SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) JULY 13, 2004
----------------
EMRISE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 001-10346 77-0226211
---------------------------- --------- ----------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
9485 HAVEN AVENUE, SUITE 100, RANCHO CUCAMONGA, CALIFORNIA 91730
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (909) 987-9220
---------------------
NOT APPLICABLE
--------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (SEE General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
Pursuant to the terms of the Stock Purchase Agreement executed as of
July 13, 2004, Emrise Corporation (formerly MicroTel International Inc.
("Emrise")) acquired, effective as of July 13, 2004, all of the issued and
outstanding common stock of Larus Corporation, a California corporation
("Larus"). Prior to the acquisition, all of the common stock of Larus was owned
by Noel C. McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust
dated December 18, 1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988.
Larus is based in San Jose, California and engages in the manufacturing
and sale of telecommunications products. Larus has one wholly-owned subsidiary,
Vista Labs, Incorporated ("Vista"), which provides engineering services to
Larus. Emrise acquired all of the assets and liabilities of Larus in this
transaction, including the intellectual property, cash, accounts receivable and
inventories owned by each of Larus and Vista. Emrise intends to use these
acquired assets for the same purpose for which they were used by each of Larus
and Vista.
The purchase price for the acquisition consisted of $1,000,000 in cash,
the issuance of 1,213,592 shares of Emrise's common stock, $887,500 in the form
of two short-term, zero interest promissory notes, $3,000,000 in the form of two
subordinated secured promissory notes, and warrants to purchase up to an
aggregate of 150,000 shares of Emrise's common stock at $1.30 per share. In
addition, Emrise assumed $245,000 worth of accounts payable and accrued expenses
and entered into an above-market real property lease with the sellers, which
lease represents an obligation that exceeds the fair market value by
approximately $756,000 and is part of the acquisition purchase price. The cash
portion of the acquisition purchase price was funded with proceeds from Emrise's
credit facility with Wells Fargo Bank, N.A. and cash on-hand.
The purpose of this Form 8-K/A No. 2 is to provide the financial
statements of Larus and pro forma financial information that were omitted from
the Form-8 K filed on July 28, 2004 and the Form 8-K/A No. 1 filed on September
24, 2004.
2
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
--------------------------------------------
The following financial statements of Larus Corporation and its
subsidiary are included in this report:
Page
Report of Registered Public Accounting Firm..................................F-1
Consolidated Balance Sheet as of November 30, 2003...........................F-2
Consolidated Statement of Operations for the Twelve Months Ended
November 30, 2003.........................................................F-3
Consolidated Statement of Stockholders' Equity for the Twelve
Months Ended November 30, 2003............................................F-4
Consolidated Statement of Cash Flows for the Twelve Months Ended
November 30, 2003.........................................................F-5
Notes to Consolidated Financial Statements for the Twelve Months
Ended November 30, 2003....................................................F-6
Condensed Consolidated Balance Sheets for the Six Months Ended
May 31, 2004 and 2003 (Unaudited).........................................F-10
Condensed Consolidated Statements of Operations for the Six Months
Ended May 31, 2004 and 2003 (Unaudited)...................................F-11
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended May 31, 2004 and 2003 (Unaudited)...................................F-12
Notes to Condensed Consolidated Financial Statements for the Six
Months Ended May 31, 2004 and 2003 (Unaudited)............................F-13
3
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Emrise Corporation
We have audited the accompanying consolidated balance sheet of Larus
Corporation and its wholly owned subsidiary, Vista Lab Incorporated, (both
California corporations) as of November 30, 2003, and the related statements of
operations, stockholders' equity and cash flows for the year then ended. These
consolidated 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 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. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Larus
Corporation as of November 30, 2003, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 10, Larus Corporation and its subsidiary were sold
to Emrise Corporation on July 13, 2004.
/s/ GRANT THORNTON LLP
Los Angeles, CA
July 9, 2004, except for Note 10,
which is as of July 13, 2004
F-1
LARUS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 2003
(In Thousands, Except Per Share Amounts)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 340
Short-term certificates of deposit .......................... 232
Accounts receivable, net of allowance for doubtful
accounts of $24 ........................................... 934
Inventories ................................................. 722
Prepaid and other current assets ............................ 70
------------
Total current assets ........................................... 2,298
Property, plant and equipment, net ............................. 116
Long-term certificates of deposit .............................. 72
------------
$ 2,486
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 549
Accrued expenses ............................................ 198
Income tax payable .......................................... 58
------------
Total current liabilities ...................................... 805
Deferred income taxes .......................................... 20
------------
Total liabilities .............................................. 825
Stockholders' equity:
Common stock, zero par value. Authorized
1,000 shares; issued and outstanding 910 shares ........... 42
Retained earnings ........................................... 1,619
------------
Total stockholders' equity ..................................... 1,661
------------
$ 2,486
============
See accompanying notes to consolidated financial statements.
F-2
LARUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED NOVEMBER 30, 2003
(In Thousands, Except Per Share Amounts)
Net sales .................................................... $ 5,857
Cost of sales ................................................ 2,752
--------
Gross profit ................................................. 3,105
Operating expenses:
Selling, general and administrative ....................... 1,867
Engineering and product development ....................... 1,098
--------
Income from operations ....................................... 140
Other income .............................................. 98
--------
Income before income taxes ................................... 238
Income tax expense ........................................... 93
--------
Net income ................................................... $ 145
========
Earnings per share:
Net income
Basic ................................................... $ 0.16
========
Diluted ................................................. $ 0.16
========
Outstanding weighted average shares
Basic and diluted ....................................... 910
========
See accompanying notes to consolidated financial statements.
F-3
LARUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
TWELVE MONTHS ENDED NOVEMBER 30, 2003
(In Thousands)
Common Stock
----------------------- Retained
Shares Amount Earnings Total
---------- ---------- ---------- ----------
Balance at December 1, 2002 ..... 910 $ 42 $ 1,474 $ 1,516
Net income ................... -- -- 145 145
---------- ---------- ---------- ----------
Balance at November 30, 2003 .... 910 $ 42 $ 1,619 $ 1,661
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
LARUS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
TWELVE MONTHS ENDED NOVEMBER 30, 2003
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 145
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization .......................................... 74
Deferred income taxes .................................................. 10
Changes in operating assets and liabilities:
Accounts receivable .................................................. 87
Inventories .......................................................... 122
Other assets ......................................................... 59
Accounts payable and accrued expenses .................................. (435)
------
Cash provided by operating activities ....................................... 62
------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...................................... (12)
------
Cash used in investing activities ........................................... (12)
------
Net increase in cash and cash equivalents ................................... 50
------
Cash and cash equivalents at beginning of period ............................ 290
------
Cash and cash equivalents at end of period .................................. $ 340
======
Cash paid for:
Income taxes ........................................................... $ 8
======
Interest ............................................................... $ --
======
See accompanying notes to consolidated financial statements.
F-5
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TWELVE MONTHS ENDED NOVEMBER 30, 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Larus Corporation (the "Company") operates out of one leased facility
in San Jose, California. It designs, manufactures and markets telecommunications
timing devices and network access equipment. The Company has a wholly-owned
subsidiary, Vista Labs Incorporated, which performs most of the research and
engineering work on a contract basis for the Company.
BASIS OF PRESENTATION
The accompanying consolidated financial statements for the year ended
November 30, 2003 have been prepared in conformity with accounting principles
generally accepted in the United States of America and include the accounts of
the Company and its subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
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:
Machinery, equipment and fixtures..3 - 7 years
Maintenance and repairs are expensed as incurred, while renewals and
betterments are capitalized.
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-6
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TWELVE MONTHS ENDED NOVEMBER 30, 2003
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards 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.
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.
INVESTMENT POLICY
The investments consist of various short-term and long-term
certificates of deposit. Investments are classified as available for sale and
are carried at estimated fair market value. Net aggregated unrealized gains were
not significant at November 30, 2003.
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
TWELVE MONTHS ENDED
NOVEMBER 30, 2003
-------------------
NUMERATOR:
Net income................................................. $145
-------------------
Income attributable to common stockholders................. $145
===================
DENOMINATOR:
Weighted average number of common shares outstanding
during the period........................................ 910
Incremental shares from assumed conversions of warrants,
options and preferred stock.............................. --
-------------------
Diluted weighted average number of outstanding shares...... 910
-------------------
Basic earnings per share................................... $0.16
===================
Diluted earnings per share................................. $0.16
===================
F-7
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TWELVE MONTHS ENDED NOVEMBER 30, 2003
(3) INVENTORIES
Inventories consist of the following (in thousands):
NOVEMBER 30, 2003
-----------------
Raw materials............................ $342
Work-in-process.......................... 233
Finished goods........................... 147
-----------------
$722
===================
(4) REPORTABLE SEGMENTS
The Company is centrally managed and operates in one business segment:
communications equipment.
(5) INCOME TAXES
The effective tax rate for the twelve months ended November 30, 2003 is
different than the 34% statutory federal rate because of an additional 5%
provided for state income tax.
Income tax expense consists of the following (in thousands):
Current
Federal.............................. $72
State................................ 11
-----------------
Total current............................ $83
=================
Deferred
Federal.............................. $ 9
State................................ 1
-----------------
Total deferred........................... $10
=================
Total
Federal.............................. $81
State................................ 12
-----------------
Total.................................... $93
=================
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
(in thousands):
Deferred tax assets (liabilities)
Revenue for doubtful accounts........ $ 9
Depreciation......................... (29)
-----------------
Net deferred tax liability .............. $(20)
F-8
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
TWELVE MONTHS ENDED NOVEMBER 30, 2003
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
Machinery, equipment and fixtures.............. $ 2,327
Accumulated depreciation....................... (2,211)
------------
Net property, plant and equipment ................. $ 116
============
(7) RELATED PARTY TRANSACTIONS - OPERATING LEASE
During the twelve months ended November 30, 2003, the Company operated
in a facility it leased from its then majority stockholders under an operating
lease agreement. Lease expenses incurred by the Company for this lease were
$463,000 for the twelve months ended November 30, 2003. Subsequent to the sale
of the Company to Emrise Corporation (see note 10), the Company continued to
lease the building from the former majority stockholders of the Company under a
seven-year lease contract with renewal option. Future minimum rental commitments
payable to the former majority stockholders as of November 30, 2003 are as
follows (in thousands):
TWELVE MONTHS ENDING NOVEMBER 30, AMOUNT
--------------------------------- -----------------
2004 ..................................... $ 324
2005 ..................................... 324
2006 ..................................... 324
2007 ..................................... 324
2008 and thereafter ...................... 1,134
-----------------
$ 2,430
===================
(8) RETIREMENT PLANS
The Company provides a defined benefit 401(k) plan to its employees and
a qualified profit share plan to its Vista employees only. For the twelve months
ended November 30, 2003, the Company made no contributions to the 401(k) plan
and $56,000 to the profit sharing plan.
(9) CONCENTRATION OF CREDIT RISK
Sales for the twelve months ended November 30, 2003 to the Company's
largest customer accounted for 13% of total sales. No other customer represented
sales of over 10% of total sales. At November 30, 2003, the customer referenced
above represented 12% of total accounts receivable. In addition to this, two
other customers accounted for 21% and 13%, respectively, of accounts receivable.
Management believes that the Company's customer acceptance, billing and
collection policies are adequate to minimize potential credit risk on trade
receivables.
(10) SUBSEQUENT EVENT
Pursuant to the terms of the Stock Purchase Agreement executed as of
July 13, 2004, Emrise Corporation (formerly MicroTel International Inc.
("Emrise")) acquired, effective as of July 13, 2004, all of the issued and
outstanding common stock of the Company. Prior to the acquisition, all of the
common stock of the Company was owned by Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 18, 1995, and Warren P.
Yost and Gail A. Yost, as 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 Emrise's common stock, $887,500 in the form
of two short-term, zero interest promissory notes, $3,000,000 in the form of two
subordinated secured promissory notes, and warrants to purchase up to an
aggregate of 150,000 shares of Emrise's common stock at $1.30 per share. In
addition, Emrise assumed $245,000 worth of accounts payable and accrued expenses
and entered into an above-market real property lease with the sellers, which
lease represents an obligation that exceeds the fair market value by
approximately $756,000 and is part of the acquisition purchase price. The cash
portion of the acquisition purchase price was funded with proceeds from Emrise's
credit facility with Wells Fargo Bank, N.A. and cash on-hand.
F-9
LARUS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, 2004 AND MAY 31, 2003
(In Thousands)
(Unaudited)
MAY 31, 2004 MAY 31, 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 722 $ 461
Short-term certificates of deposit ............... 321 310
Accounts receivable, net of allowance for doubtful
accounts of $24 ................................ 619 653
Inventories ...................................... 642 708
Prepaid and other current assets ................. 59 66
------------ ------------
Total current assets ................................ 2,363 2,198
Property, plant and equipment, net .................. 109 222
Long-term certificates of deposit ................... 75 335
------------ ------------
$ 2,547 $ 2,755
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 306 $ 378
Accrued expenses ................................. 39 516
Income tax payable .............................. 237 127
------------ ------------
Total current liabilities ........................... 582 1,021
Deferred income taxes ............................... 20 10
------------ ------------
Total liabilities ................................... 602 1,031
Stockholders' equity:
Common stock, zero par value. Authorized 1,000
shares; issued and outstanding 910 ............. 42 42
Retained earnings ................................ 1,903 1,682
------------ ------------
Total stockholders' equity .......................... 1,945 1,724
------------ ------------
$ 2,547 $ 2,755
============ ============
See accompanying notes to condensed consolidated financial statements.
F-11
LARUS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MAY 31, 2004 AND MAY 31, 2003
(In Thousands, Except Per Share Amounts)
(Unaudited)
SIX MONTHS ENDED SIX MONTHS ENDED
MAY 31, 2004 MAY 31, 2003
---------------- ----------------
Net sales ........................................... $ 2,625 $ 2,875
Cost of sales ....................................... 1,260 1,347
---------------- ----------------
Gross profit ........................................ 1,365 1,528
Operating expenses:
Selling, general and administrative .............. 682 742
Engineering and product development .............. 220 450
---------------- ----------------
Income from operations .............................. 463 336
Other income ..................................... 2 5
---------------- ----------------
Income before income taxes .......................... 465 341
Income tax expense .................................. 181 133
---------------- ----------------
Net income .......................................... $ 284 $ 208
================ ================
Earnings per share:
Net income
Basic .......................................... $ 0.31 $ 0.23
================ ================
Diluted ........................................ $ 0.31 $ 0.23
================ ================
See accompanying notes to condensed consolidated financial statements.
F-12
LARUS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MAY 31, 2004 AND MAY 31, 2003
(In Thousands)
(Unaudited)
SIX MONTHS SIX MONTHS
ENDED MAY 31, ENDED MAY 31,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 284 $ 208
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization .............................. 34 30
Deferred income taxes ...................................... 4 6
Changes in operating assets and liabilities:
Accounts receivable ...................................... 315 368
Inventories .............................................. 80 136
Other assets ............................................. (81) (340)
Accounts payable and accrued expenses ...................... (227) (225)
-------------- --------------
Cash provided by operating activities ........................... 409 183
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment ............... (27) (12)
-------------- --------------
Cash used in investing activities ............................... (27) (12)
-------------- --------------
Net increase in cash and cash equivalents ....................... 382 171
-------------- --------------
Cash and cash equivalents at beginning of period ................ 340 290
-------------- --------------
Cash and cash equivalents at end of period ...................... $ 722 $ 461
============== ==============
Cash paid for:
Income taxes ............................................... $ 2 $ --
============== ==============
Interest ................................................... $ -- $ --
============== ==============
See accompanying notes to condensed consolidated financial statements.
F-13
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED MAY 31, 2004 AND 2003
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Larus Corporation (the "Company") operates out of one leased facility
in San Jose, California. It designs, manufactures and markets telecommunications
timing devices and network access equipment. The Company has a wholly-owned
subsidiary, Vista Labs Incorporated, which performs most of the research and
engineering work on a contract basis for the Company.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements for the
six-month periods ended May 31, 2004 and 2003 are presented as unaudited, but in
the opinion of management, these financial statements include normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for such periods. The condensed consolidated financial
statements include the accounts of the Company and its subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The condensed consolidated interim financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto of the Company and subsidiary included in Item 9.01(a) of this Form
8-K/A.
REVENUE RECOGNITION
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
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:
Machinery, equipment and fixtures 3 - 7 years
Maintenance and repairs are expensed as incurred, while renewals and
betterments are capitalized.
F-14
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED MAY 31, 2004 AND 2003
(Unaudited)
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.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards 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.
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
SIX MONTHS SIX MONTHS
ENDED ENDED
MAY 31, 2004 MAY 31, 2003
------------ ------------
NUMERATOR:
Net income................................................ $284 $208
------------ ------------
Income attributable to common stockholders................ 284 208
============ ============
DENOMINATOR:
Weighted average number of common shares outstanding
during the period....................................... 910 916
Incremental shares from assumed conversions of
warrants, options and preferred stock................... -- --
------------ ------------
Diluted weighted average number of outstanding shares..... 910 916
------------ ------------
Basic earnings per share.................................. $0.31 $0.23
============ ============
Diluted earnings per share................................ $0.31 $0.23
============ ============
F-15
LARUS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SIX MONTHS ENDED MAY 31, 2004 AND 2003
(Unaudited)
(3) INVENTORIES
Inventories consist of the following (in thousands):
SIX MONTHS SIX MONTHS
ENDED ENDED
MAY 31, 2004 MAY 31, 2003
------------ ------------
Raw materials.............. $306 $316
Work-in-process............ 266 257
Finished goods............. 130 135
------------ ------------
$642 $708
============ ============
(4) REPORTABLE SEGMENTS
The Company is centrally managed and operates in one business segment:
communications equipment.
(5) INCOME TAXES
The effective tax rates for the six-month periods ended May 31, 2004
and 2003 are different than the 34% statutory federal rate because of an
additional 5% provided for state income tax.
(6) RELATED PARTY TRANSACTIONS - OPERATING LEASE
During the six-month periods ended May 31, 2004 and 2003, the Company
operated in a facility it leased from its then majority stockholders under an
operating lease agreement. Lease expenses incurred by the Company for this lease
were $201,000 and $262,000 for the six-month periods ended May 31, 2004 and
2003, respectively. Subsequent to the sale of the Company to Emrise Corporation
(see note 7), the Company continued to lease the building from the former
majority stockholders of the Company under a seven-year lease contract with
renewal option.
(7) SUBSEQUENT EVENT
Pursuant to the terms of the Stock Purchase Agreement executed as of
July 13, 2004, Emrise Corporation (formerly MicroTel International Inc.
("Emrise")) acquired, effective as of July 13, 2004, all of the issued and
outstanding common stock of the Company. Prior to the acquisition, all of the
common stock of the Company was owned by Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 18, 1995, and Warren P.
Yost and Gail A. Yost, as 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 Emrise's common stock, $887,500 in the form
of two short-term, zero interest promissory notes, $3,000,000 in the form of two
subordinated secured promissory notes, and warrants to purchase up to an
aggregate of 150,000 shares of Emrise's common stock at $1.30 per share. In
addition, Emrise assumed $245,000 worth of accounts payable and accrued expenses
and entered into an above-market real property lease with the sellers, which
lease represents an obligation that exceeds the fair market value by
approximately $756,000 and is part of the acquisition purchase price. The cash
portion of the acquisition purchase price was funded with proceeds from Emrise's
credit facility with Wells Fargo Bank, N.A. and cash on-hand.
F-16
(b) Pro Forma Financial Information.
--------------------------------
Pursuant to the terms of the Stock Purchase Agreement dated as of July
13, 2004, Emrise acquired, effective as of July 13, 2004, all of the issued and
outstanding common stock of Larus. The accompanying unaudited consolidated
statements of operations for the periods ended December 31, 2003 and June 30,
2004 are set forth herein to give effect to the acquisition of Larus and Larus'
subsidiary as if the acquisition had been consummated at the beginning of the
earliest period presented (January 1, 2003). The accompanying unaudited pro
forma condensed consolidated balance sheet as of June 30, 2004 has been
presented assuming the acquisition of Larus occurred on June 30, 2004.
The acquisition was accounted for under the purchase method of
accounting in accordance with generally accepted accounting principles. 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 acquisition,
over the fair value of net assets acquired is recorded as goodwill.
The unaudited pro forma condensed consolidated statements of operations
do not reflect any potential cost savings that may be realized following the
acquisition. 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 consolidated 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
acquisition occurred on January 1, 2003, 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 annual report on Form 10-K for the year ended December 31, 2003, its
quarterly report on Form 10-Q for the quarter ended June 30, 2004, the
consolidated financial statements and notes thereto of Larus included in Item
9.01(a) of this Form 8-K/A No. 2 and the notes to unaudited pro forma financial
information included herein. The following pro forma financial information is
included in this report:
Page
Pro Forma Consolidated Statement of Operations for
the Year Ended December 31, 2003..........................................F-17
Pro Forma Condensed Consolidated Balance Sheet as of May 31, 2004...........F-18
Pro Forma Condensed Consolidated Statement of Operations for the
Six Months Ended June 30, 2004............................................F-19
4
EMRISE CORPORATION AND LARUS CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(In Thousands, Except Per Share Data)
PRO FORMA
EMRISE LARUS ADJUSTMENT TOTALS
------------ ------------ ------------ ------------
Sales .................................... $ 25,519 $ 5,857 $ -- $ 31,376
Cost of sales ............................ 14,835 2,752 (71)a 17,516
------------ ------------ ------------ ------------
Gross profit ............................. 10,684 3,105 71 13,860
Selling & administration ................. 7,812 1,867 (168)b 9,511
Research and development, engineering .... 951 1,098 (10)c 2,039
------------ ------------ ------------ ------------
Total .................................... 8,763 2,965 (178) 11,550
Income from Operations ................... 1,921 140 249 2,310
Interest income .......................... -- -- -- --
Interest expense ......................... (416) -- (187)d (603)
Other, net ............................... (58) 98 -- 40
------------ ------------ ------------ ------------
Income before tax ........................ 1,447 238 62 1,747
Income tax ............................... 286 93 24 e 403
------------ ------------ ------------ ------------
Net income ............................... $ 1,161 $ 145 $ 38 $ 1,344
============ ============ ============ ============
Earnings per share - basic ............... $ 0.05 $ 0.06
Earnings per share - diluted ............. $ 0.05 $ 0.05
Shares outstanding - basic ............... 22,567 23,781
Shares outstanding - diluted ............. 23,811 25,025
______________
(a) Reduction of $71 rent allocated to overhead due to more favorable lease.
(b) Reduction of $168 rent allocated to selling and administration due to more
favorable lease.
(c) Reduced building rent of $10 allocable to engineering expenses.
(d) Increase in interest cost of $152 for long-term notes and an increase of
$35 in working capital interest.
(e) Income tax effect of additional income from the pro forma adjustments.
F-17
EMRISE CORPORATION AND LARUS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(In Thousands)
PRO FORMA
EMRISE LARUS ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
ASSETS
Cash .................................. $ 1,436 $ 722 $ (1,580)a $ 578
Accounts receivable ................... 4,871 619 -- 5,490
Short-term certificates of deposit .... -- 321 -- 321
Inventories ........................... 6,109 642 -- 6,751
Prepaids and other current ............ 545 59 -- 604
------------ ------------ ------------ ------------
Total current assets .................. 12,961 2,363 (1,580) 13,744
Net fixed assets ...................... 410 109 -- 519
Investments ........................... -- 75 -- 75
Goodwill .............................. 2,464 -- 5,354 b 7,815
Other assets .......................... 655 -- -- 655
------------ ------------ ------------ ------------
Total other assets .................... 3,119 75 5,351 8,545
------------ ------------ ------------ ------------
Total assets .......................... $ 16,490 $ 2,547 $ 3,771 $ 22,808
============ ============ ============ ============
LIABILITIES & EQUITY
Notes payable ......................... $ 2,458 $ -- $ -- $ 2,458
Current portion of long-term debt ..... 262 -- 888 d 1,150
Accounts payable ...................... 1,582 306 -- 1,888
Accrued expenses ...................... 2,769 39 756 c 3,564
Income tax payable .................... -- 237 -- 237
------------ ------------ ------------ ------------
Total current liabilities ............. 7,071 582 1,644 9,297
Notes payable ......................... 853 -- 3,000 d 3,853
Other ................................. 274 20 -- 294
------------ ------------ ------------ ------------
Total non-current liabilities ......... 1,127 20 3,000 4,147
------------ ------------ ------------ ------------
Total liabilities ..................... 8,198 602 4,644 13,444
------------ ------------ ------------ ------------
Stockholders' equity
Preferred stock ....................... 1 -- -- 1
Common stock .......................... 77 42 (42)e 77
Additional paid in capital ............ 25,617 -- 1,072 f 26,689
Retained earnings (deficit) ........... (17,447) 1,903 (1,903)g (17,447)
Accumulated comprehensive income ...... 44 -- -- 44
------------ ------------ ------------ ------------
Total stockholders' equity ............ 8,292 1,945 (873) 9,364
------------ ------------ ------------ ------------
Total liabilities and equity .......... $ 16,490 $ 2,547 $ 3,771 $ 22,808
============ ============ ============ ============
__________
(a) Cash and direct costs paid for acquiring Larus.
(b) Purchase price of Larus in excess of net tangible assets.
(c) To recognize 7-year lease cost in excess of market value required in order
to acquire Larus.
(d) Long-term notes of $3,000 and short term notes of $888 issue for Larus.
(e) Elimination of subsidiary capital stock for consolidating purposes.
(f) Capital stock of $1,000 and warrants valued at $72 issued to acquire Larus.
(g) Elimination of Larus' retained earnings to reflect purchase accounting
rules.
F-18
EMRISE CORPORATION AND LARUS CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
(In Thousands, Except Per Share Data)
PRO FORMA
EMRISE LARUS ADJUSTMENT TOTALS
------------- ------------- ------------- -------------
Sales .................................... $ 12,624 $ 2,875 -- $ 15,499
Cost of sales ............................ 6,978 1,347 (60)a 8,265
------------- ------------- ------------- -------------
Gross profit ............................. 5,646 1,528 60 7,234
Selling & administration ................. 4,284 742 (15)b 5,011
Research and development, engineering .... 595 450 1,045
------------- ------------- ------------- -------------
Total .................................... 4,879 1,192 (15) 6,056
Operating profit ......................... 767 336 75 1,178
Interest income .......................... -- -- -- --
Interest expense ......................... (190) -- (94)c (284)
Other, net ............................... (36) 5 -- (31)
------------- ------------- ------------- -------------
Income before tax ........................ 541 341 (19) 863
Income tax ............................... 102 133 (7)d 228
------------- ------------- ------------- -------------
Net income ............................... $ 439 $ 208 $ (12) $ 635
============= ============= ============= =============
Earnings per share - basic ............... $ 0.02 $ 0.03
Earnings per share - diluted ............. $ 0.02 $ 0.03
Shares outstanding - basic ............... 23,481 24,695
Shares outstanding - diluted ............. 24,352 25,566
_____________
(a) Reduction of $60 rent allocated to cost of sales due to new lease.
(b) Reduction of $15 rent allocated to selling and administration due to more
favorable lease.
(c) Increase in interest cost of $76 for long-term notes and increase of $18 in
working capital interest.
(d) Income tax effect of additional income from the pro forma adjustments.
F-19
(c) Exhibits.
---------
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 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 (2)
2.3 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 (2)
2.4 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 (2)
2.5 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 (2)
2.6 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 (2)
2.7 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 (2)
2.8 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 (2)
2.9 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 (2)
5
Number Description
------ -----------
2.10 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 (2)
2.11 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 (2)
10.1 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 (2)
____________________
(1) Filed with the Securities and Exchange Commission on
July 28, 2004 as an exhibit to the initial filing of
this Form 8-K and incorporated herein by reference.
(2) Filed with the Securities and Exchange Commission on
August 16, 2004 as an exhibit to Emrise's Form 10-Q
for June 30, 2004 and incorporated herein by
reference.
6
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: September 28, 2004 EMRISE CORPORATION
By: /S/ RANDOLPH D. FOOTE
---------------------------------
Randolph D. Foote,
Chief Financial Officer
7