Exhibit 10.4


 


EXECUTION COPY


 


THIS SECURITY AGREEMENT IS SUBJECT TO A SUBORDINATION
AGREEMENT

OF EVEN DATE (THE “SUBORDINATION AGREEMENT”) BETWEEN

COLLATERAL AGENT AND THE HOLDER OF THE SENIOR INDEBTEDNESS


 


SECURITY AGREEMENT


 


THIS SECURITY
AGREEMENT (the “Security Agreement”),
is made as of August 20, 2008, by and among EMRISE Electronics
Corporation, a New Jersey corporation (“Borrower”),
Advanced Control Components, Inc., a New Jersey corporation (“ACC”), Charles S. Brand, an individual (“Collateral Agent”), and the persons and entities listed on
the Schedule of Lenders attached hereto as Exhibit A (each, a “Lender” and collectively, the “Lenders”).


 


R  E  C
I  T  A  L  S


 


A.                                   Borrower
and the Lenders are parties to that certain Stock Purchase Agreement dated as of May 23, 2008 (the “Stock Purchase Agreement”) relating to the
purchase by Borrower of all of the issued and outstanding shares of capital
stock (collectively, the “Shares”)
of (i) ACC owned by Thomas P. M. Couse, Joanne Couse and Michael Gaffney and (ii) Custom
Components, Inc. owned by Charles S. Brand.  As a
result of the consummation of the Stock Purchase Agreement, Borrower
beneficially owns all of the capital stock of ACC.


 


B.                                     Pursuant
to the terms of the Stock Purchase Agreement, Borrower issued certain
subordinated secured contingent promissory notes (which are defined in the
Stock Purchase Agreement as well as herein as the “Subordinated Contingent Notes”) to the Lenders to satisfy a
portion of the aggregate consideration to be paid by Borrower for the purchase
of the Shares.  Capitalized terms used
but not otherwise defined herein shall have the meanings ascribed to them in
the Subordinated Contingent Notes.


 


C.                                     EMRISE
Corporation, a Delaware corporation and the ultimate parent of Borrower and ACC (“Parent”), is delivering a Continuing Guaranty of even date
herewith (the “Guaranty”) in favor
of the Lenders pursuant to which the obligations of Borrower to the Lenders
under the Subordinated Contingent Notes are guaranteed by Parent.


 


D.                                    In
order to induce the Lenders to extend the credit evidenced by the Subordinated
Contingent Notes, Borrower and ACC have agreed to enter into this Security
Agreement to grant Collateral Agent,
for the benefit of itself and the Lenders, the security interest in the
Collateral described below.


 


NOW, THEREFORE, in consideration of the foregoing
premises and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:


 


1.                                       Definitions and Interpretation.  Unless otherwise defined herein, all other
capitalized terms used herein and defined in the Subordinated Contingent Notes
shall have the respective meanings given to those terms in the Subordinated
Contingent Notes, and all terms 


 

















 


defined in the New Jersey
Uniform Commercial Code (the “UCC”)
shall have the respective meanings given to those terms in the UCC.


 


2.                                       Grant of Security Interest.  To secure the Obligations as defined in Section 3
hereof, ACC hereby grants to Collateral
Agent a continuing security interest and lien in and to  all of the assets and properties of ACC,
whether now owned or existing or hereafter acquired or arising and regardless
of where located and all additions and accessions thereto, substitutions and
replacements therefor, and all proceeds thereof (the “Collateral”), including, without
limitation, the following property: all tangible and intangible assets of ACC,
including, but not limited to, all existing and future inventory, accounts,
deposit accounts, accounts receivable, furniture, fixtures, equipment, general
intangibles, books and records, patents, patent applications, trademarks,
copyrights, trade secrets, and any other property interest or proprietary
right, as well as any document, instrument or drawings embodying the same.


 


3.                                       Security for Obligations.  The obligations secured by this Security
Agreement (the “Obligations”)
shall mean and include all obligations of Borrower as provided in (i) the
Subordinated Contingent Notes, (ii)  the Stock Purchase Agreement, and (iii) all
of the other Related Agreements (as such term is defined in the Stock Purchase
Agreement).


 


4.                                       Possession and Location of Collateral.  Unless
and until any default occurs hereunder as set forth in Section 11
hereof, ACC shall have possession of the Collateral for its use and enjoyment
in any lawful manner not inconsistent with this Security Agreement or the
Subordinated Contingent Notes.  The
Collateral will be kept at ACC’s place of business at 611 Industrial Way,
Eatontown, New Jersey 07724 (or such other places as ACC customarily keeps the
Collateral) with respect to such Collateral and will not be moved therefrom
without the prior written consent of Collateral Agent, except that ACC may make
sales of inventory items in the ordinary course of business.  ACC shall not replace or make material
alterations in the Collateral without the prior written consent of Collateral
Agent.  The consent of Collateral Agent
required hereby shall not be unreasonably withheld.


 


5.                                       Financing Statements.  Concurrently with the execution of this
Security Agreement, ACC shall execute and deliver to Collateral Agent the UCC-1
financing statement provided by Collateral Agent.


 


6.                                       Transfer, Taxes, Liens and Encumbrances.  ACC has title to the Collateral free and
clear of any lien, security interest or encumbrance, except for the security
interests of the holder of the Senior Indebtedness and the security interest
created by this Security Agreement. 
Title to the Collateral will remain in and continue to be vested in ACC.
 ACC will defend the Collateral and will
not sell, offer to sell or otherwise transfer the Collateral, any portion
thereof, or any interest therein, without the prior written consent of
Collateral Agent, except that ACC may make sales of inventory items in the
ordinary course of business.  The consent
of Collateral Agent required hereby shall not be unreasonably withheld.  ACC shall pay all taxes, assessments and
other charges made against the Collateral.


 


7.                                       Risk of Loss and Inspection of Collateral.  ACC shall have all risk of loss of the
Collateral, and ACC will keep the Collateral in good order and repair.  Collateral Agent shall 


 

















 


have the right, at any
reasonable time, to enter upon the premises where the Collateral is located to
examine and inspect the Collateral in person or by agent.  Any refusal to permit such entry shall be a
breach of this Security Agreement.


 


8.             Insurance.  ACC shall keep the Collateral insured, at its
own expense, in an amount not less than its full insurable value, against loss
by fire, theft, vandalism and malicious mischief, storm, earthquake and
extended coverage, and ACC shall cause the Lenders to be named as additional
insured parties and loss payees in such insurance, and furnish to Collateral
Agent written evidence thereof.


 


9.             Representations and Warranties.  Borrower and ACC hereby jointly and severally
represent and warrant to Collateral
Agent and the Lenders that each of Borrower and ACC has full power and
authority to enter into this Security Agreement and to grant the security
interest and lien in and to the Collateral and has taken all proper and
necessary actions to authorize the execution, delivery and performance of this
Agreement.  This Agreement is valid and
binding upon and enforceable against Borrower and ACC, except as such
enforceability may be limited by applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors’ rights
generally and general principles of equity. 
The making and performance of this Security Agreement by Borrower and
ACC will not breach or violate any law, statute, rule or regulation of, or
any judgment, order, decree, writ, injunction or  award issued by any governmental authority or
violate or result in a default (immediately or with the passage of time or
notice or both) under any contract, indenture, agreement or instrument to which
Borrower, ACC or Parent is a party, or by which any of Borrower, ACC or Parent
is bound.


 


10.           Covenants.  Borrower and ACC hereby agree as follows:


 


10.1                           Liens on Collateral.  Borrower and ACC agree not to create, incur,
assume or suffer to exist any lien or security interest of any kind upon the
Collateral other than in favor of the holders of any Senior Indebtedness.


 


10.2                           Further Assurances.  Borrower and ACC agree that at any time and
from time to time, at ACC’s expense, ACC will promptly execute and deliver all
further instruments and documents and take all further action, that may be
necessary or desirable, or that Collateral Agent may reasonably request, in order
to perfect and protect any security interest granted or purported to be granted
hereby or to enable Collateral Agent to exercise and enforce Collateral Agent’s
rights and remedies hereunder with respect to any Collateral.


 


10.3                           Financial Statements.  From and after the date hereof, on a
quarterly basis within five (5) business days after the scheduled filing
date (including any extensions pursuant to Rule 12b-25 of the Securities
Exchange Act of 1934) for Parent’s Form 10-Q with the Securities and Exchange
Commission, ACC will provide Collateral Agent with copies of ACC’s quarterly
financial statements and any related notes.


 

















 


11.           Events of Default; Remedies.


 


11.1                           Event of Default.  An Event of Default shall be deemed to have
occurred under this Security Agreement upon the occurrence and during the
continuance of an Event of Default (as defined in the Subordinated Contingent
Notes).


 


11.2                           Rights Under the UCC.  In
addition to all other rights granted hereby, and otherwise by law, subject to
the Subordination Agreement, Collateral Agent shall have, with respect to the
Collateral, the rights and obligations of a secured party under the UCC.


 


11.3                           Notice, Etc.  In any case where notice of sale is required,
ten (10) days notice shall be deemed reasonable notice.  Subject to the Subordination Agreement,
Collateral Agent may have resort to the Collateral or any portion thereof with
no requirement on the part of Collateral Agent to proceed first against any
other Person (as defined in the Subordinated Contingent Notes) or property.


 


11.4                           Other Remedies.  Upon the occurrence and during the
continuance of an Event of Default, subject to the Subordination Agreement, at
the request of Collateral Agent, ACC shall assemble and make available to
Collateral Agent all of the Collateral at a place or places reasonably
convenient to both Borrower and Collateral Agent.


 


11.5                           Application of Collateral Proceeds.  Subject to the Subordination Agreement, the
proceeds and/or avails of the Collateral, or any part thereof, and the proceeds
and the avails of any remedy hereunder (as well as any other amounts of any
kind held by Collateral Agent at the time of, or received by Collateral Agent
after, the occurrence of an Event of Default) shall be paid to and applied as
follows:


 


(a)                                  first,
to the payment of reasonable costs and expenses, including all amounts expended
to preserve the value of the Collateral, of foreclosure or suit, if any, and of
such sale and the exercise of any other rights or remedies, and of all proper
fees, expenses, liability and advances, including reasonable legal expenses and
attorneys’ fees, incurred or made hereunder by Collateral Agent;


 


(b)                                 second,
to the payment to each Lender of the amount then owing or unpaid on such Lender’s
Subordinated Contingent Note, and in case such proceeds shall be insufficient
to pay in full the whole amount so due, owing or unpaid upon such Subordinated
Contingent Note, then its Pro Rata Share of the amount remaining to be
distributed (to be applied first to accrued interest and second to outstanding
principal); and


 


(c)                                  third,
to the payment of the surplus, if any, to Borrower, its successors and assigns,
or to whomsoever may be lawfully entitled to receive the same.


 


For purposes of this Security Agreement, the term “Pro Rata Share” shall mean, when
calculating a Lender’s portion of any distribution or amount, that distribution
or amount (expressed as a percentage) equal to a fraction (i) the
numerator of which is the original outstanding principal amount of such Lender’s
Subordinated Contingent Note and (ii) the 


 

















 


denominator of which is
the original aggregate outstanding principal amount of all Subordinated
Contingent Notes issued under the Stock Purchase Agreement.  In the event that a Lender receives payments
or distributions in excess of its Pro Rata Share, then such Lender shall hold
in trust all such excess payments or distributions for the benefit of the other
Lenders and shall pay such amounts held in trust to such other holders upon
demand by such holders.


 


12.           Authorized Action by Collateral Agent.


 


(a)                                  Each
of Borrower and ACC hereby appoint Collateral Agent  as attorney-in-fact for each of Borrower and ACC, with full
authority in the place and stead of Borrower and ACC and in the name of
Borrower and ACC or otherwise, from time to time in Collateral Agent’s  discretion and to the full extent
permitted by law to take any action and to execute any instrument which
Collateral Agent may deem reasonably necessary or advisable to accomplish the
purposes of this Security Agreement in accordance with the terms and provisions
hereof, including without limitation, to receive, endorse and collect all
instruments made payable to Borrower or ACC representing any dividend, interest
payment or other distribution in respect of the Collateral or any part thereof
and to give full discharge for the same.


 


(b)                                 This
power of attorney is a power coupled with an interest and shall be
irrevocable.  The powers conferred on
Collateral Agent hereunder are solely to protect the Collateral Agent and
Lenders’ interests in the Collateral and shall not impose any duty upon
Collateral Agent to exercise any such powers. 
Collateral Agent shall be accountable only for amounts that he actually
receives as a result of the exercise of such powers and in no event shall
Collateral Agent or any of his employees or agents be responsible to Borrower
or ACC for any act or failure to act, except for gross negligence or willful
misconduct.


 


13.           Collateral Agent.


 


13.1                           Appointment.  The Lenders hereby appoint Charles S. Brand
as Collateral Agent for the Lenders under this Security Agreement (in such
capacity, the “Collateral Agent”) to serve from
the date hereof until the termination of this Security Agreement.


 


13.2                           Powers and Duties of Collateral Agent, Indemnity
by Lenders.


 


(a)                                  Each
Lender hereby irrevocably authorizes the Collateral Agent to take such action
and to exercise such powers hereunder as provided herein, together with such
powers as are reasonably incidental thereto. 
Collateral Agent may execute any of his duties hereunder by or through
agents or employees at his discretion.


 


(b)                                 Upon
the death or resignation of the Collateral Agent, the Lenders shall appoint a
successor collateral agent to act under the Subordinated Contingent Notes and
this Security Agreement. If no such successor collateral agent shall have been
so appointed by the Lenders and shall have accepted such appointment within
thirty (30) days after Collateral Agent’s death or giving of notice of
resignation as Collateral Agent, 


 

















 


then Collateral Agent
shall be deemed to be Thomas P. M. Couse or his successor-in-interest to his
Subordinated Contingent Note.  Upon the
acceptance of any appointment as successor collateral agent hereunder by a
successor collateral agent, such successor collateral agent shall thereupon
succeed to and become vested with all rights, powers, privileges, duties and
obligations of Collateral Agent hereunder, and the Collateral Agent shall be
discharged from his duties and obligations. After Collateral Agent’s death or
resignation hereunder as the Collateral Agent, the provisions of this Section 13
shall continue in effect for his benefit in respect of any actions taken or
omitted to be taken by him while he was acting as such Collateral Agent.


 


14.           Miscellaneous.


 


14.1                           Notices.  Any notice, request or other communication
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered or mailed by registered or certified
mail, postage prepaid, or by recognized overnight courier or personal delivery
at the respective addresses of the parties as set forth in the Stock Purchase
Agreement or on the register maintained by the Company.  Any party hereto may by notice so given
change its address for future notice hereunder. 
Notice shall conclusively be deemed to have been given when received.


 


14.2                           Nonwaiver.  No failure or delay on Borrower, ACC,
Collateral Agent or Lenders’ part in exercising any right hereunder shall
operate as a waiver thereof or of any other right nor shall any single or
partial exercise of any such right preclude any other further exercise thereof
or of any other right.


 


14.3                           Amendments and Waivers.  This Security Agreement may not be amended or
modified, nor may any of its terms be waived, except by written instruments
signed by Borrower, ACC and Collateral Agent. 
Each waiver or consent under any provision hereof shall be effective
only in the specific instances for the purpose for which given.


 


14.4                           Assignments.  This Security Agreement shall be binding upon
and inure to the benefit of Lenders, Collateral Agent, ACC and Borrower and
their respective successors, assigns, heirs, beneficiaries and legal
representatives; provided, however, that Borrower and ACC may not
assign their respective rights and duties hereunder without the prior written
consent of Collateral Agent.


 


14.5                           Cumulative Rights, etc.  The rights, powers and remedies of Lenders
and Collateral Agent under this Security Agreement shall be in addition to all
rights, powers and remedies given to Lenders and Collateral Agent by virtue of
any applicable law, rule or regulation of any governmental authority, the
Stock Purchase Agreement, the Subordinated Contingent Notes, the Guaranty, or
any other agreement, all of which rights, powers, and remedies shall be
cumulative and may be exercised successively or concurrently without impairing
Collateral Agent’s rights hereunder. 
Each of Borrower and ACC waive any right to require Collateral Agent or
Lenders to proceed against any Person or to exhaust any collateral or to pursue
any remedy in Collateral Agent or Lenders’ power.


 

















 


14.6                           Partial Invalidity.  If at any time any provision of this Security
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability
of the remaining provisions of this Security Agreement nor the legality,
validity or enforceability of such provision under the law of any other
jurisdiction shall in any way be affected or impaired thereby.


 


14.7                           Expenses.  Borrower shall pay on demand all reasonable
fees and expenses, including reasonable attorneys’ fees and expenses, incurred
by Collateral Agent with respect to any amendments or waivers hereof requested
by Borrower or in the enforcement or attempted enforcement of any of the
Obligations or in preserving any of Collateral Agent’s or Lenders’ rights and
remedies (including, without limitation, all such fees and expenses incurred in
connection with any “workout” or restructuring affecting this Security
Agreement, the Subordinated Contingent Notes, the Guaranty or the Obligations
or any bankruptcy or similar proceeding involving Borrower).


 


14.8                           Governing Law.  This Security Agreement shall be governed by
and construed in accordance with the laws of the State of New Jersey without
reference to conflicts of law rules (except to the extent governed by the
UCC).


 


14.9                           Jury Trial.  BORROWER, ACC, LENDERS AND COLLATERAL AGENT,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVE ALL
RIGHT TO TRIAL BY JURY AS TO ANY ISSUE RELATING HERETO IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS SECURITY
AGREEMENT.


 


[Signature
page follows.]


 

















 


IN WITNESS WHEREOF, the parties have caused this
Security Agreement to be executed as of the day and year first above written.


 


	
   

  	
  EMRISE ELECTRONICS
  CORPORATION,

  
	
   

  	
  a New Jersey
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Carmine T. Oliva

  
	
   

  	
  Name: 

  	
  Carmine T. Oliva 

  
	
   

  	
  Its:

  	
  Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ADVANCED CONTROL COMPONENTS, INC.,

  a New Jersey corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Charles S. Brand

  
	
   

  	
  Name: 

  	
  Charles S. Brand

  
	
   

  	
  Its:

  	
  President

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Charles S. Brand

  
	
   

  	
  Charles S. Brand, as Collateral Agent

  
	
   

  	
   

  
	
   

  	
  See Schedule of Lenders
  on Exhibit A for signatures of Lenders.

  



 

















 


EXHIBIT A


 


Schedule of Lenders


 


	
  Lender’s
  Name and Address

  	
   

  	
  Principal

  Amount

  of Note

  	
   

  	
  Lender’s Signature

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Charles S. Brand

  	
   

  	
  Up to $1,584,000

  	
   

  	
  /s/ Charles S. Brand

  
	
   

  	
   

  	
   

  	
   

  	
  Charles S. Brand

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Thomas P. M. Couse

  	
   

  	
  Up to $198,000

  	
   

  	
  /s/ Thomas P.M. Couse

  
	
   

  	
   

  	
   

  	
   

  	
  Thomas P.M. Couse

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Joanne Couse

  	
   

  	
  Up to $198,000

  	
   

  	
  /s/ Joanne Couse

  
	
   

  	
   

  	
   

  	
   

  	
  Joanne Couse

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Michael Gaffney

  	
   

  	
  Up to $20,000

  	
   

  	
  /s/ Michael Gaffney

  
	
   

  	
   

  	
   

  	
   

  	
  Michael Gaffney

  
	
   

  	
   

  	
   

  	
   

  	
   

  



 


A-1