SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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) APRIL 13, 2006
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EMRISE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 001-10346 77-0226211
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(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
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NOT APPLICABLE
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(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 4.01. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On April 13, 2006, we notified Grant Thornton LLP ("GT"), the
independent registered public accounting firm that was engaged as our principal
accountant to audit our consolidated financial statements, that we intended to
engage new certifying accountants and thereby were terminating our relationship
with GT.
Our decision to change accountants was approved by our audit committee
and board of directors. The reason for the change was to allow us to engage an
alternative firm that we believe has adequate resources to provide us with the
auditing and tax services we require, on a more cost-effective basis.
The audit reports of GT on our consolidated financial statements and
consolidated financial statement schedules as of and for the years ended
December 31, 2005 and 2004 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the years ended December 31, 2005 and 2004 and the subsequent
interim period through April 13, 2006, there were no disagreements with GT on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which disagreements, if not resolved
to GT's satisfaction, would have caused GT to make reference to the subject
matter of the disagreement in connection with its opinion.
During the years ended December 31, 2005 and 2004 and the subsequent
interim period through April 13, 2006, there were no reportable events as
described in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of
1933, as amended, except as described below.
o On April 5, 2005, in connection with its audit of our consolidated
financial statements for the year ended December 31, 2004, GT advised
our audit committee and management of two matters that GT considered to
be "material weaknesses" as that term is defined under standards
established by the Public Company Accounting Oversight Board (United
States). A material weakness is a control deficiency or combination of
control deficiencies that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements
will not be prevented or detected. The first matter related to our need
for additional staff with expertise in preparing required disclosures
in the notes to the financial statements, and our need to develop
greater internal resources for researching and evaluating the
appropriateness of complex accounting principles and for evaluating the
effects of new accounting pronouncements on us. Our growth during and
since 2004 as a result of our acquisitions of Larus Corporation and
Pascall Electronic (Holdings) Limited ("Pascall") and the increased
complexity surrounding our financing arrangements are major
contributors to the need for additional resources in financial
reporting. The second matter related to segregation of duties relating
to cash disbursements. Both our assistant controller and accounts
payable clerk had access to initiate the payment of invoices and print
electronically signed checks. Both individuals had the ability to
record transactions in the accounting system. The lack of segregation
of these two functions - check-writing ability and the recording of
disbursement transactions in our accounting system - represented a
material weakness in the cash disbursements cycle. We considered these
matters in connection with the preparation of the December 31, 2004
consolidated financial statements and also determined that no prior
period financial statements were materially affected by such matters.
In response to the observations made by GT, on April 7, 2005, we
engaged financial consultants who are certified public accountants with
the requisite background and experience to prepare required disclosures
in the notes to our financial statements and to provide greater
internal resources for researching and evaluating the appropriateness
of complex accounting principles and for evaluating the effects that
new accounting pronouncements may have on us. In addition, we recognize
that the risk of an unauthorized disbursement exists without proper
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segregation of duties between check-writing and record keeping.
However, every month we review the listing of checks produced and
research any check number that is missing or questionable. We believe
this type of detective control would identify unauthorized
disbursements. Additionally, on May 6, 2005, we limited the system
access for those individuals performing this review such that there are
appropriate mitigating controls over the incompatible duties with
regard to our disbursements. We believe these steps addressed the
matters raised by GT.
o On August 15, 2005, in connection with its review of our condensed
consolidated financial statements for the quarter ended June 30, 2005,
GT advised our management of a matter that GT considered to be a
material weakness. GT noted that we recorded revenue in our Pascall
division for certain items previously recorded as "bill and hold"
inventory. We had shipped the items to the customer on June 30, 2005,
the customer took title to the items and paid for the items. However,
the customer requested that Pascall modify the items and returned the
items to Pascall on July 7, 2005 under a separate contract. The return
of the items by the customer subsequent to June 30, 2005 resulted in
the transaction not meeting the revenue recognition criteria under
Staff Accounting Bulletin ("SAB") No. 104. The recording of these items
as sales in the quarter ended June 30, 2005 resulted in an adjusting
journal entry to reduce revenue by $841,000 and to reduce net income by
$314,000 ($0.01 per share). GT met with our audit committee on August
18, 2005 and recommended that we review the control procedures over
bill and hold arrangements to determine adherence to SAB 104. Our audit
committee and management have undertaken an extensive review of SAB
104. We have sought and plan to continue to seek guidance from our
financial consultants, who are certified public accountants with the
requisite background and experience, to assist us in our future
compliance with SAB 104 as it relates to control procedures over bill
and hold matters and believe we have therefore remediated the material
weakness.
o On March 28, 2006, in connection with its audit of our consolidated
financial statements for the year ended December 31, 2005, GT advised
our management and audit committee of two matters that GT considered to
be material weaknesses. GT indicated that in the area of accounting and
financial reporting, it believes we have insufficient accounting
resources to enable us to identify and evaluate complex accounting and
reporting matters. In addition, GT recommended that we establish
procedures to ensure that our Chief Financial Officer can more closely
monitor information submitted to our corporate headquarters by our
subsidiary controllers and oversee accounting for reserves and other
areas that involving significant judgment at all company locations. GT
also recommended that we establish procedures to ensure that personnel
familiar with accounting principles generally accepted in the United
States and with Commission disclosure requirements thoroughly evaluate
activities and transactions at all company locations in order to
determine that we are timely making all required disclosures. To
remediate this material weakness in the area of accounting and
financial reporting, we intend to seek additional guidance from our
financial consultants, who are certified public accountants with the
requisite background and experience, and from our Director of Financial
Controls for Europe, to assist us in identifying and evaluating complex
accounting and reporting matters. In addition, we intend to increase
the frequency at which our Chief Financial Officer and our Director of
Financial Controls for Europe visit and hold conference calls with
accounting personnel and managers at each of our company locations.
Also, we intend to define internal processes for identifying and
disclosing non-routine and other transactions as required by Commission
disclosure requirements and for researching and determining proper
accounting treatment for those transactions. We plan to assign
individuals with appropriate knowledge and skills to perform these
processes and plan to provide those individuals with adequate technical
resources to help ensure timely disclosure of the transactions and
proper application of accounting principles generally accepted in the
United States. We plan to develop procedures to document all
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non-routine transactions each quarter, including support for the final
accounting treatment, and require the assigned individuals to review
the documentation with our Chief Financial Officer and/or Director of
Financial Controls for Europe prior to finalizing our quarterly and
annual financial statements. GT also indicated that we need to improve
our controls over inventory reserves. GT noted that some items that
were in our inventory reserve earlier in 2005 were not present in the
year-end reserve, although those items remained in inventory at year
end. Current accounting guidance would have required us to include in
our year-end reserve all items that were included in the inventory
reserve earlier in 2005, despite the fact that we no longer viewed
those items as slow moving. Our failure to continue to include those
items in the inventory reserve resulted in a material audit adjustment.
In addition, GT determined that inventory reserves in our CXR-AJ
location were understated at year-end, resulting in an additional audit
adjustment. To remediate this material weakness with regard to our
controls over inventory reserves, we will adjust the procedures we use
to compute inventory reserves to ensure that items that are included in
inventory reserves are not removed from inventory reserves until a sale
or disposal of those items occurs.
On April 17, 2006, we engaged Hein & Associates LLP ("Hein") as its new
certifying accountants. We have not consulted with Hein in the past regarding
the application of accounting principles to a specified transaction or the type
of audit opinion that might be rendered on our financial statements or as to any
disagreement or reportable event as described in Item 304(a)(1)(iv) and Item
304(a)(1)(v).
On April 18, 2006, we provided GT with a copy of the disclosures we are
making in response to Item 304(a) of the Securities Act. We requested that GT
furnish us with a letter addressed to the Securities and Exchange Commission
stating whether GT agrees with the statements we made in response to Item 304(a)
and, if not, stating the respects in which it does not agree. A copy of GT's
letter is attached as Exhibit 16.1 to this Form 8-K.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
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Not applicable.
(b) Pro Forma Financial Information.
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Not applicable.
(c) Shell Company Transactions.
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Not applicable.
(d) Exhibits.
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Number Description
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16.1 Letter dated April 19, 2006 from Grant Thornton LLP
regarding change in certifying accountant
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SIGNATURES
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: April 19, 2006 EMRISE CORPORATION
By: /s/ RANDOLPH D. FOOTE
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Randolph D. Foote, Chief Financial
Officer
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EXHIBITS ATTACHED TO THIS REPORT
Number Description
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16.1 Letter dated April 19, 2006 from Grant Thornton LLP regarding
change in certifying accountant
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