Document:

Exhibit 10.3

 

THIS SUBORDINATED CONTINGENT
SECURED PROMISSORY NOTE IS 

SUBJECT TO A SUBORDINATION AGREEMENT OF EVEN DATE

(THE “SUBORDINATION AGREEMENT”) BETWEEN 

COLLATERAL AGENT AND THE HOLDER OF SENIOR INDEBTEDNESS

 

SUBORDINATED CONTINGENT
SECURED PROMISSORY NOTE

 

	
  $                        

  	
  August 20, 2008

  
	
   

  	
  Rancho
  Cucamonga, California

  

 

FOR VALUE RECEIVED, EMRISE Electronics Corporation, a
New Jersey corporation (the “Company”),
promises to pay to the order of                             
(“Holder”), or his assigns, the
principal sum of up to                             
($              ),
or so much thereof as may be outstanding pursuant to Section 2.6 of the
Stock Purchase Agreement (as hereinafter defined) and as adjusted pursuant to Section 2.5(b) of
the Stock Purchase Agreement, together with interest as computed below. This
Note is one of the Subordinated Contingent Notes issued pursuant to the Stock
Purchase Agreement dated as of May 23,
2008 (as amended, modified or supplemented, the “Stock Purchase Agreement”) by and among the
Company, Thomas P. M. Couse, Joanne Couse, Michael Gaffney, Advanced Control
Components, Inc. (“ACC”),
Charles S. Brand and Custom Components, Inc. (“CCI”). 
Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Stock Purchase Agreement.

 

The following is a statement of the rights of Holder
and the conditions to which this Note is subject, and to which Holder, by the
acceptance of this Note, agrees:

 

1.             Certain Definitions.  As used in this Note, the following terms
shall have the following definitions:

 

“ACC”
shall have the meaning set forth in the introductory paragraph of this Note.

 

“Applicable Interest
Rate” shall mean the rate per annum equal to the prime rate as
reported in The Wall Street Journal
plus 1%.

 

“CCI”
shall have the meaning set forth in the introductory paragraph of this Note.

 

“Collateral Agent”
shall have the meaning set forth in the Security Agreement.

 

“Company”
includes EMRISE Electronics Corporation and any Person which shall succeed to
or assume the obligations of the Company under this Note.

 

“Event of Default”
shall have the meaning set forth in Section 9.

 

“Guaranty”
shall mean the Continuing Guaranty dated
as of August 20, 2008 executed by Parent in favor of Holder.

 

 

“Holder”
shall mean the Person specified in the introductory paragraph of this Note or
any Person who shall at the time be the registered holder of this Note.

 

“Issuance Date”
shall mean August 20, 2008.

 

“Maturity Date”
shall mean the date five Business Days after the Payment Statement for the
Second Measurement Period becomes final and binding.

 

“Note”
shall mean this Subordinated Contingent Secured Promissory Note.

 

“Obligations”
shall mean and include all loans, advances, debts, liabilities and obligations,
howsoever arising, owed by the Company to Holder of every kind and description
(whether or not evidenced by any note or instrument and whether or not for the
payment of money), now existing or hereafter arising under or pursuant to the
terms of this Note and the other Subordinated Contingent Notes, including, all
interest, fees, charges, expenses, attorneys’ fees and costs and accountants’
fees and costs chargeable to and payable by the Company hereunder and
thereunder.

 

“Parent”
shall mean EMRISE Corporation, a Delaware corporation and parent of the
Company.

 

“Person”
shall mean and include an individual, a partnership, a corporation (including a
business trust), a joint stock company, a limited liability company, an
unincorporated association, a joint venture or other entity or a governmental
authority.

 

“Security Agreement”
shall mean the Security Agreement dated as of the date hereof  executed by the Company, ACC, Charles S. Brand, Thomas P.
M. Couse, Joanne Couse and Michael Gaffney.

 

“Senior Indebtedness”
shall mean the principal of and unpaid interest on all indebtedness of Parent
or any Subsidiary regardless of whether incurred on, before or after the date
of this Note (i) for money borrowed from any bank, savings and loan or other
financial institution (including without limitation money borrowed from GVEC
Resource IV Inc. and its participants, successors and assigns), and is
evidenced by notes, bonds, debentures or other written obligations in an amount
not to exceed (a) during the Restricted Period, Thirty Million Dollars
($30,000,000) (as defined in the Stock Purchase Agreement), and (b) after
the Pay Down Date, an amount equal to the difference of the maximum Senior
Indebtedness during the Restricted Period minus Three
Million Dollars ($3,000,000); and (ii) any renewals or extensions of any
indebtedness described in (i) above; provided, however, that
the term shall not include (w) any lease financing arrangement involving
Parent or any Subsidiary, (x) trade debt of Parent or any Subsidiary, (y) indebtedness
which by the terms of the instrument creating or evidencing it is subordinated
to or on a parity with this Note, and (z) money borrowed from Noel C.
McDermott, as Trustee of the Noel C. McDermott Revocable Living Trust dated December 18,
1995, or Warren P. Yost and Gail A. Yost, as Co-Trustees Under Declaration of
Trust dated March 9, 1988 relating to the purchase by Parent of all of the
capital stock of Larus Corporation.

 

“Stock Purchase
Agreement” shall have the meaning set forth in the introductory
paragraph of this Note.

 

2

 

“Subordinated
Contingent Notes” shall have the meaning set forth in the Stock
Purchase Agreement.

 

“Subsidiary”
shall mean any Person (i) the shares of stock, membership interests,
partnership interests or other forms of equity of which having ordinary voting
power to elect a majority of the directors, managers or partners, as the case
may be, of that Person are owned, directly or indirectly, by Parent or a
Subsidiary of Parent or (ii) which is controlled, directly or indirectly,
by Parent or any Subsidiary of Parent.

 

“Transfer”
shall have the meaning set forth in Section 8.2(a).

 

2.             Principal Balance.

 

2.1                                 Initial Principal Balance.  The initial principal balance (the “Initial Principal Balance”) of this Note
shall be an amount up to [             ],
as determined in accordance with the terms of Sections 2.6(d) and (e) of
the Stock Purchase Agreement.  Regardless
of the date of determination of the Initial Principal Balance, interest shall
accrue on the Initial Principal Balance from and after the Issuance Date (i.e.,
interest on the Initial Principal Balance will be computed retroactively to the
Issuance Date after determination of the Initial Principal Balance in
accordance with the terms of Section 2.6 of the Stock Purchase Agreement).

 

2.2                                 Adjustment of Principal Balance.  The Initial Principal Balance shall be
increased or decreased in accordance with the terms of Section 2.5(b) of
the Stock Purchase Agreement.

 

2.3                                 First Measurement Period Principal Balance.  Solely for the purpose of calculating the
interest only payments to be made by the Company pursuant to Section 3.2,
the “First Measurement Period Principal
Balance” shall equal the Initial Principal Balance as determined
pursuant to Section 2.6(d) of the Stock Purchase Agreement as
increased or decreased in accordance with the terms of Section 2.5(b) of
the Stock Purchase Agreement.  Nothing in
this Section 2.3 shall alter or modify the terms of Section 2.1.

 

3.             Payments of Principal and Interest.
Beginning on the Issuance Date, the outstanding principal balance of this Note
shall bear interest at the Applicable Interest Rate.  Interest shall be determined and calculated
on the first day of each quarter during the term hereof.  Subject to Section 2.6(i) of the
Stock Purchase Agreement with respect to acceleration of payment of the
principal and interest of this Note, payments of principal and interest shall
be payable in cash as follows:

 

3.1                                 The
Company shall make no principal or interest payments during the period
commencing on the Issuance Date and ending on the first anniversary of the
Issuance Date.  During such period,
interest will accrue on a quarterly basis pursuant to the terms of this Section 3.

 

3.2                                 Commencing
on the date the Payment Statement for the First Measurement Period becomes
final and binding, and continuing to the Maturity Date, the 

 

3

 

Company shall make
quarterly payments of interest on the First Measurement Period Initial
Principal Balance during each quarter.

 

3.3                                 The
principal amount, as determined pursuant to Section 2, together
with all accrued and unpaid interest, of this Note shall be due and payable on
the Maturity Date or at such earlier time as provided herein.

 

4.             Payment on Non-Business Days.
Whenever any payment to be made shall be due on a Saturday, Sunday or a public
holiday under the laws of the State of California, such payment may be due on
the next succeeding business day and such next succeeding day shall be included
in the calculation of the amount of accrued interest payable on such date.

 

5.             Prepayment.  Upon five (5) days prior written notice
to Holder, the Company may prepay this Note in whole or in part; provided,
however, that: (i) any prepayment of this Note may only be made in
connection with the prepayment of all Subordinated Contingent Notes issued
under the Stock Purchase Agreement on a pro rata basis, based on the respective
aggregate outstanding principal amounts of each such Subordinated Contingent
Note, and (ii) any such prepayment will be applied first to the payment of
expenses due under this Note, second to interest accrued on this Note and
third, if the amount of prepayment exceeds the amount of all such expenses and
accrued interest, to the payment of principal of this Note.

 

6.             Security.  The Obligations of the Company under this
Note are secured by the Security Agreement.

 

7.             Guaranty.  The Obligations due under this Note are
guaranteed by a Continuing Guaranty dated as of the date hereof and executed by
Parent in favor of Holder and the Collateral Agent.

 

8.             Certain Covenants.

 

8.1                                 Affirmative Covenants.  Promptly upon the occurrence thereof, the
Company shall furnish to Holder a written notice of the occurrence of any Event
of Default hereunder or any event of default with respect to any Senior
Indebtedness or any event which with notice or lapse of time would constitute
an Event of Default or any event of default with respect to any Senior Indebtedness.

 

8.2                                 Negative Covenants. While any amount is
outstanding under this Note, without the prior written consent of the
Collateral Agent and the holder of the Senior Indebtedness:

 

(a)                                  Asset Dispositions.  The Company shall not sell, lease, transfer,
license or otherwise dispose of (collectively, a “Transfer”) any of the assets or property of ACC, whether now
owned or hereafter acquired; provided, however, that the Company
may make any Transfers of the assets or property of ACC in the ordinary course
of its business (i) consisting of the sale of inventory, and (ii) consisting
of sales of equipment or other assets that are worn-out, no longer needed for
the business of ACC or obsolete.

 

4

 

(b)                                 Mergers and Acquisitions.  The Company shall not consolidate with or
merge into ACC any other Person or permit any other Person to merge into ACC; provided,
however, that the Company may consolidate or merge ACC with CCI.

 

9.             Events of Default.  The occurrence of any of the following shall
constitute an “Event of Default”
under this Note:

 

9.1                                 Failure to Pay.  The Company shall fail to pay (i) when
due any principal payment on the due date hereunder or (ii) any interest
or other payment required under the terms of this Note on the date due and such
payment shall not have been made within twenty
(20) days of the Company’s receipt of Holder’s written notice to the
Company of such failure to pay.

 

9.2                                 Breaches of Other Covenants.  The Company or Parent shall fail to observe
or perform any other covenant, obligation, condition or agreement contained in
this Note, the Stock Purchase Agreement, the other Subordinated Contingent
Notes, or any other of the Related Agreements and such failure shall continue
for twenty (20) days after the
Company’s receipt of Holder’s written notice to the Company of such breach.

 

9.3                                 Representations and Warranties.  Any representation, warranty, certificate, or
other statement (financial or otherwise) made or furnished by or on behalf of
the Company to Holder in writing in connection with this Note shall be false,
incorrect, incomplete or misleading in any material respect when made or
furnished.

 

9.4                                 Other Payment Obligations.  The Company shall be in default under the
terms of any Senior Indebtedness; provided, however, that if the
Company is able to cure its default thereunder and does, in fact, cure such
default pursuant to the terms and conditions contained thereunder, then such
event shall not be considered an Event of Default hereunder.

 

9.5                                 Voluntary Bankruptcy or Insolvency Proceedings.  The Company shall (i) apply for or
consent to the appointment of a receiver, trustee, liquidator or custodian of
itself or of all or a substantial part of its property, (ii) be unable, or
admit in writing its inability, to pay its debts generally as they mature, (iii) make
a general assignment for the benefit of its or any of its creditors, (iv) be
dissolved or liquidated, (v) become insolvent (as such term may be defined
or interpreted under any applicable statute), (vi) commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vii) take
any action for the purpose of effecting any of the foregoing.

 

9.6                                 Involuntary Bankruptcy or Insolvency Proceedings.  Proceedings for the appointment of a
receiver, trustee, liquidator or custodian of the Company or of all or a
substantial part of its property, or an involuntary case or other proceedings
seeking liquidation, reorganization or other relief with respect to the Company
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect shall be commenced and an order for relief entered or such
proceeding shall not be dismissed or discharged within sixty (60) days of
commencement.

 

5

 

10.           Rights of Holder Upon Default.  Upon
the occurrence or existence of any Event of Default (other than an Event
of Default referred to in Sections 9.5 and 9.6) and at any time thereafter
during the continuance of such Event of Default, Holder may declare all
outstanding Obligations payable by the Company hereunder to be immediately due
and payable without presentment, demand, protest or any other notice of any
kind, all of which are hereby expressly waived. 
Upon the occurrence or existence of any Event of Default described in Sections
9.5 and 9.6, immediately and without notice, all outstanding Obligations
payable by the Company hereunder shall automatically become immediately due and
payable, without presentment, demand, protest or any other notice of any kind,
all of which are hereby expressly waived. 
In addition to the foregoing remedies, upon the occurrence or existence
of any Event of Default, Holder may exercise any other right power or remedy
permitted by law, either by suit in equity or by action at law, or both.

 

11.           Subordination.  The indebtedness evidenced by this Note is
hereby expressly subordinated, to the extent and in the manner hereinafter set
forth, in right of payment to the prior payment in full of all of the Company’s
Senior Indebtedness.

 

11.1                           Insolvency Proceedings.  If there shall occur any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), dissolution, liquidation, or any other
marshaling of the assets and liabilities of the Company, (i) no amount
shall be paid by the Company in respect of the principal of, interest on or
other amounts due with respect to this Note at the time outstanding, unless and
until the principal of and interest on the Senior Indebtedness then outstanding
shall be paid in full, and (ii) no claim or proof of claim shall be filed
with the Company by or on behalf of Holder which shall assert any right to
receive any payments in respect of the principal of and interest on this Note
except subject to the payment in full of the principal of and interest on all
of the Senior Indebtedness then outstanding.

 

11.2                           Default on Senior Indebtedness.  If there shall occur an event of default with
respect to any Senior Indebtedness, as defined therein, or in the instrument
under which it is outstanding, permitting the holder to accelerate the maturity
thereof, then, unless and until such event of default shall have been cured or
waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no payment shall be made in respect of the principal of or
interest on this Note.

 

11.3                           Further Assurances.  By acceptance of this Note, Holder agrees to
execute and deliver customary forms of subordination agreement or intercreditor
agreement reasonably requested from time to time by holders of Senior
Indebtedness, and as a condition to Holder’s rights hereunder, the Company may
require that Holder execute such forms of subordination agreement or
intercreditor agreement; provided, however, that such forms shall
be substantially similar to the form of Subordination Agreement and
Intercreditor Agreement entered into contemporaneously with the issuance and
delivery of this Note and shall not impose on Holder terms less favorable or
materially different than those provided herein or therein.

 

11.4                           Other Indebtedness.  No indebtedness which does not constitute
Senior Indebtedness shall be senior in any respect to the indebtedness
represented by this Note.

 

6

 

11.5                           Subrogation.  Subject to the payment in full of all Senior
Indebtedness, Holder shall be subrogated to the rights of the holders of such
Senior Indebtedness (to the extent of the payments or distributions made to the
holders of such Senior Indebtedness pursuant to the provisions of this Section 11)
to receive payments and distributions of assets of the Company applicable to
the Senior Indebtedness.  No such
payments or distributions applicable to the Senior Indebtedness shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and Holder, be deemed to be a payment by the Company to or on
account of this Note; and for purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness to which Holder would be
entitled except for the provisions of this Section 11 shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and Holder, be deemed to be a payment by the Company to or on
account of the Senior Indebtedness.

 

11.6                           No Impairment.  Subject to the rights, if any, of the holders
of Senior Indebtedness under this Section 11 to receive cash,
securities or other properties otherwise payable or deliverable to Holder,
nothing contained in this Section 11 shall impair, as between the
Company and Holder, the obligation of the Company, subject to the terms and conditions
hereof, to pay to Holder the principal hereof and interest hereon as and when
the same become due and payable, or shall prevent Holder, upon default
hereunder, from exercising all rights, powers and remedies otherwise provided
herein or by applicable law.

 

11.7                           Lien Subordination.  Any lien of Holder, whether now or hereafter
existing in connection with the amounts due under this Note, on any assets or
property of the Company or any Subsidiary or any proceeds or revenues therefrom
which Holder may have at any time as security for any amounts due and
obligations under this Note shall be subordinate to all liens now or hereafter
granted to a holder of Senior Indebtedness by the Company or by law,
notwithstanding the date, order or method of attachment or perfection of any
such lien or the provisions of any applicable law.

 

11.8                           Reliance of Holders of Senior Indebtedness.  Holder, by its acceptance hereof, shall be
deemed to acknowledge and agree that the foregoing subordination provisions
are, and are intended to be, an inducement to and a consideration of each
holder of Senior Indebtedness, whether such Senior Indebtedness was created or
acquired before or after the creation of the indebtedness evidenced by this
Note, and each such holder of Senior Indebtedness shall be deemed conclusively
to have relied on such subordination provisions in acquiring and holding, or in
continuing to hold, such Senior Indebtedness.

 

12.           Successors and Assigns.  Subject to the restrictions on transfer
described in Section 14, the rights and obligations of the Company
and Holder of this Note shall be binding upon and benefit the successors,
assigns, heirs, administrators and transferees of the parties.

 

13.           Waiver and Amendment.  Any provision of this Note may be amended, waived
or modified upon the written consent of the Company and the Holder.

 

14.           Transfer of this Note.  With respect to any offer, sale or other
disposition of this Note, Holder will give written notice to the Company prior
thereto, describing briefly the manner thereof.

 

7

 

15.                                 Assignment by the Company.  Neither this Note nor any of the rights,
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by the Company without the prior written
consent of the Holder.

 

16.                                 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.

 

17.                                 Pari Passu Notes.  Holder acknowledges and agrees that the
payment of all or any portion of the outstanding principal amount of this Note
and all interest hereon shall be pari passu
in right of payment and in all other respects to the other Subordinated
Contingent Notes issued pursuant to the Stock Purchase Agreement or pursuant to
the terms of such Subordinated Contingent Notes as more fully set forth in the
Intercreditor Agreement dated as of August       ,
2008 by and among the Company, ACC and all holders of the Subordinated
Contingent Notes.

 

18.                                 Payment.  Payment shall be made in lawful tender of the
United States.

 

19.                                 Usury. 
In the event any interest is paid on this Note which is deemed to be in
excess of the then legal maximum rate, then that portion of the interest
payment representing an amount in excess of the then legal maximum rate shall
be deemed a payment of principal and applied against the principal of this
Note.

 

20.                                 Expenses; Waivers.  If action is instituted to collect this Note,
the non-prevailing party promises to pay all costs and expenses, including,
without limitation, reasonable attorneys’ fees and costs, incurred by the
prevailing party in connection with such action.  The Company hereby waives notice of default,
presentment or demand for payment, protest or notice of nonpayment or dishonor
and all other notices or demands relative to this instrument.

 

21.                                 Right of Set-Off.  The Company shall not set-off any amount of
principal or interest under this Note except to the extent expressly permitted
by and only in accordance with the terms of Section 10.8 of the
Stock Purchase Agreement.

 

22.                                 Governing Law.  This Note and all actions arising out of or
in connection with this Note shall be governed by and construed in accordance
with the laws of the State of New Jersey, without regard to the conflicts of
law provisions of the State of New Jersey, or of any other state.

 

[Signature page follows.]

 

8

 

IN WITNESS WHEREOF, the Company has caused this Note
to be issued as of the date first written above.

 

	
   

  	
  EMRISE ELECTRONICS CORPORATION,

  
	
   

  	
  a New Jersey corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Carmine T. Oliva

  
	
   

  	
   

  	
  Carmine T. Oliva,

  
	
   

  	
   

  	
  President and Chief
  Executive Officer

  

 

9Exhibit 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

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