FILED PURSUANT TO RULE 424(B)(3)
REGISTRATION STATEMENT NO. 333-122394
EMRISE CORPORATION
PROSPECTUS SUPPLEMENT NO. 4 DATED OCTOBER 28, 2005
TO PROSPECTUS DATED JUNE 30, 2005
The prospectus of Emrise Corporation dated June 30, 2005, as previously
supplemented by prospectus supplement no. 1 dated August 9, 2005, prospectus
supplement no. 2 dated August 22, 2005, and prospectus supplement no. 3 dated
September 9, 2005, is further supplemented to include the following updated
information:
Selling Security Holder Table
-----------------------------
The "Selling Security Holder" table contained in prospectus supplement
no. 1 dated August 9, 2005 is further updated to reflect changes in beneficial
ownership of various selling security holders, based on information provided by
various selling security holders and 37,497,750 shares of common stock being
outstanding as of October 4, 2005:
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED SHARES OF BENEFICIALLY OWNED
NAME OF PRIOR TO OFFERING COMMON STOCK AFTER OFFERING
BENEFICIAL OWNER NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
---------------------------- --------------- ---------------- ---------------- -------------- --------------
JLF Offshore Fund, Ltd...... 1,731,933 (1) 4.57% 1,674,618 (1) 57,315 *
JLF Partners I, LP.......... 1,179,580 (2) 3.12% 1,086,701 (2) 92,879 *
JLF Partners II, LP......... 89,116 (3) * 82,813 (3) 6,303 *
The Pinnacle Fund, L.P...... 4,363,960 (4) 11.45% 3,125,000 (4) 1,238,960 3.30%
Bonanza Master Fund Ltd..... 1,312,500 (5) 3.47% 1,312,500 (5) -- --
Roaring Fork Capital SBIC,
L.P...................... 1,706,250 (6) 4.51% 1,706,250 (6) -- --
Lagunitas Partners LP....... 1,125,000 (7) 2.98% 1,125,000 (7) -- --
Gruber & McBaine
International............ 250,000 (8) * 250,000 (8) -- --
Jon D. Gruber & Linda W.
Gruber JTWROS............ 1,581,250 (9) 4.18% 206,250 (10) -- --
J. Patterson McBaine........ 1,481,250 (11) 3.92% 106,250 (12) -- --
MicroCapital Fund LP........ 1,080,000 (13) 2.86% 1,080,000 (13) -- --
MicroCapital Fund Ltd....... 607,500 (14) 1.61% 607,500 (14) -- --
Omicron Master Trust........ 217,125 (15) * 217,125 (15) -- --
Stratford Partners, L.P..... 431,250 (16) 1.15% 431,250 (16) -- --
Select Contrarian Value
Partners, L.P............ 265,630 (17) * 265,630 (17) -- --
Precept Capital Master
Fund, G.P................ 56,250 (18) * 56,250 (18) -- --
Roth Capital Partners, LLC.. 650,310 (19) 1.70% 650,310 (19) -- --
2
SHARES OF SHARES OF
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED SHARES OF BENEFICIALLY OWNED
NAME OF PRIOR TO OFFERING COMMON STOCK AFTER OFFERING
BENEFICIAL OWNER NUMBER PERCENTAGE BEING OFFERED NUMBER PERCENTAGE
---------------------------- --------------- ---------------- ---------------- -------------- --------------
Noel C. McDermott, Trustee
of the Noel C. McDermott
Revocable Living Trust
dated December 18, 1995.. 764,211 (20) 2.03% 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) -- --
George Farndell............. 314,748 (23) * 150,000 (23) 164,748 *
Steven Jacobus.............. 50,000 (24) * 50,000 (24) -- --
Jacques Moisset............. 78,042 (25) * 78,042 (25) -- --
Jason Oliva................. 401,708 (26) 1.07% 200,500 (26) 201,208 *
Joseph Mirabella............ 50,000 (27) * 50,000 -- --
Placido Albanese............ 15,000 (28) * 15,000 -- --
-------------
* 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.
(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 11,599 shares underlying a warrant. Also includes 613,401
additional shares underlying the warrant, 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 The Pinnacle Fund,
L.P. to be beneficially owned by it as of the date of the table. 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.
3
(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) Represents 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 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) Represents 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 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) 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.
(24) Represents shares underlying a warrant. Mr. Jacobus is a former financial
advisor to Emrise.
4
(25) Mr. Moisset is a former employee of and former consultant to Emrise.
(26) 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.
(27) Mr. Mirabella is a former consultant to Emrise.
(28) Mr. Albanese is a former financial advisor to Emrise.
RO Associates Incorporated Acquisition
--------------------------------------
On September 2, 2005, Emrise Electronics Corporation ("Emrise
Electronics"), a wholly-owned subsidiary of ours, entered into a stock purchase
agreement dated effective as of August 31, 2005 to acquire RO Associates
Incorporated, a California corporation ("RO"). Effective September 28, 2005,
Emrise Electronics entered into an amendment to the stock purchase agreement.
Pursuant to the terms of the stock purchase agreement, as amended,
Emrise Electronics acquired all of the issued and outstanding shares of common
stock of RO. Prior to the acquisition, all of the common stock of RO was owned
by Robert H. Okada, as Trustee of the Robert H. Okada Trust Agreement dated
February 11, 1992, and Sharon Vavro, an individual.
RO is based in Sunnyvale, California and designs and manufactures DC-DC
converters and AC-DC PFC modules for telecom, industrial, commercial, and
quasi-military applications. As a result of the acquisition, Emrise Electronics
acquired all of the assets and liabilities of RO, including the intellectual
property, cash, accounts receivable and inventories owned by RO. Emrise
Electronics intends to use these acquired assets for the same purpose for which
they were used by RO.
The purchase price consisted of $2,400,000 in cash paid at closing and
an additional $600,000 in cash payable in two equal installments on October 6,
2005 and March 31, 2006. The acquisition purchase price was funded with cash
on-hand. The purchase price is subject to adjustment based on the value of the
shareholders' equity, accounts receivable, accounts payable, cash on hand and
net inventory of RO, as determined by the consolidated, unaudited balance sheet
as of August 31, 2005, prepared in accordance with accounting principles
generally accepted in the United States of America. In addition, concurrently
with the closing of the acquisition of RO, Emrise Electronics paid in full all
then existing credit facilities of RO in the aggregate amount of $1,602,060.
In determining the purchase price for RO, Emrise Electronics considered
the historical and expected earnings and cash flow of RO, as well as the value
of companies of a size and in an industry similar to RO, comparable transactions
and the market for such companies generally. The purchase price represented a
premium of approximately $1,845,000 over the $1,155,000 recorded net worth of
the assets of RO. In determining this premium, Emrise Electronics considered the
synergistic and strategic advantages provided by having a U.S.-based power
converter manufacturer and the value of the goodwill, customer relationships and
technology of RO. Goodwill associated with the RO acquisition totaled
approximately $1,308,000. We intend to commission a valuation firm to determine
what portion of the purchase price should be allocated to identifiable
intangible assets. We have estimated that RO's technology is valued at
approximately $484,000, its trademarks are valued at $300,000 and its customer
relationships are valued at $200,000. The valuation of the identified intangible
assets is expected to be completed in December 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 consolidated financial position or results of operations.
In connection with the execution of the stock purchase agreement,
Emrise Electronics executed a lease agreement with Caspian Associates for the
lease of 25,700 square feet of a 30,700 square feet building located at 246
Caspian Drive, Sunnyvale, California. The lease provides for a two-year term,
5
commencing on September 1, 2005 and ending on August 31, 2007, at a base rent of
$9,210 per month. Additionally, the lease provides for an extension of the lease
term for an additional three years, to August 31, 2010 if RO achieves net sales
of at least $14,500,000 and cumulative gross profit of at least $3,987,500. If
RO achieves the net sales and cumulative gross profit targets, the monthly base
rent for the facility will be increased to the fair market value as of the first
day of the next calendar month. The facility will continue to be used for the
design, manufacture and sale of power conversion products.
In connection with the stock purchase agreement, Emrise Electronics
also executed an employment agreement with Richard Okada, effective as of
September 1, 2005, to serve as president of RO. Mr. Okada will receive an annual
base salary of $115,000 for the two-year term of the employment agreement. In
addition, Mr. Okada is entitled to receive an incentive bonus based upon
performance criteria to be determined in the future. In connection with Mr.
Okada's employment agreement, we granted Mr. Okada an incentive stock option
under our 2000 Stock Option Plan to purchase up to 50,000 shares of our common
stock at an exercise price of $1.35 per share. This option vests 50% on
September 1, 2006 and 50% on September 1, 2007. The option expires on August 31,
2015.
Historical Financial Information
--------------------------------
The following historical financial statements of RO Associates are
included in this supplement:
Page
----
Independent Auditors' Report...........................................................F-1
Balance Sheet for the Year Ended May 31, 2005..........................................F-2
Statements of Income and Retained Earnings for the Year Ended May 31, 2005.............F-4
Statements of Cash Flows for the Year Ended May 31, 2005...............................F-5
Notes to Financial Statements..........................................................F-6
6
[MHM LOGO] MAYER HOFFMAN MCCANN P.C.
An Independent CPA Firm
84 South First Street, Third Floor
San Jose, CA 95113
408-794-3545 ph
408-295-3818 fx
www.mhm-pc.com
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
RO ASSOCIATES INCORPORATED
We have audited the balance sheet of RO Associates Incorporated as of May 31,
2005 and the related statement of income and retained earnings and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects the financial position of RO Associates Incorporated as of May
31, 2005, and the results of its operations and its cash flows for the year then
ended in conformity with U.S. generally accepted accounting principles.
/s/ Mayer Hoffman McCann P.C.
San Jose, California
August 9, 2005
(except for Note 12, as to
which the date is August 26, 2005)
F-1
RO ASSOCIATES INCORPORATED
BALANCE SHEET
May 31, 2005
A S S E T S
-----------
CURRENT ASSETS
Cash $ 56,615
Accounts receivable, net 792,127
Inventories 3,107,451
Deferred income taxes 281,000
Prepaid expenses 17,113
--------------
TOTAL CURRENT ASSETS 4,254,306
--------------
PROPERTY AND EQUIPMENT, net 395,091
--------------
OTHER ASSETS
Deferred income taxes
55,000
Other assets 10,618
--------------
TOTAL OTHER ASSETS 65,618
--------------
TOTAL ASSETS $ 4,715,015
==============
See Notes to Financial Statements
F-2
RO ASSOCIATES INCORPORATED
BALANCE SHEET
May 31, 2005
L I A B I L I T I E S
---------------------
CURRENT LIABILITIES
Accounts payable $ 692,833
Accrued expenses 342,845
Current portion of long-term debt 482,298
Current portion of obligation under capital lease 12,567
--------------
TOTAL CURRENT LIABILITIES 1,530,543
--------------
LONG-TERM DEBT, less current portion above 1,018,000
--------------
OBLIGATION UNDER CAPITAL LEASE, less current portion above 50,010
--------------
S T O C K H O L D E R S' E Q U I T Y
------------------------------------
CAPITAL CONTRIBUTED
Common stock, no par value; 7,500 shares authorized;
1,210 shares issued and outstanding 12,500
RETAINED EARNINGS 2,103,692
--------------
TOTAL STOCKHOLDERS' EQUITY 2,116,462
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,715,015
==============
See Notes to Financial Statements
F-3
RO ASSOCIATES INCORPORATED
STATEMENT OF INCOME AND RETAINED EARNINGS
Year Ended May 31, 2005
NET SALES $ 6,041,264
COST OF GOODS SOLD 3,750,254
---------------
GROSS PROFIT 2,291,010
OPERATING EXPENSES 1,699,501
---------------
OPERATING INCOME 591,509
---------------
OTHER INCOME (EXPENSE)
Miscellaneous income 4,754
Interest expense (129,487)
---------------
TOTAL OTHER INCOME (EXPENSE) (124,733)
---------------
INCOME BEFORE INCOME TAXES 466,776
INCOME TAX EXPENSE 168,000
---------------
NET INCOME 298,776
RETAINED EARNINGS
Balance, beginning of year 1,805,186
---------------
TOTAL RETAINED EARNINGS $ 2,103,962
===============
See Notes to Financial Statements
F-4
RO ASSOCIATES INCORPORATED
STATEMENT OF CASH FLOWS
Year Ended May 31, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 298,776
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 318,342
(Gain) on disposal of assets (4,246)
Deferred income taxes 42,000
(Decrease) in allowance for doubtful accounts (18,750)
Decrease (increase) in operating assets
Accounts receivable 72,258
Inventories 186,326
Prepaid expenses (4,707)
Increase in operating liabilities:
Accounts payable 210,344
Accrued expenses 201,828
---------------
NET CASH FLOWS FROM OPERATING ACTIVITIES 1,302,170
---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equity 9,394
Investment in property and equipment (28,539)
---------------
NET CASH FLOWS FROM INVESTING ACTIVITIES (19,145)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank overdraft (35,227)
Repayment on line-of-credit, net (2,138,655)
Proceeds from long-term debt 1,500,000
Repayment of long-term debt (543,787)
Repayment of capital lease obligation (8,741)
---------------
NET CASH FLOWS FROM FINANCING ACTIVITIES (1,226,410)
---------------
NET INCREASE IN CASH 56,615
CASH, BEGINNING OF YEAR --
---------------
CASH, END OF YEAR $ 56,615
===============
See Notes to Financial Statements
F-5
RO ASSOCIATES INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
NATURE OF OPERATIONS - RO Associates Incorporated (the Company) is
engaged principally in the development, manufacturing and marketing of
electronic power conversion devices. The Company sells principally to
original equipment manufacturers in North America. In addition, the
Company has licensed the right to manufacture and sell its proprietary
products to companies based in North America, Europe, Taiwan and Japan.
REVENUE RECOGNITION - The Company recognizes revenue as follows:
Product Sales - Revenue from product sales is recognized upon shipment.
Licenses - For those agreements that provide the licensees the right to
manufacture and sell the Company's proprietary products, initial
license fee revenue is recognized upon delivery of the product
technology. Guaranteed minimum license royalties are recognized as
revenue as they become due. Per unit royalties that exceed the
guaranteed minimum are recognized as earned when reported.
USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles 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 financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
INVENTORY VALUATION - Inventories are stated at the lower of cost or
market. Cost has been determined on the first-in, first-out basis.
Market is based upon realizable value less allowance for selling and
distribution expenses and normal gross profit.
An inventory reserve is provided for obsolete and slow moving inventory
to write it down to net realizable value (market), if necessary. The
reserve is calculated as a percentage of the cost of inventory
identified as slow moving. The carrying amount for inventory has been
reduced by $156,000 at May 31, 2005.
DEPRECIATION AND AMORTIZATION - Depreciation is computed on the
straight-line method over the following estimated useful lives:
ASSETS USEFUL LIVES
------ ------------
Machinery and equipment 3 - 7 years
Furniture and fixtures 5 - 10 years
Auto and trucks 5 - 10 years
Leasehold improvements 5 - 39 years
F-6
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject the Company to a concentration of credit risk include cash and
trade receivables. At various times throughout the year, the Company
maintained cash balances in excess of federally insured limits. All
cash balances are held by credit worthy financial institutions.
Two customers accounted for approximately 26% of revenues for the year
ended May 31, 2005. Neither customer had an accounts receivable balance
as of May 31, 2005.
ACCOUNTS RECEIVABLE, NET - Accounts receivable are stated at the amount
management expects to collect from outstanding balances. An allowance
for doubtful accounts is maintained for potential credit losses based
upon an assessment of the expected collectibility of all accounts
receivable. The allowance for doubtful accounts is reviewed
periodically to assess the adequacy of the allowance. The allowance for
doubtful accounts was approximately $93,000 as of May 31, 2005.
INCOME TAXES - The Company utilizes the asset and liability method of
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis, and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is
provided to the extent such deferred tax assets are not expected to be
realized.
RESEARCH AND DEVELOPMENT EXPENSEs - Research and development
expenditures, which are expensed as incurred, totaled $584,226 during
the year ended May 31, 2005.
ADVERTISING COSTS - Advertising costs are charged to operations when
incurred. Advertising expense was $87,953 for the year ended May 31,
2005.
(2) INVENTORIES
-----------
Raw materials $ 1,879,163
Work-in-process 572,970
Finished goods 655,318
-----------------
Total inventories $ 3,107,451
=================
F-7
(3) PROPERTY AND EQUIPMENT
----------------------
Cost of owned property and equipment:
Machinery and equipment $ 2,985,066
Furniture and fixtures 126,236
Leasehold improvements 228,441
--------------
Total cost of owned property and equipment 3,339,743
Accumulated depreciation 3,004,673
--------------
Net owned property and equipment 335,070
--------------
Cost of property and equipment under capital lease:
Machinery and equipment 71,317
Accumulated amortization 11,296
--------------
Net leased property and equipment under capital lease 60,021
--------------
Total net property and equipment $ 395,091
==============
The aggregate depreciation and amortization on the above property and
equipment charged to operations was $318,341 for the year ended May 31,
2005.
(4) LINE OF CREDIT
--------------
On August 17, 2004, the Company converted its existing $3,000,000 line
of credit into a $1,000,000 line of credit and a $1,500,000 note
payable.
The Company's line of credit bears interest at the bank's prime rate
(6.0% at May 31, 2005) plus 0.25% and expires on December 15, 2005. The
line is guaranteed by a partnership (the Partnership) whose partners
include the majority shareholder of the Company. As of May 31, 2005, no
amounts were outstanding against the line of credit.
F-8
(5) LONG-TERM DEBT
--------------
Former line of credit converted into note payable to bank, guaranteed
by the Partnership and secured by all fixtures in the building owned by
the Partnership, payable in monthly principal installments of $27,000,
plus interest at the bank's prime rate (6.0% as of May 31, 2005) plus
1.25% through July 15, 2009. $ 1,324,000
Non revolving equipment acquisition line of credit,
collateralized by substantially all of the Company's assets,
payable in monthly principal and interest installments of
$27,578; interest accrues at the bank's prime rate (6.0% as
of May 31, 2005) plus 0.5% through October 15, 2005. 135,634
Equipment note payable, collateralized by substantially all
the Company's assets, payable in monthly principal and
interest installments of $4,663; interest is at the bank's
prime rate (6.0% as of May 31, 2005) plus 0.5% through
October 15, 2005. 22,664
---------------
Total long-term debt 1,500,298
Less current portion 482,298
---------------
Noncurrent portion $ 1,018,000
===============
The line of credit, non-revolving equipment acquisition line of credit
and notes payable require the Company to meet certain financial
covenants. As of May 31, 2005, the Company was in compliance with all
of its covenants.
Estimated maturities of long-term debt are as follows:
YEARS ENDING MAY 31,
--------------------
2006 $ 482,298
2007 324,000
2008 324,000
2009 324,000
2010 46,000
---------------
$ 1,500,298
===============
F-9
(6) OBLIGATION UNDER CAPITAL LEASE
------------------------------
The Company entered into a capital equipment lease on July 14, 2004.
The lease is payable in monthly principal and interest installments of
approximately $1,500 through August 8, 2009 and bears interest at 8.5%.
Future minimum lease payments under the capital lease together with the
present value of the net minimum lease payments are as follows:
YEARS ENDING MAY 31,
--------------------
2006 $ 18,177
2007 18,177
2008 18,177
2009 18,177
2010 3,030
---------------
Total minimum lease payments 75,738
Less amount representing interest 13,162
---------------
Present value of net minimum lease payments 62,576
Less current portion 12,567
---------------
Noncurrent portion $ 50,010
===============
(7) OPERATING LEASES AND RELATED PARTIES TRANSACTION
------------------------------------------------
The Company leases office equipment under an operating lease.
The future minimum rental payments required under the operating lease
that have initial or remaining non-cancelable lease terms in excess of
one year are as follows:
YEARS ENDING MAY 31,
--------------------
2006 $ 7,779
2007 7,779
2008 7,779
2009 1,945
---------------
$ 25,282
===============
The Company leases its manufacturing facilities under a month-to-month
lease from the Partnership. Rent expense was approximately $110,000 for
the year ended May 31, 2005.
F-10
(8) INCOME TAXES
------------
Temporary differences principally arise from differences in
depreciation, allowance for doubtful accounts, reserves and
liabilities, and inventory valuation. The deferred tax asset totaled
$336,000 at May 31, 2005.
The provision for income taxes consists of the following:
Current income taxes
Federal income taxes $ 125,000
State and local income taxes 1,000
---------------
Total current income tax expense 126,000
---------------
Deferred income tax expense
Federal income taxes 6,000
State and local income taxes 36,000
---------------
Total deferred income tax expense 42,000
---------------
Total income tax expense $ 168,000
===============
The effective tax rate differs from the combined federal and state
statutory tax rates of approximately 40% principally due to the
utilization of certain federal and state research and development
credits.
As of May 31, 2005, the Company had state research and development
credit carryforwards of $41,506.
(9) PROFIT SHARING PLAN
-------------------
The Company has a profit sharing plan covering substantially all of its
employees. Contributions are made at the discretion of the Company's
board of directors. During the year ended May 31, 2005, the Company
made a contribution to the plan of $50,000. As of May 31, 2005, plan
assets totaled $2,622,887.
F-11
(10) PRODUCT WARRANTY
The Company accrues an estimate of its exposure to warranty claims
based on warranty costs incurred. The Company provides a 24-month
warranty on its products. The Company assesses the adequacy of its
recorded warranty liability annually and adjusts the amount as
necessary. The warranty liability is included in accrued liabilities in
the accompanying balance sheet. Changes to the Company's warranty
liability were as follows:
Warranty accrual, beginning of year $ 49,572
Charges to costs and expenses 34,288
Actual warranty expenditures (34,288)
---------------
Warranty accrual, end of year $ 49,572
===============
(11) CASH FLOW DISCLOSURES
---------------------
The following is a summary of supplemental cash flow information:
Cash paid:
Interest $ 129,487
===============
Income taxes $ 800
===============
Noncash investing and financing activities:
Equipment acquisitions through capital lease $ 71,317
===============
(12) SUBSEQUENT EVENTS
-----------------
Subsequent to May 31, 2005, the Company entered into a letter of intent
to sell all of its outstanding capital stock to an acquiring company.
The closing date is expected to be approximately August 31, 2005.
F-12
Pro Forma Financial Information
-------------------------------
As described above, effective as of August 31, 2005, Emrise Electronics
acquired all of the issued and outstanding capital stock of RO. The accompanying
pro forma condensed consolidated balance sheet and unaudited condensed
consolidated statements of operations as of and for the periods ended June 30,
2005 and December 31, 2004 are set forth herein to give effect to the
acquisition of RO as if the acquisition had been consummated at the beginning of
the earliest period presented (January 1, 2004).
Emrise previously acquired, effective as of March 18, 2005, all of the
issued and outstanding common stock of Pascall Electronic (Holdings) Limited
("PEHL"). The accompanying unaudited condensed consolidated statements of
operations for the year ended December 31, 2004 also give effect to the
acquisition of PEHL and PEHL's subsidiary as if that acquisition had been
consummated at January 1, 2004. The balance sheets of PEHL and PEHL's subsidiary
are included in the financial statements contained elsewhere in this prospectus.
Emrise previously acquired, effective as of July 13, 2004, all of the
issued and outstanding common stock of Larus Corporation. The accompanying
unaudited pro forma condensed consolidated statements of operations 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
at January 1, 2004. The balance sheets of Larus Corporation and Larus
Corporation's subsidiary are included in the financial statements contained
elsewhere in this prospectus.
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.
The unaudited pro forma condensed consolidated balance sheet and
statements of operations do not reflect any potential cost savings that were or
may be realized following the acquisitions. The pro forma adjustments and
assumptions are based on estimates, evaluations and other data currently
available and, in Emrise's opinion, provide a reasonable basis for the fair
presentation of the estimated effects directly attributable to the acquisition
and related transactions. The unaudited pro forma condensed consolidated balance
sheet and statements of operations are provided for illustrative purposes only
and are not necessarily indicative of what the consolidated results of
operations or financial position would actually have been had the acquisitions
occurred on January 1, 2004, nor do they represent a forecast of the
consolidated results of operations or financial position for any future period
or date.
All information contained herein should be read in conjunction with
Emrise's financial statements and other information contained elsewhere in this
prospectus for the year ended December 31, 2004 and the six months ended June
30, 2005, and the consolidated financial statements and notes thereto of RO
included in this supplement and the notes to unaudited pro forma financial
information included herein. The following pro forma financial information is
included in this supplement:
7
Page
----
Pro Forma Condensed Consolidated Balance Sheet as June 30, 2005............F-13
Pro Forma Condensed Consolidated Statements of Operations for
the Year Ended December 31, 2004.................................F-15
Pro Forma Condensed Consolidated Statements of Operations for
the Six Months Ended June 30, 2005...............................F-16
8
EMRISE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF
JUNE 30, 2005
(IN THOUSANDS)
ASSETS PRO FORMA
EMRISE RO ADJUSTMENTS TOTALS
----------- ----------- ----------- -----------
Cash $ 6,435 $ 57 $ (4,000) (a) $ 2,492
Accounts receivable 7,635 792 -- 8,427
Inventories 8,596 3,107 (856) (b) 10,847
Deferred tax assets 345 281 -- 626
Prepaids and other current 573 17 -- 590
----------- ----------- ----------- -----------
Total current assets 23,584 4,254 (4,856) 22,982
Net fixed assets 2,079 395 -- 2,474
Goodwill 12,368 -- 1,250 (c) 13,618
Intangibles 2,062 -- 984 (d) 3,046
Other assets 573 66 -- 639
Investments -- -- -- --
----------- ----------- ----------- -----------
Total other assets 15,003 66 2,234 17,303
----------- ----------- ----------- -----------
Total assets $ 40,666 $ 4,715 $ (2,622) $ 42,759
=========== =========== =========== ===========
----------------
(a) Cash for $2,400 purchase price, $1,500 to pay off RO bank debt, estimated
transaction fees of $100. At the time of the acquisition, the RO bank debt
had grown to $1,602
(b) Recalculation of inventory reserve for excess and obsolete parts
(c) Goodwill
(d) Estimated fair value of $484 for RO's technology, $300 for RO's trademarks
and $200 for RO's customer relationships
F-13
EMRISE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF
JUNE 30, 2005 (CONTINUED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY PRO FORMA
EMRISE RO ADJUSTMENTS TOTALS
------------ ------------ ------------ ------------
Borrowings under credit lines $ 811 $ -- $ -- $ 811
Current portion of long-term debt 892 482 (482) (e) 892
Notes payable to stockholders, current 500 -- -- 500
portion
Accounts payable 3,171 693 -- 3,864
Income taxes payable 594 -- -- 594
Accrued expenses 3,707 356 -- 4,063
------------ ------------ ------------ ------------
Total current liabilities 9,675 1,531 (482) 10,724
Long-term debt less current portion 322 1,018 (1,018) (f) 322
Notes payable to stockholders, less
current portion 2,000 -- -- 2,000
Deferred income taxes 1,420 -- 394 (g) 1,814
Other liabilities 887 50 600 (h) 1,537
------------ ------------ ------------ ------------
Total non-current liabilities 4,629 1,068 (24) 5,673
------------ ------------ ------------ ------------
Total liabilities 14,304 2,599 (506) 16,397
Stockholders' equity
Common stock 123 12 (12) (i) 123
Additional paid in capital 43,243 -- -- 43,243
Retained earnings (accumulated deficit) (16,735) 2,104 (2,104) (j) (16,735)
Accumulated comprehensive income (269) -- -- (269)
------------ ------------ ------------ ------------
Total stockholders' equity 26,362 2,116 (2,116) 26,362
Total liabilities and stockholders'
equity $ 40,666 $ 4,715 $ (2,622) $ 42,759
============ ============ ============ ============
-----------------
(e) Payoff of RO's bank debt (f) Payoff of RO's bank debt
(g) Deferred income taxes provided on intangibles at a composite federal
and state rate of 40%
(h) Deferred portion of purchase price is $600
(i) To eliminate RO's stock in consolidation
(j) To reduce RO's retained earnings to zero
F-14
EMRISE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
LARUS PEHL
JAN. 1 JAN. 1 PRO FORMA
EMRISE RO TO JULY 12 TO DEC. 31 ADJUSTMENTS TOTALS
------------ ------------ ------------ ------------ ------------ ------------
Sales $ 29,861 $ 6,597 $ 2,625 $ 13,912 $ -- $ 52,995
Cost of sales 16,146 4,000 1,260 10,782 (60) (a) 32,128
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 13,715 2,597 1,365 3,130 60 20,867
Selling, general and
administrative 10,226 1,034 682 2,822 (15) (b) 14,749
135 (c) 135
Engineering and product
development 1,521 635 220 359 -- 2,735
------------ ------------ ------------ ------------ ------------ ------------
Total 11,747 1,669 902 3,181 120 17,619
Operating profit 1,968 928 463 (51) (60) 3,248
Interest expense (433) (132) -- (110) 132 (d) (543)
(76) (e) (76)
Other, net (6) -- 2 -- -- (4)
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before
income taxes 1,529 796 465 (161) (4) 2,625
Income taxes 49 287 181 (151) (106) (f) 260
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 1,480 $ 509 $ 284 $ (10) $ 102 $ 2,365
============ ============ ============ ============ ============ ============
Earnings Per Share - Basic $ 0.06 $ 0.10
Earnings Per Share - Diluted $ 0.06 $ 0.10
Shares Outstanding - Basic 24,063 24,063
Shares Outstanding - Diluted 24,839 24,839
(a) Reduction of $60 Larus rent allocated to cost of sales due to new lease at
Larus
(b) Reduction of $15 Larus rent allocated to selling and administration due to
new lease at Larus
(c) Amortization for Larus Corporation for technology and customer
relationships of $135
(d) Elimination of interest expense due to payoff of RO's bank debt of $132
(e) Increase in interest cost of $76 for long term note issued for the Larus
acquisition. The notes were for $3,000 and carry an interest rate of 30-day
LIBOR plus 1%
(f) Utilization of Emrise net operating loss tax carryovers offsetting Larus
and RO tax provision
F-15
EMRISE CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RO PEHL
JAN. 1 TO JAN. 1 TO PRO FORMA
EMRISE JUNE 30 MAR. 17 ADJUSTMENTS TOTALS
------------ ------------ ------------ ------------ ------------
Sales $ 17,261 $ 2,714 $ 3,241 $ -- $ 23,216
Cost of sales 10,186 1,849 1,648 -- 13,683
------------ ------------ ------------ ------------ ------------
Gross profit 7,075 865 1,593 0 9,533
Selling, general & administrative 6,278 667 1,070 -- 8,015
Engineering and product
development 1,136 254 359 -- 1,749
------------ ------------ ------------ ------------ ------------
Total 7,414 921 1,429 0 9,764
Operating profit (339) (56) 164 0 (231)
Interest income 109 -- -- (46) (a) 63
Interest expense (196) (56) -- 56 (b) (196)
Other, net 112 -- -- -- 112
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (314) (112) 164 10 (252)
Income taxes 15 (39) -- 39 (c) 15
------------ ------------ ------------ ------------ ------------
Net (loss) income $ (329) $ (73) $ 164 $ (29) $ (267)
============ ============ ============ ============ ============
Loss Per Share - Basic ($ 0.01) ($ 0.01)
Loss Per Share - Diluted ($ 0.01) ($ 0.01)
Shares Outstanding - Basic 37,017 37,017
Shares Outstanding - Diluted 37,017 37,017
------------------
(a) Reduction of interest income due to $4,600 paid for RO and payoff of its
debt
(b) Elimination of interest expense due to pay off of RO's bank debt
(c) Elimination of RO's tax benefit due to Emrise's net operating tax losses
(end of supplement no. 4)
F-16