Exhibit 10.4
EXECUTION COPY
THIS SECURITY AGREEMENT IS
SUBJECT TO A SUBORDINATION AGREEMENT
OF EVEN DATE (THE “SUBORDINATION AGREEMENT”)
BETWEEN
COLLATERAL AGENT AND THE HOLDER OF THE SENIOR
INDEBTEDNESS
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the “
Security Agreement ”), is made as of August 20,
2008, by and among EMRISE Electronics Corporation, a New Jersey
corporation (“ Borrower ”), Advanced Control
Components, Inc., a New Jersey corporation (“ ACC
”), Charles S. Brand, an individual (“ Collateral
Agent ”), and the persons and entities listed on the
Schedule of Lenders attached hereto as Exhibit A
(each, a “ Lender ” and collectively, the
“ Lenders ”).
R
E C I
T A L S
A.
Borrower and the Lenders are parties
to that certain Stock Purchase Agreement dated as of May 23,
2008 (the “ Stock Purchase Agreement ”) relating
to the purchase by Borrower of all of the issued and outstanding
shares of capital stock (collectively, the “ Shares
”) of (i) ACC owned by Thomas P. M. Couse, Joanne Couse
and Michael Gaffney and (ii) Custom Components, Inc.
owned by Charles S. Brand. As a result of the consummation of
the Stock Purchase Agreement, Borrower beneficially owns all of the
capital stock of ACC.
B.
Pursuant to the terms of the Stock
Purchase Agreement, Borrower issued certain subordinated secured
contingent promissory notes (which are defined in the Stock
Purchase Agreement as well as herein as the “ Subordinated
Contingent Notes ”) to the Lenders to satisfy a portion
of the aggregate consideration to be paid by Borrower for the
purchase of the Shares. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to them
in the Subordinated Contingent Notes.
C.
EMRISE Corporation, a Delaware
corporation and the ultimate parent of Borrower and ACC (“
Parent ”), is delivering a Continuing Guaranty of even
date herewith (the “ Guaranty ”) in favor of the
Lenders pursuant to which the obligations of Borrower to the
Lenders under the Subordinated Contingent Notes are guaranteed by
Parent.
D.
In order to induce the Lenders to
extend the credit evidenced by the Subordinated Contingent Notes,
Borrower and ACC have agreed to enter into this Security Agreement
to grant Collateral Agent, for the benefit of itself and the
Lenders, the security interest in the Collateral described
below.
NOW, THEREFORE, in consideration of
the foregoing premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1.
Definitions and
Interpretation . Unless otherwise
defined herein, all other capitalized terms used herein and defined
in the Subordinated Contingent Notes shall have the respective
meanings given to those terms in the Subordinated Contingent Notes,
and all terms
defined in the New Jersey
Uniform Commercial Code (the “ UCC ”) shall have the
respective meanings given to those terms in the UCC.
2.
Grant of Security
Interest . To secure the
Obligations as defined in Section 3 hereof, ACC hereby
grants to Collateral Agent a continuing security interest and lien
in and to all of the assets and properties of ACC, whether
now owned or existing or hereafter acquired or arising and
regardless of where located and all additions and accessions
thereto, substitutions and replacements therefor, and all proceeds
thereof (the “ Collateral ”), including, without
limitation, the following property: all tangible and intangible
assets of ACC, including, but not limited to, all existing and
future inventory, accounts, deposit accounts, accounts receivable,
furniture, fixtures, equipment, general intangibles, books and
records, patents, patent applications, trademarks, copyrights,
trade secrets, and any other property interest or proprietary
right, as well as any document, instrument or drawings embodying
the same.
3.
Security for
Obligations . The obligations
secured by this Security Agreement (the “ Obligations ”) shall mean and
include all obligations of Borrower as provided in (i) the
Subordinated Contingent Notes, (ii) the Stock Purchase
Agreement, and (iii) all of the other Related Agreements (as
such term is defined in the Stock Purchase Agreement).
4.
Possession and Location of
Collateral . Unless and until any
default occurs hereunder as set forth in Section 11
hereof, ACC shall have possession of the Collateral for its use and
enjoyment in any lawful manner not inconsistent with this Security
Agreement or the Subordinated Contingent Notes. The
Collateral will be kept at ACC’s place of business at 611
Industrial Way, Eatontown, New Jersey 07724 (or such other places
as ACC customarily keeps the Collateral) with respect to such
Collateral and will not be moved therefrom without the prior
written consent of Collateral Agent, except that ACC may make sales
of inventory items in the ordinary course of business. ACC
shall not replace or make material alterations in the Collateral
without the prior written consent of Collateral Agent. The
consent of Collateral Agent required hereby shall not be
unreasonably withheld.
5.
Financing Statements
.
Concurrently with the execution of this Security Agreement, ACC
shall execute and deliver to Collateral Agent the UCC-1 financing
statement provided by Collateral Agent.
6.
Transfer, Taxes, Liens and
Encumbrances . ACC has title to the
Collateral free and clear of any lien, security interest or
encumbrance, except for the security interests of the holder of the
Senior Indebtedness and the security interest created by this
Security Agreement. Title to the Collateral will remain in
and continue to be vested in ACC. ACC will defend the
Collateral and will not sell, offer to sell or otherwise transfer
the Collateral, any portion thereof, or any interest therein,
without the prior written consent of Collateral Agent, except that
ACC may make sales of inventory items in the ordinary course of
business. The consent of Collateral Agent required hereby
shall not be unreasonably withheld. ACC shall pay all taxes,
assessments and other charges made against the
Collateral.
7.
Risk of Loss and Inspection of
Collateral . ACC shall have all
risk of loss of the Collateral, and ACC will keep the Collateral in
good order and repair. Collateral Agent shall
have the right, at any
reasonable time, to enter upon the premises where the Collateral is
located to examine and inspect the Collateral in person or by
agent. Any refusal to permit such entry shall be a breach of
this Security Agreement.
8.
Insurance . ACC shall keep the
Collateral insured, at its own expense, in an amount not less than
its full insurable value, against loss by fire, theft, vandalism
and malicious mischief, storm, earthquake and extended coverage,
and ACC shall cause the Lenders to be named as additional insured
parties and loss payees in such insurance, and furnish to
Collateral Agent written evidence thereof.
9.
Representations and
Warranties . Borrower and ACC
hereby jointly and severally represent and warrant to Collateral
Agent and the Lenders that each of Borrower and ACC has full power
and authority to enter into this Security Agreement and to grant
the security interest and lien in and to the Collateral and has
taken all proper and necessary actions to authorize the execution,
delivery and performance of this Agreement. This Agreement is
valid and binding upon and enforceable against Borrower and ACC,
except as such enforceability may be limited by applicable
insolvency, bankruptcy, reorganization, moratorium or other similar
laws affecting creditors’ rights generally and general
principles of equity. The making and performance of this
Security Agreement by Borrower and ACC will not breach or violate
any law, statute, rule or regulation of, or any judgment,
order, decree, writ, injunction or award issued by any
governmental authority or violate or result in a default
(immediately or with the passage of time or notice or both) under
any contract, indenture, agreement or instrument to which Borrower,
ACC or Parent is a party, or by which any of Borrower, ACC or
Parent is bound.
10.
Covenants . Borrower and ACC
hereby agree as follows:
10.1
Liens on Collateral
. Borrower
and ACC agree not to create, incur, assume or suffer to exist any
lien or security interest of any kind upon the Collateral other
than in favor of the holders of any Senior
Indebtedness.
10.2
Further Assurances
. Borrower
and ACC agree tha
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