Document:

Exhibit 10.2

 

AMENDMENT NUMBER 16 TO LOAN DOCUMENTS

 

This
AMENDMENT NUMBER 16 TO LOAN DOCUMENTS (this “Sixteenth Amendment”) is
entered into as of August 31, 2010, by and among GVEC RESOURCE IV INC.
(the “Agent”), as Agent and as a Lender, PRIVATE EQUITY MANAGEMENT GROUP
LLC, a Delaware limited liability company (“PEMG”), EMRISE CORPORATION,
a Delaware corporation (“Parent”), and Parent’s Subsidiaries that are
signatories hereto (collectively, with Parent, the “Borrowers” and each
individually, a “Borrower”), with reference to the following facts:

 

A.                                   Borrowers,
Agent and the Lenders named therein are parties to that certain Credit
Agreement, dated as of November 30, 2007, as amended by that certain
Amendment Number 1 to Loan Documents, dated as of August 20, 2008, that
certain Amendment Number 2 to Loan Documents, dated as of February 12,
2009, that certain Forbearance Agreement and Amendment Number 3 to Loan
Documents, dated as of March 20, 2009 (as amended by that certain
Amendment to Forbearance Agreement and Amendment Number 3 to Loan Documents,
dated as of April 9, 2009), that certain 
Amendment Number 4 to Loan Documents, dated as of April 14, 2009,
that certain Amendment Number 5 to Loan Documents, dated as of August 14,
2009, that certain Amendment Number 6 to Loan Documents, dated as of November 3,
2009, that certain Amendment Number 7 to Loan Documents, dated as of November 13,
2009, that certain Amendment Number 8 to Loan Documents, dated as of December 31,
2009, that certain Amendment Number 9 to Loan Documents, dated as of April 13,
2010, that certain Amendment Number 10 to Loan Documents, dated as of May 3,
2010, that certain Amendment Number 11 to Loan Documents, dated as of May 17,
2010, that certain Amendment Number 12 to Loan Documents, dated as of June 1,
2010, that certain Amendment Number 13 to Loan Documents, dated as of June 17,
2010, that certain Amendment Number 14 to Loan Documents, dated as of July 16,
2010 and that certain Amendment Number 15 to Loan Documents, dated as of July 31,
2010 (as further amended, restated, supplemented or modified from time to time,
the “Credit Agreement”).

 

NOW,
THEREFORE, for good and valuable consideration, the parties agree as follows:

 

1.                                       Defined Terms.  Capitalized terms not otherwise defined
herein shall have the same meanings as set forth in the Credit Agreement.

 

2.                                       Representations
and Warranties.

 

(a)                                  Each Borrower
hereby represents and warrants that, after giving effect to this Sixteenth
Amendment, no Event of Default or failure of condition has occurred or exists,
or would exist with notice or lapse of time or both under the Credit Agreement.

 

(b)                                 All
representations and warranties of Borrowers in this Sixteenth Amendment and the
Credit Agreement are true and correct as of the date hereof, and shall survive
the execution of this Sixteenth Amendment.

 

3.                                       Amendments.  Subject to the timely consummation of the
Stock Purchase Agreement (the “SPA”) between Emrise Electronics Corporation and
Aeroflex Incorporated dated as of June 7, 2010 (which shall, in any event,
be consummated not later than August 31, 2010), and the receipt by PEMG
for the benefit of Agent of proceeds sufficient to satisfy all amounts (which
amounts are more fully set forth in the payoff letter attached as Exhibit “B”)
due under the Credit Agreement (other than an amount on account of the Term
Loans not to exceed an aggregate of One Million Dollars ($1,000,000) and fees
otherwise due PEMG in the amount of Two Hundred Thirty Seven Thousand Five
Hundred Dollars ($237,500) which fees are permanently waived), the following
provisions of the Credit Agreement shall be deemed to be amended and restated
to read as follows:

 

(a)                                  The Revolver is
hereby terminated and Section 2.1 shall be deemed to be amended and
restated in its entirety to read as follows:

 

“[Intentionally
Omitted].”

 

(b)                                 Section 2.2(a) shall
be deemed to be amended and restated in its entirety to read as follows:

 

“(a)                            Subject to the
terms and conditions of this Agreement, on August 31, 2010, Lenders shall
be deemed to have made a term loan (the “Amended and Restated Term Loan A”) to
Borrowers in an amount not to exceed One Million Dollars ($1,000,000).

 

1

 

(c)                                  The third
sentence of Section 2.2(c) hereby is amended and restated in its
entirety to read as follows:

 

“The
Amended and Restated Term Loan A shall be repaid in accordance with the terms
and conditions of that certain Amended and Restated Term Loan A Note.”

 

(d)                                 Sections 2.2(d) and
(e) hereby are deleted in their entireties.

 

(e)                                  Section 2.7
shall be deemed to be amended and restated in its entirety to read as follows:

 

“[Intentionally
Omitted].”

 

(f)                                    Section 2.8
shall be deemed to be amended and restated in its entirety to read as follows:

 

“[Intentionally
Omitted].”

 

(g)                                 Section 2.11
shall be deemed to be amended and restated in its entirety to read as follows:

 

“[Intentionally
Omitted].”

 

(h)                                 A phrase is
hereby added to the beginning of Section 5.2 as follows:

 

“If
requested by Agent,”

 

(i)                                     Section (c) of
Schedule 5.3 shall be deemed to be amended and restated in its entirety to read
as follows:

 

“[Intentionally
Omitted].”

 

(j)                                     Sections 5.4,
5.5, 5.9 and 5.15 shall be deemed to be amended and restated in their entirety
to read as follows:

 

“[Intentionally Omitted].”

 

(k)                                  A phrase is
hereby added to the end of the introductory paragraph of Section 6 as
follows:

 

“such
consent not to be unreasonably withheld”

 

(l)                                     Section 6.1(c) shall
be deemed to be amended and restated in its entirety to read as follows:

 

“(c)                            Purchase Money
Indebtedness and Indebtedness for working capital facilities,”

 

(m)                               Section 6.1(e) shall
be deemed to be amended and restated in its entirety to read as follows:

 

“(e)                            other unsecured
Indebtedness in an aggregate principal amount at any time outstanding not to
exceed One Million Five Hundred Thousand Dollars ($1,500,000),”

 

(n)                                 A new sentence
is hereby added to the end of Section 6.2 as follows:

 

“Borrower
may incur Liens to secure working capital facilities permitted under
Section 6.1(c) and Agent hereby agrees to subordinate its security
interest to such Liens on terms and conditions reasonably acceptable to Agent.”

 

(o)                                 Section 6.16(d) is
hereby deleted in its entirety.

 

(p)                                 Section 6.21
is hereby deleted in its entirety.

 

2

 

(q)                                 All of Agent’s
and Lenders’ security interests in the assets of Advanced Control Components, Inc.
(“ACC”) and Custom Components, Inc. (“CCI”), including without limitation,
any pledge of stock in either ACC or CCI are automatically terminated and
released, Agent will promptly deliver to Borrowers the original stock
certificates of ACC and CCI and Borrowers are authorized to file of record UCC
amendment statements terminating any financing statements naming ACC or CCI as
debtor in favor of Agent or any Lender and Agent shall, at Borrowers’ expense,
execute any other lien termination documents as Borrowers may reasonably
request to effectuate this provision.

 

(r)                                    Agent and
Lenders hereby agree that as soon as is practical after execution hereof, Agent
and Lenders will take all necessary steps to terminate any Lockbox Agreements
(or related agreements) entered into by Agent, Lender, any Borrower and East
West Bank.  After the date hereof and
prior to termination of such Lockbox Agreements (or related agreements), Agent
shall turn over to Borrowers all items collected into the lockbox, on a daily
basis.

 

(s)                                  Agent consents
to the consummation of the transactions contemplated under that certain Master
Agreement dated June 7, 2010 among Parent, Borrowers, certain Subsidiaries
of Borrower, Charles S. Brand, Thomas P. Couse, Joanne Couse and Michael
Gaffney

 

(t)                                    Agent shall
execute and deliver Deeds of Priority in favor of Lloyds TSB Commercial Finance
Limited with respect to (i) XCEL Power Systems, Ltd and (ii) Pascall
Electronics Limited in form and substance reasonably acceptable to Agent.

 

(u)                                 The Term Loan A
Note shall be replaced in its entirety with the Amended and Restated Term Loan
A Note

 

(v)                                 The defined
term “Term Loan A” in the Credit Agreement shall mean and refer to the “Amended
and Restated Term Loan A.”

 

4.                                       Default.  In addition to all other Events of Default
under the Credit Agreement, the following shall constitute Events of Default
under this Sixteenth Amendment and the Credit Agreement: (i) Borrowers’
failure to pay any amount when due under this Sixteenth Amendment or to perform
any covenant or other agreement contained in this Sixteenth Amendment, or any
other document entered into pursuant hereto, including but not limited to the
Amended and Restated Term Loan A Note, and/or (ii) the termination of the
SPA.

 

5.                                       Conditions
Precedent.  The
effectiveness of this Sixteenth Amendment is subject to Agent’s receipt of all
of the following:

 

(a)                                  this Sixteenth
Amendment and such other agreements and instruments reasonably requested by
Agent pursuant hereto (including such documents as are necessary to create and
perfect Agent’s interest in the Collateral, and including but not limited to
the Amended and Restated Term Loan A Note, substantially in the form attached
hereto as Annex Q), each duly executed by each Borrower;

 

(b)                                 payment by
Borrowers to PEMG of an amendment fee in the amount of Twenty Thousand Dollars
($20,000), which shall be nonrefundable as of the date hereof and due and payable
upon receipt of the “Closing Payment” under and as defined in the SPA;

 

(c)                                  payment by
Borrowers of all legal fees and expenses incurred through (which shall be due
and payable on, and nonrefundable as of) the date of this Sixteenth Amendment
(which shall be remitted via wire transfer according to the instructions set
forth on Exhibit A hereto); and

 

(d)                                 such other
documents and completion of such other matters as Agent may reasonably deem
necessary or appropriate.

 

6.                                       Conditions
Subsequent.  Parent shall
deliver to Agent, the following items by the respective dates following
consummation of the SPA, each in form and content reasonably acceptable to
Agent:

 

(a)                                  A detailed
post-closing outline of sources and uses of the purchase price, within 2
calendar days thereof; and

 

3

 

(b)                                 Borrower’s
go-forward, pro forma financials.

 

7.                                       Release.

 

(a)                                  Each Borrower
acknowledges that neither Agent, any Lender nor PEMG (the “Released Parties”)
would enter into this Sixteenth Amendment without Borrowers’ assurance
hereunder.  Except for the obligations
arising hereafter under this Sixteenth Amendment, each Borrower hereby
absolutely discharges and releases the Released Parties, any person or entity
that has obtained any interest from any of them under the Credit Agreement or
otherwise and each of the Released Parties’ and such entities’ former and
present partners, stockholders, officers, directors, employees, successors,
assignees, agents and attorneys from any known or unknown claims which any
Borrower now has against any of them of any nature, including any claims that
any Borrower, its successors, counsel, and advisors may in the future discover
they would have now had if they had known facts not now known to them, whether
founded in contract, in tort or pursuant to any other theory of liability,
including but not limited to any claims arising out of or related to the Credit
Agreement or the transactions contemplated thereby.

 

(b)                                 Each Borrower
waives the provisions of California Civil Code Section 1542, which states:

 

A
GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF
KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

 

(c)                                  The provisions,
waivers and releases set forth in this section are binding upon each Borrower
and each Borrower’s shareholders, agents, employees, assigns and successors in
interest.  The provisions, waivers and
releases of this section shall inure to the benefit of the Released Parties and
their respective agents, employees, officers, directors, assigns and successors
in interest.

 

(d)                                 Each Borrower
warrants and represents that such Borrower is the sole and lawful owner of all
right, title and interest in and to all of the claims released hereby and no
Borrower has heretofore assigned or transferred or purported to assign or
transfer to any person any such claim or any portion thereof.  Each Borrower shall indemnify and hold harmless
Agent, each Lender and PEMG from and against any claim, demand, damage, debt,
liability (including payment of attorneys’ fees and costs actually incurred
whether or not litigation is commenced) based on or arising out of any such
assignment or transfer.

 

(e)                                  The provisions
of this section shall survive payment in full of the Obligations, full
performance of all the terms of this Sixteenth Amendment and the Credit
Agreement, and/or Agent’s, any Lender’s or PEMG’s actions to exercise any
remedy available under the Credit Agreement or otherwise.

 

8.                                       Consultation of
Counsel.  Each Borrower acknowledges
that such Borrower has had the opportunity to be represented by legal counsel
of its own choice throughout all of the negotiations that preceded the execution
of this Sixteenth Amendment.  Each
Borrower has executed this Sixteenth Amendment after reviewing and
understanding each provision of this Sixteenth Amendment and without reliance
upon any promise or representation of any person or persons acting for or on
behalf of Agent.  Each Borrower further
acknowledges that such Borrower and its counsel have had adequate opportunity
to make whatever investigation or inquiry they may deem necessary or desirable
in connection with the subject matter of this Sixteenth Amendment prior to the
execution hereof and the delivery and acceptance of the consideration described
herein.

 

9.                                       Miscellaneous.

 

(a)                                  Successors and
Assigns.  This Sixteenth Amendment shall
be binding upon and shall inure to the benefit of Borrower and Agent and their
respective successors and assigns; provided, however, that the foregoing shall
not authorize any assignment by Borrower of its rights or duties hereunder.

 

(b)                                 Integration.  This Sixteenth Amendment and any documents
executed in connection herewith or pursuant hereto contain the entire Sixteenth
Amendment between the parties with respect to the subject matter hereof and
supersede all prior agreements, understandings, offers and negotiations, oral
or written, with respect thereto and no extrinsic evidence whatsoever may be
introduced in any judicial or arbitration proceeding, if any, involving this
Sixteenth Amendment; except that any financing statements or other agreements
or instruments filed by Agent with respect to Borrower shall remain in full
force and effect.

 

4

 

(c)                                  Course of
Dealing; Waivers.  No course
of dealing on the part of Agent or its officers, nor any failure or delay in
the exercise of any right by Agent, shall operate as a waiver thereof, and any
single or partial exercise of any such right shall not preclude any later
exercise of any such right.  Agent’s
failure at any time to require strict performance by Borrower of any provision
shall not affect any right of Agent thereafter to demand strict compliance and
performance.  Any suspension or waiver of
a right must be in writing signed by an officer of Agent.

 

(d)                                 Time is of the
Essence.  Time is of the essence as to
each and every term and provision of this Sixteenth Amendment and the other
Credit Agreement.

 

(e)                                  Legal Effect.  The Credit Agreement remains in full force
and effect.  If any provision of this
Sixteenth Amendment conflicts with applicable law, such provision shall be
deemed severed from this Sixteenth Amendment, and the balance of this Sixteenth
Amendment shall remain in full force and effect.

 

(f)                                    Choice of Law
and Venue; Jury Trial Waiver; Judicial Reference; Service of Process.  Section 12 of the Credit Agreement
hereby is incorporated herein by this reference as though fully set forth.

 

(g)                                 Upon the
effectiveness of this Sixteenth Amendment, each reference in the Credit
Agreement to “this Sixteenth Amendment,” “hereunder,” “herein,”
“hereof” or words of like import referring to the Credit Agreement shall
mean and refer to the Credit Agreement as amended by this Sixteenth Amendment.

 

(h)                                 Upon the
effectiveness of this Sixteenth Amendment, each reference in the Loan Documents
to the “Credit Agreement” “thereunder,” “therein,” “thereof
or words of like import referring to the Credit Agreement shall mean and refer
to the Credit Agreement as amended by this Sixteenth Amendment.

 

(i)                                     Assignment and
Indemnity.  Borrower
consents to Agent’s assignment, in accordance with Section 13 of the
Credit Agreement, of all or any part of Agent’s rights under this Sixteenth
Amendment and the Credit Agreement.

 

10.                                 Entire
Amendment; Effect of Sixteenth Amendment.  This Sixteenth Amendment, and the terms and
provisions hereof, constitutes the entire Sixteenth Amendment among the parties
pertaining to the subject matter hereof and supersedes any and all prior or
contemporaneous amendments relating to the subject matter hereof. Except as
expressly set forth in this Sixteenth Amendment, the Credit Agreement and other
Loan Documents shall remain unchanged and in full force and effect. To the
extent any terms or provisions of this Sixteenth Amendment conflict with those
of the Credit Agreement or other Loan Documents, the terms and provisions of
this Sixteenth Amendment shall control. This Sixteenth Amendment is a Loan
Document.

 

11.                                 Counterparts; Electronic Transmission. This Sixteenth
Amendment may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument and any of the parties
hereto may execute this Sixteenth Amendment by signing any such counterpart.
Delivery of an executed counterpart of this Sixteenth Amendment by electronic
mail shall be equally as effective as delivery of an original executed
counterpart of this Sixteenth Amendment. Any party delivering an executed
counterpart of this Sixteenth Amendment by electronic mail also shall deliver
an original executed counterpart of this Sixteenth Amendment, but the failure
to deliver an original executed counterpart shall not affect the validity,
enforceability, and binding effect of this Sixteenth Amendment.

 

[Balance of Page Intentionally Left Blank]

 

5

 

IN
WITNESS WHEREOF, the parties have caused this AMENDMENT NUMBER 16 TO LOAN
DOCUMENTS to be executed and delivered on the date first written above.

 

	
  EMRISE
  CORPORATION

  	
   

  	
  EMRISE
  ELECTRONICS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Carmine Oliva

  	
   

  	
  By:

  	
  /s/
  Carmine Oliva

  
	
  Name:
  Carmine Oliva

  	
   

  	
  Name:
  Carmine Oliva

  
	
  Title:
    Chief Executive Officer

  	
   

  	
  Title:
    President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  CXR
  LARUS CORPORATION

  	
   

  	
  ADVANCED
  CONTROL COMPONENTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Carmine Oliva

  	
   

  	
  By:

  	
  /s/
  Carmine Oliva

  
	
  Name:
  Carmine Oliva

  	
   

  	
  Name:
  Carmine Oliva

  
	
  Title:
    President

  	
   

  	
  Title:
    President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  CUSTOM
  COMPONENTS, INC.

  	
   

  	
  GVEC
  RESOURCE IV INC.,

  
	
   

  	
   

  	
  as
  Agent and a Lender

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Carmine Oliva

  	
   

  	
  By:
  PRIVATE EQUITY MANAGEMENT

  
	
   

  	
   

  	
  GROUP
  LLC, its Court-Appointed Receiver

  
	
  Name:
  Carmine Oliva

  	
   

  	
   

  
	
  Title:
    President

  	
   

  	
  By:

  	
  /s/
  Jim LeSieur

  
	
   

  	
   

  	
  Name:
  Jim LeSieur

  
	
   

  	
   

  	
  Title:
    Chief Operating Officer

  
	
  PRIVATE
  EQUITY MANAGEMENT GROUP LLC

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Jim LeSieur

  	
   

  	
   

  
	
  Name:
  Jim LeSieur

  	
   

  	
   

  
	
  Title:
    Chief Operating Officer

  	
   

  	
   

  

 

[Signature Page to
Amendment Number 16 to Loan Documents]

 

 

ANNEX Q

(Amended and Restated Term Loan A Note)

 

[hard copy to be attached]Exhibit
10.4

 

THIS SECURITY AGREEMENT IS OR WILL BE SUBJECT TO SUBORDINATION
AGREEMENTS BETWEEN COLLATERAL AGENT AND THE HOLDERS OF THE SENIOR INDEBTEDNESS

 

AMENDED AND RESTATED SECURITY AGREEMENT

 

THIS
AMENDED AND RESTATED SECURITY AGREEMENT
(the “Security Agreement”),
is made as of August 31, 2010, by and among EMRISE Electronics Corporation, a
New Jersey corporation (“Borrower”),
EMRISE Corporation, a Delaware corporation (“Parent”),
the Subsidiaries (as listed on Exhibit A),
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) Advanced Control
Components, Inc., a New Jersey corporation (“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 owned 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 (as amended, are referred to 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. 
The Subordinated Contingent Notes were amended in November 2009 to add
additional payment amounts, and to modify the payment date and terms.  The Subordinated Contingent Notes have been
amended by Amendment No. 2 of even date herewith.

 

C.            Parent, the ultimate parent of
Borrower, delivered a Continuing Guaranty dated August 20, 2008 (the “Guaranty”) in favor of the Lenders pursuant
to which the obligations of Borrower to the Lenders under the Subordinated
Contingent Notes were guaranteed by Parent.

 

D.            The Lenders subordinated the
indebtedness owed to them under the Subordinated Contingent Notes to the holder
of the Senior Indebtedness pursuant to that certain Subordination Agreement
between the Collateral Agent and GVEC Resource IV Inc. dated as of August 20,
2008 (the “GVEC Subordination Agreement”).

 

E.             On June 7, 2010, Borrower entered
into an agreement to sell its direct and indirect interests in the Shares (the “Sale Transaction”). 
In connection with the Sale Transaction, the Borrower, Parent and the
Lenders entered into a Master Agreement, pursuant to which the Lenders agreed
to release their lien on all of the assets or property of ACC (the “Original Collateral”).

 

 

E.             The parties desire to enter into
this Amended and Restated Security Agreement to grant the Collateral Agent, for
the benefit of himself and the Lenders, a security interest in the collateral
described below as substitute collateral for the Original Collateral.

 

F.             To perfect their grant of a
security interest hereunder, each of XCEL Power Systems, Ltd. and Pascall
Electronics Limited will enter into an All Assets Debenture dated as of the
date hereof in favor of the Collateral Agent (each, a “UK Debenture”).

 

G.            The Collateral Agent will enter into
that certain Deed of Priorities dated as of the date hereof between Lloyds TSB
Commercial Finance Limited, GVEC Resource IV, Inc., Collateral Agent and XCEL
Power Systems, Ltd. (the “XCEL Deed”) and
that certain Deed of Priorities dated as of the date hereof between Lloyds TSB
Commercial Finance Limited, GVEC Resource IV, Inc., Collateral Agent and
Pascall Electronics Limited (the “Pascall Deed”
and collectively with the GVEC Subordination Agreement and the XCEL Deed, the “Subordination Agreements”).

 

H.            The Subordinated Contingent Note
held by Michael Gaffney has been paid in full and he is no longer a “Lender”
hereunder.

 

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.

 

2.1           To secure the Obligations as defined in Section 3
hereof, each of the Subsidiaries hereby grants to Collateral Agent a continuing security interest and lien in and to
all of the assets and properties of the Subsidiaries, 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  the
Subsidiaries, 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.

 

2.2           Borrower, Parent and each of the Subsidiaries hereby jointly
and severally warrant and represent to and covenant and agree with the
Collateral Agent and the Lenders that the continuing security interest and lien
granted pursuant to this Security Agreement is and shall at all times be a
priority security interest in the assets of each Subsidiary, subordinate only
to Senior Indebtedness.

 

2

 

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, each of the Subsidiaries
shall have possession of its 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 any of Parent’s place of business or the place of business of any of
the Subsidiaries (or such other places as any of Parent or the Subsidiaries
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 Parent and the Subsidiaries may make sales of inventory items in
the ordinary course of business.  No
Subsidiary shall 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, each of the Subsidiaries shall execute and deliver to
Collateral Agent (a) the UCC-1 financing statement, or its foreign equivalent,
provided by Collateral Agent evidencing the Collateral Agent’s interest in the
Collateral and (b) a UCC-3 financing statement provided by Collateral Agent
evidencing Collateral Agent’s release of its lien on the Original
Collateral.  Collateral Agent hereby
authorizes and directs each of Borrower and Parent to file or cause to be filed
the UCC-3 financing statement.

 

6.             Transfer, Taxes,
Liens and Encumbrances. 
Each of the Subsidiaries represents and warrants that it has title to
its respective Collateral free and clear of any lien, security interest or
encumbrance, except for the security interests of the holders of the Senior
Indebtedness and the security interest created by this Security Agreement, and
if such Subsidiary is party to a UK Debenture, the applicable UK
Debenture.  Title to the Collateral will
remain in and continue to be vested in each respective Subsidiary.  Each of the Subsidiaries will defend its
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 Parent and Subsidiaries may
make sales of inventory items in the ordinary course of business.  The consent of Collateral Agent required
hereby shall not be unreasonably withheld. 
As applicable, Parent, Borrower or the Subsidiaries shall pay all taxes,
assessments and other charges made against the Collateral.

 

7.             Risk of Loss and
Inspection of Collateral. 
As applicable, Parent or the Subsidiaries shall have all risk of loss of
the Collateral, and each Subsidiary will keep its 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.  As applicable, Parent or the Subsidiaries
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 

 

3

 

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,
Parent and each of the Subsidiaries hereby jointly and severally represent and
warrant to Collateral Agent and
the Lenders that: (i) each of Borrower, Parent and the Subsidiaries has full
power and authority to enter into this Security Agreement (and, if party to a
UK Debenture, such UK Debenture) 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 Security Agreement
(and, if party to a UK Debenture, such UK Debenture); (ii) that the Parent owns
one hundred percent (100%) of the issued and outstanding capital stock,
directly or indirectly, of the Borrower and each of the Subsidiaries; (iii)
this Agreement is valid and binding upon and enforceable against Borrower,
Parent and Subsidiaries, 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;
and (iv) the making and performance of this Security Agreement (and if a party
to a UK Debenture, such UK Debenture) by Borrower, Parent and the Subsidiaries
will not conflict with their respective certificates of incorporation, bylaws,
or other organizational documents, 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, Parent or the Subsidiaries, as
applicable, is a party, or by which any of Borrower, Parent or the Subsidiaries
is bound.

 

10.           Covenants.  Borrower, Parent and each of the Subsidiaries
hereby agree as follows:

 

10.1         (Liens on Collateral)  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; provided that no additional
liens or security interest will be granted in favor of McDermott and Yost as
defined in the Note;

 

10.2         (Further Assurances)  that at any time and from time to time, at
Parent’s expense, Parent, Borrower and the Subsidiaries 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         (Parent Financial
Statements)  from and
after the date hereof until the Notes are paid in full, 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 or Form 10-K, as applicable, with the Securities and
Exchange Commission, Parent will provide Collateral Agent with copies of Parent’s
quarterly and annual financial statements and any related notes;

 

10.4         (Parent, Borrower and
Subsidiary Financial Statements) 
from and after the date hereof until the Notes are paid in full, on a
quarterly basis within forty-five (45) 

 

4

 

days after the end of each fiscal quarter, and
within sixty (60) days after the end of each fiscal year, Parent, Borrower and
each Subsidiary will provide Collateral Agent with copies of separate company
quarterly and annual financial statements and any related notes for each of
Parent (only to the extent such separate company financial statements may no be
longer required to be filed with the Securities and Exchange Commission),
Borrower and each Subsidiary;

 

10.5         (Sale of Parent, Borrower
or Subsidiaries).  in the
event that Parent, Borrower or any of the Subsidiaries or any assets of the
Subsidiaries (other than assets of the Subsidiaries sold in the ordinary course
of business) is proposed to be sold, including by way of stock sale, merger or
otherwise, the Parent shall provide notice to the Collateral Agent of such
proposed sale promptly and to the extent possible at least thirty (30) days
prior to the consummation thereof and in no event less than fourteen (14) days
prior to the consummation thereof; and

 

10.6         (Senior Indebtedness).
on an aggregate basis, not to incur Senior Indebtedness in an amount
outstanding exceeding Fifteen Million Dollars ($15,000,000) without the prior
written approval of the Lenders (which shall not be unreasonably withheld) and,
in no event, in an amount outstanding exceeding Twenty Million Dollars
($20,000,000).

 

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 by the UK Debentures, and otherwise by law, subject to the
Subordination Agreements, 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 Agreements,
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 Agreements, at
the request of Collateral Agent, Parent, Borrower and each Subsidiary, as
applicable, shall assemble and make available to Collateral Agent all of the
Collateral at a place or places reasonably convenient to each of Borrower,
Parent and the Subsididaries, as applicable, and Collateral Agent; provided,
however, that none of Parent, Borrower or any Subsidiary shall be obligated
under this Agreement to ship any Collateral internationally.

 

11.5         Application of
Collateral Proceeds. 
Subject to the Subordination Agreements, 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 

 

5

 

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
outstanding principal amount of such Lender’s Subordinated Contingent Note as
set forth on Exhibit A hereto, and (ii)
the denominator of which is the aggregate outstanding principal amount of all
Subordinated Contingent Notes issued under the Stock Purchase Agreement as set
forth on Exhibit A hereto.  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 Lenders upon
demand by such Lenders.

 

12.           Authorized Action by
Collateral Agent.

 

(a)           Borrower, Parent and each of the Subsidiaries each hereby
appoint Collateral Agent  as
attorney-in-fact for each of Borrower, Parent and each Subsidiary,
respectively, with full authority in the place and stead of Borrower, Parent
and each Subsidiary, respectively, and in the name of Borrower, Parent and each
Subsidiary, as applicable, 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, Parent or any Subsidiary 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 

 

6

 

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,
Parent or any Subsidiary 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 on Exhibit
A hereto or on the register maintained by the Parent.  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, Parent, a
Subsidiary, Collateral Agent or Lenders’ part in exercising any right hereunder
shall operate as a waiver 

 

7

 

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, Parent, each Subsidiary 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, Parent, Borrower and
each Subsidiary and their respective successors, assigns, heirs, beneficiaries
and legal representatives; provided, however, that none of
Borrower, Parent and any Subsidiary may 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, the UK
Debentures, the XCEL Deeed, the Pascall Deed 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, Parent and
each Subsidiary 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.  Parent, Borrower and each Subsidiary, jointly
and severally, agree to 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 Parent, Borrower
or a Subsidiary 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, the UK Debentures,
the XCEL Deeed, the Pascall Deed or the Obligations or any bankruptcy or
similar proceeding involving Parent, Borrower or any Subsidiary).

 

14.8         Governing Law;
Jurisdiction.  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). 
Any action or proceeding seeking to enforce any provision of, or based
on any right arising out of, this Security Agreement, may be brought against
any party to this Security Agreement in the courts of the State of New Jersey,
Monmouth County, or, if it has or can acquire jurisdiction, the United States 

 

8

 

District Court for the District of New Jersey, and
each of the parties hereto consents to the jurisdiction of such courts (and of
the appropriate appellate courts) in any such action or proceeding and waives
any objection to venue laid therein. 
Process in any action or proceeding referred to in the preceding
sentence may be served on any party anywhere in the world.

 

14.9         Jury Trial.  BORROWER, PARENT, EACH SUBSIDIARY, 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.]

 

9

 

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

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  EMRISE
  CORPORATION,

  
	
   

  	
  a
  Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Carmine T. Oliva

  
	
   

  	
  Name:

  	
  Carmine T. Oliva

  
	
   

  	
  Its:

  	
  Chairman and Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CXR
  LARUS CORPORATION,

  
	
   

  	
  a
  Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Carmine T. Oliva

  
	
   

  	
  Name:

  	
  Carmine T. Oliva

  
	
   

  	
  Its:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  PASCALL
  ELECTRONICS LIMITED,

  
	
   

  	
  a
  United Kingdom corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Graham Jefferies

  
	
   

  	
  Name:

  	
  Graham Jefferies

  
	
   

  	
  Its:

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
  XCEL
  POWER SYSTEMS, LTD.,

  
	
   

  	
  a
  United Kingdom corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Graham Jefferies

  
	
   

  	
  Name:

  	
  Graham Jefferies

  
	
   

  	
  Its:

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/
  Charles S. Brand

  
	
   

  	
  Charles S. Brand, as Collateral Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

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

  

 

Amended
and Restated Security Agreement

 

 

EXHIBIT A

 

Schedule of Subsidiaries

 

·                                          CXR Larus Corporation, a
Delaware corporation

 

·                                          Pascall Electronics Limited,
a United Kingdom company

 

·                                          XCEL Power Systems, Ltd., a
United Kingdom company

 

Schedule of Lenders

 

	
  Lender’s Name and Address

  	
   

  	
  Principal Amount of

  Note outstanding

  on August 31, 2010

  	
   

  	
  Lender’s Signature

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Charles S. Brand

  	
   

  	
  $

  	
  2,211,766.43

  	
   

  	
   

  	
   

  
	
  175 Boundary Road

  	
   

  	
   

  	
   

  	
  /s/ Charles S. Brand

  	
   

  
	
  Colts Neck, NJ 07722

  	
   

  	
   

  	
   

  	
  Charles S. Brand

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Thomas P. M. Couse

  	
   

  	
  $

  	
  332,720.81

  	
   

  	
   

  	
   

  
	
  1 Waltham Way

  	
   

  	
   

  	
   

  	
  /s/ Charles S. Brand

  	
   

  
	
  Jackson, NJ 08527

  	
   

  	
   

  	
   

  	
  Charles S. Brand, as
  attorney in fact for Thomas P.M. Couse

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Joanne Couse

  	
   

  	
  $

  	
  332,720.81

  	
   

  	
   

  	
   

  
	
  1 Waltham Way

  	
   

  	
   

  	
   

  	
  /s/ Charles S. Brand

  	
   

  
	
  Jackson, NJ 08527

  	
   

  	
   

  	
   

  	
  Charles S. Brand, as
  attorney in fact for Joanne Couse

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Aggregate Principal Amount:

  	
   

  	
  $

  	
  2,877,208.05

  	
   

  	
   

  	
   

  

 

Amended
and Restated Security Agreement

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