net of goodwill charged or credited to the profit
and loss account on subsequent disposal of the business to which it
related is (POUNDS)280,797 (2004: (POUNDS)280,797).
The balance on the share premium account and capital redemption reserve
may not be distributed legally under the Companies Act 1985.
F-82
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
19. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' FUNDS
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Loss for the financial period (33,939) (25,783)
Dividends - (39,000)
--------- ---------
Net decrease in shareholders' funds (33,939) (64,783)
Shareholders' funds at 1 April 2004 821,272 886,055
--------- ---------
Shareholders' funds at 18 March 2005 787,333 821,272
========= =========
20. NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Operating loss (481,904) (33,358)
Depreciation 283,131 287,038
Profit on sale of fixed assets 2,628 20,044
(Increase)/decrease in stock (438,218) 126,596
Decrease/(increase) in debtors 341,519 (379,651)
Increase/(decrease) in creditors 653,603 (254,501)
--------- ---------
Net cash inflow/(outflow) from operating activities 360,759 (233,832)
========= =========
F-83
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
21. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
PERIOD TWELVE MONTHS
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
Increase/(decrease) in cash in year 150,536 (177,769)
Cash outflow from finance leases 41,544 36,073
--------- ---------
Change in net debt resulting from cash flows 192,080 (141,696)
Inception of finance leases (41,640) (106,390)
--------- ---------
Movement in net debt in the year 150,440 (248,086)
Net debt at 1 April 2005 (191,360) 56,726
--------- ---------
Net debt at 18 March 2005 (40,920) (191,360)
========= =========
22. ANALYSIS OF CHANGES IN NET DEBT
AT AT
1 APRIL CASH FLOW NON-CASH 18 MARCH
2004 (POUNDS) ITEMS 2005
(POUNDS) (POUNDS) (POUNDS)
Cash at bank and in hand 475,767 (305,617) - 170,150
Overdrafts (596,810) 456,153 - (140,657)
--------- --------- -------- ---------
(121,043) 150,536 - 29,493
Finance leases (70,317) 41,544 (41,640) (70,413)
--------- --------- -------- ---------
(191,360) 192,080 (41,640) (40,920)
========= ========= ======== =========
F-84
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
23. DISPOSALS
During the period the group disposed of its interest in Pascall
Microwave Limited and Pascall Electronic Systems Limited. Group profits
include (POUNDS)Nil earned by Pascall Microwave Limited and Pascall
Electronic Systems Limited up to their date of disposal on 22 February
2005. The net assets/(liabilities) on the date of disposal were:
PASCALL
PASCALL ELECTRONIC
MICROWAVE SYSTEMS
LIMITED LIMITED
(POUNDS) (POUNDS)
Debtors 796,699 2,205
Creditors (720,701) (317,889)
--------- ---------
75,998 (315,684)
Profit on disposal 1 315,685
--------- ---------
75,999 1
--------- ---------
Satisfied by:
Cash 75,999 1
--------- ---------
Pascall Microwave Limited and Pascall Electronic Systems Limited were
dormant for the period ended 18 March 2005 and the year ended 31 March
2004 and therefore made no contribution to group cash flows.
Analysis of the net cash inflow of cash in respect of disposals during
the period:
2005 2004
(POUNDS) (POUNDS)
Cash consideration 76,000 -
========= =========
F-85
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
24. RETIREMENT BENEFITS
DEFINED CONTRIBUTION PENSION SCHEME
The group operates a defined contribution pension scheme for the
benefit of the employees. The assets of the scheme are administered by
trustees in a fund independent from those of the group.
DEFINED BENEFIT PENSION SCHEME
On 18 March 2005, Intelek plc, the group's ultimate parent undertaking
for the period to that date, undertook to meet Pascall Electronics
Limited's proportion of the scheme deficit at that date. The potential
liability has not yet been finalised by the scheme's actuaries, but it
is not expected to exceed (POUNDS)800,000.
Since the period-end, a sum in excess of this amount has been paid over
to the Trustees of the scheme by Intelek plc to meet Pascall
Electronics Limited's proportion of the deficit arising in the scheme.
Furthermore the scheme trustees have given an undertaking discharging
Pascall Electronics Limited from any further liability to the scheme.
At 1 April 2004, the financial statements included a prepayment in
respect of scheme contributions of (POUNDS)241,976 as required by SSAP
24. As at 18 March 2005 following agreement by Intelek plc to make up
the shortfall for the elements of the scheme attributable to Pascall
Electronics Limited, this prepayment was written off to the profit and
loss account.
Full disclosures as required by SSAP 24 and FRS 17 transitional
disclosures are given in the financial statements of Intelek plc.
F-86
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
25. FINANCIAL COMMITMENTS
CAPITAL COMMITMENTS
Capital expenditure commitments are as follows:
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Contracted for, but not provided in the accounts 712 1,188
========= =========
OPERATING LEASE COMMITMENTS
The payments which the group is committed to make in the next year
under operating leases are as follows:
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
(i) Land and buildings, leases expiring
beyond five years 276,530 298,500
========= =========
(ii) Other assets, leases expiring
within one year 5,334 -
one to five years 5,705 8,054
========= =========
11,039 8,054
========= =========
26. CONTINGENT LIABILITIES
The group has entered into foreign exchange commitments totalling
(POUNDS)2,178,000 (2004: (POUNDS)1,539,000).
27. RELATED PARTY DISCLOSURES
The group has taken advantage of the exemption offered by FRS 8 not to
disclose transactions with other group companies on the grounds that it
is a wholly owned subsidiary and group accounts are publicly available
from the registered office of the ultimate parent undertaking.
F-87
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
28. ULTIMATE PARENT UNDERTAKING
The company's immediate parent undertaking is Xcel Corporation Limited.
The company's ultimate parent undertaking was Intelek plc for the year
ended 31 March 2004 and for the period to 18 March 2005. Intelek plc is
a company incorporated in the United Kingdom.
At 18 March 2005, the company's ultimate parent undertaking changed
from Intelek plc to Emrise Corporation, a company incorporated in the
United States of America. The largest group of undertakings for which
group accounts are drawn up is that headed by Emrise Corporation.
Copies of the consolidated financial statements of Emrise Corporation
and Intelek plc are available from the registered office of the
relevant company.
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
The financial statements are prepared in conformity with accounting
principles generally accepted in the United Kingdom ("U.K. GAAP") which
differ in certain respects from accounting principles generally
accepted in the United States of America ("U.S. GAAP").
The following is a summary of the significant adjustments to loss on
ordinary activities and shareholders' funds when reconciling amounts
recorded in the financial statements to the corresponding amounts in
accordance with U.S. GAAP. There are no differences between turnover
recorded in the financial statements and the corresponding amounts in
accordance with U.S. GAAP.
PERIOD YEAR
ENDED ENDED
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Loss on ordinary activities under U.K. GAAP (33,939) (25,783)
U.S. GAAP adjustments:
Adjustments under SFAS No. 133-Derivatives (a) 61,717 (2,471)
Provision for compensated absences (b) 2,781 1,338
Adjustment to pension charge (c) 169,383 (59,483)
Elimination of gain on disposal of dormant
subsidiaries (d) (315,686) -
--------- --------
Loss on ordinary activities under U.S. GAAP (115,744) (86,399)
========= ========
F-88
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
(CONTINUED)
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Shareholders' funds under U.K. GAAP 787,333 821,272
U.S. GAAP adjustments:
Adjustments under SFAS No. 133-Derivatives (a) 56,871 (4,846)
Provision for compensated absences (b) (15,991) (18,772)
Elimination of pension asset (c) - (169,383)
Elimination of dividend provision (e) - 39,000
Adjustment to record goodwill previously written off to
group reserves (f) 42,000 42,000
-------- ---------
Shareholders' funds under U.S. GAAP 870,213 709,271
======== =========
The following table reflects the effects on balance sheet line items as a
result of the adjustments listed above. The effects on shareholders' funds
are reflected in the table above.
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Debtors under U.K. GAAP 1,871,930 1,782,160
U.S. GAAP adjustments:
Adjustments under SFAS No. 133-Derivatives (a) 56,871 (4,846)
Elimination of pension asset (c) - (169,383)
-------- ---------
Debtors under U.S. GAAP 1,928,801 1,607,931
========= =========
Creditors: Amounts falling due within one year
under U.K. GAAP 3,395,842 3,220,309
U.S. GAAP adjustments:
Provision for compensated absences (b) 15,991 18,772
Elimination of dividend provision (e) - (39,000)
-------- ---------
Creditors: Amounts falling due within one year
under U.S. GAAP 3,411,833 3,200,081
========= =========
Goodwill under U.K. GAAP - -
U.S. GAAP adjustments:
Adjustment to record goodwill previously
written off to group reserves (f) 42,000 42,000
-------- ---------
Goodwill under U.S. GAAP 42,000 42,000
======= ========
F-89
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
(CONTINUED)
The following table reflects the effects on the profit and loss line
items as a result of the adjustments listed above. The effects on the
net loss from ordinary activities are reflected in the table above.
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
Cost of sales under U.K. GAAP (4,864,212) (5,642,113)
U.S. GAAP adjustments:
Adjustments under SFAS No. 133-Derivatives (a) 61,717 (2,471)
Provision for compensated absences (b) 2,781 1,338
-------- ----------
Cost of sales under U.S. GAAP (4,799,714) (5,643,246)
========= =========
Administrative expense under U.K. GAAP (712,598) (707,735)
U.S. GAAP adjustments:
Elimination of pension asset (c) 169,383 (59,483)
-------- ---------
Administration expense under U.S. GAAP (543,215) (767,218)
======= ========
Exceptional item-gain on disposal of dormant
subsidiaries under U.K. GAAP 315,686 -
U.S. GAAP adjustments:
Elimination of gain on disposal of
dormant subsidiaries (d) (315,686) -
-------- ---------
Exceptional item-gain on disposal of dormant
subsidiaries under U.S. GAAP - -
======= ========
(a) Adjustments under SFAS No. 133-Derivatives
Under U.K. GAAP, at each balance sheet date, monetary assets and
liabilities denominated in a foreign currency may be translated at a
forward rate where there are related or matching forward contracts in
respect of trading transactions. Under U.K. GAAP the fair value of
derivatives is not permitted to be recognised on the balance sheet.
Under U.S. GAAP, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments, requires the valuation of
monetary assets and liabilities at their fair value. Changes in fair
value are either reflected in current earnings or comprehensive income
depending on the nature of the derivative.
(b) Provision for compensated absences
Under U.K. GAAP, no provision is made for employee compensated
absences. Under U.S. GAAP provision is made for the cost of employee's
rights to compensated absences from work.
(c) Adjustment to pension charge and elimination of pension asset
The Intelek plc Group Defined Benefit Pension Scheme provided the same
defined benefits to the employees of all companies within the group,
including the company. The assets contributed by Intelek plc were
available to provide benefits to employees of all companies within the
group and were not segregated into separate accounts for each company
nor were assets restricted in any way to limit the benefits provided to
any one company within the group.
F-90
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
(CONTINUED)
Intelek plc performed an actuarial calculation of the entire group's
pension cost in accordance with SSAP 24, "Accounting for Pension
Costs." In addition, the supplemental disclosure requirement of FRS 17,
"Retirement Benefits," was presented on a group level. Intelek plc
recorded a prepaid pension asset in accordance with the U.K. GAAP
requirements that permit the recognition of an asset if the net
periodic pension cost is less than the amounts the employer has
contributed to the scheme. Intelek plc allocated a portion of this
asset to the company based on an internal formula developed by Intelek
plc, which resulted in a prepaid pension asset on the books of the
company through 31 March 2004. The allocation of this asset was not
based on actuarial data because separate actuarial computations were
not performed for each company in the group. As described in Note 24,
under U.K. GAAP, the company recorded a charge to write off the pension
asset that was previously recorded under SSAP 24.
The characteristics of the scheme are similar to those of a
multiemployer pension plan that provides defined benefits under U.S.
GAAP. Under a multiemployer pension plan, the company would have been
required under U.S. GAAP 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. U.S.
GAAP would not have permitted the initial recording of the pension
asset. Accordingly, the pension asset was eliminated at 31 March 2004
for U.S. GAAP presentation. Also, the charge to write off the pension
asset recorded under U.K. GAAP in the period ended 18 March 2005 was
reversed in the U.S. GAAP reconciliation. There are no other
reconciliation adjustments because the amount recorded as expense under
U.K. GAAP was based on the annual contributions required into the plan.
This expense and liability would have been the same as that recorded
under U.S. GAAP.
F-91
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
(CONTINUED)
(d) Elimination of gain on disposal of dormant subsidiaries
During the period ended 18 March 2005, the company reported an
"exceptional item-gain on disposal of dormant subsidiaries" of
(POUNDS)315,686 in its Consolidated Profit and Loss Account. Under
U.K. GAAP, gains arising upon the disposal of a subsidiary undertaking
to a related party may be recognised in the profit and loss account
for the period. Under U.S. GAAP, gains arising upon the disposal of a
subsidiary undertaking to a related party must be recognised directly
in shareholders' funds and not included in the calculation of net
profit and loss.
(e) Elimination of dividend provision
Under U.K. GAAP, for accounting periods beginning before 1 January
2005, dividends not approved for payment prior to the year-end may be
provided for at the balance sheet date. Under U.S. GAAP, a dividend
must be approved prior to the year-end in order for it to be recorded
as a liability at the balance sheet date.
(f) Adjustment to record goodwill previously written off to group
reserves.
For acquisitions prior to 1998, U.K. GAAP permitted goodwill arising on
acquisitions to be written off directly to group reserves. Under U.S.
GAAP, the amount of goodwill required to be recognised would be
(POUNDS)42,000 at 18 March 2005 and 31 March 2004.
PRESENTATIONAL DIFFERENCES
BALANCE SHEET PRESENTATION
Under U.K. GAAP, assets in the balance sheet are presented in ascending
order of liquidity.
Under U.S. GAAP, assets are presented in descending order of liquidity.
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
(POUNDS) (POUNDS)
--------- ----------
Net loss (33,939) (115,744)
Outstanding shares - basic and diluted 224,391 224,391
Net loss per share (0.15) (0.52)
======= ========
U.K. GAAP U.S. GAAP
PERIOD YEAR
ENDED ENDED
31 MARCH 2004 31 MARCH 2004
(POUNDS) (POUNDS)
--------- ----------
Net loss (25,783) (86,399)
Outstanding shares - basic and diluted 224,391 224,391
Net loss per share (0.11) (0.39)
======= ========
There were no potentially dilutive options or warrants outstanding
during the periods presented.
COMPREHENSIVE INCOME (LOSS)
The comprehensive loss under U.S. GAAP is the same as net loss under
U.S. GAAP for all periods presented.
F-92
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
(CONTINUED)
CASH FLOW STATEMENT
As permitted by Item 17 of Form 20-F, the following statements of cash
flows were prepared in conformity with U.S. GAAP.
PERIOD YEAR
ENDED ENDED
18 MARCH 31 MARCH
2005 2004
(POUNDS) (POUNDS)
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (115,744) (86,399)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization 283,131 287,038
Gain on sale of property, plant and equipment 2,628 20,044
Deferred income taxes (108,907) (87,307)
Changes in operating assets and liabilities:
Accounts receivable (173,994) (330,145)
Inventories (438,218) 126,596
Accounts payable and accrued expenses 811,015 (100,551)
Other liabilities -- 51,137
Cash provided by (used in) operating activities 259,911 (119,587)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (183,488) (84,542)
Proceeds from sale of property, plant and equipment 39,657 62,433
Proceeds from sale of investments in subsidiary 76,000 --
Cash used in investing activities (67,831) (22,109)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings on bank overdraft (456,153) 469,284
Repayments of capital lease obligations (41,544) (36,073)
Cash provided by (used in) financing activities (497,697) 433,211
Net increase (decrease) in cash and cash equivalents (305,617) 291,515
Cash and cash equivalents at beginning of period 475,767 184,252
Cash and cash equivalents at end of period 170,150 475,767
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 61,868 35,613
Income taxes -- --
Noncash transactions:
Purchase of equipment under capital lease 41,640 106,390
Conversion of payable to Intelek plc into equity 315,684 --
======= =======
F-93
PASCALL ELECTRONIC (HOLDINGS) LIMITED AND ITS SUBSIDIARY UNDERTAKINGS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM 1 APRIL 2004 TO 18 MARCH 2005 AND THE TWELVE
MONTHS ENDED 31 MARCH 2004
29. SUMMARY OF CERTAIN DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY
ACCEPTED IN THE UNITED KINGDOM AND THE UNITED STATES OF AMERICA
(CONTINUED)
RELATED PARTY DISCLOSURES
U.S. GAAP requires the disclosure of related party transactions. The
following summarizes the related party balances and transactions for
each period with Intelek plc, the ultimate parent undertaking for the
period to 18 March 2005 and the year ended 31 March 2004:
AT AT
18 MARCH 2005 31 MARCH 2004
(POUNDS) (POUNDS)
------------- -------------
Non-interest bearing payable to Intelek plc 1,800,000 1,178,877
Of the (POUNDS)1,800,000 payable to Intelek plc at 18 March 2005,
(POUNDS)200,000 is included in trade creditors in Note 14. The
remaining (POUNDS)1,600,000 was replaced by debt payable to Xcel
Corporation Limited, the company's immediate parent undertaking at 18
March 2005.
During the period ended 18 March 2005 Intelek plc charged the group
(POUNDS)Nil (2004: (POUNDS)252,370) in respect of management charges.
On 22 February 2005 the group sold its interest in Pascall Microwave
Limited and Pascall Electronic Systems Limited for cash consideration
amounting to (POUNDS)76,000.
During the period ended 18 March 2005 Intelek plc converted payables
amounting to (POUNDS)315,686 into equity.
F-94
EMRISE CORPORATION
PROSPECTUS
_________, 2005
WE HAVE NOT AUTHORIZED ANY DEALER, SALESMAN OR OTHER PERSON TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND ANY ACCOMPANYING SUPPLEMENT TO THIS PROSPECTUS. YOU MUST NOT RELY
UPON ANY INFORMATION OR REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT. THIS PROSPECTUS AND ANY ACCOMPANYING
SUPPLEMENT TO THIS PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED
SECURITIES TO WHICH THEY RELATE, NOR DO THIS PROSPECTUS AND ANY ACCOMPANYING
SUPPLEMENT TO THIS PROSPECTUS CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. THE
INFORMATION CONTAINED IN THIS PROSPECTUS AND ANY ACCOMPANYING SUPPLEMENT TO THIS
PROSPECTUS IS ACCURATE AS OF THE DATES ON THEIR COVERS. WHEN WE DELIVER THIS
PROSPECTUS OR A SUPPLEMENT OR MAKE A SALE PURSUANT TO THIS PROSPECTUS OR A
SUPPLEMENT, WE ARE NOT IMPLYING THAT THE INFORMATION IS CURRENT AS OF THE DATE
OF THE DELIVERY OR SALE.
PART II
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses to be paid by the
registrant in connection with this offering. All amounts shown are estimates
except for the SEC registration fee.
SEC registration fee $ 3,225
Legal fees and expenses $150,000
Accounting fees and expenses $ 90,000
Printing expenses $ 5,000
Blue sky fees and expenses $ 10,000
Transfer agent and registrar fees and expenses $ --
Miscellaneous $ 15,000
--------
Total $273,225
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents in terms sufficiently broad to permit
indemnification under certain circumstances and subject to certain limitations,
such as if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
registrant, and with respect to any criminal proceeding, had no reasonable cause
to believe such person's conduct was unlawful.
As permitted to Section 145 of the Delaware General Corporation Law,
the registrant's amended and restated certificate of incorporation includes a
provision that eliminates the personal liability of its directors of monetary
damages for breach of their fiduciary duty as directors.
In addition, as permitted by Section 145 of the Delaware General
Corporation Law, the bylaws of the registrant provide that:
o The registrant shall indemnify its directors and officers for
serving the registrant in those capacities or for serving
other business enterprises at the registrant's request, to the
fullest extent permitted by Delaware law.
o The registrant may, in its discretion, indemnify employees and
agents in those circumstances where indemnification is not
required by law.
o The registrant is required to advance expenses, as incurred,
to its directors and officers in connection with defending a
proceeding, except that such director or officer shall
undertake to repay such advance if it is ultimately determined
that such person is not entitled to indemnification.
o The rights conferred in the bylaws are not exclusive, and the
registrant is authorized to enter into indemnification
agreements with its directors, officers, employees and agents
and to obtain insurance to indemnify such persons.
II-1
o The Registrant may not retroactively amend the bylaw
provisions to reduce its indemnification obligations to
directors, officers, employees and agents.
The registrant's policy is to enter into separate indemnification
agreements with each of its directors and officers that provide the maximum
indemnity allowed to directors and officers by Section 145 of the Delaware
General Corporation Law and which allow for additional procedural protections.
The registrant also maintains directors' and officers' insurance to insure those
persons against various liabilities.
Registration rights agreements between the registrant and various
investors provide for cross-indemnification in connection with registration of
the registration's common stock on behalf of those investors.
These indemnification provisions and the indemnification agreements
entered into between the registrant and its officers and directors may be
sufficiently broad to permit indemnification of the registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
Reference is made to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein.
EXHIBIT
DOCUMENT NUMBER
-------- ------
Restated Certificate of Incorporation 3.1
Amended and Restated Bylaws 3.2
Form of Indemnification Agreement 10.4
Registration Rights Agreements 4.2 and 4.5
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 2002, the registrant issued an aggregate of 39,628 shares of
common stock upon conversion of 3,962.8 shares of Series B Preferred Stock held
by two individuals.
In April and May 2002, the registrant issued an aggregate of 756,742
shares of common stock upon conversion of 75,674.2 shares of Series B Preferred
Stock held by four individuals and three entities.
In July 2002, the registrant issued an aggregate of 46,293 shares of
common stock upon conversion of 4,629.3 shares of Series B Preferred Stock held
by one entity.
In September 2002, the registrant issued to a former employee for
advice and consultation services valued at $6,000, three-year warrants to
acquire 120,000 shares of our common stock at an exercise price of $0.50 per
share.
In November 2002, the registrant issued 5,000 shares of common stock
with an aggregate value of $1,000 to a former employee for services rendered.
In December 2002, the registrant issued an aggregate of 16,759 shares
of common stock to two holders of Series B Preferred Stock upon conversion of
1,675.9 shares of Series B Preferred Stock.
II-2
In March 2003, the registrant issued 41,663 shares of common stock to
one investor upon conversion of 4,166.3 shares of Series B Preferred Stock.
In April 2003, the registrant issued to two individuals three-year
warrants to purchase up to 150,000 shares of common stock at a per share
exercise price of $0.75 and up to 100,500 shares of common stock at a per share
exercise price of $1.00 in consideration for financial advisory services
rendered.
In May and June 2003, the registrant issued an aggregate of 587,286
shares of common stock to five investors upon conversion of 58,728.6 shares of
Series B Preferred Stock.
In May and June 2003, the registrant issued an aggregate of 1,263,250
shares of common stock to four investors upon conversion of 25 shares of Series
A Preferred Stock.
In September 2003, the registrant issued an aggregate of 5,926 shares
of common stock to two investors upon conversion of 52.6 shares of Series B
Preferred Stock.
In January 2004, the registrant issued 3,703 shares of common stock to
an investor upon conversion of shares of Series B Convertible Preferred Stock.
On July 13, 2004, the registrant issued 1,213,592 shares of common
stock and warrants to purchase up to an aggregate of 150,000 shares of common
stock at $1.30 per share to two trusts as part of the purchase price for the
acquisition of Larus Corporation pursuant to a Stock Purchase Agreement.
On November 3, 2004, the registrant issued to one entity warrants to
purchase an aggregate of 100,000 shares of common stock at exercise prices
ranging from $0.85 to $1.15 per share as partial consideration for investor
relations services. On January 24, 2005, the registrant issued to this same
entity additional warrants to purchase 25,000 shares of common stock at an
exercise price of $2.00 per share, again as partial consideration for investor
relations services.
In December 2004, the registrant issued 15,000 shares of common stock
to one individual upon exercise of a warrant with an aggregate exercise price of
$3,750.
In January 2005, the registrant issued 12,503,500 shares of common
stock at a purchase price of $1.44 per share and five-year investor warrants to
purchase up to an additional 3,125,875 shares of common stock at an exercise
price of $1.73 per share in a private offering to 17 record holders pursuant to
a Securities Purchase Agreement. The registrant also entered into a Registration
Rights Agreement in which it agreed to register for resale the shares of common
stock issued to investors and the shares of common stock issuable upon exercise
of the investor warrants and placement warrants. Additionally, the registrant
paid cash placement agent fees and expenses of approximately $961,000 and issued
a five-year placement agent warrant to purchase up to 650,310 shares of common
stock at an exercise price of $1.73 per share.
In March 2005, the registrant issued to one entity a three-year warrant
to purchase up to 85,000 shares of common stock at an exercise price of $1.86
per share as partial consideration for financial advisory services.
The issuances of our securities described above were made in reliance
upon the exemption from registration available under Section 4(2) of the
Securities Act, among others, as transactions not involving a public offering.
This exemption was claimed on the basis that these transactions did not involve
any public offering and the purchasers in each offering were accredited or
sophisticated and had sufficient access to the kind of information registration
would provide. In each case, appropriate investment representations were
obtained and stock certificates were issued with restrictive legends.
II-3
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
The following exhibits are included or incorporated herein by
reference.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Stock Purchase Agreement dated July 13, 2004 between MicroTel
International Inc.; Noel C. McDermott; Warren P. Yost; Noel C.
McDermott, as Trustee of the Noel C. McDermott Revocable
Living Trust dated December 19, 1995; and Warren P. Yost and
Gail A. Yost, as Co-Trustees Under Declaration of Trust dated
March 9, 1988 (1)
2.2 Agreement dated March 1, 2005 among Intelek Properties
Limited, XCEL Corporation Limited, Intelek plc and Emrise
Corporation relating to the sale and purchase of the
outstanding capital shares of Pascall Electronic (Holdings)
Limited (17)
2.3 Supplemental Agreement dated March 18, 2005 among Intelek
Properties Limited, XCEL Corporation Limited, Intelek plc and
Emrise Corporation (17)
2.4 Loan Agreement dated March 18, 2005 among XCEL Corporation
Limited, Pascall Electronics Limited and Pascall Electronic
(Holdings) Limited (17)
3.1 Amended and Restated Certificate of Incorporation of Emrise
Corporation filed with the Secretary of State of Delaware on
May 9, 2005 (19)
3.2 Amended and Restated Bylaws adopted by the Board of Directors
of the Corporation on September 1, 2004 (3)
4.1 Securities Purchase Agreement dated December 29, 2004 among
Emrise Corporation and the investors listed on an attachment
thereto (4)
4.2 Registration Rights Agreement dated December 29, 2004 among
Emrise Corporation and the investors who are parties to the
Securities Purchase Agreement listed as Exhibit 4.1 (4)
4.3 Form of Investor Warrant issued by Emrise Corporation to the
investors who are parties to the Securities Purchase Agreement
listed as Exhibit 4.1 (4)
4.4 Form of Placement Warrant issued by Emrise Corporation to Roth
Capital Partners, LLC covering 650,310 shares of common stock
(4)
4.5 Registration Rights Agreement dated July 13, 2004 among the
Registrant and Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988 (18)
4.6 Form of Common Stock Purchase Warrant dated July 13, 2004
issued by the Registrant to: (a) Noel C. McDermott, as Trustee
of the Noel C. McDermott Revocable Living Trust dated December
19, 1995 (84,066 shares); and (b) Warren P. Yost and Gail A.
Yost, as Co-Trustees Under Declaration of Trust dated March 9,
1988 (65,934 shares) (18)
4.7 Warrants to Purchase Common Stock dated November 3, 2004
issued by the Registrant to Hayden Communications, Inc.
(100,000 shares) (18)
II-4
EXHIBIT
NUMBER DESCRIPTION
------ -----------
4.8 Warrants to Purchase Common Stock dated January 24, 2005
issued by the Registrant to Hayden Communications, Inc.
(25,000 shares) (18)
4.9 Warrants to Purchase Common Stock dated April 3, 2001 issued
by the Registrant to Coffin Partners LLC (35,000 shares) (18)
4.10 Warrants to Purchase Common Stock dated September 25, 2002
issued by the Registrant to Jacques Moisset (120,000 shares)
(18)
4.11 Form of Warrants to Purchase Common Stock dated April 2, 2003
issued by the Registrant to: (a) Jason Oliva (100,000 shares
at $0.75 per share); (b) Jason Oliva (100,500 shares at $1.00
per share); (c) Steven Jacobus (50,000 shares at $0.75 per
share); and (d) George Farndell (150,000 shares at $0.75) (18)
5 Opinion of Rutan & Tucker, LLP (20)
10.1 1993 Stock Option Plan (#) (6)
10.2 Employee Stock and Stock Option Plan (#) (7)
10.3 1997 Stock Incentive Plan (#) (8)
10.4 Amended and Restated 2000 Stock Option Plan (#) (9)
10.5 Form of Incentive Stock Option Agreement Under Amended and
Restated 2000 Stock Option Plan (#) (5)
10.6 Form of Non-Qualified Stock Option Agreement Under Amended and
Restated 2000 Stock Option Plan (#) (5)
10.7 Credit Facility Letter Agreement dated June 1, 2004 between
Wells Fargo Bank, N.A., XET Corporation and CXR Telcom
Corporation (10)
10.8 Revolving Line of Credit Note dated June 1, 2004 in the
principal amount of up to $3,000,000 made by XET Corporation
and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A.
(10)
10.9 Term Note dated June 1, 2004 in the principal amount of
$150,000 made by XET Corporation and CXR Telcom Corporation in
favor of Wells Fargo Bank, N.A. (10)
10.10 Continuing Guaranty made by XET Corporation and CXR Telcom
Corporation in favor of Wells Fargo Bank, N.A. (10)
10.11 Security Agreement Equipment made by XET Corporation in favor
of Wells Fargo Bank, N.A. (10)
10.12 Security Agreement Equipment made by CXR Telcom Corporation in
favor of Wells Fargo Bank, N.A. (10)
10.13 Continuing Security Agreement Rights to Payment and Inventory
made by XET Corporation in favor of Wells Fargo Bank, N.A.
(10)
10.14 Continuing Security Agreement Rights to Payment and Inventory
made by CXR Telcom Corporation in favor of Wells Fargo Bank,
N.A. (10)
10.15 Deed of Guarantee and Indemnity dated November 12, 2002 made
by MicroTel International Inc., XCEL Corporation Limited,
Belix Power Conversion Limited and Belix Wound Components
Limited in favor of Venture Finance plc (11)
II-5
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.16 Advantage Facility dated November 12, 2002 between XCEL Power
Systems Limited and Venture Finance plc (11)
10.17 Cashflow Loan Agreement dated November 12, 2002 between XCEL
Power Systems Limited and Venture Finance plc (11)
10.18 Term Loan Agreement dated November 12, 2002 between XCEL Power
Systems Limited and Venture Finance plc (11)
10.19 Deed of Subordination dated November 12, 2002 between Venture
Finance plc, MicroTel International Inc. and XCEL Corporation
Limited (11)
10.20 Agreement for the Purchase of Debts dated November 12, 2002
between XCEL Power Systems Limited and Venture Finance plc
(11)
10.21 Letter Agreement dated October 23, 2002 between XCEL Power
Systems Limited and Venture Finance plc regarding Amendments
to Agreement for the Purchase of Debts (11)
10.22 Credit Facility Agreement dated April 8, 2003, between IFN
Finance and CXR, S.A.S. (11)
10.23 English Summary of Credit Facility Agreement dated April 8,
2003 between IFN Finance and CXR, S.A.S. (12)
10.24 Subordinated Secured Promissory Note dated July 13, 2004 in
the principal amount of $1,681,318.68 made by MicroTel
International Inc. in favor of Noel C. McDermott Revocable
Living Trust dated December 19, 1995 (10)
10.25 Subordinated Secured Promissory Note dated July 13, 2004 in
the principal amount of $1,318,681.32 made by MicroTel
International Inc. in favor of Warren P. Yost and Gail A.
Yost, as Co-Trustees Under Declaration of Trust dated March 9,
1988 (10)
10.26 Pledge and Security Agreement dated July 13, 2004 between
MicroTel International Inc.; Noel C. McDermott, as Collateral
Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott
Revocable Living Trust dated December 19, 1995; and Warren P.
Yost and Gail A. Yost, as Co-Trustees Under Declaration of
Trust dated March 9, 1988 (10)
10.27 Intercreditor Agreement dated July 13, 2004 between MicroTel
International Inc.; Noel C. McDermott, as Trustee of the Noel
C. McDermott Revocable Living Trust dated December 19, 1995;
and Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988 (10)
10.28 Continuing Guarantee dated July 13, 2004 made by Larus
Corporation in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988 (10)
10.29 Continuing Guarantee dated July 13, 2004 made by Vista Labs
Incorporated in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988 (10)
10.30 Continuing Guarantee dated July 13, 2004 made by CXR Telcom in
favor of Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988 (10)
II-6
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.31 Security Agreement dated July 13, 2004 made by Larus
Corporation in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988 (10)
10.32 Security Agreement dated July 13, 2004 made by Vista Labs
Incorporated in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988 (10)
10.33 Security Agreement dated July 13, 2004 made by CXR Telcom in
favor of Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988 (10)
10.34 Lease agreement between the Registrant and Property Reserve
Inc. dated September 16, 1999 (13)
10.35 Lease agreement between XET, Inc. and Rancho Cucamonga
Development dated August 30, 1999 (13)
10.36 Commercial Lease dated July 13, 2004 between MicroTel
International Inc., as Tenant, and Noel C. McDermott and
Warren P. Yost, as Landlord, for the premises located at 894
Faulstich Court, San Jose, California (10)
10.37 Employment Agreement dated as of January 1, 2001 between the
Registrant and Carmine T. Oliva (#) (14) 10.38 Employment
Agreement dated as of July 2, 2001 between the Registrant and
Randolph D. Foote (#) (9)
10.39 Employment Agreement dated as of January 1, 2001 between the
Registrant and Graham Jefferies (#) (9)
10.40 Form of Executive Officer and Director Indemnification
Agreement entered into between the Registrant and each of
Carmine T. Oliva, Robert B. Runyon, Laurence P. Finnegan, Jr.,
Otis W. Baskin, Randolph D. Foote and Graham Jefferies (2)
10.41 Description of Retirement Account Matching Contributions (#)
(5)
21 Subsidiaries of the Registrant (5)
23.1 Consent of Grant Thornton LLP, Independent Registered Public
Accounting Firm *
23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5)
23.3 Consent of Grant Thornton UK LLP, Independent Auditors*
24 Power of Attorney (contained on the signature page to the
initial filing of this registration statement)
---------------
* Filed herewith.
(#) Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit.
II-7
(1) Filed as an exhibit to the Registrant's current report on Form 8-K for
July 13, 2004 and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's current report on Form 8-K for
December 8, 2004 and incorporated herein by reference.
(3) Filed as Appendix G to the Registrant's definitive proxy statement for
the Registrant's 2004 annual meeting of stockholders and incorporated
herein by reference.
(4) Filed as an exhibit to the Registrant's current report on Form 8-K for
December 29, 2004 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's annual report on Form 10-K for
the year ended December 31, 2004 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's annual report on Form 10-K for
the year ended December 31, 2000 and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's definitive proxy statement for
the Registrant's annual meeting of stockholders held June 11, 1998 and
incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's definitive proxy statement for
the special meeting of stockholders held January 16, 2001 and
incorporated herein by reference.
(9) Filed as an exhibit to the Registrant's quarterly report on Form 10-Q
for September 30, 2001 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's quarterly report on Form 10-Q
for June 30, 2004 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's quarterly report on Form 10-Q
for June 30, 2003 and incorporated herein by reference.
(12) Filed as an exhibit to Amendment No. 1 to the Registrant's quarterly
report on Form 10-Q for June 30, 2003 and incorporated herein by
reference.
(15) Filed as an exhibit to the Registrant's registration statement on Form
S-8 (Registration Statement No. 333-29925) and incorporated herein by
reference.
(16) Filed as an exhibit to the initial filing of the Registrant's
registration statement on Form S-1 (Registration Statement No.
333-63024) and incorporated herein by reference.
(17) Filed as an exhibit to the Registrant's current report on Form 8-K for
March 18, 2005 and incorporated herein by reference.
(18) Filed as an exhibit to Amendment No. 1 to the Registrant's registration
statement on Form S-1 (Registration Statement No. 333-122394) and
incorporated herein by reference.
(19) Filed as an exhibit to the Registrant's current report on Form 8-K for
May 6, 2005 and incorporated herein by reference.
(20) Filed as an exhibit to Amendment No. 3 to the Registrant's registration
statement on Form S-1 (Registration Statement No. 333-122394) and
incorporated herein by reference.
II-8
(b) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule required to be filed by Item
16(b) is contained on page F-41 of this registration statement.
Consolidated Schedule II Valuation and Qualifying Accounts for the
Years Ended December 31, 2004, 2003 and 2002
All other schedules have been omitted because they are either
inapplicable or the required information has been given in the consolidated
financial statements or notes thereto.
II-9
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration fee" table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-10
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 hereof, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment no. 4 to registration statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rancho Cucamonga, State of California on June 27,
2005.
EMRISE CORPORATION
By: /s/ Carmine T. Oliva
--------------------------------
Carmine T. Oliva
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment no. 4 to registration statement has been signed by the following
persons in the capacities and on the dates indicated.
NAME TITLE DATE
-------------------------------- ---------------------------------- -------------
/s/ Carmine T. Oliva Chairman of the Board, President, June 27, 2005
-------------------------------- Chief Executive Officer (principal
Carmine T. Oliva executive officer) and Director
/s/ Carmine T. Oliva Acting Chief Financial Officer June 27, 2005
-------------------------------- (principal accounting and
Carmine T. Oliva financial officer)
/s/ Robert B. Runyon* Director June 27, 2005
--------------------------------
Robert B. Runyon
/s/ Laurence P. Finnegan, Jr.* Director June 27, 2005
--------------------------------
Laurence P. Finnegan, Jr.
/s/ Otis W. Baskin* Director June 27, 2005
--------------------------------
Otis W. Baskin
* By: /s/ Carmine T. Oliva
--------------------
Carmine T. Oliva,
Attorney-in-Fact
II-12
INDEX TO EXHIBITS ATTACHED TO THIS AMENDMENT NO. 4 TO FORM S-1
Exhibit
Number Description
------- -----------
23.1 Consent of Grant Thornton LLP, Independent Registered Public
Accounting Firm
23.3 Consent of Grant Thornton UK LLP, Independent Auditors
II-13